Selective Insurance Group Inc Q2 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to Selective's Second Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brad Wilson, Senior Vice President, Investor Relations and Treasurer. Please go ahead.

Good morning. Thank you for joining Selective's second quarter 2024 earnings conference call on short notice. Yesterday, we posted our earnings press release, financial supplement, and investor presentation on the Investors section of our website selective.com. The investor presentation includes a new exhibit highlighting our historical reserve development and relevant comparisons. A replay of the webcast will be posted there shortly after this call. Today, we will discuss our financial performance, market conditions, and expectations for the rest 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 we and the investment community use to make it easier 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 supplement 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 are not guarantees of future performance. These statements are subject to risks and uncertainties that we disclose 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. This was a challenging quarter. We hold ourselves to a high standard, exhibited by the profitability and growth we strive for and have consistently achieved over the long term. Our consistent and disciplined approach to underwriting, pricing, and reserving is the foundation underlying our strong track record. That foundation remains as strong as ever. However, the industry-wide social inflationary trends have continued to put upward pressure on average severities in the general liability line of business. Catastrophe losses and our reserve strengthening drove the 116.1% combined ratio in the quarter. As a result, we had an operating loss of $1.10 per diluted common share and an operating ROE of negative 9.6%. This brought our year-to-date operating ROE to 1.1%. Our revised full-year guidance implies an ROE in the upper single-digit range, below our 12% target. Although earnings this quarter were challenged, our capital position remains strong, and our underlying combined ratio of 91.4%, which includes an updated run rate for general liability, positions us well moving forward. We maintain our disciplined focus and execution in the areas of risk selection, pricing, and claims management in the face of this challenging and dynamic loss trend environment. This has positioned us as an industry leader. With our run-rate profitability, we are confident in our ability to quickly reestablish our earnings profile that consistently meets or exceeds our 12% operating ROE target. We've been very transparent about our assumed loss trend, which we have consistently increased over the past several years. For general liability, we increased our assumed loss trend to 9% for 2024 from 4% in 2020. While reported frequencies in the more recent accident years continue to emerge at or better than our expectations, we continue to see average severities exceed our elevated expectations. The most recent accident years are still relatively immature, but rather than hope these severity trends flatten as those years mature, we believe it was prudent to react to the early severity emergence we are experiencing. While we reacted to the actual emergence, our action this quarter also contemplated some potential continuation of these trends. Specifically, we recorded $176 million or 16.3 points of net unfavorable prior-year casualty development within our Commercial Lines segment. $166 million was in the general liability line of business. 90% of this quarter's general liability action relates to accident years 2020 through 2023, similar to the action we took in the first quarter. Our year-end 2023 actions were mostly associated with accident years 2020 and prior. As older accident years continue to mature, we gain greater confidence in our estimates, and further developments have been modest in 2019 and prior. This increases our confidence in the adjustments we are now making to accident years 2020 and subsequent, which puts us in a stronger overall reserve position. Given the consistency in our underwriting appetite and risk profile over time, our corrective actions are primarily focused on achieving additional rate with a continued emphasis on prudent underwriting. Taking a step back, our full year 2023 Standard Commercial Lines combined ratio was 94.9%, in line with our 95% target. Excluding the impact of prior year casualty reserve development, our 2024 year-to-date Standard Commercial Lines combined ratio is 96.4%. Consequently, we must get additional rate to achieve our 95% target. In the second quarter, general liability renewal pure price increased to 7.6%. This is 110 basis points higher than the first quarter 6.5% and 220 basis points above full year 2023's 5.4%. We expect that general liability pricing will further increase in the second half of the year. We entered 2024 with an overall expected loss trend of 7% with casualty at 8% and property at 4%. In the second quarter, Standard Commercial Lines renewal pure price was 7.9%, up 30 basis points from the first quarter's 7.6% and 120 basis points higher than a year ago. Excluding workers' compensation, commercial lines pricing increased 9.1%. Exposure growth added 4.3 points, contributing to a total renewal premium change of 12.6%. In addition, commercial property at 12.1% and commercial auto at 10.8%, continue to generate the highest pure rate increases within our Standard Commercial Lines segment. Let me now shift to our other segments. Excess and Surplus continued its strong performance with excellent top line growth and a 94.6% combined ratio despite elevated catastrophe losses. In total, E&S net premiums written increased 39% in the quarter, with strong contributions from our contract binding and brokerage operations. The E&S market opportunity continues to be robust, with elevated submissions within our existing appetite at attractive pricing. Our E&S technology investments are paying dividends. We modernized our rate, quote, and buying platform, which has improved operational efficiency. We are focused on investments to build scale and continue taking advantage of attractive market conditions. Personal Lines net premiums written increased 6% in the quarter due to strong renewal pure pricing of 20.7% and larger average policy size, partially offset by declining new business and lower retentions. Retention in the quarter was 78%, down 10 points from the second quarter of 2023 and in line with our expectations given our actions to shift to the mass-affluent market. We are taking a balanced approach in Personal Lines, promoting growth in areas where rates are adequate and limiting new business in states needing additional rate approvals. Overall, we are making progress towards profitability in this segment as the quarter's underlying combined ratio improved by 3.4 points compared to the second quarter of 2023. Nonetheless, we have more work to do, and remain highly focused on strengthening our rate plans and achieving rate adequacy. Across our three insurance segments, we will continue to balance growth and profitability with a goal of consistently achieving a 95% combined ratio. Our pricing discipline, strong relationships with our distribution partners, and sophisticated analytical tools have enabled us to effectively balance rate and retention over the long term. We see the same opportunity going forward. With that, I'll now turn the call to Tony to discuss our quarterly financial results in more detail.

Thank you, John, and good morning, everyone. We reported a fully diluted net loss of $1.08 per share in the second quarter and a non-GAAP operating loss of $1.10 per share. This brings our year-to-date return on equity and operating return on equity to 1.1%. Our GAAP combined ratio was 116.1% in the quarter, including 16.3 points of unfavorable prior-year casualty reserve development and 8.4 points of catastrophe losses. Catastrophes were widespread, with 28 events impacting results this quarter. The underlying combined ratio deteriorated by 1.4 points compared to a year ago, primarily due to a 0.5 point increase in non-cat property losses and reserve actions in the current accident year. Adverse prior-year casualty reserve development in the quarter totaled $176 million, with $166 million in general liability and $10 million in commercial auto. As John described, the reserve strengthening was severity-driven and concentrated in the more recent accident years as we continue to experience elevated loss emergence in the quarter. We attribute this mainly to the continued impacts of social inflation. Frequency continues to be generally in line with our expectations. The general liability development is primarily related to the 2020 through 2023 accident years. While these more recent accident years are still relatively immature, and paid losses as a percent of expected ultimate losses are relatively low, our response is prudent given the trends and elevated uncertainty. Consequently, we also took action in the current accident year impacting results in the quarter by $28 million or approximately 2.6 points on the overall combined ratio. Notably, the general liability reserving action we took in the fourth quarter last year, predominantly on older accident years, held up reasonably well over the last six months. As these years mature, we are gaining increased confidence in our estimates. In the current quarter, the reserve adjustment was 8% of our net reserves for general liability and 4% of our overall net reserves. This represented an average of about 4 points on the general liability combined ratio across each of the impacted accident years. Our expense ratio in the second quarter was better than expected and improved by 1.1 points compared to a year ago. The expense ratio improvement was primarily due to reductions in employee and aging compensation accruals that reflect our updated view of 2024 underwriting performance. We now expect the expense ratio to finish the year about 1 point better than full year 2023. After-tax net investment income was $86 million in the second quarter, up 11% from last year and contributed 12.5 points of ROE. Alternative investments, which report on a 1-quarter lag generated $8.3 million of after-tax income in the quarter, down slightly from $9 million a year ago. In the second quarter, we invested over $500 million of new money at an average pretax yield of 6.4%. The fixed income portfolio's overall pretax book yield increased modestly in the quarter, ending at approximately 4.8%. The meaningfully higher book yield embedded in our portfolio should provide a durable source of income as we move forward. Overall, 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 on June 30 with an average credit quality of AA- and a duration of 3.9 years. Turning to reinsurance. We successfully completed the renewals of our July 1, 2024 property and casualty excess of loss treaties covering Standard Commercial Lines, Standard Personal Lines, and E&S. Both treaties have substantially the same structure as the expiring treaties. Our casualty excess of loss treaty provides $88 million of protection above a $2 million retention for all our casualty business, in line with the expiring treaty. Given the conditions in the casualty market, we retained a co-participation of 17.5% on the first layer of the treaty, which provides $3 million of coverage in excess of a $2 million retention. The remaining layers of the treaty were fully placed and consistent with the expiring program. For our property excess of loss treaty, we maintain the retention on the first layer of $5 million. All attachment points and limits remain the same with $65 million of coverage. Our capital position remains strong with GAAP equity of $2.9 billion and statutory surplus of $2.7 billion. Book value and adjusted book value per share decreased by 1% from year-end. At the end of the quarter, the debt-to-capital ratio was 14.8%, well below our internal threshold of 25%. This ratio, together with our operating cash flows, provides us with 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. Our results in the quarter are an earnings event, not a capital event. We are confident in our ongoing strategies and ability to execute. For 2024, we now expect our GAAP combined ratio to be 101.5%, up from our previous guidance of 96.5%. The 5-point increase reflects the full-year impact of the adverse prior-year casualty reserve development, current accident year bookings in general liability, and a 0.5 point increase in our catastrophe loss assumption, which is now 5.5 points. Consistent with our typical process, we assume no additional prior-year casualty reserve development. As previously mentioned, these increases are partially offset by a lower expense ratio. Even with these updates, the underlying combined ratio of 91% highlights our strong forward earnings potential. Our estimate for $360 million of after-tax net investment income, including $32 million from alternative investments, remains unchanged. 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.

Thanks, Tony. Our guidance implies an operating ROE in the high single-digits for the full year 2024 despite our reserving actions in the first and second quarters. With our underlying combined ratio guidance of 91% and 5.5 point assumption for catastrophe losses, the gap to reach our 95% combined ratio target is manageable. Importantly, the 91% underlying combined ratio includes approximately 1.5 points of strengthening in the current accident year. We have strong momentum in our E&S business and profit improvement plans in Personal Lines. In Standard Commercial Lines, our flagship segment, we have the tools and organizational muscle to effectively manage rate and retention, apply disciplined and prudent underwriting, and execute our strategy. Our actions position us well moving forward despite the uncertainty that exists in the external environment. I'll now ask the operator to open our question-and-answer session.

Our first question comes from Mike Phillips from Oppenheimer.

Thanks. Good morning, everybody. John, first question is on the commercial renewal pricing and retention stuff there. You're continuing to kind of move that up, good news, but it sort of feels like that's a bit different than what we're seeing from other commercial players. I guess, I want to see if you agree with that. And then maybe just your confidence on the ability to continue to do so and impacts on retention and kind of where that stands. And if we look out over the next couple of quarters, do you think that GL number, you mentioned 7.6% or the commercial 7.9%, continues to move up?

Thank you, Mike. We are optimistic about the trajectory of Commercial Lines pricing. While we may be slightly ahead of the market, there has been ample discussion regarding the direction of loss trends, particularly in the casualty sector and specifically for general liability, indicating a need for pricing increases. When reviewing the past few quarters alongside our public peers and their earnings call commentary, it's clear they also acknowledge the necessity for pricing adjustments relative to loss trends in casualty. We believe these trends are being recognized and will persist. Although we are proactive in updating our current accident year in response to emerging severity trends, we anticipate that the industry will also follow suit, which should not lead to a significant impact on retention. However, as we've demonstrated in the past, when we are confident in pricing and where it needs to be, we act on that belief. Should retention be affected, we consider that a necessary trade-off in the current climate.

Okay, John. Thank you for that. I have a two-part question regarding the reserve issues. You adjusted the current accident year slightly. Have you noticed any of the trends you mentioned from 2020 to 2023 for the 2024 accident year? Also, what would you say to those who believe that the recent issues with the accident year are selective and that their book of business is different, suggesting that the problems may not be as widespread as John thinks?

Yes, I appreciate the question, Mike. Regarding the 2024 accident year, it's still quite early. However, in light of the recent years where we have seen higher severity, it's wise to adjust the current year unless we want to alter our forward trend assumptions. Our current year adjustment primarily reflects the higher expected loss ratios we’ve set for 2022 and 2023, while maintaining our original severity trend assumption for this year, which raises our expectation for the current year. As for whether this is a selective issue, we feel confident that our portfolio remains stable across various business segments, industry verticals, and hazard profiles. Historically, there's nothing indicating that our book has changed significantly in a way that would drastically alter the frequency and severity profile. Some have pointed out certain states as being more vulnerable, but those suggestions stemmed from my earlier response, and they relate to states that are already part of our operations and past results. I didn't mention larger states like California, Texas, and Florida, which are known for challenging litigation environments and contribute significantly to nuclear verdicts. These factors tend to influence social inflation and general severity trends. Unfortunately, the narrow focus on my earlier comments did not encapsulate the broader outlook on these trends being common. Moreover, our portfolio has a higher proportion of General Liability compared to some peers, which might amplify some impacts. In writing General Liability, particularly as it relates to certain companies’ liability portions, I believe these trends will be evident in the coming years. Our approach prioritizes swift reactions to emerging adverse trends, which we are implementing now. Along with our proactive measures in the current year and strong starting combined ratio, we believe we are well-positioned to maintain our status as a reliable performer moving forward.

Okay. No, thanks for all that color and all the best. Thanks, John.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Michael Zaremski from BMO.

Thank you and good morning. I would like to discuss some of the reserving actions. Can you elaborate on the 9% assumption for loss trends? Is that specifically for general liability? Also, considering your available data, how does this 9% compare to past trends you've observed? John, with your extensive experience in the industry, is this assumption significantly different from what has been seen in the past? I'm trying to understand how your assumptions relate to historical data.

Certainly. The 9% we mentioned pertains specifically to General Liability. This figure is part of the overall casualty rate of 8%, and the 8.5% we discussed previously, which excludes workers' compensation. The 9% does not factor in any changes in frequency, meaning it is driven purely by severity. If we analyze past loss trends, which greatly inform our projections, we observe that over the last four to five accident years, particularly from 2020 to 2024, the expected loss trend started at around 4% in 2020 and has risen to 9%. On average, from 2020 to 2023, our expected loss trends hovered around 5%. However, upon reassessing this period, we've determined that the average projected loss trend is now closer to 6.5%, taking into account changes in frequency and severity. Specifically, the frequency has improved by about 4%, while severity trends have approached 10%, leading to the 6.5% figure. Looking ahead to 2024, we maintain the 9% estimate without anticipating a drop in frequency, and we feel confident given the recent history. It’s also important to note that this 9% is applied to a higher base due to recent accident years being elevated. When we consider historical data, we find that the industry is experiencing an unprecedented trend, where all accident years and evaluation periods are reflecting an upward movement in severity. This indicates that the current situation is a widespread phenomenon affecting the industry as a whole.

I understand. That's useful information. For those of us looking from the outside at the actions you've taken in general liability this quarter and in previous quarters, it seems like this could be considered a comprehensive quarter for general liability. It appears there may be some leeway for the loss trend to continue worsening slightly without SIGI needing to make additional adjustments to the general liability picks. I'm not sure if you agree with that perspective. Regarding commercial auto, some might argue that there is probably not much leeway in this area. Could you elaborate on why reserves haven't been increased? I know they were adjusted, but not to a significant extent for commercial auto. Maybe you can clarify the loss trend in that segment and share some statistics that explain why commercial auto didn't require as much adjustment as general liability.

Yes. So I think if you look at commercial auto for us, in particular, you've actually seen some improvement over the last few years. And I would suggest that these higher severity trends that we're seeing right now in GL impacted commercial auto more quickly in large part, because it's got a shorter tail to it. And I think the drop-off in activity, and therefore, the frequency benefits that I talked about in GL weren't as evident in commercial auto. So I think it came through, when it was recognized more quickly in commercial auto. But the other important point is the pricing, the renewal pricing in commercial auto has been elevated for an extended period of time. We've been in the 8% to 10%, now 10.5% range for about five, maybe more years. So you've got a lot more earned rate coming through to offset that loss trend. And I think that's the piece that many seem to be missing on the GL side is, when you look at GL rate. And forget about Umbrella, because Umbrella is a different animal, but the GL rate, which has been running in, call it, the 4% to 6% range industry-wide and for us as well, is probably short of where these updated trends are coming in. And that's why you really want to take a close look at the '19 and prior periods for both auto and GL. And where the current bookings are for '21 through '23, then overlay updated views of loss trends, and overlay actual price increases to make sure that that all holds together. And when I think - if you do that analysis for us, I think you're going to feel pretty good.

Got it. That is helpful. And I'll sneak one last one in, sticking on this topic. Is there anything you can help us kind of appreciate about, why that consistent additions quarter-over-quarter for this - in more recent quarters to the reserves? Is the process just simply that there's just such a big book of reserves, as new data coming in every day that it just - you need to take smaller bites of the apple that, to really get to where you need to be. Or just maybe you could help kind of unpack, or was there just so much new data this quarter that was so much meaningfully worse than you saw last quarter and the quarter before? Anything there would help? Thanks.

Yes. Thanks. So I guess the first thing I would say and just to sort of reinforce the point, the three quarters, so the first reaction was the '20 and prior years, and largely '19 and prior at the end of last year. So it's really the last two quarters, we're talking about with regard to the more recent accident years. And I think, we've always reacted to the emergence that we see in the quarter. So, we're not just working off of actual versus expected claim activity. We're doing a full review on a line-by-line basis, as we've always done and that continues to be our process. I think the difference, and you heard the reference to it in our commentary, about an addition to the emergence in the quarter, also contemplating some additional risk associated with some potential continuation of these trends. That was really the difference, which is after seeing in more recent accident years emerge worse than expected in two consecutive quarters, we thought it made sense to react a little bit more as a result of that.

Understood. Thank you, John.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Paul Newsome from Piper Sandler.

Good morning. Thanks for the call. I was hoping you could touch a little bit more on the workers' comp business, and maybe things that have historically been a bit of an offset from a reserve perspective? And should we be thinking about that as merely a pricing function that we see less development out of there? Or are there underlying trends that we should be aware of as well?

Yes. Thanks, Paul. So first thing is I would just highlight, our workers' comp continues to produce strong results. And I think that's evident in our reports here. Workers' comp has become a smaller portion of our reserve inventory over the last several years, as that market has become hyper-competitive, from a pricing and a commission - agency commission perspective, we have not been as competitive in most cases, by design. With regard to what's happening from an emergence perspective, in addition to it being a smaller portion. I think what we've seen and pointed to of late, is a leveling off of very favorable frequency trends that have persisted for an extended period of time. And I think everybody anticipated that at some point, frequencies would find a new level. And while it might change, and it could move around from quarter-to-quarter. We've seen what I would describe as a leveling off in frequency trends. The other point to keep in mind is while economic, or medical inflation relative to overall economic inflation has been pretty muted, you started to see that reverse in the more recent CPI prints. And you've heard us talk about this before. When you look at the component parts of medical CPI that drive workers' comp loss cost. It's about 90% physician services and hospital services, and then about 10% pharma and medical equipment. And in the more recent prints, that blended basket has been in the 4.5% or so range, 4.5% range, and wages are now at about 4%. So what was a favorable gap with regard to the medical component of the loss dollar has flipped, albeit slightly. And again, that could change, but I think both of those dynamics in a negative rate environment, just give us a little bit more of a conservative outlook, in terms of how we think that line will emerge going forward.

Makes sense. Getting question this morning a little bit about the capital ratio, like, you have always historically been quite well capitalized, but you've typically had more operating leverage premiums to surplus and you're growing fairly. And then also, you have very low debt leverage. Given where the premiums or surplus is going, where the premiums are, does that suggest that you may raise a little debt and push the capital down into the subsidiary? Or is it still fairly self-funding?

Yes. I think, Paul, the operating leverage ratio targets that we talk about, and we certainly believe in, we also recognize that there are times where you might run outside of those targets mostly, because we need to look at the overall capital position of the organization. Those ratios are calculated based on statutory capital, and don't account for the additional capital that sits at the Holdco. But when we think about where the growth is coming from, and the fact that a lot of the growth is driven by price and exposure change, and knowing a strong capital position overall, and the flexibility of having some of that capital sitting at the holding company is kind of our desirable position. But we'll always evaluate the capital positions and the options that are available in the capital markets. Our debt to cap at just under 15% is well below the threshold that we're comfortable operating. So depending on prospects for profitable growth and where the debt markets are, we would evaluate those and do what was most appropriate at the time.

Great. So that suggests, from a new business perspective, there's no constraints, the first one. Great. Thanks. Much appreciate your help as always.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Grace Carter from Bank of America.

Hi, everyone. Good morning.

Good morning, Grace.

Good morning.

I guess, you've already talked about how you tend to do extensive quarterly reserve reviews. I was just wondering if there's any sort of tweaks that you're going to be making to the process going forward, just given the recent adverse development. If maybe temporarily, you would be doing some additional work on a quarterly basis, or if there's just anything that you think over a longer time period might make sense to implement, on top of everything that you've already been doing? And I guess, just obviously, today, the environment is quite challenging. But if at some point in the future, you start to see good news emerging, I'm wondering if you would be maybe more hesitant to acknowledge that after this experience relative to history, if there's just any sort of impact on how quickly you might acknowledge good news, relative to the past after the past couple of quarters? Thank you.

Yes. Thank you, Grace. I guess what I would say overall is, our carried reserve position is always established in the context of the risk factors that we see, currently and in the future. And those risk factors shift over time. And as a result of that, our view of the carried reserve position relative to the actuarial indication or actuarial best estimate, will always flex based on that. That's always been our philosophy, and I would say, continues to be our philosophy on a go-forward basis. We've had the very consistent and robust approach to quarterly reserving reviews. Now within that process, as the actuarial discipline continues to enhance and find new and different approaches to provide additional insights, we have always taken advantage of those. And I know from my own career here, the additional insights that we get as part of the traditional actuarial method outputs, on a by line of business basis have continued to be enhanced, and that will continue to be the case going forward. But your broader question about reacting to good or bad news, I think we've had a very consistent approach there. And it always has to be evaluated in the context of the risk factors in the moment, and the risk factors that you see down the road, to determine what your carried position should be relative to the best estimate, or the indication.

Thank you. And obviously, it's been a challenging social inflationary environment here lately, but I guess if we look at the E&S book, it has continued to perform quite well. And I was just wondering if you would kind of attribute the, I guess, the performance there, relative to some of the challenges emerging to a greater extent in Standard Commercial fully, to the freedom of rate and form, or if there's any sort of differences in the makeup of that book otherwise across industries, geographies, anything that we should consider? And I guess going forward, if given the greater freedom on the non-admitted side, if you're considering maybe pushing casualty growth to a greater extent there, relative to the standard commercial lines where it's historically been on the bulk of your exposures? Thanks.

Yes. No, great question. Let me answer the second part first. With regard to business moving from admitted to non-admitted, that will always be more of a market dynamic-driven shift, because it's going to depend on whether there are other admitted markets. So a retail agency is always going to look to place its customers in an admitted product, if they can. So you would need a broader market move for that shift to happen. But we like our position in the E&S market, and we continue to see strong growth opportunities there, some of which is business migrating out of admitted into non-admitted. With regard to your - the first part of your question, though, with regard to reserving trends or loss trends in E&S. I would say the same trends with regard to increasing severities on GL exist in E&S that exists in Standard Commercial. With regard to what we're seeing in our particular book though, I would say a couple of things. That frequency trend, which has been favorable in Standard Commercial has actually been more pronounced in our E&S book in part because that book turns over at a more rapid clip. So you do see more movement from an underwriting perspective that has actually brought about a more pronounced frequency improvement. We've also traditionally assumed higher severities in our expected loss ratios, for the more recent accident years, and that frequency benefit has allowed us to build more into our assumed severity. And then the final one, I think probably equally important point, is the pricing - the renewal pricing and new business pricing for that matter, in E&S casualty. Has been a lot stronger for a lot longer than it is in - or has been in admitted, other liability or general liability. And I think all of those factors have resulted in a more muted impact, with regard to emergence for E&S.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Scott Heleniak from RBC Capital Markets.

Yes. Good morning. Yes. Just wondering if you could talk about if you feel like you need any repositioning actions if you expect to see any of those in 2024 and 2025? And do you expect, the last couple of quarters, what's - I guess, what's happened the impact in your growth plans on the commercial lines side, if you can talk about those two?

Yes. So repositioning, if you're talking about the underwriting portfolio, I would say, no dramatic repositioning. As I mentioned earlier, I believe this is largely a pricing-driven issue from our perspective, as opposed to wholesale shifts in our underwriting portfolio. So that's my high-level comment with regard to how we're responding to this. And I'm sorry, just give me the other part of the question again, Scott.

The other part of the question, is just does this impact any of your growth plans on the commercial line side, just the mid-and market side?

Thank you. So I would say that's more of a question of how our pricing stance might be either in line with or different from the market broadly. And again, I want to reinforce the point that we've made on multiple occasions here, which is, our run rate profitability for Standard Commercial, and if you look at the current accident year, excluding the impact of adverse development, call it, somewhere in the 96.5% range, well, let's call it, 96% to 97% kind of run rate combined ratio for Standard Commercial. The gap to 95%, in the context of the loss trends we've talked about, is not so significant that it's going to result in us being very disruptive, in terms of a shift in our pricing strategy. So I would not - while it certainly might impact growth a little bit, it's not a dramatic move in terms of where we are, to where we need to be from an underwriting perspective.

Okay. That's helpful. And then on the rate improvement that you expect in the second half of the year, how much more rate do you think you need on GL and commercial auto and some of the areas where you feel like you need rate? Is it just a few more points? Or is it more significant than that to kind of get where you need to be at least for the next couple of quarters?

Yes. So again, I think - and I know you know the math well enough. If you look at where we have loss trends, and I know we spent a lot of time focusing on GL at 9% but our all-in loss ratio, because you have to throw in the property at 4% - our all-in loss trend, rather, it continues to be in that 7% range. And - because you want to look at all of these lines together. I don't want to lose sight of the fact that we're getting 12.5 points of rate on property against a much lower trend. So you've got directional movement in property, which should be favorable. You've got commercial auto still running at about a 10.5% rate, and we've mentioned on several occasions what our assumed casualty loss trends are. And you've got GL moving higher against that loss trend But your all-in starting point is relatively close to your target - our target combined ratio. So, I think all of those pieces, when you put them together, look at the starting point from a profitability perspective, look at our forward trend assumptions at 7%, and our run rate pricing across all lines, and I think we're in a really good spot.

Got it. Thanks. Thanks. Appreciate the answers.

Thanks, Scott.

Thank you. One moment for our next question. Our next question comes from the line of Michael Zaremski from BMO.

Great. Thanks for letting me back in. Curious on the catastrophe side component of loss trend on the property side. Selective over the years has been one of the few willing to also give guidance. So we can - it feels like Selective has been assuming a higher catastrophe trend as well over time, although I can't - sometimes - there's property losses within the loss ratio attritional. But any thoughts on is the industry also kind of, going to need to move up their catastrophe load or Selective's guidance overtime, too, given the weather trends?

Yes. We always look at a blend of model output and recent experience - recent and longer-term experience. And when we set ours at 5% and remember, that's been drifting up. It was about 3.5% just a few years ago, and at 5%, that was kind of right in the middle of our five and 10-year averages, and in line with the model output. We evaluate that on a regular basis. I think for us, it's more of a personal lines issue, where that drift higher has been happening more significantly. If you look - so even this year through six months, our - in an elevated cat environment, our Commercial Lines cat ratio is 5.3 points, which is maybe 30 basis points above our expected for that segment of business. So, I think those have held pretty well. But I think there's clearly, based on the severe convective storm activity that we've been seeing on a pretty consistent basis, it seems to be a bigger issue on the homeowner side in particular within personal lines. And my sense is that's where you're going to continue to see upward pressure on expected cat loads.

Okay. That's all I had. Thank you.

Thank you.

Thank you. At this time, I would now like to turn the conference back over to John for closing remarks.

Well, thank you all for joining us. And again, we appreciate you joining on very short notice. As always, if you have any questions, please feel free to reach out to Brad. Thank you, and we'll talk to you soon.

This concludes today's conference call. Thank you for participating. You may now disconnect.