Selective Insurance Group Inc Q3 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Selective Insurance Group, Incorporated Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Brad Wilson, Senior Vice President, Investor Relations and Treasurer. Please go ahead.

Good morning. Thank you for joining Selective's third quarter 2024 earnings conference call. Yesterday, we posted our earnings press release, financial supplement, and investor presentation on the Investor Section of our website, selective.com. A replay of the webcast will be posted there shortly after this call. John Marchioni, our Chairman of the Board, President and Chief Executive Officer; and Tony Harnett, our Senior Vice President and Chief Accounting Officer, will make remarks and address your questions. We're also pleased to have Patrick Brennan, our new Executive Vice President and Chief Financial Officer, join us. 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, 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, 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. Now, I'll turn the call to John.

Thanks Brad, and good morning. Before we discuss the quarter's results, I'm pleased to introduce our new Executive Vice President and Chief Financial Officer, Patrick Brennan. Many of you are familiar with Patrick from his prior company. He has significant insurance experience and a deep background in corporate finance. We believe he is ideally suited to lead our finance and investment operations. I'll ask Patrick to make a few introductory remarks before we discuss the quarter's results. Patrick?

Thanks John. I'm really excited to be here. I've known of Selective for a long time, dating back to 2006 when I sat next to Greg Murphy at an investor conference and left not only impressed with him, but also the company he led. Selective is an industry leader with a differentiated operating model and track record and runway for profitable growth, the company's competitive advantages, strong foundation, and excellent market reputation for why I joined the team. I'm very excited to partner with John, the other executives on his management team and our finance team to help lead Selective into the future. I want to thank my new colleagues for their warm welcome and their eagerness to help. I especially would like to thank Tony for his steady leadership as Interim CFO and for his generosity in helping me quickly onboard and get acquainted with Selective. I know many of you from when I sat in Brad's role at my prior company many years ago, and I look forward to meeting those of you I haven't yet met. Over the coming months, I'll be speaking with you about how we're allocating and investing your capital and focusing on long-term value creation. Thanks, John, for this opportunity. It's great to be here.

Thanks, Patrick. I would like to acknowledge Tony Harnett for his work as Interim CFO. He has done an excellent job running our finance team and preparing for this transition. Tony will continue to serve as our Chief Accounting Officer and remain a key executive leadership team member reporting to Patrick. Let me now turn to results. For the quarter, we generated operating earnings per share of $1.40 and an operating ROE of 12.1%. Given the very elevated catastrophe losses that added 13.4 points to our combined ratio, these results highlight our underlying profitability and strong contribution from investment income. Year-to-date, operating ROE is 4.8%. Our full-year guidance implies we'll deliver an operating ROE in the high single-digit range. This is below our 12% target, primarily due to our reserving actions in the first and second quarters, along with catastrophe losses above our expectations in the first nine months of the year. Before discussing segment results, I want to reinforce where our team is focused on creating value. Priority one is delivering combined ratios in line with or better than our 95% target in each insurance segment. Our tactics vary due to market dynamics and our competitive position in each segment, but we always strive to be a stable market for our distribution partners and customers, generate long-term returns for our shareholders, and invest in our business, employees, and communities. In recent quarters, we have discussed social inflation and its impact on severity trends. We believe these dynamics are impacting both Selective and the industry. The prudent reserve actions we've taken in recent quarters strengthened our balance sheet, and we experienced no further prior accident year development this quarter on our total casualty portfolio and general liability in particular. Despite this result, loss trends remain elevated, and social inflationary pressures persist, demanding our continued underwriting and claims discipline, prudence, and execution. We continue to leverage our disciplined and detailed planning process based on our latest quarterly reserve review and incorporate future pricing and loss trend assumptions to set realistic and achievable perspective combined ratios. We update our model monthly with actual premiums, written and rate changes, allowing us to quickly establish appropriate underwriting and pricing actions. The output from our planning process is also used to calibrate our risk selection, pricing, and claims management tools that provide risk-level guidance to our underwriting claims staff. The actions we are taking to achieve renewal pure price increases and refine our book of business position us for future success. Selective has long demonstrated these capabilities, and I'm confident that we have the tools and team to execute in this environment. As mentioned, achieving our target profitability remains our top priority, and in standard commercial lines, we have pushed pricing higher, responding to the loss emergence and elevated severity in recent quarters. While new business has moderated, we are willing to trade growth for profitability in the current loss trend environment. For renewal business, we delivered a meaningful increase in general liability pricing from 7.6% in the second quarter to 10.2% in the third quarter. At the same time, renewal pure pricing in commercial property was 12%, and commercial auto was 10.9%, holding steady with levels reported in recent quarters. Our regional teams achieved this renewal pricing while maintaining retention of 86% in standard commercial lines as we look to protect a high-quality renewal portfolio and increase our pricing targets. Standard commercial lines renewal pure price accelerated this quarter to 9.1%, up 120 basis points from the second quarter’s 7.9% and 200 basis points higher than a year ago. Commercial lines pricing excluding workers' compensation increased 10.2%. Exposure growth added 3.9 points, contributing to a total renewal premium change of 13.4%. Adding new states and growing in states with lower market share should further diversify our property book and provide ample market opportunities within our existing appetite. We added Washington, Oregon, and Nevada as standard commercial line states in early October, bringing the total number of states we have entered since 2017 to 13. We now offer standard commercial lines in 35 states. Kansas, Montana, and Wyoming are the next three states we expect to enter over the next two years. After that, our pace of geographic expansion will moderate as we move closer to our goal of operating across the country and our flagship standard commercial lines business. Across our entire footprint, standard commercial lines net premiums written grew 8% in the quarter, driven by 13.4 points of renewal premium change. Our combined ratio of 99.2% was above our 95% target due to elevated catastrophe losses. While no single event exceeded our net reinsurance retention, Hurricane Helene represented a significant portion of total catastrophe losses. Despite the variability quarter-to-quarter, we remained comfortable with our net catastrophe exposure, which we manage through strict coastal guidelines of appropriate risk-based pricing, property aggregation management, and our conservative reinsurance program. While we price and manage our business based on the all-in performance, we note the underlying combined ratio, which excludes these catastrophes, was an excellent 87.7%, 2.7 points lower than a year ago. Excess and surplus lines, now representing 12% of net premiums written, continued a strong performance. Net premiums written increased 28% in the quarter with an 83.2% combined ratio. Despite the higher commissions paid in the E&S segment, our expense ratio of 30.7% in the quarter reflects our investments in building scale. Our focus in E&S is on maintaining very favorable levels of underwriting profitability and taking advantage of attractive growth opportunities. Personal lines net premiums written decreased by 2% in the quarter, reflecting our actions to improve profitability. We continue to take significant rate actions and promote growth in areas with rate adequacy. Simultaneously, we're limiting new business and non-renewing underperforming business in states needing additional rate approvals. Renewal pure pricing was strong at 22.8%, and our average policy size increased by 19% as we shifted towards our target mass affluent segment, with declining new and renewal policy counts offsetting those increases. Retention in the quarter was 75%, down 13 points from the third quarter of 2023. Across homeowners, we are growing in the subset of our book where coverage A values are over $500,000. We are progressing towards personalized profitability as the quarter's underlying combined ratio improved by 15.3 points or 12 points excluding the impact of NFIP claim handling fees compared to the third quarter of 2023. Nonetheless, we have more work to do and remain highly focused on achieving rate adequacy and transitioning our book toward the mass affluent segment. So far, 2024 has been a challenging year. I'm proud of our team's focus and commitment to executing our strategy. Our strong capital position gives us flexibility to manage through these market dynamics. Despite the quarter's elevated catastrophe losses, we delivered an operating ROE of 12.1% in line with our target. We are confident in our ability to create value as we move forward. Let me now turn the call to Tony, who will discuss our quarterly financial results in more detail.

Thank you, John, and good morning, everyone. We reported fully diluted net income of $1.47 per share in the third quarter and non-GAAP operating income of $1.40 per share. As a result, our year-to-date return on equity is 5%, and operating return on equity is 4.8%. Our GAAP combined ratio is 99.5% in the quarter, including 13.4 points of catastrophe losses. Catastrophes were widespread with 19 events impacting results. Hurricane Helene was the most significant, causing an estimated $85 million pre-tax loss. There was no net prior year casualty reserve development in the quarter. Modest favorable development of $10 million, $5 million in both workers' compensation and bonds was offset by $10 million of reserve strengthening in commercial auto. The favorable development in workers' compensation and bonds was related to accident years 2021 and prior. The commercial auto action was severity-driven related to accident year 2023. As a result, we also booked an additional $5 million of current year loss costs in commercial auto. As we noted last quarter, our updated full-year guidance reflected our decision to increase the current year loss ratio by approximately 1.5 points, reflecting the severity emergence we observed in the 2020 through 2023 accident years. This informed our loss ratio selection for the 2024 accident year. To that end, we recorded a $16 million increase to current year loss costs as we earned the corresponding general liability premiums over the course of the third quarter. This run rate adjustment drove the total current year loss cost of $21 million or 1.9 combined ratio points in the quarter. Nonetheless, our underlying combined ratio was excellent and improved 4.1 points from a year ago, mainly due to a 4.4 point reduction in non-catastrophe property losses. Property results are benefiting from renewal pure price increases and modifying coverage terms and conditions. Anecdotally, we are seeing lower loss outcomes from implementing cosmetic damage exclusions, higher wind and hail deductibles, and roof depreciation schedules. Even with these positive changes, non-catastrophe property losses are inherently volatile. We assume they will return to a more normal level in the fourth quarter and have embedded that expectation in our full-year guidance. National Flood Insurance program write your own claims handling fees, primarily related to Hurricane Helene, benefited the underlying combined ratio. These fees were $4.7 million, reducing the overall loss and LAE ratio by 0.4 points and the personal lines and LAE ratio by 4.3 points in the quarter. Our expense ratio in the third quarter was 30.6%, 30 basis points better than a year ago. The expense ratio improvement was due to reductions in expected profit-based employee compensation from our updated view of 2024 underwriting performance. Our investment portfolio remains conservatively positioned, fixed income and short-term investments with an average credit quality of AA- and a duration of 3.9 years represented 92% of the portfolio on September 30th. After-tax net investment income was $93 million in the third quarter, up 16% from last year, and contributed 13.1 points of ROE. Alternative investments, which report on a one-quarter lag, generated $7.1 million of after-tax income, up from $5.1 million a year ago. In the third quarter, we invested nearly $800 million of new money at an average pre-tax yield of 5.8%. This increased the fixed income portfolio's overall pre-tax book yield modestly, ending the quarter at approximately 4.9%. The higher book yield embedded in our fixed income portfolio should provide a durable income source moving forward, even with the 50 basis point reduction in the federal funds rate during the quarter. Our capital position remains strong with a GAAP equity of $3.2 billion and statutory surplus of $2.8 billion. Book value per share increased 7% from year end, and adjusted book value per share increased 2%. At the end of the quarter, our debt to capital ratio was 13.8%, well below our internal threshold of 25%. Given our operating cash flows and borrowing capacity, we have the financial flexibility to support organic growth and execute our strategic initiatives. During the quarter, we repurchased approximately 103,000 shares of common stock at an average price of $84.34 for a total of $8.7 million. That left $75.5 million remaining under our share repurchase authorization at quarter end. We expect to continue to use this opportunistically. With our outlook for continued profitable growth, our Board of Directors declared a quarterly dividend per common share of $0.38, an increase of $0.03 or 9%. For 2024, we now expect our GAAP combined ratio to be 102.5%, up from our previous guidance of 101.5%. The one-point increase reflects our higher catastrophe loss assumption, which is now 7.5 points. Better than expected non-catastrophe property losses in the third quarter partially offset this, leading us to reduce the full-year underlying combined ratio by one point to 90%. It is too early to provide a specific estimate for Hurricane Milton, but based on its path, our minimal exposure in Florida and very early claims reporting, we expect our losses from the event will be immaterial. Consistent with our typical process, we assume no additional prior year positive reserve development. Our after-tax net investment income estimate of $360 million, 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, and we make no assumptions for share repurchases under our existing authorization. Before we get to questions and answers, I would like to take this opportunity to thank John, the rest of the executive leadership team, and the Board of Directors for their unwavering support over the past year. After 25 years of service, it was an honor and a privilege to serve as the company's interim CFO. It has also been a pleasure telling the Selective story and getting to know so many of you in the investor community. As I turn my focus back to being the Chief Accounting Officer, I would like to take this opportunity to officially welcome Patrick to the Selective team. With that, I'll ask the Operator to please start our question-and-answer session.

The first question comes from Michael Phillips with Oppenheimer.

I guess, I was going to ask this question and then I definitely want to ask after Tony's comments on some commercial auto stuff. I guess for clarification, it sounds like you added $10 million to the current year. Just want to confirm that, right, Tony?

Yes, that's correct. $10 million commercial auto to the current accident year.

My question would be I guess given the nature of comments over the last few quarters, not just from you guys, of course, but from everybody else on the impacts of social inflation. I guess maybe help us get comfortable with the extent to which that could spread more to commercial auto. You took $10 million last quarter, $10 million this quarter. I think you took $10 million last quarter. I'm pretty sure, and then $10 million this quarter. So just help us get comfortable on the commercial auto reserves and the extent to which what we saw for GL, maybe not spread over, because still $20 million is pretty small for the size of your commercial auto book and what you took for GL has been pretty extensive. So just help us get comfortable with the commercial auto reserves, I guess is a crush of the question.

Yes, Mike, thanks. Thanks for the question. This is John. I'll start on that. I guess a couple of things, and I think, I believe we've highlighted this before. I think the trends we've seen in commercial auto have persisted for longer. We saw them start earlier and we've seen them persist. And to your point, the actions we've taken on prior year are relatively small and largely focused on the '23 accident year driven by severities. And much like we did in GL last quarter when we saw some small movement in the most recent prior year, we opted to make a small adjustment to the current year. But the difference here is these trends that we've pointed out with regard to commercial auto have remained relatively stable. Albeit elevated. And that's been for an extended period of time. But if you look at the pricing in commercial auto, and this is a selective comment, as much as it is an industry comment, commercial auto pricing has been a lot stronger for a lot longer. Our commercial auto pricing, even in the current year is 10.9% in a quarter, 10.7% on a year-to-date basis. And if you strip out the prior year emergence and look back over the last couple of years on an accident year basis up and through this year, that line's running for us right around a 98%. And you've got strong earn rate coming through there. So I view it very differently than I view GL, which is the emergence in GL from a severity perspective has been more recent and evident more recently. Whereas you've had a longer-term track record in auto, that's been responded to from a pricing perspective on a more consistent basis.

And Mike, it's Tony. Just one point of clarification on the commercial auto, the prior development was $10 million and it was $10 million last quarter for prior development. The current year actions were actually $5 million.

Thanks for the comments, that's helpful. That makes sense. I guess let's take that maybe just more broadly on social inflation. John, you know, you're not unlike others who have talked about it for a while and I think the difference is that, you know, you've taken some pretty significant charges. Good, good that you've got I think to your track record of what I know about Selective is you see, you take it early. We hear that from other companies. We have really, to me, we haven't seen the extent to which you've taken GL. And so the question then becomes, do you think that, how confident are you that what you've seen isn't just a microcosm of what you write and more specific to your book of business and maybe won't be widespread through the industry. Or if it is, then it's just a matter of time so everything else happens for everybody else.

Yeah. So again, I appreciate the question. First thing I'll say is when your book is as stable as ours is, and you look at our portfolio over a long period of time, it's incredibly stable from an industry classification perspective, from a limits profile perspective, and even from a geographic perspective. And while we've expanded our footprint the portfolio distribution from a geo perspective remains relatively stable. And then you look at the pricing diagnostics on a new and renewal basis, and you see a lot of stability there. It's something external that's pushing those average severities higher. And I know I've pointed to this in the past, while there's some jurisdictional challenges in our footprint that I pointed out in particular states like Georgia and like New York and certain parts of Illinois, there are a number of jurisdictions not in our footprint like California, Texas and Florida, that have been driving a lot of the nuclear verdicts and a lot of the active attorney engagement that are also, you know, sort of industry-wide trends. This is not a class-specific environmental shift. Anytime you have a bodily injury claim, whether that bodily injury claim is in a construction class or is in a retail class or a manufacturing class, a bodily injury claim is what puts you in this environment where you have social inflation, higher litigation rates, you've got jury pools that are more willing to give out high awards. And that's why I think we're pretty confident that this is, in fact, an industry-wide trend. Now with regard to the reserving actions, if you look back over the last several years, the GL line for the entire industry has emerged extremely unfavorably, primarily for the years actually in the years 2020 and prior. And I think on a full industry basis over the last three or four years, that adverse emergence has told somewhere in the neighborhood of $18 billion, and it's been pretty consistent. What you haven't yet seen is those more recent years emerge unfavorably and every company is going to be different. Every company has a different portfolio, every company has a different planning and reserving process. But I think it's instructive if you look company by company and where the '19 and prior years are currently for GL and assume they're relatively mature, and then project that forward by looking at what those companies have disclosed in terms of their forward loss trend assumption and what they've earned on a rate basis. And take a, you know, exercise your own judgment as to whether or not you think that all hangs together. And I think from our perspective with the actions we've taken in the more recent years and our updated view of loss trend, as well as how we're pricing on a go forward basis is the right approach for us. And that continues to be our focus.

Okay. No, thank you, John for all that. That's very helpful. I guess, congrats on Patrick and thanks to Tony for all your help in the past year. Thanks guys.

The next question comes from Michael Zaremski with BMO.

My first question is about commercial auto. Congratulations to Patrick Brennan on starting with us on October 1st. Progressive is a leading commercial auto writer in the US. I'm interested to know if the charges taken this quarter or the addition to reserves in commercial auto is related to a reserve study that Patrick was involved in, or if he will be conducting a detailed analysis in the upcoming months as he gets more familiar with the company.

Yes, so this is John and I appreciate the question. I know there's been a lot of speculation and discussion around this, and I think it's important to restate our process. First of all, Patrick joined on October 1st and we're thrilled to have Patrick on board. And Patrick certainly has a strong background and a set of experiences that are additive to the team and to the process. And while we're competent in our processes, we're always looking for opportunities to refine them. But I think it's also important to restate the approach we've had for a long time. And when I say long time, I'm talking decades that predate my role with the company 26 years ago when I started, which is our reserving process. First and foremost, the chief actuary in our organization and the current Chief Actuary, Vince Senia, has been here for a long time and was prior the lead reserving actuary. Chief Actuary reports to the CEO in our organizational structure and has appeared to the CFO and is heavily involved in the management decision relative to reserves alongside of the CFO and the CEO. Tony and his role prior as Chief Accounting Officer, and then serving as the Interim Chief Financial Officer has been heavily engaged and involved in that process over the long term. And I realize there's been speculation about the CFO change, but the way our process has worked has always worked and will continue to work. There are multiple people, myself included that have been involved and will continue to be involved in that process, that have a voice and weigh in on those decisions. With regard to commercial auto in particular, I think Patrick's background is going to be beneficial. As I said earlier, his voice and his experience will be instrumental in those decisions we make going forward, but the process has been very consistent at our organization.

Yes, that's helpful. Thank you. Regarding the standard commercial lines underlying loss ratio, which is one of the best we've seen in years, we can see that the favorable non-catastrophe property losses are contributing to this. I want to clarify our understanding. Should we be averaging non-catastrophe property losses over longer time frames? Also, similar to the catastrophe load, is there a noticeable upward trend in non-catastrophe property losses and total cash losses as we consider the overall trend? It seems like you're suggesting that we shouldn't focus solely on the underlying this quarter.

Yes, I guess a couple of things and Tony can certainly weigh in as well. I think your starting point and we give you a lot of disclosure around trends and in more recent years we've been breaking that trend assumption down in between property and casualty. And for 2024, our all-in trend assumption of 7% assumed a property trend that was closer to 4%. And we're earning rate in the commercial property line in particular, at around 12%. If you look at last year 2023 and the current run rate this year of 2024, a little over 12% plus whatever portion of exposure pickup that you want to view as profit positive, margin positive. We generally don't. We just focus on the rate number. But there's a positive gap there that continues to earn its way through. So I think there's a clear benefit there in commercial. Now we're starting to turn the corner on personal property that impacts that. On the cat side, as you've seen from us, our expected cat loads have been going higher last several years and continue to move higher in our assumption for 2024 so far. That gets built into our forward pricing assumptions. If you look at it for us, I think we've seen volatility in the quarterly and annual cat loads for the personal lines book than we have for commercial. While commercial has gone higher, the range around variability in cat loads for commercial has been a little bit tighter or a fair amount tighter than it has in personal lines, but there's a pricing dynamic to that as well.

Yes. The only thing I would add, John, was just I agree that the pricing has had a positive impact on the non-cat property. But obviously, there's some normal variability there as well. So I think the way you describe taking a look at multiple periods and averaging them would be prudent. In fact, when you look at overall guidance, we expect a more normalization of non-cat in the fourth quarter, which is embedded in the guidance we've put out there. So I think your approach sounds reasonable.

Okay. That's very helpful. And then just lastly, quickly on the personal lines, the flood of claim handling fees. Should those continue to trickle into Q4 and/or next year?

Yes. I mean, I think all in all, most of them, I think we have estimated and contained to the current quarter. So I believe the number we put out for the current quarter is accurate, and there won't be much, if any, real bleed into the fourth quarter. And with regards to Milton, like we said, it's pretty immaterial. So we don't expect there to be much with regards to that particular storm and flood fees either.

And there's a normal claim flood volume that is in our results early. But when you have these bigger events, you get a little bit of a higher impact from the claims revenue portion of that operation.

And the next question comes from Paul Newsome with Piper Sandler.

It's clearly in the category, curious about the Hurricane Helene losses. If you remove those, would the cat load be roughly in the normal zone? Additionally, I'm interested in whether the mix of Hurricane Helene seemed typical from your perspective.

Yes. The overall impact on our combined ratio for the quarter was 7.6 points due to the storm. If you exclude that, it would be a slightly above-average quarter, around 6 or 5.8 points. Without Helene, it’s a relatively standard quarter. The industry losses for Helene have increased as time has passed, and I think what wasn't fully recognized is that while there was significant attention on the landfall and the Big Bend region, the extent of the wind field traveled far into the Southeast. This resulted in considerable wind-driven losses in areas of Georgia, South Carolina, and North Carolina, meaning it wasn't just a coastal event—many impacts were felt quite a bit inland. This may explain some of the discrepancy in loss expectations. At the end of the quarter, we have a loss, and we are focused on accurately estimating and accounting for the catastrophe losses in the appropriate period. We are confident in our total estimate of $85 million for Helene.

And then maybe just one question in addition. If we think about sort of what you do from a pricing and competitive perspective and the change in the business that you mentioned, are we going to see or do you think you expect to see more of a shift in the business mix towards property within Selective? Or do you think that at the end of the day, it will kind of end up being a fairly similar mix of what you're doing today prospectively?

Yes. I think you're likely to see a shift towards home, but I don't think the magnitude will be very significant. The average home premium continues to be much higher than we have seen historically due to significantly higher replacement costs. When you consider the competition and the market we are targeting, there are fewer competitors with a product offering for the mass affluent market like ours; there are certainly some, but there are fewer competitors in that space. In contrast, the auto market remains highly competitive with a broader range of competitors. I believe these factors combined will likely lead to a slight shift towards home as a percentage of the overall mix.

And the next question comes from Scott Heleniak with RBC Capital Markets.

I was just curious, you guys used to give out the rate differential between your best performing accounts and kind of your lowest performing accounts. I'm wondering if you had that data available now that you're able to share. I was just curious how that's kind of changed over the past year that kind of spread if you have that, if not, that's fine too.

Yes, I’m not sure if we’ve posted the updated investor presentation yet. We include it every quarter, and it has been part of our process for at least a decade. Overall, you can see a consistent trend in average rate by retention, along with retentions in the same categories. As rates have increased, the entire curve has also risen in relation to the cohort, but there’s a noticeable higher rate level which leads to lower retention in the worst 10%. This shift is based on anticipated forward loss ratios, and there has been a slight leaning in that direction. You can find this information in the investor presentation.

That was Page 15 of the investor package if you're looking for it.

I'm curious about the rate trends in Personal Lines, which have been increasing. Some others have mentioned that this might slow down a bit. What are your expectations for your book in 2025 based on the rate increases you've filed, and how are you balancing that with retention as you develop your high net worth business?

Yes. We are regularly updating our pricing indications on a state-by-state basis and filing accordingly. The blended rate number for the quarter is 22.8%, but there are significant variations from state to state, and some states still face regulatory hurdles in getting approvals for adequate rate levels. As we revise those indications and update our outlook on loss trends, this will influence our rate indications, and we will continue to file until we reach our target combined ratio on a run rate basis. I'm not able to provide a 25% rate expectation at this time, but achieving rate adequacy state by state is our goal. Currently, we have several states that are rate adequate, and we anticipate that new business growth will come from those areas moving forward. In states that are not adequate, we've decided to slow or stop the flow of new business. This describes our current situation. Moreover, we have seen a significant improvement in the underlying combined ratio, although there is still work to be done. Much of that will come from the earnings of the current rates throughout the remainder of 2025.

Okay. That's helpful detail. And then just the last one I had was just on the loss trend in GL. Was there any change on that? I think it was 9% in the second quarter. Is that still running around that same rate? Any change there?

Yes, I would say there's no change in our trend assumptions, and based on what we see and we took it through last quarter, both historical trend for the more recent accident years and our view of forward loss trends are stable from last quarter.

The next question comes from Grace Carter with Bank of America.

Hi, everyone. Looking at retention in the standard commercial book this quarter, it hung in there very well even with the pretty material step-up in overall renewal rate increases. So I guess I'm just kind of wondering if you could update us on sort of your distribution partners’ reactions to the rate increases you've been taking and if you expect retention to continue to be able to stay at these levels over the next few quarters as you continue to go through these rate actions. I mean, it sounds like all of your peers are kind of reacting and share some concerns on social inflation and so forth, but I just kind of wanted your updated views on that.

Thank you, Grace. It's important to note that the rate we are discussing is not a drastic change from our previous levels. The movement in general liability has been significant and appropriate, reaching 10%. Overall, we are looking at just over 9% for the quarter in commercial and just over 8% year-to-date. While it's an adjustment, it shouldn't cause enough disruption to greatly affect retention. This is speculative, as market dynamics will play a role, and we expect these to evolve over time. From a new business perspective, the general liability pricing environment isn't as conservative as some market rhetoric might imply. The conversation around social inflation and elevated loss trends is consistent across the industry, but there remains significant competition in general liability from various market players. It's uncertain how this will develop in the coming quarters. However, I previously mentioned that our pricing and property targets are our primary focus, and if this leads to a nominal growth trade, we are fine with that. Furthermore, the investments we’ve made in expanding our production outlets through geographic expansion and new agency appointments, as well as additional resources, will provide a continued path for growth despite potentially conservative pricing compared to the market. So, while it's a complex response to a straightforward question, it reflects the dynamic environment we’re operating in.

Thank you. And the next one, premium to surplus. It's still a little bit above kind of the long-term target range. I guess, is there a particular kind of trajectory that you all see that or a particular time line that you all see that kind of naturally returning to the target range? And how much of a priority is getting that back to sort of that 1.35x to 1.55x? Or is this just one metric out of many that you'll look at? It doesn't really matter.

Yes, it is a metric that we monitor and discuss, so it is important. However, your observation is correct, as it is just one of several metrics related to capital adequacy. The main limitation of the surplus ratio is that it does not take into account holding company capital. When we consider that factor, it explains why the other capital metrics are as they are. We anticipate being within our desired range over time and believe there is a feasible path to achieve this. Addressing this could happen quite quickly by including holding company capital. While this metric is significant, it is always assessed in relation to future earnings potential and the status of other capital metrics.

And the next question comes from Meyer Shields with Keefe, Bruyette & Woods.

I have a couple of questions regarding property losses. You've mentioned this briefly, but I'm curious if you could elaborate on how you determine that the lower-than-expected non-catastrophic weather losses are not influenced by the significant catastrophic losses that might be pushing overall losses above the threshold.

Yes, to clarify, this refers to total non-cat property losses, which encompasses commercial property, personal property, and auto physical damage. Generally, if there is a consistent definition of catastrophes, as we have with our PCS designation, these losses should operate independently. There are frequency and severity components to non-cat property losses that account for the variability we've discussed historically. However, a higher level of cat losses in a quarter or year should not favorably impact non-cat property losses.

And to that point, I would just say that the two biggest loss types are auto, as John referred to, and the other would be fire losses. And the two of those generally make up if you look at year-to-date about 70% of the non-cat property.

Okay. That's very helpful. And the second question, when you thought a quarter like this with elevated catastrophe losses, is there any quantifying maybe the impact on incentive compensation, either to employees or agents?

Yes. So I guess the first thing is our incentive compensation program for employees is driven by combined ratio all in. So we don't exclude cat losses. So a high cat year will put downward pressure on the 50% of the incentive comp pool that's driven by financial performance in the current year. So we don't strip that out. And I would say the same thing applies with regard to agency compensation, our profit-sharing plan for agents includes a one-year and a multiyear profit component. Now there's always a lag and a lot of the heavy cat losses in a given quarter are going to be in IBNR, especially when it happens at the end of a quarter. But ultimately, those payments come through there; it does impact profit-sharing payouts when you have large events.

Yes, and just to tie to get the 30 basis point improvement in the expense ratio in the quarter and the almost 1 point for the year-to-date is heavily driven by the employee compensation and the variability of that, as John mentioned.

The next question comes from Matt Carletti with Citizens JMP.

First, in past quarters, you've given cats by line within Standard Commercial. Do you have that handy for the $100 million or so of cap this quarter?

Yes. The property is $93.7 million. The BOP was $4.4 million, and the commercial auto was $2.3 million for the total commercial lines of $100.4 million.

All right. Great. My next question is focused on the long-term prospects for standard personal lines. After implementing profit improvement actions, what are your plans for that business in the coming years? Currently, it represents about 10% of our high with a relatively small state footprint. Are you aiming to maintain this size and scale with stable profitability over the long term, or do you have intentions to grow it further? This might involve expanding your footprint or increasing your market presence in the states where you currently operate.

Thanks, Matt. That's a great question. I'll address it from a longer-term perspective. In the short term, our goal is to demonstrate that we can successfully compete in this target market, and I believe we are showing signs of that. However, when considering a business that focuses on a smaller addressable market, it's crucial to maximize our engagement with that market, which involves expanding our state presence. There are definitely opportunities to better serve that market through expansion. However, our first priority is to execute effectively in our current states, and I feel we're on a solid path to establish ourselves as a strong competitor in those areas. Once we've made progress there, we can consider investing in expanding our business footprint, doing so thoughtfully while keeping in mind our overall catastrophe exposure profile. We aim to grow while also creating a more diversified book in terms of catastrophe exposure.

I show no further questions at this time. I would now like to turn the call back over to John for closing remarks.

Well, thank you all again for joining us. We appreciate your time. I appreciate your interest and your questions. And as always, if you have any follow-ups, please feel free to reach out to Brad. Have a nice day.

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