Earnings Call Transcript - SIGI Q4 2021

Operator, Operator

Good day, everyone, and welcome to Selective Insurance Group’s Fourth Quarter 2021 Earnings Call. At this time, for opening remarks and introductions, I would like to turn the call over to Senior Vice President, Investor Relations, and Treasurer, Rohan Pai.

Rohan Pai, Senior Vice President, Investor Relations, and Treasurer

Good morning and thank you. We are simulcasting this call on our website, selective.com. The replay is available until March 06. We use three measures to discuss our results and business operations. First, we use GAAP financial measures reported in our annual, quarterly, and current reports filed with the SEC. Second, we use non-GAAP operating income and non-GAAP operating return on common equity to analyze trends in operations. We believe these measures make it easier for investors to evaluate our insurance business. Non-GAAP operating income is net income available to common stockholders, excluding the after-tax impact of net realized gains or losses on investments and unrealized gains or losses on equity securities. Non-GAAP operating return on common equity is non-GAAP operating income divided by average common stockholders’ equity and GAAP reconciliations to any referenced non-GAAP financial measures are in our supplemental investor package found on our website Investors page. Third, we make statements and projections about our future performance. These forward-looking statements under the Private Securities Litigation Reform Act of 1995 are not guarantees of future performance and are subject to risks and uncertainties. We discuss three risks and uncertainties, including supplemental disclosures about the COVID-19 pandemic in detail in our annual, quarterly, and current reports filed with the SEC, and we undertake no obligation to update or revise any forward-looking statements. Now, I’ll turn the call over to John Marchioni, our President and Chief Executive Officer, who will be followed by Mark Wilcox, our EVP and Chief Financial Officer. John?

John Marchioni, President and Chief Executive Officer

Thank you, Rohan and good morning. I focus my opening remarks on our strong financial and operating results, then turn to key industry trends and how we’re responding to them. Mark will then provide additional details on our results for the fourth quarter and the year, and I’ll return with a few closing comments before opening the call up to questions. 2021 marks our eighth consecutive year of double-digit operating ROEs. This track record of consistently strong growth performance is matched by very few in our industry. We’re proud of this achievement and we’re pleased by AM Best’s upgrade of our financial strength rating to A+. This upgrade is a testament to our excellent financial position and consistent superior operating performance. As proud as we are about performance, we’re even more enthusiastic about the opportunities that lie before us. We’ve built a unique franchise with a strong foundation of great people, sophisticated tools and technologies, and deep relationships with a top-notch group of distribution partners. We generated solid financial results in the fourth quarter with a 13.8% annualized non-GAAP operating ROE. For the full year, our 14.3% non-GAAP operating ROE was extremely strong and well above our target of 11%. Underwriting profitability and investment performance were both meaningful contributors to our financial results for the quarter and the year. For the quarter, the drivers of our net premiums written growth included overall renewal pure price increases averaging 4.7%, which were driven by 5% in commercial lines and 5.9% in E&S. The exposure growth was approximately 3.6% on our renewable book for commercial lines, strong retentions across all three segments, and overall new business growth of 11%, including 8% in commercial lines and 30% in E&S. Our 93.1% combined ratio for the quarter included 4.5 points of net catastrophe losses, partially offset by 1.9 points of net favorable prior year casualty reserve development. The underlying combined ratio was 90.5, reinforcing the high quality of our book of business. Net investment income after tax was $65 million in the quarter, benefiting again from the exceptional performance of our alternative investments, particularly unrealized gains on our private equity limited partnership portfolio. In addition to delivering excellent results, I want to highlight some of our other key achievements for the year. We continued our decade-long track record of achieving renewal pure price increases that have been in line with or above expected loss trend. This track record gives us confidence to effectively navigate through all market cycles. We executed several strategic initiatives that will drive ongoing profitability growth, such as expanding utilization of MarketMax, our agency-facing platform that helps identify new business opportunities, upgrading our technology platforms for small commercial and E&S business, and repositioning our personal lines of products and services to compete in the mass affluent market. We also laid a foundation to expand our commercial lines footprint by three additional states in the latter half of this year and we made significant progress on our ESG initiatives and disclosures, including taking a number of steps to enhance employee diversity at all levels within the organization. We also ensured our employees were supported throughout the pandemic, as we maintained excellent employee engagement and alignment despite the largely remote work environment. Our success on this front is best demonstrated by Selective being certified as a great place to work for the second consecutive year. The achievement I’m most proud of is the unwavering dedication of our employees in serving our customers and distribution partners and helping them navigate through the pandemic-related challenges and the various catastrophic events they’ve experienced. Their efforts over the past two years have further strengthened our reputation in the market with customers and distribution partners. The excellent performance we delivered in 2021 is the direct result of our ability to successfully execute the fundamentals of our business with selection, pricing, and claims adjudication. Our strategic competitive advantages in our core commercial lines business have us well-positioned for the future. Those key advantages are a unique field model placing empowered underwriting staff in proximity to our distribution partners and customers, a franchise value distribution model defined by meaningful and close business relationships with a group of top-notch independent agents, our ability to develop and integrate sophisticated tools for risk selection, pricing, and claims management, delivering a superior omni-channel customer experience enhanced by digital platforms and value-added services, and a highly engaged and aligned team of extremely talented employees. I’ll close by highlighting two key market dynamics and how we are managing through this environment. First, there is less certainty in forward loss trends, as we emerge from a pandemic-influenced economy. Every company in the market faces this reality. This uncertainty is driven primarily by three factors: economic inflation, social inflation, and the two most recent accident years presenting unusual frequency and severity patterns. With regard to economic inflation, the impact continues to be largely on the shorter tail property lines, and these trends have persisted longer than originally anticipated. On the casualty lines, the social inflationary trends that were evident pre-pandemic are expected to persist. Medical trends, which impact workers' compensation and bodily injury coverages, have been more stable. Finally, we use prior accident years as a basis to estimate future year loss ratio selections, and accident years 2020 and 2021 show meaningful decreases in frequency, largely offset by increases in severity scenarios. These patterns create additional uncertainty in projecting frequencies and severities in a post-pandemic environment. Taken together, these additional uncertainties have led us to increase the expected loss trends contained in our 2022 loss ratio estimates from approximately 4% to 5%. Second, given these loss trends, combined with continued pressure on investment income from historically low interest rates, elevated catastrophe losses, and a firming reinsurance market, we expect the commercial lines pricing environment, other than workers' compensation, to remain favorable. We’ve demonstrated for over a decade our ability to consistently obtain renewal pure price increases that are in line with or above expected loss trends, an approach we will maintain. We also pride ourselves on maintaining a similar level of underwriting and pricing discipline when evaluating new business opportunities. We will continue to leverage our sophisticated underwriting and pricing tools, franchise distribution relationships, and superior customer servicing capabilities to achieve our top and bottom line targets. In our commercial lines portfolio, renewal pure price increases net of any exposure change remain relatively stable throughout the year. Our fourth-quarter pure renewal rate was 5% compared to 5.3% for the full year. While pure price is the primary lever to maintain pace with loss trends and improve loss ratios, we take other actions to improve our loss experience. These include underwriting actions to improve mix of business and claims initiatives to improve outcomes while maintaining fair settlements for our claimants. On business mix, we have long focused on administering renewal pricing in a very granular fashion, based on expected future profitability of an account. Our underwriters managed the renewal pricing and retention based on profitability cohorts to achieve a favorable shift in portfolio mix. In 2021, the cohort of accounts with the lowest expected future profitability, which represents about 11% of our portfolio at renewal, had pure rate increases seven points higher than our top-performing cohort, and were retained at six points lower than our top-performing cohort, which represents 25% of our portfolio. This favorable shift in the mix of business will benefit future loss ratios. On the claims front, we are focused on improving outcomes, efficiencies, and customer experience through initiatives such as centralization of complex claims, incorporation of robotic process automation for persons of loss, virtual appraisals, and digital fast-tracking of certain low complexity claims. Overall, I’m very pleased with our strong execution, consistent track record of excellent results, and plans to generate consistent and profitable growth. Now I’ll turn the call to Mark to review the results for the quarter.

Mark Wilcox, EVP and Chief Financial Officer

Thank you, John and good morning. I’ll review our consolidated results, discuss our segment operating performance, and finish with an update on our capital position and initial guidance for 2022. For the fourth quarter, we reported net income available to common stockholders per diluted share of $1.59 and non-GAAP operating EPS of $1.56. Strong underwriting results and investment performance were both meaningful contributors to the results this quarter. For the full year, we reported record EPS of $6.50 and record non-GAAP operating EPS of $6.27, which was up 51% from 2020. A strong non-GAAP operating ROE of 14.3% was driven by solid underwriting results, favorable reserve development, and extremely strong alternative investment income. We also generated excellent top-line growth in 2021 and advanced our strategic objectives. Overall, it was an excellent year for Selective and our shareholders. Turning to our consolidated underwriting results, we reported 9% growth in net premiums written in the fourth quarter. For the full year, net premiums written increased 15%, which makes it the strongest year of growth for Selective in almost two decades. We reported a consolidated combined ratio of 93.1% for the fourth quarter. Included in the combined ratio were $35.3 million of net catastrophe losses of 4.5 points and $15 million of net favorable prior year casualty reserve development of 1.9 points. Catastrophe losses were elevated this quarter, with two events in mid-December accounting for approximately half of the losses and primarily impacting commercial lines. On an underlying basis or excluding catastrophes and prior year casualty reserve development, the combined ratio was 90.5% for the quarter. For the year, we reported a very profitable combined ratio of 92.8% and an underlying combined ratio of 90.1%. The 90.1% underlying combined ratio compares favorably to our initial 2021 guidance of 91%, with the variance driven principally by lower than expected non-cat property losses and a lower than expected expense ratio. Moving to expenses; our expense ratio was 32.5% for the year compared to 33.8% for the prior year period, reflecting some of our cost containment initiatives, as well as lower than expected travel and entertainment and overhead expenses. We remain focused on lowering the expense ratio for a range of initiatives, while ensuring we’re investing appropriately to support our longer-term strategic objectives. We report our expense ratio down meaningfully since its peak of 35.3% in 2016, while we expect on 2022 expense ratio to be flat with 2021, as our continued cost containment initiatives will be offset by pandemic revenue expense savings trending back to pre-pandemic levels. We expect to lower it and achieve a longer-term expense ratio target in 2023. Corporate expenses, which are principally comprised of holding company costs and long-term stock compensation, totaled $5.4 million in the quarter and $28.3 million for the year. Turning to our segments, for the fourth quarter, standard commercial lines net premiums written increased 8% driven by renewal pure price increases averaging 5%, solid and stable retention of 86%, and new business growth of 8%. Exposure growth was also positive. For the year, net premiums written increased 16%, or 12% when adjusted for the prior year COVID-19 related items. The commercial lines combined ratio was a profitable 93.1% for the fourth quarter and included 4.2 points of net catastrophe losses and 2.4 points of favorable prior year casualty reserve development. The favorable prior year casualty reserve development was driven by $30 million for the workers' compensation line related to accident years 2019 and prior. This was partially offset by $15 million of reserve strengthening for the commercial auto line, related principally to the higher than expected bodily injury severities for the 2016 through 2019 accident years. The commercial lines underlying combined ratio was 91.3% for the quarter. For the full year, the combined ratio was a very profitable 91.9% and the underlying combined ratio was 90.6%. In our personal line segment, net premiums written increased 1% in the quarter, but were down 1% for the year, reflecting continued competitive market conditions, particularly for personal auto. We started to gain some traction in our new mass affluent target market for home, which is encouraging and an early indicator that our new strategy is working. However, it will likely take some time to get back into a consistent growth mode. Renewal pure price increases averaged 1.1% for the quarter, retention was slightly down relative to a year ago at 83%, and new business was down 9%. The combined ratio in the quarter was 97.6% and included 9.9 points of net catastrophe losses. The underlying combined ratio was 87.7%. For the full year, the combined ratio was 98.6% and the underlying combined ratio was 85.9%. In our E&S segment, net premiums written grew 27% for the quarter relative to a year ago. Renewal pure price increases averaged 5.9%. Retention remained strong relative to a year ago. New business was up 30%. The Argo renewal rights transaction that incepted in the fourth quarter was not a meaningful contributor to premium growth, although we expect renewals on that book to pick up in the coming quarters. The combined ratio for the segment was extremely profitable 88.8% in the quarter and included 1.6 points in net catastrophe losses. The underlying combined ratio was 87.2%. For the full year, the combined ratio was 94.3% and the underlying combined ratio was 88.7%, and net premiums written growth was a very strong 23%. Overall, 2021 was our best year for our E&S segment since we launched it about a decade ago. Moving to investments, our investment portfolio remains well-positioned. As of quarter-end, 91% of our portfolio was invested in fixed income and short-term investments, with an average credit rating of 80-plus and an effective duration of 3.9 years, offering a high degree of liquidity. Risk assets, which included a high yield allocation contained within fixed income, public equities, and alternatives, represent 11% of our portfolio. For the quarter, after-tax investment income of $64.5 million was up 16% for the year-ago period. The increase was primarily driven by $19.6 million of after-tax alternative investment gains compared to $13.9 million in a comparative period. As a reminder, net investment income from alternative investments is reported on a one-quarter lag. We expect the contribution from alternatives to return to more normal levels in the coming quarters. The after-tax yield on the portfolio was 3.2% for the quarter, delivering a strong 9.4 points of ROE contribution with alternative investments contributing 2.8 percentage points. The after-tax yield on the fixed income securities portfolio was 2.5% in the fourth quarter, which is slightly down compared with a year ago. The average after-tax new money yield on fixed income purchases during the quarter was 2.1%, which is up sequentially from 1.8% but down from 2.2% in the comparative quarter. The total return on the portfolio was 0.41% for the quarter and 2.74% for the year. With regard to our reinsurance program, we successfully renewed our CAP program on January 1. We retained our existing structure for a core CAP program including a $40 million retention, although we added $50 million of limit in response to our growing book of business. We maintained a one in 100 or 1% net probable maximum loss or PML for US hurricane at a very manageable 1% of GAAP equity and one in 215 net PML or 0.4% probability and 4% of GAAP equity. We also renewed our non-cat footprint property CAP program. We restructured this cover to the E&S only cover and it now covers all states for our E&S business but does exclude standard commercial lines for our five new states. We increased the retention to $10 million from $5 million and increased our co-participation from 15% to 34%. Pricing on our CAP program increased modestly on a risk-adjusted basis but was in line with that of loss-free accounts in the US. As a reminder, the reinsurance program also includes access to loss treaties, which limit the impact to us for large losses to $2 million covers for casually and $3 million per occurrence for property. Now turning to capital, our capital position remains extremely strong with $3 billion of GAAP equity as of year-end. Book value per share increased 9% during the year with strong earnings partially offset by dividends and a reduction in net unrealized gains. Cash flow was extremely strong in 2021 with $771 million of operating cash flow with 24% of net premiums written. Our financial position is now the strongest in our company’s 95-year history and offers us significant financial flexibility as we look to grow and execute on our strategic objectives. Our cash and investment position at our holding company stands at $527 million, which is above our longer-term target. Our net premiums written to surplus ratio of 1.33 times is slightly below our target range of 1.35 to 1.55 times. Our debt-to-capital ratio of 14.5% is also very conservative. We did not repurchase any shares during the fourth quarter or subsequent to the quarter-end under the $100 million share repurchase program. We have $96.6 million of remaining capacity under this program, which we plan to use opportunistically. As we transition and look ahead to 2022, each year we establish and operate in our retarget based on at least a 300 basis points spread over our weighted average cost of capital, as well as considering other factors including market conditions. For 2022, we have maintained the 11% non-GAAP operating ROE target, which is about 350 basis points over our weighted average cost of capital. Our target ROE sets a high bar for our financial performance and aligns our incentive compensation structure with shareholder interest. Over the years, our actual reported results have, of course, varied from our targets, given the inherent volatility in our business. But over the last eight years, we have delivered strong returns for our shareholders with an 11.9% average non-GAAP operating ROE. We’ve also grown tangible book value per share plus accumulated dividends by 12.1% annually during that same time period. Let me finish with some commentary on our initial guidance for 2022. First, we expect a GAAP combined ratio, excluding catastrophe losses, of 91%. This assumes no prior accident year reserve development. Catastrophe losses of 4 points on the combined ratio after-tax net investment income of $200 million, including $20 million in after-tax gains from our alternative investments, an overall effective tax rate of approximately 20.5%, which includes an effective tax rate of 19.5% for net investment income and 21% for all other items, and weighted average shares of 61 million on a diluted basis, which does not reflect any share repurchases we may make under our authorization. With that, I’ll turn the call back over to John.

John Marchioni, President and Chief Executive Officer

Thanks, Mark. Looking forward, we remain focused on achieving our objectives around profitable growth and generating strong ROEs relative to our weighted average cost of capital. We have a decade-long track record of successfully balancing our goals around growth and profitability while driving improvements in our business mix. I would like to highlight some of the key strategic initiatives that will contribute to our ongoing success. In commercial lines, we remain focused on three fronts. Strategically increasing agent appointments to represent at least 25% market share in our footprint states, increasing Selective's share of our agents’ premium to 12%, and executing our geographic expansion plan. During 2021, we made meaningful progress on each. We appointed just over 100 new agencies, increasing our total agency count to approximately 1430 and our total storefronts to approximately 2500. We expect this pace to remain steady. We continue to generate organic growth with our existing agency partners. Our MarketMax tool, which provides our distribution partners with insights into their overall portfolio and identifies target accounts to grow their business with us, has been instrumental in generating new high-quality business opportunities. And finally, our commercial lines geographic expansion plans remain on track. Over the next year, we plan to open the states of Alabama, Idaho, and Vermont, with others planned for subsequent years. Our new small business platform has been deployed for commercial auto, general liability, property, workers' compensation, and other supporting lines of business, enhancing the ease and speed of transacting with us in this important market. We also expect to complete the rollout of our new E&S automation platform for general liability, property, and package business by the end of this quarter. Our updated personalized product and service offerings to compete in the mass affluent market are showing early signs of success. Finally, we continue to invest in and build out our digital customer offerings. Adoption of our self-service platform and MySelective mobile app continue to accelerate. These platforms, along with our ongoing focus on expanding our value-added service offerings, should generate future retention patterns. For the remainder of 2022, we are confident about our ability to sustain superior financial performance. We will stay true to our historically prudent and disciplined approach to generating consistent and profitable growth. With that, we will open the call for questions.

Operator, Operator

We have the first question from the line of Michael Zaremski of Wolfe Research. You may ask your question.

Michael Zaremski, Analyst

Hey, good morning.

John Marchioni, President and Chief Executive Officer

Good morning.

Michael Zaremski, Analyst

First question, I was hoping to further unpack the increase in the expected loss trend from four to five. I also, maybe I’m wrong, I believe that in past years it’s been in the threes, but you can correct me if I’m wrong. And now maybe you can kind of further unpack, you gave a lot of color, John, is it being driven by property or is it just a mix of a number of things? So there’re some good guys and some bad guys and, we can see some of your lines are running kind of hot, commercial auto, but maybe that’s a separate question, but maybe we’ll start there. Thanks.

John Marchioni, President and Chief Executive Officer

Thank you for the question, Mike. There are several aspects to consider, and you’ve highlighted a few. Firstly, it's crucial to differentiate between historical loss trends, which reflect changes in frequency and severity from prior accident years, and our expected loss trend. Our expected loss trend is projected at 5%, which is included in the 2022 loss tech that supports the guidance Mark provided, and it does not reflect shifts in our historical patterns. Our historical loss trend has hovered around 4% for the past couple of years, slightly below that, and previously was in the 3% range. We have adjusted that trend upwards over the last few years, increasing it to 4% and now to 5% moving forward. This is a forward-looking estimate, influenced by three primary factors we've mentioned previously. The first is economic inflation, which you've noted affects certain sub-lines more than others. The second factor is social inflation, particularly regarding trends in liability lines that began before the pandemic and are anticipated to resurface. The third consideration, which falls into the uncertainty category, relates to the recent accident years, which present different frequency and severity patterns compared to our historical data. Like many companies, we maintain discipline in making loss reflections. We analyze the last four or five accident years, adjust for current rates, and account for the cumulative effect of the rates earned over recent years, as well as the actual changes in severity and frequency. This process is essential, and we consistently emphasize it. Over the long term, we've been aligning or exceeding our rate levels compared to loss trends. Following our analysis, we roll that information forward by adding our expected trend of 5%. You can interpret whether that is conservative or aggressive based on our anticipated earned rate level. Understanding the dynamics between historical and expected loss trends is crucial. It's also necessary to consider where economic inflation impacts the business significantly. Notably, in the case of medical inflation, we haven’t observed substantial movements, maintaining a relatively stable rate in the mid-3% range. The inflation we see is more related to the building sector, used cars, and body work. When discussing auto, it’s important to keep in mind the frequency dynamics. Frequencies have rebounded compared to 2020, but they remain slightly below pre-pandemic levels in our portfolio. This lower frequency provides some offset to the economic inflationary impacts on severity. Specifically focusing on auto physical damage, this accounts for around 2% of our overall premium and the same proportion in terms of ultimate loss dollars. For commercial auto, it is approximately 6.5%. In total, physical damage represents about 24% of premium and 6.5% of losses. Thus, the impact of inflation on losses is relatively contained within the overall portfolio. I understand I’ve elaborated considerably, and I’m happy to provide more detail on other lines if needed. Overall, we view a trend of 4% to 5% as reasonable going forward. While other companies may not see significant movement in their trends, the factors compelling us to raise our forward loss trend by a point are broadly applicable across our industry. I'm open to discussing any specific areas you’d like to explore further, as this is an essential topic.

Michael Zaremski, Analyst

Okay, that was helpful. Could some of the upward trend be attributed to Selective's strength in commercial auto or blue-collar trades? I'm trying to think specifically about Selective. It might be my responsibility to figure this out, but could you discuss if certain lines are particularly driving this?

John Marchioni, President and Chief Executive Officer

I don’t know that I would point to certain lines. Auto is certainly one that we have a little bit of a higher expected forward trend, but I will say that we view the liability side as much as the physical damage side from that perspective. But I will say when it comes to building out our expected loss trend, yes, there’s an influence from your historical loss trend, but then we take the component parts of the CPI and break those down very specifically by line of business and how they impact each individual line. And that gets embedded into our expected loss trend. So to that extent, you will see a line of business distributions that might vary from one company to another when you think about their percentage of property, the liability writings, when you think about their auto and specifically their auto liability to auto physical damage. Those ratios or those relative premium volumes will move the number around but, generally speaking, those inflationary impacts are going to impact everybody, but the mix of business might vary. But I’d say there’s nothing in our portfolio that would currently suggest that the forward trend expectation for us should be any different than anybody else.

Michael Zaremski, Analyst

Okay, that's helpful. Let's quickly shift to investment guidance, probably for Mark. I believe the implied yield on alternatives feels a bit lower than what our peers or the industry are projecting. Most peers seem to be guiding for high singles, and some even low doubles.

Mark Wilcox, EVP and Chief Financial Officer

Yeah, good question, Mike. Just to level set, 2021 was a record year for us in terms of after-tax net investment income at $263 million, including $93 million of after-tax net investment income for the alternative portfolio, but now delivered six consecutive quarters of really strong returns from old. And while we have great expectations for the portfolio to continue to produce very strong and attractive returns for us and our shareholders, we do think that the strong returns we’ve enjoyed for the last six quarters will revert back to longer-term expectations. So our guidance for 2022 to 202 million, 20 after tax alternatives, that is an off the tax number and if you would have grossed that up to a pre-tax number, it implies an 8% return for alternatives for 2022. And the way to think about that is, we probably think that portfolio, which is a mix of private equity, private credit, and real asset strategies long-term will run between about 8% and 10%. We will have the benefit of a healthy capital markets returned from Q4 coming through Q1, but if you were to cut the quarter off today, for Q1 coming through Q2, we’ve had tremendous amounts of volatility. And when you think about public equity, market expectations, the transition to a higher interest rate environment, slower economic activity, likely slower corporate revenue, corporate profits, low valuations, we do think it’s appropriate to be kind of on the lower end of the range in terms of our expectations for the alternative portfolio for 2022. So again, that 8% return is the expectation built into the guidance. So hopefully that provides some context.

Michael Zaremski, Analyst

Great. Thank you.

Operator, Operator

We have the next question from the line of Meyer Shields of KBW. You may ask your question.

Meyer Shields, Analyst

Great. Thanks. I really only have one question and I’m asking this in the context of what’s already been a very thoughtful explanation. But I’m trying to understand why you’re not assuming the, call it, 5% average loss trend on earlier accident years, if they’re subject to the same external catalysts.

John Marchioni, President and Chief Executive Officer

Well, I guess you really want to think about how much of that is subjected to the same catalyst versus how much isn’t. A lot of these economic inflationary items, because medical is not the driver, doesn’t really impact your reserve portfolio from the same perspective. And I think that’s the biggest change that would be different on a forward basis, which is more of a shorter tail line impact, as opposed to any meaningful impact on the reserve portfolio. Plus when we evaluate every prior accident year, and you can see where the movement has been coming from and the ‘20 and ‘21 accident years, we have not acted on. And when I say that, there was clearly some frequency benefits but this question around severities as one is what’s led us to maintain those loss selections in both the ‘20 and ‘21 accident years. So you can say, our stance relative to increasing severity expectations and not reacting to the frequency drops in ‘20 and ‘21, may be somewhat reflecting of our view that some of those inflationary considerations are driving some of the severities in the more recent accident years. But again, those are all contained within our ‘20 and ‘21 accident your loss picks, which we continue to remain very comfortable with.

Meyer Shields, Analyst

You know that’s helpful. I got the question. I just really want to understand the thinking. Thank you.

Operator, Operator

We have the next question from the line of Grace Carter of Bank of America. Your line is now open, you can ask your question.

Grace Carter, Analyst

Hi, everyone. Thinking about combined ratio guidance for this year, paired with outlook for a flat expense ratio and it applies a little bit of underlying loss ratio deterioration. I mean, we’ve talked about the commercial loss trends and there’s expectations for pressure industry-wide in personal lines. But I just wonder if you could just walk us through a little bit the contribution by segment to that potential deterioration in the loss ratio and just kind of how to think about that in the context of the ongoing pricing increases on the commercial line side.

Mark Wilcox, EVP and Chief Financial Officer

So Grace, this is Mark and I will start and John can certainly jump in. One thing I would just highlight is, it is an expectation for the year. And as I mentioned, our results, so the industry results tend to have a little bit of volatility. So it represents kind of our base case and expectations going into 2022. If you look back at the last couple of years, in 2020, we had a underlying combined ratio expectation of a 91.5 and we delivered 90.1. Last year of ‘21, we had an underlying combined ratio guidance of 91 and we deliver 90.1. So we have come in better than expected for the last couple of years, but the last couple of years have been unusual, given a pandemic-driven frequency benefits and how that came through the results. As we look to 2022, you’re right, if you go from 90.1 to 91, with a flat expense ratio, it implies 90 basis points of loss ratio deterioration year-on-year and I would attribute almost all of that to non-cat property losses. So, we’ve had two years now where the non-cat property losses have been much lower than expected. We expect those to revert back to pre-pandemic levels and that’s really the majority of the increase. There are always other moving parts. We have the rate versus trend and we have the underwriting mix and claims benefits. We have a slightly different reinsurance marketplace that puts some pressure on loss ratios, but non-cat property is the biggest contributor to the movement in the loss ratio year-on-year.

John Marchioni, President and Chief Executive Officer

So just to clarify the point or reinforce the point Mark is making, it’s very similar to how you think about cat loss expectations. We take a longer-term view in terms of non-cat property, and even if we have a good year or two good years in a row relative to expectations, we’re generally going to look at longer-term averages and set that non-cat loss expectation where we think it should be based on historical patterns. So that’s not a statement that we think non-cat property losses are going to deteriorate, but we just think about that in a longer-term view, as opposed to just reacting to one year that was better than expected, or in this case, two years that were better than expected.

Grace Carter, Analyst

Thank you. And thinking about the pivot towards mass affluent in the personal lines segment, it feels like maybe the new business that you’re looking at adding as the year goes on probably has a higher liability component than property component versus the older business. So I’m just kind of wondering how you expect loss costs in that segment to evolve in that context?

John Marchioni, President and Chief Executive Officer

You know, it’s a great question. I don’t actually see a big shift there because I mean, the fact of the matter is your property values, on both the auto and the home side, are going to be moving higher as well. So there might be a little bit drift higher in liability limits, but you’re going to see the same thing on the property limit side of the house, so that we don’t anticipate a meaningful shift from that perspective.

Operator, Operator

We have the next question from the line of Scott Heleniak of RBC Capital Markets. You may ask your question, your line is now open.

Scott Heleniak, Analyst

Hi, good morning. I just wanted to ask first on the E&S premium growth, which has been strong for a while now. And I’m assuming that you’re getting a lot more quote activity, probably expansion with your distribution partners, but is there really just a pretty big shift in the way you’re viewing E&S and you’re obviously coming out for a record year for that business? Are you just more comfortable in expanding that kind of over the long-term, based on the favorable trends?

John Marchioni, President and Chief Executive Officer

Yeah, we like the business and, as Mark indicated, we’ve hit our stride and are delivering really strong results. When you look back over our track record since getting into that business about 10 years ago. What you see is clearly a pickup in both new business and even strong retentions. And this is E&S that certainly retains at lower levels but even in that context, retentions are stronger. We haven’t meaningfully shifted. Our underwriting appetite and the mix of business we’re seeing is pretty consistent. I think we’re hitting our stride relative to agency relationships. I think we’re hitting our stride relative to our processes and the underwriting platforms that we continue to develop and introduce and better execution. Do we think there are opportunities to potentially expand? We do, but we’re going to still stick to our knitting here, which is a lower limits profile business sort of lower hazard within the E&S context and we think the opportunities continue to be there in a meaningful way. With regard to longer term, you know, we still view this as a business we’d like to be and that call it up to 15% of total premium. We don’t want it to be our predominant business. We think we’ve got a very unique set of competitive advantages and a very unique market position, a standard commercial, and some of those skills are able to be leveraged to help us in the E&S space. So we love the business. We think we’ve got a good growth path in front of us but we’re not just out there and chasing different types of opportunities that we don’t have experience in, and we’re really growing in the areas that we feel like we’ve got a lot of confidence in from an underwriting and a pricing perspective.

Scott Heleniak, Analyst

Okay. Sounds like it’s pretty similar thinking to what you’re talking about before, just kind of pushing full steam ahead. And then the personal line side, I’m sure I’m assuming in personal auto, you’re seeing the same trend as everyone else’s on the frequency and severity. Are there any plans to take significant rate actions there? I noticed that the personal lines premium increases were up 1.1% for the quarter and I was wondering if you might expect to take further actions on those in 2022.

John Marchioni, President and Chief Executive Officer

I think when you look at our profitability in the personal auto line, and this is not just a reflection of some shifts in the last couple of quarters with regard to frequency or severity, we have work to do from a profitability perspective but we do think there are some underwriting actions that will drive some of that, but there’s clearly a rate being there and we’d expected to begin to increase the rate level on that business on a go-forward basis.

Scott Heleniak, Analyst

Okay. The 4% to 5% loss cost inflation change, is that consistent across the board? How much of that pertains to personal lines versus commercial lines? I'm just trying to understand the overall impact.

John Marchioni, President and Chief Executive Officer

That’s an all-in number and it varies by line of business. And it varies a little bit by segment, but commercial lines is really the primary driver being 80% of our business, and commercial lines is right in that 5% kind of range. So it’s all lines and commercial lines is a big driver, but think about it in terms of 5% overall.

Scott Heleniak, Analyst

I have one last question. You mentioned that the expense ratio would remain flat for 2022. Mark, I didn't catch your comments regarding 2023. Do you have a target range for improvement in 2023?

Mark Wilcox, EVP and Chief Financial Officer

Yeah, good question, Scott. I didn’t mention the target this quarter but we’ve put it out there in the past, which is the longer-term target for us, which we believe it’s appropriate to compete effectively, given our mix of business between commercial line, E&S, and personal lines, given the current marketplace is 32. And our plan, as we sit here today, points to us achieving that target in 2023. So that’s the plan, as we sit here today and think about all those strategic objectives and growth initiatives we have in place, as well as some of the significant efficiency plays we have in place as well.

Scott Heleniak, Analyst

All right. Great, that’s helpful. Thanks.

Operator, Operator

We have the next question from the line of Paul Newsome of Piper Sandler. Your line is now open, you can ask your question.

Paul Newsome, Analyst

Good morning. Just based upon the emails we are getting, it seems like folks are pretty concerned about the uptick in the claims inflation number. Just you said this so many times but I think it’s worth reiterating, when you have an increased view in claims deflation that goes directly into your pricing model, right. So you would expect all things being equal to offset that over time, so it would not necessarily mean a margin decrease just because you have a more aggressive view on claims inflation. I think you’ve said that in the past.

John Marchioni, President and Chief Executive Officer

Yeah. Yep. Thank you. I appreciate the question. And I would say we point to our long-term history, this is not just a recent phenomenon, but that has always been our philosophy, which is depending on where our margins are relative to our target and what our outlook for loss trends on a forward basis is, our pricing indications and pricing targets are set accordingly, and that continues to be the case. And I want to just go back to Mark’s point because I think this really emphasizes the important consideration here, which is if you look at the roll-forward from 2021 underlying to 2022 underlying, it’s really just the resetting of non-cat property based on long-term averages that is creating that what appears to be a movement a little bit higher in the underlying by a little bit under a point, which would suggest that our expectation is that loss trend on a forward basis and written rate or earned rate on a forward basis are relatively comparable. So you’re keeping that underlying the same when you take out the resetting of the non-cat property to a longer-term average. So I think it’s actually embedded in there and I understand that the reaction to going from 4% to 5%. I think that the key point in all of this is all of these loss trends are manageable, as long as you identify them and recognize them and respond to them. And I think our history over a long time now should show that we get out in front of these things and we price for it and we focus on delivering very stable and very strong margins on a consistent basis over the long term and that philosophy will continue. We’re highly transparent about how we think and how we make our loss ratio selection. Sometimes that transparency might create a negative reaction, but we think it’s still the right way for us to interact with our shareholders. So I appreciate the question and the opportunity to clarify that point, Paul.

Paul Newsome, Analyst

Great. Now, actually, an actual question, one of the things I thought was curious, at least this quarter so far, is that as we’re listening to the various conference calls, you’re seeing a fairly wide range of views on whether or not pricing is getting better in workers’ compensation with Brown & Brown saying it’s bad and going down, and Gallagher saying it’s up. And so I’m just curious, from your perspective, because I know you’re pretty thoughtful about this, what might be the characteristics of the market today, where you would get this sort of different view on workers' comp pricing and how would that sort of square your view?

John Marchioni, President and Chief Executive Officer

I believe a significant factor in the differing perspectives may be geographic concentrations. On an all-in basis, our rates for workers' compensation have been around zero. However, it's important to consider the market-wide impact of loss cost changes filed by the NCCI in various state rating bureaus. To give you a rough idea, in 2021, the overall market impact of those changes was in the 5% to 6% negative range. For 2022, the filings from those bureaus, which are now in effect, are about 200 basis points lower, indicating a more negative trend compared to 2021. This highlights that loss cost changes are trending negatively and are slightly more unfavorable in 2022. That being said, this is just one of the factors affecting pricing. Individual credits and debits are based on the specific account qualities and expectations for performance, which ultimately influence the rate changes. As we mentioned, our figure was zero in 2021, suggestive that 2022 might see additional deterioration in comp pricing due to loss cost filings. Moreover, while comp results have been strong, especially when we focus on accident year numbers and exclude payroll development, they don't support a rate reduction of 5%, 6%, or 7% for another year. We've discussed loss trends and economic inflation; medical costs have remained stable. However, the impact of increasing medical inflation is significant for all workers' compensation riders. A half-point or one-point increase in medical inflation affects the entire reserve inventory. This gives insight into why we've maintained a conservative approach to pricing in workers' compensation and why our growth in this area has been relatively muted over the past couple of years.

Paul Newsome, Analyst

Great. Thank you and congrats on the quarter.

John Marchioni, President and Chief Executive Officer

Thank you.

Mark Wilcox, EVP and Chief Financial Officer

Thank you.

Operator, Operator

We have the next question from the line of JMP. Your line is now open, you can ask your question?

Unidentified Speaker, Analyst

Yes. Hi. Just have a simple question. Can you please just give me the breakdown of the cats in the standard commercial please?

Mark Wilcox, EVP and Chief Financial Officer

Certainly. This is Mark. I can give you that number. So in standard commercial line, so assume this is for the quarter, we had $26.89 of catastrophe losses or 4.2 points on the combine, and that breaks down to $23.6 in commercial property, $900,000 in commercial auto, and $2.3 million in, and that should get you back to the $26.8 million in total for the quarter.

Unidentified Speaker, Analyst

Perfect. Thank you. That’s all.

John Marchioni, President and Chief Executive Officer

Thank you.

Mark Wilcox, EVP and Chief Financial Officer

Thank you.

Operator, Operator

And at this time, speakers, we have the next question from the line of Mike Zaremski of Wolfe Research. Your line is now open, you can ask your question.

Michael Zaremski, Analyst

Hey, great. Just a couple follow ups. Curious, you talked about a frequency low during the pandemic, are you seeing that frequency low kind of fade and is that going away? Any data points there? And then I guess just next question, I don’t make too big of a deal of the loss trend changing from four to five, but just does it kind of change your expectation of kind of the pulling off the gas in terms of top-line growth in certain areas in the near term.

John Marchioni, President and Chief Executive Officer

So just with regard to frequency, and I think I might have made a passing reference to this earlier, frequencies continued to be a little bit below expected—and I would say pretty much across all lines of business—but not nearly as significantly lower than we saw in 2020. So generally speaking, they come back up, but still remain a little bit below what we saw pre-pandemic, whether or not that continues, I think it’s one of the uncertainties that we point to, on a go-forward basis. And I know this loss trend increase from 4% to 5% is becoming the focal point and probably appropriately so. That’s an uncertainty that we factor into that decision because we don’t—none of us in our business fully understand what a post-pandemic environment will look like. And that’s not just about driving behaviors, okay, so miles driven, have largely come back, frequencies have not bounced all the way back, probably because the time of day that the miles are being logged is a little bit different. You could also suggest on the general liability side that the dramatic increase in online shopping might be a more permanent shift, so, therefore, in-store traffic and traffic and parking lots might not be the same as it used to be. That might be a permanent shift that lowers frequencies and then the question is if frequencies are more permanently lower, what does that mean for severities? And how much of the severity increase was purely driven by the drop in frequencies versus other macro factors? So I think that’s kind of how we think about it. And that’s why we put it in more of the uncertain category. And when there’s uncertainty, our response would be to build a little bit more into our forward loss trend, which is what we’ve done. With regard to your other question, and I mentioned this briefly in the prepared comments, we have a very similar level of discipline on new business pricing and new business risk selection as we do on our renewal portfolio. We’ve got great monitors around that. And at this point, we remain comfortable with what we’re seeing coming in relative to new business. I think our history has shown, and there have been lines of business or segments where our growth hasn’t been as strong and those are cases where we don’t feel as comfortable with where the pricing is in order for us to be significant players in that market. That’ll always be our philosophy and I would say continues to be our philosophy going forward.

Michael Zaremski, Analyst

Great. Thank you.

Operator, Operator

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

John Marchioni, President and Chief Executive Officer

Well, thank you all for participating. We appreciate the active engagement, as always, and if anybody has any follow ups, please feel free to reach out to Rohan. Thank you.

Mark Wilcox, EVP and Chief Financial Officer

Thank you.

Operator, Operator

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