Release Date: July 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Selective Insurance Group Inc (SIGI, Financial) maintained a strong capital position despite a challenging quarter.
- The underlying combined ratio of 91.4% positions the company well moving forward.
- The Excess and Surplus (E&S) segment showed strong performance with a 94.6% combined ratio and 39% increase in net premiums written.
- Personal lines net premiums written increased by 6% due to strong renewal pure pricing of 20.7%.
- The company successfully renewed its property and casualty excess of loss treaties with substantially the same structure as the expiring treaties.
Negative Points
- Selective Insurance Group Inc (SIGI) reported an operating loss of $1.10 per diluted common share and an operating ROE of negative 9.6% for the quarter.
- The combined ratio for the quarter was 116.1%, driven by catastrophe losses and reserve strengthening.
- Adverse prior-year casualty reserve development totaled $176 million, with $166 million in general liability.
- The company revised its full-year guidance, implying an ROE in the upper single-digit range, below the 12% target.
- Retention in personal lines decreased to 78%, down 10 points from the second quarter of 2023.
Q & A Highlights
Q: John, first question is on the commercial renewal pricing and retention stuff there. You're continuing to move that up, good news, but it feels like that's a bit different than what we're seeing from other commercial players. I guess I want to see if you agree with that. And then maybe just your confidence on the ability to continue to do so and impacts on retention and where that stands. As we look out over the next couple of quarters, do you think that GL number you mentioned 76% or the commercial 79% continues to move up?
A: So I think we feel pretty good about the direction of commercial lines pricing. And honestly, while we might be a little bit ahead of the market, there's enough commentary out there and has been enough commentary out there about the direction of loss trends and therefore the need, particularly on the casualty side and GL more specifically for pricing to increase. And I think if you were to look back over the last couple of quarters against our public peer set and their commentary in their earnings calls, while they make statements and have made statements about where they think pricing is relative to loss trends for casualty, they also point to the need for pricing to go higher. So I think these trends are being recognized. I think they'll continue to be recognized. And while we might be an early mover with regard to the recent accident years and then moving on to update our current accident year, which we think is appropriate and prudent in light of these severity trends that continue to emerge, I think we will -- we do expect to see the industry also move, and therefore, I wouldn't expect a significant retention impact. Now that said, and you've seen this in our history, when we have conviction on pricing and where we think pricing needs to be, we respond to that conviction. And if there is an impact to retention, that's a trade-off we think is appropriate in the current environment.
Q: I guess on the reserve issues, I guess maybe a two-part question here. You moved up to 20 the current action here a bit, but have you seen -- have you seen much of what you described as 2023, have you seen much of that already for the 2024 accident year? And then what do you say to those that say, this recent accident year issues are a selective issue, their book of business is different, this is not going to be as widespread as maybe what John thinks?
A: Yeah. So there's a lot there in that question, Mike, and I appreciate it. The first thing is with regards to the '24 accident year, it's extremely early. But if you react to the more recent years and recognize higher severity emergence in the more recent years, unless you want to back down in your forward trend assumption, it's prudent to adjust the current year. So I would say the current year adjustment is almost entirely driven by the fact that we've moved our expected loss ratios for the '22 and '23 years higher and kept our severity trends assumption that we started the year with in place, which effectively pushes up our view of the current year. So I think that's that's the important point. With regard to whether this is a selective specific issue or not, I think we feel pretty good based on this. And we reiterated this last quarter, our portfolio has been extremely stable from a mix of business perspective, industry verticals, hazard mix, limits profile, and when you look at our history, there's nothing to suggest that the book has changed in a manner that would present a meaningfully different frequency and severity profile. And I know some have called out certain jurisdictions and states as being more exposed. And honestly, that list of states that have been bouncing around out there came out of my response to a question last quarter, and those were states that have been in our footprint and continue to be on our footprint and have historically been in our results. What I didn't cite was the big states that are more challenging litigation environments that are not in our footprint in states like California, Texas, and Florida that are driving the vast majority of nuclear verdicts. And therefore, you would expect that if you're driving the nuclear verdicts, those same cartridge are driving social inflationary trends and higher severity trends generally. So unfortunately, that single thread got kicked off as opposed to the broader commentary around how these trends are fairly widespread. Listen, I think the fact that our book is a little bit heavier in GL than some of our peers will drive some of the impact. But generally speaking, if you write GL, other liability occurrence in particular in the liability portion of CMP for some companies, I think these trends are there, and I think they will manifest themselves in the coming years. And our philosophy around reacting quickly when we see emerging potential adverse trends, that's what we're doing here. And in addition to the more recent accident years, we're taking action in the current year, which we think is the prudent approach. But our strong underlying combined ratio starting point and our approach to pricing relative to our updated indications, we think, puts us in a good position to continue to be that steady, strong performer on a go-forward basis.
Q: Maybe sticking with some of the reserving actions, maybe you can reflect on the 9% assumption, I believe, on loss trend. Is that for GL? And then if you think back, and I'm not sure how long of a data thread you have, where -- how does a 9% compare to what you've seen? I know, John, you've been obviously doing in the industry for decades, but is this a multi-standard deviation assumption, or has the industry seen this before decades ago? I'm trying to get a sense of how severe your assumptions are relative to the historical data you have?
A: Yeah, sure, Mike. So let me try to take that in pieces. So the 9% we referenced is for GL, that was in the overall casualty of 8% and then 8.5% we had talked about excluding workers' comp. So the 9% is GL specific, and as we said the beginning of the year, that didn't assume any frequency change. So you could assume then that that 9% is entirely severity driven. But now, if you look back because obviously historical loss trends, actual historical loss trends influence how you think about forward loss trends. And if you were to look back, and I think we've been as transparent as anybody in terms of our expected loss trends and we've been doing that for several years, if you look back over the last four or five accident years, let's just focus on the period that is in everybody's focus right now which is that '20 to '24 period, our expected loss trend over that time was about 4% in 2020, it's now at 9%. But if you look on average from '20 through '23, our average expected loss trends was about 5% over that timeframe. Our current evaluation of those years, and I'm careful not to call it loss trend because technically it's not, but if you just think about what we're seeing in terms of average change in frequency and severity which gives you average loss cost change, what we've seen over that time period on an
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
