Selective Insurance : 1Q 2023 Earnings Conference Call Transcript

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EDITED TRANSCRIPT

Q1 2023 Selective Insurance coverage Group Inc Earnings Name

EVENT DATE/TIME: MAY 04, 2023 / 2:00PM GMT

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MAY 04, 2023 / 2:00PM GMT, Q1 2023 Selective Insurance coverage Group Inc Earnings Name

CORPORATE PARTICIPANTS

Haley Chrobock

John Joseph Marchioni Selective Insurance coverage Group, Inc. – CEO, President & Chairman

Mark Alexander Wilcox Selective Insurance coverage Group, Inc. – Govt VP & CFO

CONFERENCE CALL PARTICIPANTS

Grace Helen Carter BofA Securities, Analysis Division – Analysis Analyst

Jon Paul Newsome Piper Sandler & Co., Analysis Division – MD & Senior Analysis Analyst

Matthew John Carletti JMP Securities LLC, Analysis Division – MD & Fairness Analysis Analyst

Michael David Zaremski BMO Capital Markets Fairness Analysis – MD & Senior Fairness Analysis Analyst

Derek Han KBW

PRESENTATION

Operator

Good day, everybody. Welcome to Selective Insurance coverage Group’s First Quarter 2023 Earnings Name. Right now, for opening remarks and introductions, I wish to flip the decision over to Investor Relations analyst, Haley Chrobock.

Haley Chrobock

Good morning. We’re simulcasting this name on our web site, selective.com. Replay is accessible till June 2. We use three measures to debate our outcomes and enterprise operations. First, we use GAAP monetary measures reported in our annual, quarterly and present experiences filed with the SEC. Second, we use non-GAAP working measures, which we consider make it simpler for buyers to judge our insurance coverage enterprise. Non-GAAP working revenue is internet revenue out there to widespread stockholders, excluding the after-tax affect of internet realized positive aspects or losses on investments and unrealized positive aspects or losses on fairness securities.

Non-GAAP working return on widespread fairness is non-GAAP working revenue divided by common widespread stockholders’ fairness. Adjusted e-book worth per widespread share differs from e-book worth per widespread share by the exclusion of whole after-tax unrealized positive aspects and losses on investments included in gathered different complete loss. GAAP reconciliations to any referenced non-GAAP monetary measures are in our supplemental investor package deal discovered on the Traders web page of our web site.

Third, we make statements and projections about our future efficiency. These are forward-looking statements underneath the Non-public Securities Litigation Reform Act of 1995. They aren’t ensures of future efficiency and are topic to dangers and uncertainties. We focus on these dangers and uncertainties intimately in our annual, quarterly and present experiences filed with the SEC. We undertake no obligation to replace or revise any forward-looking statements. Now I will flip the decision over to John Marchioni, our Chairman of the Board, President and Chief Govt Officer, who shall be adopted by Mark Wilcox, our Govt Vice President, Chief Monetary Officer and Treasurer.

John Joseph Marchioni Selective Insurance coverage Group, Inc. – CEO, President & Chairman

Thanks, Haley. Good morning and thanks for becoming a member of us. We have had a wonderful begin to the 12 months. The headline for the quarter is that we continued to ship robust earnings and stay very nicely positioned to successfully navigate the financial uncertainty and elevated loss tendencies that our business faces. Within the quarter, we had robust progress in all three insurance coverage segments. Our all-in mixed ratio was 95.7% regardless of higher-than-expected disaster losses. After-tax internet funding revenue was up 25% over Q1 2022, pushed by energetic administration of our core mounted revenue portfolio over the previous few quarters, and we produced a non-GAAP working ROE of 14.6%, outperforming the 12% common we generated over the previous 9 years. Let me present some further shade on our prime line progress within the quarter. Internet premiums written in our core enterprise, Customary Industrial Strains grew 10%. New enterprise on this section was up 15% as we continued discovering alternatives inside our conventional threat profile and pricing expectations. Renewal premium change was a optimistic 12% as pure pricing elevated by 7% and publicity was up 4.7%.

Our Customary Industrial Strains footprint has expanded by eight states over the previous 5 years, and that enlargement contributed two factors of total progress within the quarter. Our early success in these markets is pushed by the distinctive working mannequin we make use of and the power of the brand new distribution partnerships we established. Along with bolstering prime line progress, this enlargement additionally advantages the underside line by higher geographic diversification. We’re working in the direction of opening an extra 5 states over the subsequent two to

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MAY 04, 2023 / 2:00PM GMT, Q1 2023 Selective Insurance coverage Group Inc Earnings Name

three years.

Internet premiums written in our E&S section grew 16% with new enterprise progress of 9%, renewal pure charge of seven.4% and steady retention. Our mixture of enterprise has remained comparatively steady when it comes to limits profile and the strains of enterprise and hazard combine. Internet premiums written in our Customary Private Strains section grew 31% as we continued our transition to the mass prosperous market. The mass prosperous market now represents about half of our in-force e-book, and we count on that focus on enterprise allocation to extend over the subsequent a number of quarters.

I’m notably happy with our profitability within the face of elevated disaster losses. In 1 / 4 the place business losses had been considerably above long-term averages. Our disaster losses had been six factors on the mixed ratio or about one level above anticipated. Our mixed ratio of 95.7% was solely barely above our 95% long-term goal. Our underlying mixed ratio was 91%.

Let me make some additional feedback about profitability. Customary Industrial Strains produced a 94.7% mixed ratio and a 91.3% underlying mixed ratio. Non-cat losses had been about three factors decrease than final 12 months and our funds, reversing the development of will increase we noticed all through 2022. Regardless of this favorable consequence, our view of total loss tendencies stays in keeping with final quarter and continues to drive our pricing targets. Industrial Strains pricing moved meaningfully from 5.6% in This fall 2022 to 7% within the first quarter, pushed by will increase within the property and auto line. Retentions remained robust and steady.

Industrial property renewal pure charge was up 11.8% within the quarter and publicity elevated 5.1%, producing a renewal premium change of 17.5%. We count on this pricing development to proceed. Industrial auto renewal pure charge was up 10% and publicity grew by 4.9%, leading to a complete premium change of 15.4%. E&S continued to ship robust margins with a mixed ratio of 85% and an underlying mixed ratio of 84.3%. Like Customary Industrial Strains, non-cat property improved year-over-year and was higher than anticipated for the quarter. The robust charge we have earned and underwriting enhancements we have revamped the previous few years have favorably impacted E&S casualty loss ratios.

Customary Private Strains profitability stays challenged. Extra cat losses largely drove the quarter’s 116% mixed ratio, however the 95.7% underlying mixed ratio was about 10 factors over goal. Profitability enchancment shall be pushed primarily by worth will increase as we proceed to transition to the mass prosperous market. Within the quarter, 15 filed charge modifications turned efficient throughout the auto and residential strains, with a mean enhance of 9.4%. We count on this tempo to proceed over the subsequent a number of months. Whereas there’s a lagged affect on renewal pricing, new enterprise pricing was up over 5% in Q1 and over 7% within the month of April.

Investments was one other brilliant spot within the quarter. The portfolio produced $73 million of after-tax revenue within the quarter, up 25% over Q1 2022. Our funding staff has been actively positioning the portfolio to extend e-book yields, which is up by 137 foundation factors at the beginning of 2022 whereas additionally shifting up in credit score high quality. To reiterate some extent made final quarter, when funding returns exceed their long-term common, as we’re at the moment experiencing, we count on to outperform our 12% working ROE goal, and we did that this quarter. Whereas happy with our robust begin to 2023, we totally acknowledge that one quarter doesn’t make a 12 months. We proceed to function with nice self-discipline in executing our progress and profitability initiatives. Our staff of extremely expert and totally aligned workers, leveraging our subtle instruments and applied sciences has positioned us as a market of alternative for our top-notch distribution companions.

Our government and regional administration groups hosted six regional company council conferences in March as we do every year. These classes, every of which incorporates 12 to fifteen company rules, are an amazing alternative to solicit suggestions on our efficiency, perceive the challenges they face of their native markets and align on alternatives for extra worthwhile progress. They routinely inform us that the power of our expertise, the individuality of our working mannequin and the constant strategy we take to managing progress and profitability are the first the reason why they make us their market of alternative.

In closing, we within the business proceed to face headwinds from financial and loss development uncertainty. Nevertheless, I’m assured we’ve constructed the organizational muscle to efficiently navigate by any potential financial and market challenges. Our long-term observe report of constant robust efficiency together with business low volatility backs up that declare. Now let me flip the decision over to Mark.

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MAY 04, 2023 / 2:00PM GMT, Q1 2023 Selective Insurance coverage Group Inc Earnings Name

Mark Alexander Wilcox Selective Insurance coverage Group, Inc. – Govt VP & CFO

Thanks, John, and good morning. We reported a robust begin to the 12 months with $1.48 of totally diluted EPS within the first quarter and $1.44 of non-GAAP working EPS. Our non-GAAP working ROE of 14.6% got here in properly forward of our 12% goal. The robust efficiency was pushed by strong underwriting outcomes and vital progress in after-tax internet funding revenue. Turning to our consolidated underwriting outcomes. For the quarter, we reported $1 billion of internet premiums written for a wholesome 12% progress charge over the primary quarter of 2022, with every of our three segments contributing to the expansion.

We reported a worthwhile consolidated mixed ratio of 95.7% regardless of one other energetic disaster quarter within the U.S. There have been 18 particular person PCS occasions impacting our footprint within the first quarter leading to $55.3 million of internet disaster losses or a manageable 6.1 factors on the mixed ratio. The motive force of the cat losses had been two massive storms in March and one in February, totaling $38.8 million or 70% of our first quarter cat losses. These losses had been offset partially by $13 million or 1.4 factors of internet favorable prior 12 months casualty reserve growth. The favorable reserve growth included $10 million in favorable claims emergence in our Employees’ Compensation line of enterprise and $5 million in E&S casualty. This was offset partially by $2 million of hostile growth in private auto. We have now additionally adjusted up our private auto legal responsibility loss choose for 2023 in comparison with our unique plan for the 12 months. The underlying mixed ratio of 91% for the quarter was 2.1 factors decrease than within the prior 12 months interval, benefiting from decrease non-cat property losses in our industrial property and E&S property strains of enterprise. Non-cat property losses in whole had been 2.8 factors higher than anticipated, which drove underlying margin enchancment in comparison with our expectations. Non-cat property auto bodily injury losses for industrial and private auto stay elevated and above expectations.

Shifting to bills. Our expense ratio of 32.6% was up 50 foundation factors versus the 12 months in the past. As famous final quarter, we count on modest upward stress on the expense ratio in 2023 however have a number of value containment initiatives in place. Over the medium and long term, we remained targeted on reducing the expense ratio by varied initiatives whereas guaranteeing we’re investing appropriately to help our longer-term strategic aims. Company bills, which principally embody holding firm prices and long-term inventory compensation, totaled $12.1 million within the quarter.

Shifting to investments. Our portfolio stays nicely positioned. As of March 31, 93% of our portfolio was in mounted revenue and short-term investments with a mean credit standing of AA- and an efficient period of 4.1 years. Threat property had been roughly 9.9% of our portfolio as of March 31, in keeping with final quarter, however down from 11.8% a 12 months in the past as we’ve modestly derisked the portfolio in opposition to market expectations of a recession later this 12 months.

For the quarter, after-tax internet funding revenue was $73.1 million, up 25% relative to $58.5 million within the 12 months in the past interval, pushed by vital progress in funding revenue from our core mounted revenue portfolio. This was partially offset by a decrease contribution from alternate options, that are reported on a one-quarter lag and generated $6.1 million of after-tax positive aspects in comparison with $15.1 million a 12 months in the past. The robust progress in mounted revenue was pushed by our energetic portfolio administration final 12 months, the place we put $2.7 billion to work at excessive yields. The after-tax yield on the whole portfolio was 3.7% for the primary quarter, translating to a wholesome 12.2 factors of ROE contribution.

In anticipation of a possible decline in short-term rates of interest later this 12 months, we have been reducing our allocation to floating charge securities. Roughly 8.4% of our mounted revenue and short-term funding portfolio stays in floating charge securities, which is down from 10.4% at year-end and round 15% simply over a 12 months in the past. As we’ve pared again our floaters, we’ve as an alternative elected to lock within the present excessive new cash charges for an extended time frame whereas managing our period and credit score high quality targets. As well as, in line with 2022, we continued our theme of energetic portfolio administration within the quarter and put $1.1 billion of latest cash to work at a pretax yield of 5.5%. Our present e-book yield now stands at 4.33%, up 20 foundation factors within the quarter and 137 foundation factors because the begin of 2022. As a reminder, each 100 foundation factors of excessive yield on our whole funding portfolio interprets to about 2.6 ROE factors.

I would additionally like to spotlight the power of our funding portfolio in mild of the current turmoil, notably inside the banking sector. We have now no direct publicity to the securities of the actual banks which have just lately been wound down. Our publicity to bonds of monetary establishments is extra diversified throughout sectors with a deal with massive cash middle banks inside banking. Given the current deal with industrial actual property, I believed I would additionally briefly spotlight our publicity to this asset class. Industrial actual property represents about 11.8% of our funding portfolio and principally arises from our allocation to company and non-agency industrial mortgage-backed securities,

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MAY 04, 2023 / 2:00PM GMT, Q1 2023 Selective Insurance coverage Group Inc Earnings Name

which totals 8.1% of our portfolio. Simply over 93% of those securities are invested in AAA and AA rated tranches and have a low chance of loss attachment partially pushed by the robust degree of subordination in these increased rated tranches. We even have a 1.8% allocation to industrial mortgage loans, that are all performing with an underwritten loan-to-value of 58% and debt service protection ratio of 1.8x. Funding-grade actual property funding belief debt makes up 1.3% of the portfolio whereas actual property funding belief fairness represents 0.3% and industrial actual property debt and fairness inside our different portfolio makes up the remaining 0.3%. General, we be ok with the credit score high quality and liquidity profile of our funding portfolio. Nevertheless, we’re carefully monitoring credit score and liquidity circumstances out there and have a basic bias to stay underweight threat property right now and to remain up when it comes to credit score high quality and to take care of a robust liquidity place.

Turning to capital. Our capital place stays extraordinarily robust with $2.7 billion of GAAP fairness and $2.5 billion of statutory capital and surplus as of quarter finish. Ebook worth per share elevated 5.8% in the course of the quarter. Adjusted e-book worth per share was up 2.5% for the quarter or 3.1% adjusted for dividends. Our guardian firm money and funding place stands at $497 million, which is above our longer-term goal. Our internet premiums written to surplus ratio of 1.46x is in the course of our goal vary and our debt-to-capital ratio of 15.9% is on the low finish of our goal vary. These metrics present us with vital monetary flexibility to help our progress and execute on our strategic initiatives. We didn’t repurchase any shares in the course of the first quarter. We have now $84.2 million of remaining capability underneath our share repurchase authorization, which we plan to make use of opportunistically in 2023.

Lastly, turning to our outlook. For 2023, our full 12 months expectations stay unchanged from final quarter and are as follows: a GAAP mixed ratio of 96.5% inclusive of 4.5 factors of disaster losses. This assumes no further prior accident 12 months reserve growth. Whereas our first quarter mixed ratio got here in higher than anticipated, it is too early to regulate our full 12 months expectations. After-tax funding revenue of $300 million, together with $30 million in after-tax positive aspects from different investments, an total efficient tax charge of roughly 21%, which incorporates an efficient tax charge of 20% for internet funding revenue and 21% for all different gadgets, and weighted common shares of 61 million on a diluted foundation, which doesn’t mirror any share repurchases we might make underneath our authorization. General, we’re off to a wonderful begin to the 12 months when it comes to progress and profitability.

With that, I will ask the operator to open up the decision for questions.

QUESTIONS AND ANSWERS

Operator

Thanks. We are going to now start the question-and-answer session. (Operator Directions.] Our first query comes from Mike Zaremski with BMO.

Michael David Zaremski BMO Capital Markets Fairness Analysis – MD & Senior Fairness Analysis Analyst

Perhaps I might need missed this, I got here on a couple of minutes late. Any shade on the prior 12 months growth, the pluses and minuses? I did hear the commentary that I do not assume your view of loss development has modified meaningfully quarter-over-quarter, however I used to be simply curious any shade on PYD, which did come a little bit mild versus, I suppose, no less than our expectations in industrial strains.

Mark Alexander Wilcox Selective Insurance coverage Group, Inc. – Govt VP & CFO

Mike, it is Mark Wilcox. I will begin, and John would possibly soar in as nicely. So PYD for Q1 2023 was $13 million internet. And there are a few places and takes in there. First off, actually in line with the 12 months in the past. We proceed to see favorable claims emergence inside the staff’ compensation line of enterprise, actually pushed by decrease severities in years 2020 and prior. We additionally noticed decrease severities for accident years 2021 and prior inside E&S casualty and noticed about $5 million, or $5 million of favorable reserve growth there. However then the one different merchandise within the quarter that went within the different route was some stress inside private auto legal responsibility for the 2022 12 months, and that was to the tune of $2 million from an hostile growth. So, $15 million favorable, $2 unfavorable, internet $13, a 1.4% profit on the mixed ratio in the course of the quarter.

And in addition, I discussed in my ready feedback, which you’ll or might not have heard, was we did really on the again of the rise

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Selective Insurance coverage Group Inc. printed this content material on 07 Could 2023 and is solely answerable for the knowledge contained therein. Distributed by Public, unedited and unaltered, on 07 Could 2023 17:20:03 UTC.

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