Selective Insurance Group, Inc.

Good day, everyone. Welcome to Selective Insurance Group's second quarter 2022 earnings call. At this time for opening remarks and introductions, I'd like to give a call over to Senior Vice President, Investor Relations and Treasurer, Rowan Pai. You may begin. Good morning, everyone.

We're simulcasting this call on our website, selective.com. The replay is available until September 4th. 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. And second, we use non-GAAP operating measures, which we believe 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. Adjusted book value for common share differs from book value for common share by the exclusion of total after-tax unrealized gains and losses on investments included in accumulated other comprehensive loss or income. And GAAP reconciliations to any reference non-GAAP financial measures are in our supplemental investor package found on the investor's page of our website. Third, we make statements and projections about our future performance. These are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They are not guarantees of future performance and are subject to risk and uncertainties. We discuss these risks and uncertainties 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 Marcioni, our Chairman of the Board, President, and Chief Executive Officer, who will be followed by Mark Wilcox, EVP and Chief Financial Officer. John.

Thank you, Rohan. Good morning, and thank you for joining us today. We delivered strong earnings in the second quarter, continuing our long-term track record of consistently achieving our target operating returns while also generating excellent top-line growth. Our annualized non-GAAP operating ROE was 11.4 percent in the second quarter, and for the first six months, our annualized operating ROE was 12.1 percent. Based on our updated forecast for the full year, we were on track to hit our 11 percent ROE target for 2022 and record our ninth consecutive year of double-digit ROEs. Despite slightly elevated non-catastrophe property losses from the impact of higher economic inflation, we produced a 95.5 percent combined ratio in the second quarter. Our year-to-date combined ratio is 94.3 percent, slightly better than our initial four-year guidance. Growth in net premiums rating was 12 percent for the quarter, driven by strong renewal pricing in standard commercial lines and excess and surplus lines, solid retention rates in standard commercial and personal lines, and an increase in exposure. In standard commercial lines, renewal pure price increases in the second quarter averaged 5.3 percent, up from 4.8 percent in the first quarter. Retention of 86 percent was up a point from the prior year period, suggesting the pricing environment remains constructive. Combined with an exposure increase of 3.9 percent, the total premium change in our commercial lines renewal book in the second quarter was a positive 9.4 percent. We've long maintained a highly disciplined approach to managing renewal pricing in the context of expected loss trend. We have been extremely transparent about this over the past several years, providing the expected loss trend in our forward combined ratio guidance. With the heightened interest in this topic, I want to highlight the approach we have consistently taken and how we view trends in the current environment. The first key point is that loss trend is affected by both frequency and severity. we continue to see frequencies running slightly lower than pre-pandemic levels across most lines of business, providing a bit of an offset to severities, which are being impacted by a higher level of economic inflation. When we gave our initial guidance in January, we said our 2022 combined ratio included a loss trend assumption of 5% across all lines. More specifically, that loss trend assumed a 5.5% trend for casualty lines, and a 4 percent trend for property lines. Underlying that property trend assumption was an expectation that frequencies would continue to run below pandemic levels and partially offset the higher severities. While property frequencies have held up relative to our expectations, severities have come in higher. We see current year severity trends in the property lines running closer to 10 percent as economic inflation is hitting those lines particularly hard. The impact of this higher trend, which continued from the first through the second quarter, is fully reflected in our current year combined ratio guidance and amounts to an approximately 70 basis point increase to our all lines expected loss ratio. Through the first two quarters, we remain confident that our assumed casualty loss trend is holding up well. It is also worth noting that we have largely remained on our 2020 and 2021 casualty loss picks, despite the better-than-expected frequencies in both accident years. This recognizes the potential for elevated severities to emerge in those more recent accident years. Increased pricing is the primary lever available to address higher loss trends. We are pleased with the sequential increase in our commercialized renewal pure pricing in the second quarter, which was up 50 basis points over the first quarter. Renewal pure price increases in the lines of business most affected by economic inflation was strong, with commercial auto up 8 percent and commercial property up 7.5 percent. Another key lever is adjusting inflation-sensitive exposure bases to generate additional premium increases, which serves as an offset to the inflationary impacts on lost trim. For example, in commercial property, we saw an exposure increase of about 3.8 percent for the first half of the year. A portion of this increase acts to offset the increase in property severities. When we combine the exposure change with renewal rate of about 7.5 percent, they produce a total impact of over 11 percent, which is approximately in line with the severity trend for this line. We have a proven track record of effectively managing price relative to loss trend through market cycles going back over a decade. The organizational strength we have built continues to serve us well in this more uncertain economic environment. We remain highly confident in our ability to continue to deliver consistently strong underwriting margins moving forward. Turning to investments, the higher interest rates realized in the first half of the year have had both negative and positive impacts on our investment portfolio. Book value dropped by 14 percent for the first six months of the year due to the impact of realized and unrealized losses on the fixed income portfolio. However, higher rates have also created the opportunity to increase overall book yield while also moving up in credit quality. Through the first two quarters, we have increased the pre-tax book yield on our fixed income portfolio by 50 basis points. With an approximate 3.2 times investments to equity ratio, every 100 basis points of higher return on the investment portfolio translates to approximately 250 basis points of additional ROE. I'll close with a few quick business updates. Overall, I remain extremely pleased with our strong execution despite an environment of economic, capital market, and loss trend uncertainty. Our commercial lines geographic expansion plans discussed on recent calls remain well on track. We opened Vermont during the second quarter and are on track to open Alabama and Idaho in the coming months. We expect to maintain a similar pace over the next several years. Geographic expansion is an attractive and relatively low-risk growth opportunity for us as we can leverage our strong underwriting and technical capabilities in business lines that we understand well. While at-size catastrophe losses during the quarter hurt our personal lines results, we continue to make solid progress in migrating our business towards the mass affluent market. Direct written premium growth in the target mass affluent segment was strong in the quarter at 20%, reflecting our superior coverage and service capabilities. As the year progresses, we expect to continue to attain additional rate and exposure changes to further offset higher loss severities. Our E&S business remains a strong contributor to our financial results. The marketplace continues to provide strong pricing and business flow opportunities. Our E&S business profile is primarily smaller accounts and lower hazard risks with a casualty focus. Our new automation platform for general liability property and package business provides us with capacity to continue to grow the business while enhancing operating efficiencies. Our strong market position has us well positioned to navigate this challenging environment and continue to produce the strong and consistent results we have delivered over the past several years. With that, I'll turn the call over to Mark.