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spk05: 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.
spk07: 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.
spk01: 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.
spk04: Thank you, John, and good morning. I'll review our consolidated results for the quarter and first half of the year, discuss our segment operating performance and capital position, and finish with some comments on our updated guidance for 2022. For the second quarter, we reported net income available to common stockholders per diluted share of $0.61 and non-GAAP operating EPS of $1.17. Underrated results and investment performance were both meaningful contributors to our solid results with alternative investment income coming in better than we had previously expected. The results translated to an annualized non-GAAP operating ROE of 11.4 percent for the quarter and 12.1 percent for the first half of the year. Turning to our consolidated underwriting results, we reported 12 percent growth in net premiums written for the quarter and year-to-date, driven by strong growth in our commercial lines and E&S segments. We reported a consolidated combined ratio of 95.5 percent for the second quarter. The combined ratio included 46 million of net catastrophe losses, or 5.5 points, and 12 million of net favorable prior year casualty reserve development, accounting for 1.4 points. The catastrophe losses related to a series of Midwest storms that were particularly impactful for our coastal line segment. Outside of coastal lines, cat loss activity was lower than expectations. On an underlying basis, or excluding catastrophes and prior year casualty reserve development, the second quarter combined ratio is 91.4 percent, down from 93.1 percent in the first quarter, but up compared with 89 percent in the year-ago period, driven by non-cap property losses. In particular, the year-ago period benefited from pandemic-driven frequencies, which favorably impacted non-cap property losses. For the second quarter, non-cap property losses accounted for 16.6 points on the combined ratio, which is about a point higher than expected. The high losses were driven by higher auto physical damage and commercial property severities. This continues the theme we experienced in the first quarter and is factored into our updated four-year expectations. Year-to-date, we reported a 94.3 percent combined ratio, or 92.2 percent on an underlying basis. The combined ratio includes a non-cap property loss ratio of 17.5 percent, which is running about a point above expectations and is partially offset by a lower than expected expense ratio. In addition, our year-to-date CAAT loss ratio of full percentage points is running a bit better than expected for the first half of the year. Our updated ex-CAAT combined ratio guidance of 90.5 percent for the year implies an underlying combined ratio of approximately 91.5 percent for the year. This is consistent with our guidance from last quarter, but it is up from 91 percent at the start of the year, with the increase driven by expectations that non-cap property losses will run about 70 basis points higher than we expected when we started the year. Moving to expenses, our expense ratio was 32.5 percent for the second quarter, slightly down relative to 32.7 percent in the prior year period. For the first half of the year, the expense ratio of 32.3 percent was slightly below our four-year run rate expectations of 32.5 percent. primarily due to the timeliness of labor benefits and other overhead expenses. Over the longer term, we remain focused on lowering the expense ratio through a range of initiatives, including technology and process improvements, while balancing this objective with longer-term investments. Corporate expenses, principally comprised of holding company costs and long-term stock compensation, total $8 million in the quarter, compared with $9 million in the year-ago quarter. Turning to our segments, standard commercial lines net premiums rate an increase of 12%, driven by renewal fuel price increases averaging 5.3 percent, excellent retention of 86 percent, and exposure growth of approximately 3.9 percent. New business was in line with a year ago. The commercial lines combined ratio was a profitable 93.1 percent and included 3.3 points of net capacity losses and 1.8 points of net favorable prior year casualty reserve development. The favorable prior year casualty reserve development was driven by 10 million from workers' compensation for accident years 2019 and prior, and $2 million from bonds for accident year 2020. The commercial lines underlying combined ratio was 91.6 percent. This was 2.3 percentage points higher than the year-ago period, with the increase principally coming from 2.2 percentage points of higher non-cap property losses. Commercial auto physical damage severities, which we highlighted last quarter, remained at elevated levels, and non-cap commercial property losses were a bit higher than expected this quarter as well. In our Postal Line segment, net premiums increased 5 percent relative to the prior year period. Renewal fuel price increases averaged 0.6 percent. Retention was slightly up relative to a year ago at 85 percent. And new business growth was strong at 23 percent, reflecting a successful execution of a mass affluent strategy as the growth was within our target market. However, the combined ratio was an unprofitable 116.9 percent for the quarter. driven by a heavy cap-loss quarter, with the cap's impact in the combined ratio by 28.7 points. The underlying combined ratio of 88.2% was 2.7 points higher than in the prior year period, driven by higher personal order physical damage losses. In our E&S segment, net credence rate grew 13% relative to a year ago. Renewal fuel price increases averaged 6.9%. Retention remains strong, and new business was up 17%. The algo renewal rights transaction entered into late last year was, again, not material to the premium growth. The combined ratio for the segment was a solid 95.8% in the quarter and included 2.8 points of net catastrophe losses. The underlying combined ratio of 93% was 2.9 points higher than in the prior year period, driven mainly by 3.9 points of high non-cap property losses. Moving to investments, our portfolio remains well-positioned. As of quarter end, 91% of the portfolio was invested in fixed income and short-term investments, with an average credit rating of A-plus and, in effect, a duration of 4.1 years, and offering a high degree of liquidity. Risk assets, which include our high-yield allocation contained with fixed income, public equities, and alternatives, represented 10.9% of our investment portfolio, down about a point as we reduced public equities and high-yield exposure in the quarter. For the quarter, after-tax net investment income of $56.7 million was down relative to $67.4 million in the year-ago period. Alternative investments, which were reported on a one-quarter lag, contributed $7.3 million of after-tax gains relative to our prior expectation for loss in the quarter, significantly outperforming public benchmarks, but were down $16.3 million compared to the prior year period. Year-to-date, we have generated $22.4 million of after-tax gains from our alternative investments. Our current best estimate is for approximately $15 million in after-tax income from alternatives for the full year. Therefore, we're inclined to expect to get back some of our year-to-date gains, most likely in the third quarter. I would highlight how there is an inherent degree of imprecision when estimating future returns from alternative investments, particularly when estimating them over a relatively short time horizon. The after-tax yield on the total portfolio was 3 percent for the quarter, which translated to 9.1 percentage points of annualized non-GAAP operating ROE contribution. The after-tax yield on the fixed income securities portfolio was 3.1 percent in the second quarter, up from 2.6 percent in the first quarter. While generating underwriting income continues to be our focus, we also continue to actively manage the investment portfolio to optimize our risk-adjusted investment yields and what has become an attractive fixed income market. We put approximately $1.5 billion of new money to work in our fixed-income portfolio during the first half of the year. We've moved up in credit quality on these purchases, which have averaged a AA minus credit rating. The after-tax new money yield for the quarter was up meaningfully to 3.6 percent relative to 2.6 percent in the first quarter and 1.8 percent in the comparative quarter. In addition, approximately 14 percent of our fixed-income portfolio remains invested in floating-rate securities and these securities are resetting at high benchmark rates, helping increase book yield and investment income. Since year end, we have increased the pre-tax book yield of our fixed income portfolio by about 46 basis points. This includes 27 basis points this quarter in addition to the 19 basis points increased last quarter. We expect to put an additional $700 million to work in new fixed income purchases in the second half of the year from organic cash flows for maturities coupons, and operating cash flow. While the current investment market is helping prospective investment income, the high interest rate environment and wider credit spreads have negatively impacted the total return on the portfolio. The portfolio's total return was negative 2.98% in the quarter and negative 6.37% for the first half of the year. Turning to capital, our capital position remains strong, with $2.6 billion of cap equity as of June 30th. Book value per share declined 7.2% during the second quarter, and it's down 14.2% for the first half of the year, with our earnings more than offset by an increase in net unrealized losses. Adjusted book value per share increased 1% in the quarter, and over the trailing 12 months, it's up 9% or 12% inclusive of dividends. Our financial position remains extremely strong. Our holding company has $510 million of cash in investment exceeding our longer-term target. Our net previous rent-to-surface ratio has edged up a bit to 1.41 times, but it's still at the lower end of our target range of 1.35 to 1.55 times. Our debt-to-capital ratio of 16.3 percent is also very conservative. During the first half of the year, we repurchased 86.1 thousand shares of our common stock at an average price of $75.41 per share for a total of 6.5 million. As of the end of the quarter, we had $90.1 million of remaining capacity under our share repurchase program, which we plan to use opportunistically. I'll conclude with an update on our guidance. We currently expect a gap-to-bind ratio this year, excluding the casualty losses, of 90.5 percent, inclusive net favorable casualty reserve development in the first half of the year. Our guidance assumes no additional prior accident-year casualty reserve development, Our catastrophe loss assumption remains full points on the combined ratio. We're now projecting off the tax net investment income of $215 million, which is up $10 million relative to our prior guidance, reflecting higher income from our core fixed income portfolio. We still expect approximately $15 million of off the tax net investment income from alternative investments, which implies losses in the second half of the year, but I would again highlight the difficulty in estimating this line item and the fact that alternative investment income could come in materially lower or higher than our current expectations. An overall effective tax rate of approximately 20.5 percent, which includes an effective tax rate of 19.5 percent for net investment income and 21 percent for all other items. And weighted average shares of 61 million on a diluted basis, which assumes no additional share repurchases we may make under our authorization. Overall, a strong first half of the year in terms of growth and profitability. And with that, I'll ask the operator to open up the call for questions.
spk05: Thank you. We will now begin our Q&A portion. If you would like to ask a question on the phone, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star and then 2. Once again, star 1 to ask a question. Please wait for your name to be announced and star 2 to cancel your requests. And we have a question on the line. Our first question is from Michael Phillips from Morgan Stanley. Your line is open, sir.
spk03: Hey, thanks. Good morning, everybody. I guess, Mark, I want to make sure I understand the wording, the way you're talking about the guidance for the first half of the year. So sorry if I'm a little confused here. For the full year, 90.5. For the first half, your XCAT was 90.3%. about two points of favorable. So that 90.3 or about a 92.3, depending on which one you're using. Are you comparing the 90.5 for the full year to the 90.3 for the first half or the 92.2 for the first half? So is it from the first half or flat from the first? That's my confusion.
spk04: Yeah, no, a good question, Mike. So let me walk you through that and make sure I'm answering your question correctly. So our guidance is on an X-CAP basis, and I'll come back to the underlying in just a second. So for the full year, we're forecasting an XCAT combined ratio of 90.5%. Year-to-date, we're at 90.3%, so that does imply a slightly higher combined ratio for the second half of the year of 90.7%. Another way to look at it is on an underlying basis, so this is XCAT and ex-fable reserve developments. the year-to-date underlying combined ratio is 92.2 percent. And then what I highlighted in my prepared comments was on an underlying basis of guidance, when you take the year-to-date variable reserve development and spread it over the full year, it's approximately a point. So, in the full year, we're expecting an underlying combined ratio of 91.5 percent, and that would then imply underlying margin improvement in Q3 and Q4, which would add the 91.5 for the full year. So I know that's kind of a detailed reconciliation, but hopefully that squares out the year-to-date results for the full-year guidance on an X-CAT and on the underlying basis.
spk03: Yeah, it does, I think. So, again, the 92.2 gets to about a 91.5, right? Correct. Correct. Okay. Correct. And so let's talk about that then. So the improvement in the back half of the year, I guess I'm going to couple that with John's earlier comments with I guess it's what we saw in the second quarter is that the severity rise to 10% added about 75% to your overall loss ratio. I guess you're assuming that the rate that you have, the pricing that you have now will help to offset that. So that's where this improvement is going to come from in the back half of the year.
spk04: Yeah, I think that's right, Mike. Let me maybe start and then John can jump in as well. So a couple things to think about. One is I highlighted our non-cap property losses are running about a point above expectations here today. It's actually about 90 basis points. It's a little bit of rounding. We've talked about it better than our guides for the full year, about 70 basis points of high non-cap property losses from when we started the year. We started the year with an underlying combined ratio of 91, and now we're suggesting 91.5. So we are expecting continued elevated non-cap property losses in the back half of the year. although subsiding a little bit as we're getting strong rate increases and healthy exposure growth from a premium perspective. And we also now expect, perhaps, a little bit of expense ratio improvement relative to our guidance at 32.5, and that sort of squares you back to the 91.5 for the full year.
spk01: Mike, this is John. The only thing I'll add to that, I think it's important to put the non-cap property losses in the proper context. So, as Mark indicated, It's about a year to date, it's about 90 basis points above expectations. That equates to about $22 million. 18 of that 22 million is auto physical damage. So there's a little bit of traditional property, but if you put together a commercial property home and bought along with E&S property, it's only a couple million dollars over expected. That auto physical damage is the one line of business we as an industry don't have an inflation-sensitive exposure base, whereas in the property lines we have that. And that's why we think it was important to kind of point out the combination of rate plus the exposure change in the property lines. And we highlighted commercial property in particular because those exposure increases do neutralize the inflationary impact of severity. And that's why we wanted to put that all together.
spk03: Okay, no, that's helpful. Thanks. That clears it all up. So thanks for all the details there, guys. So I guess second question then is on your commercial book, and maybe it's just because the dollars are a little bit small, but anything to read on this quarter's new business was, you know, not down but flat. Relative to prior quarters, it was kind of down. It was pretty flat this quarter. Anything to read there and kind of what does that mean going forward, I guess, for the sustainability? You're pretty strong. You know, the commercial lines, overall growth. If new business may be flat, if that continues. And then, you know, if there's any exposure impacts on the top line from what might happen to the economy. So kind of two-part question there. Thanks.
spk01: Yeah, sure. So new business is always going to be a little bit bumpy quarter to quarter. And I say that because our primary focus on new business acquisition is pricing and underwriting systems. And I don't think, and I believe this is probably what you've heard from others in the market, I think overall the market pricing dynamics remain fairly rational. But new business pricing is always a little bit of a different game. And I think, you know, you go through periods of time where markets, different markets, sometimes dial up their focus on new business. And as a result of that, we might not be comfortable where pricing levels are. But I will say this, flat new business overall in Q2, we had a really strong Q2 last year, so I think that would explain part of the differential. We're comfortable with where we're writing our new business levels, but from quarter to quarter, you just will see some inherent noise in that number on a year-over-year basis based on our ability to win accounts at pricing levels and from an underwriting quality perspective that we're comfortable with. Now, I do think you do want to factor in a little bit of what you mentioned as well, which is that exposure increase that's evident in everybody's renewal book is also probably impacting favorably the average size of premiums on new business. So, there's probably a little bit of lift in that new business number. And if you would strip that out, I would say you might actually refer to some of the new businesses being down slightly on an exposure adjusted basis. But a long way of saying new business quality and pricing is something we monitor very closely. We're very comfortable with what we're bringing on the books and at what pricing level, but that's going to bounce around from quarter to quarter depending on our ability to win based on where the market is.
spk03: Okay. No, thanks. That's helpful. Last one, if I could then, guys. Commercial auto, obviously there's physical damage issues and property issues there too as well. But I guess... Are you seeing anything in recent trends that might indicate on the non-property side of commercial auto, the liability side of commercial auto, that might indicate that that line might start to become more of a problem child like it was a few years back?
spk01: So I wouldn't point to anything specific there. First comment I'll sort of refer back to is commercial auto liability is included in that casualty discussion I had in my prepared comments, and we had embedded a a current year loss trend assumption of 5.5% across all casualty lines that includes auto BI. But I also stressed the point, and I wanted to make the connection there, that the 20 and 21 accident years for us, we have largely stayed on those initial loss picks. And obviously, auto liability for us is a big part of our casualty loss picks. And we've done that because while the frequency benefit is real, and I think those accident years have aged to the point where we feel like that frequency benefit is real, we're staying on those loss picks because any concerns over emerging severity in the current accident year would also ultimately come through in the more recent prior accident years. So I think that's just reflective of our way of recognizing that whether it's evident or not at this point, we were concerned that severities might emerge, and we've stayed on those loss picks for that reason, essentially, largely ignoring the frequency benefit that's been recognized for that line of business.
spk04: Male Speaker 1 Right. Okay. Thank you for your answers, guys.
spk05: Male Speaker 2 Thank you. Male Speaker 1 Thank you. Thank you. Next question is from the line of Paul Newsom from Piper Sandler. The line is open.
spk08: Paul Newsom Thank you. Good morning. I was also interested in the commercial auto, but I think you mostly covered it. Does Bob have the same sort of property and liability exposures that inflationary impacts as you were talking sort of broadly as well? Or is it when you're talking about property and liability, was that just sort of general liability, commercial auto and commercial property?
spk01: So in my comments about property and casualty, you're asking from a loss trend perspective?
spk08: That's right. From a loss trend perspective, Bob, seeing the kind of – because there seems to be some differentiation amongst companies between size of customer, but I'm not really certain if you're seeing the same thing or different things.
spk01: No, so now we do split out the BOP and the BOP into the property component and the casualty component. And that's embedded in the breakdown that I gave you. And property represents about 60 to 65 or 70 percent of that premium allocation. So, it's in there. I will say, and it was in my answer to the last question relative to what's driving the non-cap property. For the most part, our BOP on a property basis has been running a little bit better than expected on a year-to-date basis. And there's a combination of, it's likely frequency-driven more so than severity-driven. But I'm not sure if I'm getting to your specific question, Paul. I want to make sure I'm understanding it correctly.
spk08: No, it sounds like there's not a big differentiation in terms of the loss trends in BOP versus others. Just based on what you're saying.
spk01: Yeah, and The other thing to note, too, is BOP is a bit of a smaller line for us than many of our competitors. And part of that is a lot of our small accounts are in small artist and contractor segments, which are not written on a BOP. Those are written on a property and GL package. So it's not as big of a line for us as well.
spk08: It's somewhat similar. Any differentiation in these loss trends, if we're talking about sort of the excess piece, of liability or property at the higher end?
spk01: I would say no. And we do a full reserve analysis, a full reserve review by line, including umbrella. We have not seen any noticeable shift in trends in our umbrella line, which has been a consistently strong performer for us. I would say, because we write, the umbrella that we write, and I think this is probably reflective of most of our standard market peers, is generally written on a supported basis, meaning you're writing the underlying GL and or auto. And I think you would expect, if you're seeing umbrella issues, you'd be seeing severity emerge unexpectedly high on the auto and or the GL that underlies it. And we're not seeing that. As I said earlier, the lost trend assumptions we have in the current year and the more recent prior accident years are holding up quite well. And I think that's the first thing you would see before you saw an umbrella impact. That surprised you. But one way of saying no, there's nothing in our umbrella trends that have us concerned at this point.
spk08: Right. Thank you. Appreciate the help, as always.
spk01: Thank you, Paul.
spk05: Thank you. Next question is from the line of Meyer Shield from ABW. Your line is open.
spk06: Great. Thanks. Good morning. John, first of all, thanks for all of your commentary on the impact of the exposure-based growth. I was wondering, given your pricing capabilities, what are the opportunities for actually even making that flow through even better or more responsive to inflation?
spk01: Well, I guess I feel like we do a really good job of that. I think this comes through in the non-cap property commentary where the majority of the non-cap property noise we're seeing is driven by auto fiscal damage. Because it is the one line, we don't have that inflation-sensitive exposure base. I feel like there's two aspects to this, especially on the casualty lines, which is make sure you're getting your exposure base right when you write accounts, and then make sure you've got a lot of discipline and timely discipline around auditing those policies that are auditable to make sure you're quickly recognizing any change and charging for any change in exposure. And I think that discipline around that is certainly important. And then I think on the property side, it's just making sure that you've got discipline around running updated replacement cost estimators, which include the impact of building materials and wages, and you're getting those through your exposure base as quickly as possible. I think those are the big drivers on that. Unfortunately, on the auto physical damage side, there's just not a lot of levers available to reflect those increased costs of repairing and replacing vehicles in your exposure base, which means that pricing is your primary tool. And that's what we continue to be focused on for that line.
spk06: Understood, and I guess that was kind of my question. I know it's certainly not industry practice right now. Is there any way of actually incorporating replacement costs in the pricing for auto coverages?
spk01: I think that would be a very positive change going forward. I think we're all highly dependent on third parties to do that for us. In personal auto, it is done. It's done on an annual basis, so there's a bit of a lag there, and I wouldn't suggest it's as responsive to actual changes in replacement and repair costs as what you're really seeing in terms of inflation. But you've got it happening on a very lag basis in personal auto. You don't have anything similar to that. You get some model year lift in commercial auto each year. But again, these are not, I wouldn't call these inflation sensitive. And I think the providers of those estimates for us would be doing the industry a real service by being a lot more responsive like we are on the property side to the change in the replacement costs. Now, again, we're in an unusual circumstance. I think historically you've never seen this kind of movement in this short of a period of time and the cost of used vehicles and the cost of repairing vehicles, but I think we should all learn from this, and I think that would be a positive change going forward to be more responsive to exposure or inflation-adjusted exposures.
spk06: No, that's perfect. That's very helpful. Thank you. Second-ish question, I guess, and I apologize if I missed this. I was wondering if I could get quarterly and year-to-date catastrophe losses by line of business. I know we've gotten that on some previous call.
spk01: Yeah, I'll give Mark a second to find those for you.
spk04: Yeah. And maybe I can start with standing commercial lines and walk you through that and see if that hits the mark and we can go into... Personal lines, E&S, but I think those are pretty self-explanatory. But in standard commercial lines for the quarter in commercial auto, it was $637,000. Commercial property, $19,143,000. And BOS, $2,530,000. That should come up to the $22.3 million or 3.3 points on the combined for CATS and Q2 for standard commercial lines.
spk01: So, 15 and a half points on the property line. Yes, 15 and a half points. And eight points on the BOP line. Exactly. Right, right.
spk05: Thank you. Was there more?
spk06: Is that good? Yeah, I mean, I don't think we got on the first quarter, so I was hoping for year-to-date numbers, but I can also follow up if that's easier.
spk04: Yeah, I'll give you the year-to-date numbers quickly. So, commercial auto, 936,000 year-to-date. Commercial property, $32,084,000. And FARP, $4,240,000. Gets you to the $37.3 million on a year-to-date basis, or 2.8 points on the combined. And then in postal lines, there is a little bit in postal order if you wanted that spread, but most of the cap-offs activity is in homeowners.
spk06: That is perfect. Thank you so much.
spk05: Thank you. Our next question is from the line of Grace Carter from Bank of America. Your line is open.
spk00: Hi, everyone.
spk01: Good morning, Grace. Good morning.
spk00: So I was wondering if we could look at personal lines a little bit. I know you all mentioned expecting maybe some accelerated rate increases in the back half of the year. With the rate being a little bit lower than in 2021 year to date and just kind of flat sequentially, I was wondering if there's anything related to the mix change going on in that book that's maybe hiding some increases year to date or if, I guess, if you think that the 0.6% is actually representative of the rate that you're taking so far.
spk01: Robert Niblett Yeah, thank you, Ray. So, that is the actual rate number. I don't want anybody to be misled by that at all. That's the actual rate number. I think what you were pointing to, though, is more of a mix change. And there is a substantial mix of business change happening in our portfolio. And historically, without getting too much into the specific differentials, our target market that's generating the growth has performed better than our non-target market historically. The book of business transformation has been meaningful. And I mentioned, I gave you the growth and target market premium in the quarter on a direct basis. And that was 20% versus you saw the overall at 5% growth in the quarter. So you can see a substantial shift in that book that's happening, which will generate, in our view, mixed change. Now that said, we need to be responsive to the overall C-level increase from a lawsuit cost perspective, which we think impacts every segment of the market pretty evenly. And that's why we will be increasing the file rate amounts. It'll just take a little bit longer for those to appear in the pure rate that you see reported. But I can't understate that mixed change because we believe it is meaningful. And then the other point I will highlight is when we got into the pandemic, we opted to just provide premium credits. Our rate level was actually positive in 2020 and flat in 21 overall, as opposed to taking big rate decreases, while rate decreases like a number of market participants did. So I think the starting point's a little bit different, but not to say that we don't want to see rate pick up as we move forward in both the auto and homeland.
spk00: Thank you. And I guess related to the outperformance you mentioned in your target market for that book, the core loss ratio hasn't really been quite as variable as we've seen from peers over the past few quarters, just kind of hovering in that give or take 61% to 62% range. Is that also a function of the mix change ongoing in the book, or is there anything else unique in your book that might have precluded the sizable step-up that we've seen from some peers this quarter.
spk01: No, I think that the mix change would be the one thing that would be impacting that. Again, there's some property sensitivity there. We've seen homeowners in particular come in a little bit better than expected on a non-CAT basis, but there's nothing else there that would suggest otherwise.
spk00: Thank you.
spk05: Thank you. Thank you, Grace. Thank you. Once again, for those who would like to ask a question on the phone, please press star 1 on your telephone and wait for your name to be announced. And to cancel your request, please press star followed by the number 2. Our next question is from Scott Koleniak from RBC Capital Markets. The line is open.
spk02: Yeah, good morning. Thank you. Just had a question. You know, severity is up for the industry across a lot of lines. And you mentioned in your comments about the claims frequency still being down versus pre-pandemic levels. And I wonder if you're able to quantify that really at all. And just I would be interested to hear your thoughts as to why you think that that has not rebounded kind of with the exception of maybe workers' comp too. to kind of current levels, given that, you know, the reopening has been around for, you know, a year plus? Just anything you can share on that.
spk01: Male Speaker Yeah, well, I think the first thing, and I'm not going to quantify specifically by line, but I will tell you it's pretty consistent across all lines. And I use the word slight on an on-level basis. So, when you strip out the impacts of rate change on an on-level basis, we continue to see frequencies below pre-pandemic levels, albeit slightly. So, that'll be in the single-digit percentages, and it'll vary a little bit by line. And I understand your point about the reopening, but I think we have to recognize the economy behaves different, has been behaving differently post-pandemic than it has pre-pandemic. I mean, I think the obvious that's always been talked about is the shift in miles driven. So even if they bounce back, the type of miles driven are different. I think shopping behaviors have changed. I think there's a whole bunch of behavior changes. I think the people working from home is a change. And I think those things will all probably have some influence on frequencies for different lines of business, not just oil. And it's hard to specifically point to any one of those items individually, but I think there clearly has been some consumer behavior change and some employee behavior change all of which could accumulate to change frequency patterns and, in this instance, result in a lower frequency pattern that might persist. Again, I'm not predicting that frequencies will continue to come down because they've been relatively stable the last couple of years and have settled out for a long enough period of time where it's a little bit of a trend that you could point to relative to pre-pandemic. Again, you always want to look at this on an on-level basis so you don't get a false reading because of the price impact. If the price increases, you want to on-level that to get to a real viewer frequency.
spk02: That's really helpful. I appreciate that. I just had a quick question, too, on the high net worth business. You covered that a little bit, but could you give us a little more of an update? I know you mentioned the 20% growth, but in terms of how many states you're in, how many states you think you'll be in in the next couple years, and just the overall loss profile on where you think that might stand once you get that up and running versus where the book had been. Just anything more you can share on that just based on what you learned so far?
spk01: Yeah, so just in terms of the state footprint, we're in the same 15-state footprint that we were in when we launched the transformation. So, it's a portion of our commercial line states. I could run through them if you want, but there's been no change to that for the state profile. And right now, we don't have immediate plans to expand geographically. And I say right now, we're expanding our footprint commercially, and to the extent we continue to gain traction and gain confidence in the mass affluent market, will evaluate the opportunity to potentially expand geographically as well, but take a very disciplined approach around that. With regard to the loss profile, again, I don't want to go too deep into that topic, but I will tell you there's, in our historical view from a loss ratio perspective, there has been a difference, and it's been recognizable, and we expect that difference to continue to benefit us from a mixed change perspective. But I'd rather not go into specifics in terms of what that means in terms of loss ratio points. David Chambers- Sure.
spk02: Yeah, I understand. And just two other quick ones just on the investment side. The alternative, it seemed like that may have outperformed a little bit in the quarter. I think you mentioned some commentary. Was there any particular class that outperformed on that? Or anything more you can share on that?
spk04: David Chambers- Yeah, alternatives did outperform. It has been a bit of a growing allocation for us. It's an asset class that we really like. It's about 4.9% of our total invested assets with a heavier weighting towards private equity and, to a lesser extent, private credit and real assets. When you look at the public market benchmarks, and as you know, we're a quarter lag, so you have to go back to Q1 to see how the public market benchmarks perform. We were expecting a loss in Q2, and we came in at that gain that I mentioned of the tax of about $7.4 million. most of that gain came from private equity, and then to a lesser extent, real assets, particularly energy and infrastructure, and then private credit to a lesser extent.
spk02: Okay, that's helpful. Just the last one, too. You mentioned the $700 million in capital you expect to deploy in a fixed income over the second half of the year. Is that going to be typically in the same areas you looked in in the first half, or anything more you can touch on there?
spk04: Yeah, so we've been very active this year from an investment perspective, really trying to optimize the portfolio and build book yield in what has been obviously a rapidly increasing interest rate environment. And then secondly, in the second quarter, a little bit of a widening of credit spreads with the market's anticipation of a slowdown in the economy and a potential for a recession at some point. So, in the first half of the year, I mentioned we put $1.5 billion of cash flow to work into the portfolio and increased the book yield by approximately 46 basis points, which is meaningful in terms of future ROE contributions and selective. In the second half of the year, we're anticipating about $700 million. That's obviously an estimate with a range around that. And that's just organic cash flow. So when you think about natural maturities, coupons, and operating cash flow, we can source from an insurance operation and move to our investment operations. That's without doing any proactive trading in the portfolio. Year-to-date, we have been very active from a sales perspective. So it hasn't just been organic cash flow. We've been trading the portfolio to put new money to work. In terms of allocations, we've really liked Securitized in the first half of the year And to a lesser extent, not taxable muties, but mainly in the securitized sector, agency RMVF, CMVF, and CLOs were found attractive from a yield perspective and also from a credit quality perspective. So as I highlighted, one of the benefits of trading the portfolio this year has been not only to increase the book yield, but become a little bit more defensive with a higher allocation to higher-rated securities going into what might be a little bit of a downturn from an economic perspective, so really accomplishing a couple of things. And maybe one last thing I'll mention, and it's embedded in our forward investment income guidance, is the benefit of the floating rate exposure, being that we're about a 14% allocation to floaters as LIBOR has moved up, and now SOFA, meaningfully on a year-to-date basis, probably about Those securities reset typically every 90 days. That's been a nice lift in terms of the book yield and contributed to the core fixed income that we've generated here today and expectations for the full year as well.
spk02: Okay, got it. Thanks for all the answers.
spk05: Thank you. We don't have any further questions on queue. I'd like to hand the floor back to our speakers.
spk01: Great. Well, thank you all for joining us and look forward to speaking to you again next quarter.
spk08: Thank you. Thank you.
spk05: Thank you. And that concludes today's conference for today. Thank you all for participating. You may now disconnect. Thank you very much.
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