Selective Insurance : 2Q 2023 Earnings Conference Call Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

SIGI.OQ - Q2 2023 Selective Insurance Group Inc Earnings Call

EVENT DATE/TIME: AUGUST 03, 2023 / 3:00PM GMT

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2023 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

AUGUST 03, 2023 / 3:00PM, SIGI.OQ - Q2 2023 Selective Insurance Group Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Brad Wilson

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

Mark Alexander Wilcox Selective Insurance Group, Inc. - Executive VP & CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Grace Carter

Jack

Jiang Li

Paul Newsome

P R E S E N T A T I O N

Operator

Good day, everyone. Welcome to Selective Insurance Group's Second Quarter 2023 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, Brad Wilson.

Brad Wilson

Thanks, and good morning. We are simulcasting this call on our website, selective.com, and a replay will be available until September 1st. We use 3 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 measures, which we believe makes 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 per common share differs from book value per common share by the exclusion of total after-tax unrealized gains and losses on investments included in accumulated other comprehensive loss or income. GAAP reconciliations to any referenced non-GAAP financial measures are in our supplemental investor package found on the Investors 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 risks and uncertainties. We discuss these risks and uncertainties in detail in our annual, quarterly and current reports filed with the SEC. We undertake no obligation to update or revise any forward-looking statement. Now I'll turn the call over to John Marchioni, our Chairman of the Board, President and Chief Executive Officer, who will be followed by Mark Wilcox, our Executive Vice President, Chief Financial Officer.

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

Thank you, Brad. Good morning, and thank you for joining us. The second quarter property casualty industry results were impacted by elevated catastrophe losses. We were no exception, and these losses affected all 3 of our underwriting segments driven mainly by storms in our Midwest and East Coast footprint states. However, with our strong balance sheet, sophisticated underwriting capabilities and robust risk management, Selective is well positioned to navigate the industry's elevated and uncertain loss trends. In the first half of the year, despite catastrophe losses being about 3 points above expected levels, our operating ROE was 12.2%, slightly above our 12% target. In the quarter, net premiums written growth was an excellent 17%. Our distribution relationships and unique field-based model allowed us to deliver strong new business production while effectively managing our renewal book. Our consistent approach to underwriting and pricing throughout market cycles is one of the primary reasons our distribution partners make us their carrier of choice. Our strong written premium growth was attributable to new business premiums, which were up 33% and renewal premiums driven by an overall renewal pure price change of 6.4%, strong exposure growth and generally stable

2

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2023 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

AUGUST 03, 2023 / 3:00PM, SIGI.OQ - Q2 2023 Selective Insurance Group Inc Earnings Call

retentions. In Commercial Lines, our flagship segment, new business was up 23%, renewal rate was 6.7% and exposure growth was 4.6%. Across new and renewal, Commercial Lines exposure counts were up a manageable 3%, highlighting the impact of rate and exposure. Personal Lines and E&S also turned in excellent growth of 32% and 20%, respectively. Our proven disciplined execution has positioned us well, and our underlying combined ratio was 90% in the quarter and 90.5% year-to-date. There are 3 main reasons for the improved underlying combined ratio. Lower non-catastrophe property losses year-to-date, continued benefit from the renewal pure rate and a lower expense ratio due to expense discipline and top line growth. Most importantly, our strong investment income and underlying profitability allowed us to generate an operating ROE in line with our target for the first half of the year and maintain our full year combined ratio guidance despite increasing our catastrophe loss assumption to 6 points from 4.5 points.

Weather is inherently volatile, but we have robust risk management, including a prudent reinsurance program, strong aggregation management and a predominant underwriting focus on low to medium hazard risks. Our long-term combined ratio target of 95% is embedded in our pricing plans. Consequently, we should be able to generate ROEs at or above our 12% target given elevated interest rates and a significant ROE contribution from investments, assuming catastrophe losses are at a normalized level. With our strong capital position and underlying profitability, we continue to pursue attractive growth opportunities, including increasing agency market share and share of wallet in existing states, expansion of excess and surplus lines capabilities, transitioning to a mass affluent portfolio in personal lines and targeted geographic expansion. Geographic expansion is a lower risk way for us to deploy capital. We have a repeatable process and successful approach that is allowing us to accelerate this critical organic growth opportunity. Since 2017, we've added 8 states to our Standard Commercial Lines footprint. These states contributed 2 points of premium growth in the first half of '23. We plan to introduce 5 new states to our standard Commercial Lines footprint over the next 2 to 3 years. West Virginia and Maine are on track for early 2024, followed by targeted state expansion in the western half of the country. Ultimately, we plan to write standard commercial lines in most of the contiguous United States. This expansion should continue to drive top line growth and further diversify our property book. Our ability to underwrite at a granular level enabled by sophisticated tools, best-in-class talent, strong distribution partner relationships and a customer experience focus differentiates Selective. Throughout pricing cycles over the past dozen years, we consistently achieved renewal pure rate equal to or exceeding expected loss trend. At the same time, our renewal retention levels increased. We continue to strengthen our portfolio by achieving the necessary renewal pure price and exposure changes to our standard commercial lines property and auto books. During the quarter, property renewal pure rate was up 11.7% with increased exposure of 5.8%, resulting in total renewal premium increase of 18.2%. In commercial auto, renewal pure rate was 9.5%, with increased exposure of 4.3%, resulting in a total renewal premium increase of 14.3%. Excess and surplus lines continued to perform well with 20% premiu m growth in the quarter and an excellent underlying combined ratio. E&S was negatively impacted by elevated catastrophe losses in the quarter, which we view as normal quarterly variability, resulting in breakeven underwriting results. However, our strong new and renewal rates and recent underwriting improvements position us well to take advantage of opportunities in the E&S market and continue our profitable growth strategy in this segment. It was a difficult personal lines quarter with an elevated combined ratio driven by catastrophe losses and pressure on personal auto margins. Personal Lines net premiums written grew 32% off a small base. Profitability in this segment is not where it needs to be. We are executing a detailed plan as we reposition the book, taking the necessary steps to improve profitability. That said, it will take time to reach target levels of profitability. As we've discussed in recent quarters, we are transitioning to a mass affluent customer base. We see positive early signs that our product and service are hitting the mark as our distribution partners are giving us positive feedback and growing their book with us. In home, our target customer base represents approximately half of our in-force premium. We believe that focusing on a less price-sensitive customer who values coverage and service better aligns our organizational capabilities with a market where we believe we can succeed over the long term. We are focused on increasing rate to address profitability challenges within this segment. New business rate, which is more responsive to filed changes, increased 8% in the quarter compared to 5% in the first quarter. Directionally, we expect a greater number of rate filings with more meaningful increases in the third and fourth quarters, further accelerating new and renewal pricing. At the same time, we are taking underwriting actions to improve terms and conditions and restrict new business in areas outside our target market.

Overall, Selective is operating from a position of strength. We have the capital to support growth, well-established and differentiated relationships with our distribution partners and the organizational capability to drive disciplined execution to enhance profitability. In a market disrupted by underwriting and appetite changes and increased frequency and severity of weather-related and liability losses, we continue to be a stable carrier for our distribution partners.

In early July, we published our third sustainability report. As the industry experiences heightened frequency and severity trends, the report highlights our robust risk management processes that enhance our organization's sustainability. Our strategy includes bringing value to our employees, customers and distribution partners, which drives returns for our shareholders. Ultimately, our people and the relationships they foster are our

3

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2023 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

AUGUST 03, 2023 / 3:00PM, SIGI.OQ - Q2 2023 Selective Insurance Group Inc Earnings Call

most enduring competitive advantage and drive the superior financial performance we've generated in recent years. I am confident we have the strategy and execution-oriented culture to continue delivering profitable growth. With that, I will turn the call over to Mark to review our financial performance in more detail.

Mark Alexander Wilcox - Selective Insurance Group, Inc. - Executive VP & CFO

Thank you, John, and good morning. I will focus my comments on providing some more detail on our underwriting and investment performance, capital position and our full year guidance. Before doing so, I'd like to reiterate John's opening point. Despite elevated catastrophe losses in the first half of 2023, we have delivered a 12.2% non-GAAP operating ROE, and we are on track to exceed our 12% ROE target this year. While the second quarter underwriting result was not where we wanted to be, a strong premium growth, underlying underwriting profitability and higher net investment income position us well to achieve our full year targets as we move into the second half of the year. As preannounced on July 24, we reported $0.92 of fully diluted EPS in the second quarter and $0.99 of non-GAAP operating EPS. Year-to-date, fully diluted EPS was $2.41, up 61% compared to the prior year period, and non-GAAP operating EPS was $2.44, down 5%. Our performance this quarter was driven by significant growth in after-tax net investment income. We have been actively managing our fixed income portfolio in this higher interest rate environment, putting cash flow to work at higher new money rates, meaningfully increasing the pretax book yield of our fixed income portfolio and as expected, that stable core investment income is benefiting our results. Despite essentially breakeven underwriting results this quarter, we delivered a 9.8% operating ROE. For the quarter, our consolidated combined ratio was 100.2% due to an active catastrophe loss quarter. There were 19 individual PCS events impacting our footprint, primarily in the Midwest and East Coast, contributing to $100 million of net catastrophe losses or 10.6 points on our combined ratio. This was almost double our expectations. No single storm was large enough to attach to our catastrophe reinsurance treaty, which has a $60 million retention. The largest events in the quarter resulted in $13 million of ultimate net losses. So clearly, it was a frequency-driven CAT quarter, at least for us. Net favorable prior year casualty reserve development was $3.5 million or 0.4 points on the combined ratio. The favorable reserve development included $7.5 million in favorable claims emergence in workers' compensation, partially offset by $4 million of adverse development in personal auto. Amid elevated inflation in the economy and higher loss cost for the industry, we continue our practice of full reserve reviews each quarter to stay on top of emerging trends. As a reminder, from our February call, we have assumed loss cost of 6.5% for 2023, which includes approximately 7% in property and approximately 6% in casualty. The underlying combined ratio was a profitable 90% for the quarter and was 1.4 points lower than the prior year period. 1 point of this improvement came from the expense ratio, which is benefiting from our strong premium growth as well as our continued expense discipline. Over the medium and longer term, we remain focused on lowering our expense ratio while ensuring we invest appropriately to support our strategic objectives. The remaining improvement in the underlying combined ratio came from the current accident year loss ratio. Included within that a non-CAT property losses of 16.7 points in line with 16.6 points in the second quarter of 2022. Year-to-date, the underlying combined ratio was a solid 90.5%, 1.7 points lower than we reported in the first half of 2022. 0.3 points of the improvement came from the expense ratio, which was 32% year-to-date compared to 32.3% in the same period last year. The remaining 1.4 points is from an improved underlying loss ratio, driven in part by non-CAT property losses, which decreased 0.9 points. Underlying casualty loss ratios remain on plan for the year with the exception of personal auto, which we have increased. We expect the personal auto loss ratio to remain elevated for the remainder of the year. Our updated ex cat combined ratio guidance of 90.5% for the year implies that an underlying combined ratio of approximately 91% for 2023 compared to our original expectations of 92%. This improved outlook is primarily due to lower-than-expectednon-CAT property losses and the better-than-expected expense ratio we have delivered for the first half of the year.

As it relates to our Insurance segment, I'd like to highlight the solid underwriting performance in standard Commercial Lines, with a 97.1% combined ratio despite 8.2 points of cat losses and an underlying combined ratio of 89.9%, 1.7 points improved from the prior year period. While our E&S segment experienced a 100.7% combined ratio due to 17.6 points of cat losses, the underlying combined ratio of 83.1% was strong and almost 10 full percentage points better than the prior year period. It was clearly a disappointing quarter in personal lines from an underwriting profitability perspective with a 126.5% combined ratio driven by 24.3 points of cat losses, non-CAT property losses running 6.2 points higher than last year, 4.6 points of prior year reserve development and continued pressure on the current accident year in personal auto.

Returning to investments. Our portfolio remains very well positioned. As of June 30, 93% of the portfolio was in fixed income and short-term investments with an average credit rating of AA- and an effective duration of 4 years. Risk assets were approximately 9.8% of our portfolio as of June 30, in line with the last quarter. We have taken advantage of higher yields and finding opportunities to improve the credit quality and liquidity of the portfolio for remaining underweight risk assets. We've also been decreasing our allocation to floating rate securities, which now represent approximately 8.2% of our fixed income portfolio, down from 10% at year-end and 17% at the peak. As we have pared back floaters, we have locked

4

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2023 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

AUGUST 03, 2023 / 3:00PM, SIGI.OQ - Q2 2023 Selective Insurance Group Inc Earnings Call

in higher new money rates for longer while managing our overall duration and credit quality targets. This will provide more stability in our forward investment ROE contribution over the next few years. We put $537 million of new money to work in the quarter at an average pretax yield of 5.9%, improving our book yield by 13 basis points to 4.46%. This adds to the approximately 20 basis point increase in the first quarter and 115 basis points last year. At this point, unless we see a move higher in interest rates or a widening of credit spreads, we expect the quarterly increases in book yield we've enjoyed over the last 6 quarters to start tapering off a bit, although at a strong level relative to recent years. After-tax net investment income for the quarter was $77.8 million, up 37% from a year ago, driven by core fixed income. Alternative investments, which are reported on a 1-quarter lag, generated $9 million of after-tax income, up from $7.3 million from a year ago. The after-tax yield on the total portfolio was 3.9% for the second quarter, translating to a healthy 12.6 points of investment ROE contribution. Our capital position remains extremely strong with $2.7 billion of GAAP equity and $2.5 billion of statutory capital and surplus as of quarter end. Book value per share is up 5.8% this year or 7.4% adjusted for dividends. Operating cash flow remained strong through June 30, improving 21% to $294 million compared to the first 6 months of 2022. Our parent company's cash and investment position totaled $480 million at June 30, above our long-term target of $180 million. Net premiums written to surplus increased to 1.52x due to our strong premium growth. Debt to capital was stable at 15.9%. We have significant financial flexibility to support our strong growth and execute on our strategic initiatives. We did not repurchase any shares during the quarter, and we have $84.2 million of remaining capacity under our share repurchase authorization. We expect to take an opportunistic approach to share repurchases, given our strong growth and attractive options to deploy capital towards additional organic growth within our core insurance operations. We successfully completed the renewals of our July 1, 2023, excess of loss treaties, which covered standard commercial lines, Standard Personal Lines and E&S. Our casualty excess of loss treaty has substantially the same substantially the same structure as the expiring treaty providing $88 million of protection above a $2 million retention for all of our casualty business. Deposit premium increased $28.3 million or 33%, reflecting the strong growth in our business, driven by pure renewal rate increases, exposure growth and new business, coupled with a very modest reinsurance rate increase on subject premium and additional reinstatement premium coverage in the first 3 layers. For our property excess of loss treaty, we increased the retention on the first layer from $3 million to $5 million due to strong growth in our property portfolio and the cost of keeping the retention the same. Our modeling of the portfolio resulted in a strong expected economic benefit from increasing the retention, although it will result in marginally more quarterly volatility in our property results. The attachment points and limits for the subsequent layers remain the same with $65 million of coverage. Overall deposit premium on the treaty decreased $5.6 million or 11%, reflecting the increased first layer retention, partially offset by a risk-adjusted rate increase and growing exposure.

I'll conclude with an update on our guidance. For 2023, we increased our expectations for net catastrophe losses while maintaining other full year expectations as follows: a GAAP combined ratio of 96.5% including 6 points of catastrophe losses, up from 4.5 points previously. This assumes no additional prior accident year reserve development. After tax net investment income of $300 million, including $30 million in after-tax gains from alternative investments, an overall effective tax rate of approximately 21%, which includes an effective tax rate of 20% 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 ask the operator to open the call for questions.

Q U E S T I O N S A N D A N S W E R S

Operator

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Paul Newsome from Piper Sander.

Paul Newsome

Just maybe a little bit more thoughts on the property underlying doing as well as it is. It seems to be going in a little bit different direction than other folks of late. I would have thought there would be a fairly significant claim cost inflation on an underlying basis in those kind of businesses. So maybe there's a business mix difference from others or something along those lines that you've done something different to give you those good results?

5

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2023 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.