the interests of punctuality, we're gonna get started with our next session. Sorry about that, with Selective CEO, John Marchioni. Thank you so much for joining us.
Thank you.
I'm gonna start with a number of questions, but we certainly want to encourage audience participation. I wanna make sure that what you want to know is what we're finding out. So when I look up, just raise your hand, we'll get the mic brought to you, and we can have that component of Q&A. So I'm gonna start maybe unsurprisingly, on the GL reserve side, because we've had a few consecutive quarters of reserve strengthening there. And I was hoping you could take us through both the data that's informed that reserve strengthening and maybe the process, because it seemed like it was broken up with different accident years being addressed at different points in time rather than all at once.
Right. Thank you for hosting us. As always, we appreciate it, and thank you for jumping right out of the gate with a hard question.
I wanted to get it over with.
So I guess let me just start with the process, and our process has been very consistent and remains the same, which is every quarter for every major line of business, we do a review of all prior or all recent prior accident years. That process is unchanged. The actuaries use several methods on both an unadjusted and an adjusted basis, on a paid and an incurred basis, and provide to the Reserve Committee, which includes myself, the Chief Actuary, the Chief Financial Officer, the Chief Accounting Officer, and the Chief Risk Officer, the output and their updated indications. As a result of that process, which has remained the same, we carry them out in relationship to their best estimate across each of those lines of business.
And then the difference between what we're carrying and what they're indicating is tied back to what we believe to be risk factors that exist in the current environment on a line-by-line basis. That continues to be the case. In Q4, we took an adjustment to the 2020 and prior, mostly 2019 and prior accident years, and then in Q1 and Q2, their response was to the more recent accident years, 2020 through 2023. But honestly, the second quarter action was the majority came from 2022 and 2023.
Mm-hmm.
The most immediate accident years. Now, obviously, the difference there is the most recent accident years for the GL line, you're working off of very low, as a percentage, paid dollars-
Right
... and even incurred dollars relative to ultimate. So we're responding very early to paid and incurred emergence, and that's what we saw in Q1 and Q2 on those more recent accident years and responded accordingly. In Q2, and this was, might seem nuanced, but it was, we thought, worthy of pointing out, is we weren't just responding to the movement we saw, the change we saw in Q2, in the Q2 reserve analysis. We also acted in a way that we felt was reflective of the potential continuation of the trends that we were seeing.
Right.
And just to put a little bit more context around it, and I think I went into some detail on the earnings call on this topic. We talk about loss trends, and you talk about reserve emergence, and there's a lot of pieces to this. Number one, what is your expected loss ratio for each of those years? And what loss trend did you assume underlying each of those accident years? That's obviously an important consideration, and we've always been very transparent and detailed around our loss trend assumptions in the planning process, and we also guide to combined ratio. So this is important.
But if you look on an average basis for the GL line over the 2019 through 2023 years, while it increased sequentially over that time period, ending at about 7%, a little actually closer to 8% for GL, the average assumed loss trend was about 5% over that time period.
Mm-hmm.
Our updated view of those accident years and actual loss trend or actual change in frequency and severity is closer to about 6.5. So that's the movement that took place over the last few quarters in terms of actual loss trend, and we broke it down a little further and said the two components, severity, was growing about 10%, between 9% and 10%, whereas frequencies were actually coming in about 4% down on a year-over-year basis. That's how you get to the 6.5%, and that compares to the 9% we assume for 2024. So I know I threw a lot at you there, and we can certainly-
Right
... dive into it a little bit more specifically. But it was severity and movement in severities that drove the reaction, and I think we've pointed on several occasions to social inflation, and I think it's also important to point out that our portfolio... If you look at our portfolio over the last several years by mix, hazard grade, limits profile, industry classification, it's very stable. And that's why when we look at that stability in the portfolio, and therefore what's historically been very predictable frequency and severity patterns, we view it as environmental in nature, social inflationary driven, when you see an entire diagonal move or you've seen a move on average severities.
Okay. No, that's very helpful. I'm gonna move to the other side, which is workers' compensation, which has been a very strong source of reserve releases. And I want to get a sense of how you're thinking about the line of business going forward, 'cause on the one hand, we've had, I think, again, environmentally favorable frequency trends. On the other hand, maybe realistically or reasonably, the industry's pricing has been, call it, flat, plus or minus a little bit for a while. How do you look at that line of business in terms of current available profitability? And have there been any changes to the reserving approach, or maybe even the outcomes of the reserve analysis that you've done?
So I would say no, no change to the reserving approach. What I will say is, if you looked at our commercial lines growth over the last several years and broke it down by line of business, you'll see workers' comp has been the lightest growth line.
Mm-hmm.
In several quarters over the last several years, probably slightly negative growth, which I think is reflective of the pricing stance that we've adopted. So over the last several years, the industry, especially for small, lower hazard workers' comp, has become extremely competitive, not just in terms of pricing, but also in terms of raising commissions. Commissions have workers' comp's historically been the lowest commission line.
Mm-hmm.
On the commercial line side. We've opted not to compete at that level because we've been concerned about the normalization of loss trends.
Right.
'Cause we've seen, everybody in the industry has seen, you know, decades-long, consistent downward trend in frequencies, favorable trend in frequencies, and have seen medical inflation run, call it on average, about 3%, 2.5%-3.5%, versus historical averages, which would be north of 5%. That's had a benefit. We've probably been more careful in selecting the more recent accident years and assuming that that frequency trend would in fact level off, and now what we've seen in more recent periods is your medical inflation for the basket, the CPI basket that impacts workers' comp, which is physician service, hospital service, and then pharmaceutical and medical equipment, but 90% is physician services and hospital services. That's been bouncing around the last couple of CPI prints between 4% and 4.5%.
So still under the historical, but higher than it's been running, and we've seen a more recent flattening of frequency trends.
Mm-hmm.
I think the combination of those two, with the current pricing environment, indicates that you would expect to see some additional pressure, potentially, if you don't get that frequency benefit, potentially on a go-forward basis. Our accident year for workers' comp is still in the, call it mid to maybe upper middle nineties.
Mm-hmm.
So we like the line. We will continue to compete in that line. We've just been careful because when those inflationary trends and the loss trends do start to reverse, it impacts everything, not just the current year.
Yep.
It impacts your entire open inventory, and the more recent benefit, and you, you've heard us talk about this, and I'm sure others, is when wage inflation was above medical, you actually got a benefit on the medical side of the loss dollar, whereas indemnity is kind of a wash, so.
Right.
But our philosophy on reserves hasn't changed. We've continued to see favorable emergence, although, you know, a couple of things. One is the size of that emergence has been coming down on a relative basis, still favorable, and then in the current year, it's been relatively de minimis, not in the second quarter and a small amount in the first quarter, but it's also become a smaller portion of our reserve inventory.
Right.
It would've been about 28% or so of our reserves back in 2018. It's now down to about 17% or so of our reserves in at the end of 2023.
So I want to follow up on one point that you made, and this is definitely true. We saw it, I guess, the most recent aggregates and averages is out, and we have seen the workers' compensation commission ratio up from 5% to about 8.5% industry-wide. If you don't go along with that, does that impede your ability to grow in other lines of business?
Not entirely. In certain cases, it might. It's all market-dependent by state. In certain states, there are very strong monoline markets where you can write the package lines and not write the comp. There are other states where you're more competitive if you can write the entire. But if you look at our growth over the last several years, and the fact that workers' comp has been flatter than the other lines, and we're still growing our package lines at a strong clip, I think that's pretty indicative that we can compete without writing the comp in all cases, and that's always been our philosophy.
Okay, that's helpful. I'm gonna continue sort of working my way through individual lines of business. I want to talk about commercial auto-
Mm
... which has been sort of an interesting line of business for me because there is a tremendous amount of data. Telematics are relevant to commercial auto, so there's a lot of information. It's been a really tough line of business for the industry, and I was hoping you'd talk about your book and Selective is one of relatively few companies that provides underwriting results by line of business. So your overall outlook for that line of business and how it impacts maybe packages.
Yeah, I think we've seen over the last several quarters, last couple of years, what I'll call a stabilization of loss trends in commercial auto.
Right.
If you look at our current year, on a reported basis, that line is right around 100. On an accident year basis, it's around the 98 combined ratio. Still a little bit north of where we'd like to be, but we've seen really good improvement there, in part because the pricing in that line has remained pretty consistently firm. We're at about 10.5 points a rate, and we've been earning that kind of rate. Unlike GL, where the market dynamic hasn't been as strong on pricing, although we expect that to rise, commercial auto's been consistently strong, and we've been earning the impact of that rate.
I would also suggest that the conversation we just had around general liability and social inflation was there in commercial auto, but it just manifested itself more quickly because there's a shorter tail associated with commercial auto than there is with general liability. And I think the frequency bounced back more quickly relative to pre-pandemic levels, whereas in GL, you've seen that, that downward trend with regard to frequencies. So it's an important line of business for us, and it's a line that we've been very focused on. We've seen good, strong improvement. We don't think, you know, we're not declaring victory relative to that line of business, but we feel good about where loss trends are settling out, our ability to continue to earn rate. And I think while we have more, of our book driven by auto and GL-
Mm-hmm
... and we have a stronger construction focus, and certainly, there's been a couple of pressure points there. It also allows us to manage our aggregate catastrophe exposure. Because those are segments, construction segments in particular, which tend to be auto and GL driven, whereas you're not, you know, you don't have to write a lot of East Coast exposed property. So there's trade-offs.
Right.
Right, you're taking some of this social inflation pressure, but it also helps you mitigate some of the elevated weather patterns that we see in a number of parts of the country, and therefore, we're a little bit less exposed on the property side.
Can you talk a little bit about the analytics? We've always described Selective as a company that punches above its weight-
Mm-hmm.
With regard to analytical capabilities and how you bring those to bear in commercial auto.
Yeah, and well, I think it applies across all lines of business. We were certainly an early adopter with regard to predictive analytics for all lines of business, and I think where we pride ourselves is 'cause certainly there are companies that are bigger and have more information scale, but we think we also are able to better deliver useful or usable information to our underwriters and our claims adjusters through analytics at the point of decision, and really deploy and get the impact of those tools a lot more effectively than maybe some of our peers might be.
I would say that's a continued evolution, and while we've been at that for 20+ years now, and you look at the advances in AI, not just the most recent advances, but the advances over the last several years in AI, and that just further fuels the accuracy of our modeling, and the ability to score drivers on the commercial line side, I think is one of those areas that has advanced quite a bit, and when you think about it, that's what really drives the rating process in personal lines. It's not just about the account, it's about understanding who the drivers are, and as the drivers change, when you wind up in an employment environment like we're in, understanding that and understanding the average scoring of a driver, of a group of drivers on a 20-fleet account-
Mm-hmm
... and staying up with that is very important. And then we continue to experiment with some telematics solutions, where, as long as the business owner takes or the fleet manager takes responsibility for improving driving behavior based on the information you provide them from telematics, that's where you really start to drive better behavior, and therefore, lower frequency.
Has that been changing on a year-to-year basis?
You're starting to see more interest on the part of business owners, and again, we wrote a lot of small and mid-market accounts-
Right
... and they tend to be most focused on running their business. But now, because of what we've seen as an industry over the last several years, first in property, and now more recently in casualty, and all of these cost drivers pushing up the cost of insurance, I think customers on the commercial line side are a lot more interested in opportunities to reduce their costs by becoming a safer workplace, and, you know, this being one example.
Right, and then kind of everyone wins-
Mm-hmm
... if that plays out.
Exactly.
Okay, I'm going to move along to property, because property-
Mm
has been a, also a difficult line of business for a while. I'm going to say most, some, to some extent, for weather-related reasons, others, exposure to inflation. In property, it's sort of tricky because you have to balance longer term and shorter term in terms of making a judgment of, is this an anomaly, or is this a trend? And I was hoping you could talk about how your underwriters and your actuaries are balancing long-term and short-term trends in property.
Yeah, so, but like everybody else, we reacted as quickly as we could to the spike in economic inflation that took place in 2021 and into 2022, because that manifested itself almost immediately in commercial property, and that was on top of this increased weather pattern. So it's not, it's not just... I mean, I think hurricane risk is something that, as an industry, between the primary writers and the reinsurers, we figured out how to manage that exposure and spread that risk reasonably well in most of the country. Whereas on the severe convective storm front, that's where I think it's taken a little bit more time to be able to effectively model that.
Mm-hmm.
Because you've seen this change in weather pattern that's impacted most parts of the country. We're not as wildfire exposed based on our footprint.
Right
... but certainly exposed to severe convective storm. And our response has been, from a pricing perspective, to make sure that we're pricing accordingly, based on our estimated CAT load. So I'll focus on CATs, and we can talk about non-CAT property. Updating our CAT loads annually, and if you look over the last five years, our average or expected CAT loads gone from about three and a half to about five and a half.
Right.
You've got a little bit of bouncing, you know, in inside of those time frames. But that's right sort of on the five- and ten-year averages. So weighting both the short term, the more recent accident years, and the longer-term view, that's kind of right in line with that, plus the output of our modeling relative to expected CAT loads. But I think the question about whether or not this is a pattern that's going to continue to accelerate, I think is an open question.
Right.
But I think we have to price as though it is, or will continue to accelerate. I think... And this is where some of the commentary about an inflection point in property, I think, might be premature. And I say that because we, we think about line of business returns on a risk-adjusted basis. So casualty lines, the longer the tail, and then the inherent volatility in a line of business will drive your capital allocation, and therefore, your, your risk-adjusted target combined ratio.
Mm-hmm.
So for a line like workers' comp or GL or commercial auto, you could run that line in the current interest rate environment at a 97 or 98 combined ratio and still produce a mid-teens, you know, 12%-15% operating ROE-
Right
... depending on your operating leverage. The property line, you don't have the benefit of investing the float.
Right.
So you really need—if you wanna achieve a reasonable return on that line, knowing you've got the inherent volatility, that line needs to run somewhere in the upper eighties-
Right
... to 90 combined ratio.
And that's all in, that's including the CAT load?
With CAT. And if you were to look at the industry entirely and take the property line... but you gotta, you gotta take the property line in pieces. You gotta take out earthquake, and you've gotta take out inland marine.
Mm-hmm.
Which is a very different business and very profitable business. The core property line's been running at about a hundred. So as we've addressed, we individually and the industry collectively, as we've addressed this changing catastrophe environment, and while inflation has come down, the sea level rose, and that's in the cost of goods sold. We've tried to stay on top of that. There's still room to improve margins in commercial property.
Right.
I think that would suggest that pricing needs to stay at, kind of, at the run rate for at least another cycle.
Mm-hmm.
And for us, our rate this year in commercial property is around 12.5%, just pure rate, not counting the exposure change, and it was around 12% last year. Our expectation is that run rate needs to continue. Now, there are terms and conditions changes that we're making, and others in the market are starting to make, to address this severe convective storm issue, particularly with regard to roof exposure.
Right.
Cosmetic damage exclusions, higher wind and hail deductibles, higher all other peril deductibles, and then in personal lines, because you've got the same dynamic there, you're seeing a significant increase in adoption of roof depreciation schedules. Not quite ACV, but pretty close, where you're depreciating the value of a roof, which we think is an appropriate risk-sharing mechanism.
Right.
So a lot of changes on the property side in addition to rate, but in terms of how we think about the target combined ratio, it's gonna be an upper eighties to ninety kind of number.
Okay. Is the roof depreciation concept applicable to commercial property?
It hasn't taken hold there yet, but it should be, because there's a useful life to a roof, and depending on the roofing material, there it should be depreciated after a certain period of time. It's been a little bit slower, whereas you're seeing higher wind-hail deductibles-
Right
... which accomplishes somewhat the same impact.
Sure.
You are starting to see the adoption of more cosmetic damage exclusions for metal roofs.
Right
... where you have hail, you have cosmetic damage, but you have nothing structural, and people are willing to take that on.
Okay. I'm just looking around the room to make sure that if there are any questions, I'm not overlooking them. Please don't hesitate to raise your hands. I'm wondering, maybe just as a follow-up on the commercial property side, 'cause we have seen at least a moderation in pricing. It may not be... Well, depending on hurricane season and other factor it may not last for all that long. But when you talk about your individual, or when you look at your individual approach to, increasing penetration within agents, how is a more conservative pricing strategy impacting those growth prospects?
We're an account underwriter, and we have-
Mm-hmm
... targets that we establish for each line of business. When you look at our ability to continue to generate growth with our pricing philosophy, we feel pretty good about our ability to continue to grow. Now, ultimately, it. We're not. We don't believe in having either a growth on or growth off strategy, depending on market. Ultimately, our pricing stance will dictate the level at which we grow.
Okay.
And now, we're in a unique position because we tend to be one of the top markets for the vast majority of our agents, and that's important because the relationship is as important to them as it is to us. So they're gonna have a commitment to growing with us and growing profitably with us, and I think that positions us uniquely to execute our pricing and underwriting strategies and still get looks at accounts. I will say this, we're probably turning down more submissions than we have historically, which is a good thing-
Mm-hmm
... because it shows that your underwriters are exercising judgment, but it also shows that your agency partners are still giving you at bats to generate-
Okay
... the kind of growth that you'd want to generate. But it's ultimately the pricing guidance we give our underwriters will determine our hit ratios and our retention ratios that will ultimately determine our growth.
I was gonna ask, maybe the flip side of that, is there a frustration component where they keep on sending you stuff, you're turning down more of it? Does that matter?
Well, it matters if you get to the point where your hit ratios have dropped substantially below where they've historically been, and it matters if you don't give your distribution partner a quick no, right?
Okay.
Getting to yes might take some time, but if you're working through the process to try to get to yes, they'll understand that as long as there's good communication. If the answer is gonna be no in two weeks, give them the answer on day one-
Right
... that this is just a this. And I think we've gotten really good at that on an agency-by-agency basis.
Okay.
And that, I think, helps manage frustration. And we're really good about communicating with our agents in terms of what our stance is and what our strategies are relative to pricing and underwriting and any changes that might be coming down the road.
Okay. I'm gonna follow up on that also because there's been some geographic expansion, and I think more heavily focused on casualty lines, at least as you're new to a state. What's the process of engaging with agents to develop that mutual importance of the relationship?
Yeah, so we're generally kicking off geo expansion, and it's been entirely commercial lines to this point, not necessarily casualty specific. It mirrors kind of our underwriting appetite that we have-
Right
... in our existing footprint. But we're active about starting at about 18 months pre-launch.
Mm-hmm.
And when I say active, and our Southwest expansion was the first expansion that created an entirely new region that we had to staff the management team. Since then, the states that we've added have been added to one of these six existing regions. So now you're really just talking about local underwriting talent and agency appointments, and that's the process that starts about 18 months out. We're embedding them into our management process, our local management that is Selective trained and understands how we think about underwriting and pricing and agency management. And then by hiring local staff that has knowledge of the key distribution partners in those states, we start having the conversations about who we are...
and about what our expectations are, and to see if we have an appetite fit and a commitment fit, commitment to making us one of their key partners. And when that aligns, we'll make appointments. Now, just to give you a sense of how we've entered most of these newer states, we're talking about 12 to 15 significant agency relationships in each state. So it follows our franchise value approach of fewer, more substantial relationships, and that process has worked extremely well for us. On the underwriting appetite side and the product side, it's very similar to what we do elsewhere, but there will be local nuances.
Mm-hmm.
So for instance, when we entered Colorado, you're gonna have different guidelines around flat roofs because of the hail exposure that we might not have in other parts of the country. Or we're gonna have a focus on fire risk score, CAR scores on an individual account basis in places like Arizona, where we have a different exposure than we have in other parts of the country. So there are some local nuances, but generally speaking, it's the same underwriting approach and the same product portfolio, and we continue to see some expansion opportunities. We're at 32 states for commercial lines now. We've got three coming online this year, Washington, Oregon, Nevada.
Mm-hmm.
Then Kansas, Wyoming, Montana at the end of next year, and I think at that point, we'll start to slow the pace. We're now starting to add states that are really account rounding states and give us the ability to write more multi-state accounts with our existing distribution partners-
Right.
-and our existing footprint.
Okay, but it sounds like, and I don't want to put words in your mouth, but just to confirm that the general liability uncertainties or the hiccups associated with that aren't in any way associated with or impeding-
Correct.
-geographic expansion?
Correct.
Okay.
Correct.
Which means, I guess, you're comfortable with your ability to assess the litigiousness of part of the newer regions?
Yeah, when we think about the entering a state, we're generally looking at what's the litigation environment, what's the regulatory environment, what's the economic growth outlook, what's the historic profitability of the industry on a line-by-line basis. That's why there are some states that are either at the end of the list or not on the list for expansion.
Mm-hmm.
We're generally picking markets. Now listen, every state in the union has challenges.
Sure.
We've been in some highly litigious environments. I mean, if you looked at our performance on the commercial line side, and we don't disclose it by state, but some of what are believed to be the toughest insurance markets are our most profitable, consistently profitable states on the commercial line side. We know how to manage different environments. It's just important that you go into these states with a clear understanding of how to manage the exposure that you're gonna be taking on, whether it's regulatory risk or litigation risk.
Okay, that's helpful. Can we talk about personal lines a little bit? Because there are two initiatives that are going on. One is the industry-wide return to profitability-
Mm-hmm.
-after a prolonged period of elevated severity trends. And second is the Selective, specific, shift to, I'm gonna say I'm Canadian here, the mass affluent market.
Mm-hmm.
Can you update us on where you are with both of those?
Yeah, so the transition has actually been accelerated as a result of the pricing actions that we've been taking in response to the broader market dynamics around elevated loss trends. Our pricing and we were probably a few quarters behind where the industry was, in part because we had launched this market repositioning from the mass market to the mass affluent market in mid to late 2021. But we're now on a run rate basis, call it about 20 points of rate on a written basis, and we expect the earning of that and the continued level of that sort of rate to impact profitability.
But we also have seen, based on the way those filings have been made and the different factors that we're moving and the updating of our models relative pricing models relative to personal lines, we've seen an acceleration of the transformation of the book away from the legacy portfolio towards the target market. Just to give you one data point, in Q2, 90% of our new business was in the target market for home.
Mm-hmm.
Our in-force portfolio for home is now about 60%-
Yeah. Okay
... mass affluent, and we think that'll continue to accelerate. We continue to like that business. We think it lines up well with our value proposition. We think it lines up well with the type of business our agents like to sell and have in their portfolio, and we think we'll be able to reposition it from a profitability perspective to, to be effective in, in competing in that space.
How responsive are the most important markets' regulators to this tool? I'm calling it two-track. I don't even know if that's fair, but-
Yeah
... these two initiatives.
Yeah, so I think very responsive on the product side to position our product and service offerings for the mass affluent market. More of a mixed bag on the pricing side, which I think everybody's sort of dealing with. I would say, for the most part, and judging by the fact that our written rate is as high as it is at this point, we're generally getting receptivity in support of it, because we're filing indicated amounts.
Right.
There are some states, and New Jersey's been a headache for us and many others, that have been slower to react and less comfortable approving rate level in line with what companies' indications are, not just us, but others. And there are opportunities to take a more restrictive underwriting stance in those states until we get our fully indicated filing approved. So I would put New Jersey in that category. To a lesser extent, I'd put Pennsylvania in that category, and then for the most part, while there's been some delays, we've generally been able to get our indicated pricing approved.
Okay, and let me ask that question from the opposite perspective. There's certainly some signs of at least physical damage, severity trends moderating. We are seeing some with negative inflation, but certainly with lower levels of inflation. How quickly can you pivot? And how quickly would you want to pivot as those trends if, assuming that those trends persist?
Yeah, I guess you want to think about physical damage indications and profitability alongside of bodily injury profitability indications, because I think they're two very different outcomes, and we think about that while there are sub-lines, we're thinking about the auto line in total, and that's the indication that matters most, is the overall indication, which right now I think is still driven by BI.
Mm-hmm
and less so by physical damage.
Are you seeing any inflections in the BI trends? I assume that's mostly tied to medical costs.
You've got a frequency and a severity component.
Right.
Now, it's a different limits profile for everybody in the industry. Social inflation impacts every casualty line. Now, clearly, the more limit you have exposed on the commercial side, the more susceptible you are-
Mm-hmm
And probably the bigger impacts. But social inflation is not just more $1 million and $2 million and $5 million claims, it's the $100,000 claim now being worth $150,000. So there's an upward pressure on severities. I think that's also driven by some of the social inflationary forces. Less so plaintiff's bar targeting those limits, and more so by, I think a different mindset in terms of society around who should be responsible and who sits on juries, and how that informs how you think about settlement values on a BI case. So I think there's an impact there as well that goes beyond medical, just pure medical inflation.
Right, and how comfortable are you with your ability to disentangle how much of that is a function of the higher liability limits that I assume are associated with the mass affluent market, and how much is just the secular environment?
I think the change in liability limits should always be factored for in your pricing.
Right.
As long as your increased limits factors are set in the right place, that should be a neutral item.
Okay.
That's kind of how we plan for it, and that's what we see.
All right. When we talk about... I know this is overly simplistic, but people look at premium to equity, premium to surplus, ratios as an indication of capital adequacy, and as long as your mix doesn't change that much, it seems like a reasonable shortcut. When you look at your current level, I think you're at the higher end of operating leverage targets, how comfortable are you going above that, and maybe for how long?
Yeah, so it's an internally imposed target range.
Right.
You know, we say 135 to 155 on a premium to surplus basis, and we're currently at about a little over 164.
Mm-hmm.
First thing I'll say is, capital position is extremely strong.
Right.
We focus, I think, a little bit more on S&P required capital, AM Best required capital, RBC, and our own internal capital models, and by all measures, the capital position is extremely strong. Debt-to-capital is in the 17% range, so more than ample capital to support the growth that we expect to be able to achieve. The other important point is, and it is a crude measure, premium to surplus, because it doesn't capture the capital to holding company.
Right.
So our target is to have two times our annual cash need at the holdco, which is approximately $210 million. We currently have $450 million of capital at the holding company. We opt to keep it there because it gives us more flexibility.
Mm-hmm.
We could downstream that to the subsidiaries and put our pretax surplus back into that range, but we don't think that's the right thing for us to do at the moment, but we have that ability, so overall, it's something we've talked about in the past, based on where the growth is coming from, and we can't lose sight of the fact that our top-line growth has been influenced by price and exposure.
Sure.
You know, we're getting all in, commercial and personal, call it a little over 8% rate, and exposure on the commercial line side is still running about 4%. So a lot of that growth is good, good growth. You know, we're not growing policy count, but that's what's driving the growth and putting a little bit of pressure on that particular ratio. But we're comfortable operating at that level as long as we feel good about forward margin potential.
Right. And it's a good problem to have-
Mm-hmm
If you've got the growth prospects there. Again, I want to look around just to make sure that I'm not overlooking any questions. I did want to spend some time. Oh, sorry, go ahead, Clayton.
I think you said earlier, it's three quarters in a row of adverse development in GL, and it feels like you addressed 2019 before, and now 2022 and 2023, you bumped up your loss cost assumptions a lot. Like, where are we in this strengthening life cycle, especially if you see inflation kind of slowing globally now?
I guess, you know, as I tried to point out earlier, our response in Q2 was designed not just to address what we saw emerge in the quarter, but to contemplate some additional adverse trends from a severity perspective. So that's our way of saying we think we took a prudent step. Now, I'll also say, and this shouldn't go unnoticed, if you look at the last four or five accident years and the actions we've taken over the last few quarters, we've effectively raised our GL's expected loss ratios for those years by about five points. We raised the current year GL by about five points as well.
So our view was, "Hey, if we're seeing this in the more recent accident years, that should influence our view of the current year," and we acted accordingly and made that move. So I think that's also a prudent step. In terms of me declaring where we are in the severity cycle or whether social inflation has peaked or hasn't, I would be very hesitant to do that with any level of certainty. We've talked about elevated and uncertain loss trends... we're pushing rate higher because of that level of uncertainty, and we think that's the appropriate place for us to be right now in the market.
But I think social inflation is hard to attribute, and determining when it's found this new level, and are we gonna see a more historic run rate in terms of average severity change? I think you'd like to see a year or two of that happening before you declare it, so we're gonna continue to be prudent in how we think about expected loss ratios, how we set our loss picks, where we think loss trends are. You're not gonna generally hear me say pricing is well ahead of loss trend, because I think that fails to recognize the uncertainty in GL loss trends at the moment.
But your pricing incorporates what you've said-
It actually does.
is a very conservative assumption.
And we've seen it increase. You know, our pricing is approaching 8% on the pure rate. We don't throw exposure in there. You could.
Mm-hmm.
We think it's a lot more nuanced than that if you do, because some of that exposure is true exposure and should bring the same loss ratio with it. But if you look at it excluding workers' comp, it's north of nine, and we, we've seen GL move on a sequential basis, and I expect that to continue. So our, our pricing stance is reflective of that uncertainty and the fact that these higher severity trends could continue.
Okay. I ask this question a lot, mostly 'cause I'm looking for an update, but included in your competition are the big publicly traded companies whose results are basically okay.
Mm-hmm.
When we look at a distribution of loss ratios, there are a lot of companies that are doing quite poorly. There are many smaller companies, they're mostly not public. I was hoping you could talk about how it looks from your perspective and how that impacts your opportunity for growth, for winning agency market share.
It's certainly a diverse competitor set, and depending on where you are in the country and what segment of business you're talking about, we are competing against our national peers and other regional peers that are public, and we're competing against mutuals, reciprocals, privately owned companies. We think our. If you look at our competitive advantages, with the top two being a very unique field operating model, where we position our underwriters as close to our distribution partners as possible, which agents love because they've got a decision-maker there, not a marketing person.
Mm-hmm.
We love it because our underwriter has local knowledge and understands the quality of the submission from that producer because they have a history with that producer, and they understand the geographic nuances of the business that they're underwriting. That, combined with the franchise value model I talked about earlier, I think allows us to compete against companies of all different style and structure. I will say, when you think about the smaller, more concentrated regionals, especially in the Midwestern part of the country, they were most significantly impacted by the significant correction in the property cat reinsurance market a couple of years ago, where the pullback in capacity, the increase in retentions that were required, I think forced many of them to rethink their aggregate exposure and whether they had the surplus to support the writings.
A lot of them have pulled back, which I think has created a little bit of a different playing field. Now, unfortunately, you get some of those less sophisticated companies say, "Hey, I need to back off property. Let me go write casualty," and not have an appreciation for casualty loss trends. So that's a dynamic that we need to manage against, and that's why I said it's always about our pricing stance on a line-by-line basis, and our pricing guidance will determine our rate of growth.
Right.
I think that applies regardless of the competitor we're talking about.
Okay, fantastic. Apparently, we are at time, so please join me in thanking John for a very informative session.
Thank you. Thank you.