Good day, everyone. Welcome to Selective Insurance Group's second quarter 2020 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, Rohan Pai. Please begin.
Good morning, everyone. Welcome. We're simulcasting this call on our website, selective.com, and the replay will be available until August 28, 2020. Our supplemental investor package, which provides GAAP reconciliations of any non-GAAP financial measures referenced today, also is available on the investor's page of our website. Today, we will discuss our results and business operations using GAAP financial measures that also are included in our filings with our annual, quarterly, and current reports filed with the U.S. Securities and Exchange Commission. Non-GAAP operating income, which we use to analyze trends in operations and believe makes it easier for investors to evaluate our insurance business. Non-GAAP operating income is net income, excluding the after-tax impact of net realized gains or losses on investments and unrealized gains or losses on equity securities. Statements and projections about our future performance.
These forward-looking statements under Private Securities Litigation Reform Act of 1995 are not guarantees of future performance and are subject to risks and uncertainties. For a detailed discussion of these risks and uncertainties, please refer to our annual and quarterly reports filed with the U.S. Securities and Exchange Commission, which includes supplemental disclosures related to the COVID-19 pandemic. You should be aware that Selective undertakes no obligation to update or revise any forward-looking statements. On today's call are the following members of Selective's executive management team: John Marchioni, President and Chief Executive Officer, and Mark Wilcox, Chief Financial Officer. I'll turn the call over to John.
Thank you, Rohan. Good morning. I'll make some introductory remarks and focus on some high-level themes impacting the industry and our company. Mark will discuss our financial results, and I'll return to highlight how we continue to invest in strengthening our platform so that we remain well-positioned to generate continued superior financial performance. Let me begin by saying I remain extremely proud of how our employees have navigated through this difficult period, delivering exceptional service to our customers and distribution partners despite the various challenges posed by COVID-19. As we stated in our earnings pre-release, elevated catastrophe losses, which were well in excess of the historical mean for the industry, alternative investment losses that we report on a one-quarter lag, and the impacts of COVID-19 obscure the strong underlying results of our business.
Our premiums written growth remains solid despite the challenging economic environment, and we are pleased to report a profitable all-in 98.4% combined ratio despite the higher catastrophe losses. From a financial standpoint, for the second quarter of 2020, Selective reported non-GAAP, fully diluted operating earnings per share of $0.40 and an annualized operating ROE of 4.4%. There were three main items that negatively impacted our results during the quarter. First, we reported $83 million of catastrophe losses, which was an historically significant loss for us. These losses related to numerous catastrophe events. Those more meaningful to our results included $43 million of losses related to two April storms and $20 million of claims related to civil unrest. Second, alternative investment losses totaled $16 million compared to a gain of $7 million in the year-ago period.
We report alternative investment performance on a one-quarter lag, and the results reflect the decline in investment values during the first quarter. With the market rebound in the second quarter, we expect our third quarter return on alternative investments to be much stronger. Third, COVID-19-related items, including the continued earning of the $75 million audit premium accrual booked during the first quarter and a slight increase to our premiums receivable allowance for doubtful accounts totaled $10 million and added 1.3 points to the combined ratio. In addition, we returned approximately $20 million in premium credits to our Commercial Auto and personal auto customers with an offsetting reduction in reported losses for those lines of business. Partially offsetting these items was continued net favorable casualty reserve development, lower than expected non-catastrophe property losses, and ongoing expense management initiatives. I'd like to highlight a few key topics.
First, with respect to the COVID-19 pandemic, this is an ongoing and tragic event that is impacting the health and livelihoods of numerous people around the country and across the world. From a financial standpoint, we took a prudent and proactive approach during the first quarter to reflect our estimates for potential exposures to the event, and with the passage of another quarter, these estimates have largely held. The following pre-estimates are recorded in the first quarter. Number 1, a $75 million return audit and midterm endorsement premium accrual to reflect the anticipated decline in exposures on our in-force premium for the Workers' Compensation and General Liability lines of business, for which through June 30th, the remaining accrual stands at $61 million.
Second, a $10 million in property IBNR for losses related to a small portion of our property policies that have specific sub-limit coverage for extra expense associated with a government-ordered cleaning. To date, we have not incurred any claims against this IBNR. Third, a $10.5 million increase in our allowance for uncollectible premiums receivable reflecting potential policy cancellations and non-payment of premium. In the second quarter, we increased this allowance by $3 million. Despite the COVID-19 exposures, loss trends were generally favorable, benefiting from the lower level of economic activity. This was particularly evident for the auto lines, where driving activity declined substantially due to various government shelter in place directives, although this was far more so for personal auto than Commercial Auto.
While claim frequencies were down during the quarter, we maintained our casualty lines loss ratios on plan for non-auto lines due to the long tail nature of these exposures, the inherent uncertainty presented by COVID-19, and the current volatile economic environment. The reduction for our Personal Lines and Commercial Auto insurance loss ratios reflect the earned impact of the premium credits, which reduced premiums and losses by equivalent amounts. The second topic I want to highlight was the significant level of catastrophic loss activity for us and the industry during the second quarter. Insured catastrophe losses were well above historical second quarter averages as measured by Property Claim Services or PCS, and driven by numerous smaller events rather than a few headline events. None of these events reached our excess of loss catastrophe reinsurance program, which attaches at $40 million per occurrence.
While quarters like this do happen on occasion, the annual impact of catastrophes on our loss ratio over the past 15 years has averaged three points and compares favorably to AM Best's estimated industry average of 5.3 points. We attribute this differential to our conservative underwriting and pricing philosophy and strong reinsurance program. Third, we've continued to successfully execute on our strategy of consistently generating profitable growth despite challenging market or economic conditions. Overall, second quarter reported net premiums written growth of 3% was reduced by three percentage points due to the aforementioned auto premium credits. Our strong distribution partner relationships continue to present us with excellent opportunities for growth without sacrificing our margin targets. Our field-based employees in underwriting, agency management, claims, and safety management were able to seamlessly transition to a virtual environment while maintaining highly responsive, personalized service and support to our customers and distribution partners.
Finally, with respect to pricing, industry-wide Standard Commercial Lines pricing continues its upward trajectory driven by an interest rate environment that is expected to be lower for longer, increased volatility in catastrophe and non-catastrophe property losses, a firming reinsurance market, and ongoing concerns over increasing loss trends. Our second quarter Commercial Lines renewal pure pricing was up 3.9%. Our successful track record of achieving renewal pure price that has matched or exceeded our expected loss trend in each of the past 10 years positions us well with a high quality and adequately priced in-force book of business. This sophisticated and granular approach to risk selection and pricing is also deployed in the acquisition of new business. Looking forward, we see opportunities to achieve higher price levels in property, auto, and General Liability, while Workers' Compensation is expected to present a continued drag in the upcoming quarters.
I'll turn the call over to Mark to review the results for the quarter.
Thank you, John, and good morning. I will review our consolidated results, discuss our segment operating performance, and finish with our updated outlook for 2020. For the quarter, we reported net income per diluted share of $0.57 and $0.40 of non-GAAP operating earnings per share. We generated an annualized ROE of 6.2% and a non-GAAP operating ROE of 4.4%. For the first half of the year, we generated a non-GAAP operating ROE of 6.7%. While our operating ROE is well below our 11% target so far this year, we feel good about the strength of our business, which continues to perform well despite some short-term volatility from COVID-19, catastrophe losses, and alternative investments. We believe we are well positioned to generate strong profitability for the balance of the year.
Consolidated net premiums written growth was 3% in the quarter, is inclusive of $19.7 million of COVID-19 related return premium credits for our Personal Lines and Commercial Auto lines of business. These premium credits were accounted for as a reduction in net premiums written, were fully earned in the quarter, and were offset by a reduction in auto bodily injury and physical damage losses. The premium credits had the impact of reducing our growth rate by three percentage points in the quarter. Strong renewal retention, overall renewal pure price increases averaging 3.9%, Steady new business volumes helped drive the solid growth. Year-to-date, our net premiums written are flat with 2019.
Our year-to-date net premiums written was significantly impacted by COVID-19 related items, including the first quarter $75 million audit premium accrual and the $19.7 million of second quarter auto premium credits that collectively reduced the top line by seven percentage points. As John mentioned, we endorsed $14 million of Workers' Compensation and General Liability premium against the audit accrual during the quarter related to lower exposures. That brought the accrual down to $61 million at quarter-end. It will be well into the latter part of 2021 until the premium audits are complete. We know the full extent of the impact of the reduced exposure on our auditable premiums. With GDP estimated to be down around 6% in 2020, we feel good about the audit premium accrual, we will continue to evaluate it quarterly.
We reported a combined ratio of 98.4% for the second quarter, an excellent result in light of the significant level of catastrophe losses and the ongoing impact of COVID-19. Catastrophe losses totaled $83 million, added 13.2 percentage points to the combined ratio. Favorable net prior year casualty reserve development of $15 million helped the combined ratio by 2.4 points. On an underlying basis, or excluding catastrophes and prior year casualty reserve development, the combined ratio was 87.6%, a significant improvement compared to 91.1% in the prior year period. For the first six months of 2020, the underlying combined ratio of 90.4% reflects 170 basis points of margin improvement. Underlying margins have benefited from lower-than-expected non-catastrophe property losses and reduced underlying operating expenses.
Included in the underlying combined ratio are the COVID-19 specific underwriting accruals that reduced pre-tax underwriting income by $9.6 million in the second quarter and increased the combined ratio by 1.3 percentage points. These specific items include $6.6 million of reduced underwriting income due to the earned impact net of reduced underwriting expenses and losses of our first quarter $75 million audit premium accrual. We also increased our premiums receivable allowance for doubtful accounts by $3 million in the quarter due to the COVID-19 related billing leniencies. These items reduced our second quarter EPS by $0.13 and our ROE by 1.4 percentage points. Year-to-date, the specific COVID-19 related pre-tax underwriting charges total $34 million and have increased our combined ratio by 2.4 percentage points. These items have reduced our year-to-date EPS by $0.45 and our ROE by 2.4 percentage points.
Moving to expenses, our expense ratio was elevated at 34.3% for the quarter. The earned impact of the COVID-19 related premium items reduced net premiums earned by $50 million in the second quarter. This, coupled with a $3 million increase in our allowance for bad debts, added 2.2 percentage points to the expense ratio. Absent these COVID-19 related items, the expense ratio of 32.1% for the quarter and 32.6% year-to-date was better than expected and reflects expense management initiatives. Some of these initiatives, however, can be seen as temporary and relate to lower travel and entertainment expenses, some short-term deferrals of projects to new highs, and lower employee incentive compensation. In addition, if premium volumes come under pressure from a further economic slowdown, the expense ratio will continue to face some upward pressure due to our operating costs being spread over a smaller premium base.
The expense ratio will also face pressure if our customers' finances are further impacted, which could result in us having to increase our allowance for bad debts. That said, we continue to seek out ways to improve our operational efficiency, leverage our infrastructure, and drive our expense ratio down over time while continuing to invest in our business. Corporate expenses, which are principally comprised of holding company costs and long-term stock compensation, totaled $6.3 million in the quarter, compared with $9.6 million in the year-ago period, driven by lower stock-based compensation expense. Going to our segments, in the second quarter, Standard Commercial Lines reported a 5% increase in net premiums written, a solid result in light of the challenging backdrop, and reflects the strength of our field-based model and our deep and long-term distribution partner relationships.
The growth is inclusive of the $15.4 million impact of the April and May Commercial Auto premium credits that reduced our Standard Commercial Lines quarterly growth rate by two percentage points. New business was flat relative to a year-ago, while retention was very strong at 86% for the quarter, and renewal pure price increases were stable at 3.9%. The combined ratio was 96.7%, and the underlying combined ratio was 89.6%. Catastrophe losses accounted for 10.1 points on the combined ratio. Net favorable prior year casualty reserve development reduced the combined ratio by three points and included reserve releases of $15 million in Workers' Compensation and $10 million in General Liability, partially offset by unfavorable prior year reserve development of $10 million in Commercial Auto.
The increase in the Commercial Auto prior year reserves was driven by higher severities, putting pressure on the 2016 through 2019 accident years, as well as higher-than-expected frequencies in accident year 2019. As John mentioned, while the current accident year reported claim frequencies were down during the quarter, except for reducing losses in the Commercial Auto line related to the premium credit, our 2020 casualty loss ratios for Standard Commercial Lines remain on plan. Due to the long-term nature of these risks and the inherent uncertainty presented by COVID-19 and the volatile economic environment, we do not believe it is appropriate to reflect a temporary reduction in frequencies at this time. Our Personal Lines segment reported a 5% decline in net premiums revenue, driven by $4.3 million of personal auto premium credits offered in April and May, which impacted the growth rate by five points.
Renewal pure price increases averaged 3.1%, retention remained solid at 84%. New business was up 13%. The segment produced a combined ratio of 108.8, which included an elevated level of catastrophe losses of 36.2 points. There was no prior accident year casualty reserve development. The underlying combined ratio was 72.6%, benefiting from lower non-catastrophe property losses. Our E&S segment generated three percentage points in net premiums written growth. Renewal pure price increases averaged 5.5%. New business was up 13%. A higher level of catastrophe losses this quarter added 11.3 points to the combined ratio and resulted in a 100.9% combined ratio for the quarter. There was no prior accident year casualty reserve development. The underlying combined ratio was a solid 89.6%.
Over the past few years, targeted price increases, business mix changes, and exiting specific underperforming parts of the business have contributed to the improved combined ratio performance in this segment. Our investment portfolio remains conservatively positioned. As of June 30th, approximately 91% of our portfolio was invested in core fixed income securities and short-term investments with an average credit rating of double A-minus, an effective duration of 3.6 years, and offering a high degree of liquidity. We increased risk assets modestly during the quarter from 8% to just over 9% of the overall portfolio as we found valuations attractive. We will continue to evaluate further increases to risk assets depending on market and economic conditions. After-tax net investment income of $28.5 million was down 40% from the comparative quarter, driven primarily by $16 million of pre-tax alternative investment losses, which we report on a one-quarter lag.
The alternative investment losses came in at the lower end of the estimated $15 million to $20 million range that we disclosed last quarter. We do, however, expect a rebound in the valuation of these investments. This is reflected in our updated net investment income guidance, which I will discuss in a minute. The overall after-tax yield on the fixed income portfolio, including high yield, was 2.7% for the quarter. The average after-tax new money yield on fixed income purchases during the quarter was also approximately 2.7%, with purchases more heavily weighted earlier in the quarter when spreads were wider. Total invested assets include an increase in pre-tax unrealized gains in the fixed income portfolio of $220 million in the quarter, driven principally by a narrowing of credit spreads. The total return on the portfolio was a very strong 4.2% for the quarter and 2.3% year-to-date.
Our capital position remains strong with $2.3 billion of GAAP equity, which is up 4% from year-end. Book value per share increased 9.5% in the quarter. Our net premiums written to surplus ratio is 1.4 times. Cash flow is strong, with $197 million of cash flow from operations year-to-date, up 20% from last year and representing 14% of net premiums written. We have $324 million of cash and investments at our holding company. During the second quarter, we repaid the $50 million that we drew on our line of credit out of an abundance of caution in the first quarter. We currently expect to repay the remaining short-term borrowings by year-end. Overall, our strong balance sheet and holding company cash and liquidity provides us with the resources and financial flexibility to continue to invest in our business and grow our insurance operations.
As we have laid out in our earnings pre-release, we have revised our full year 2020 guidance as follows: A GAAP combined ratio excluding catastrophe losses of between 90% and 91%. This represents an improvement from our prior guidance of a range of 92% to 93%. This also assumes no additional prior accident year reserve development. Catastrophe losses of six points on the combined ratio, which is a 1.5 point increase from our prior guidance, reflecting higher-than-expected cat losses through the first half of the year. As COVID-19 has not been designated a PCS event, such losses are not included in this ratio. After-tax net investment income of $170 million, a $10 million improvement from our prior guidance of $160 million, and includes up to $5 million in after-tax gains from our alternative investments.
Weighted average shares of 60.5 million on a diluted basis. Our 2020 guidance reflects the estimated full-year impact of COVID-19 on our underwriting results. Our guidance this year has a higher degree of uncertainty than in prior years due to the dynamic and fluid nature of the impact of the COVID-19 pandemic on the U.S. economy, our business, and our operations. With that, I'll turn the call back over to John for our closing comments.
Thanks, Mark. We've continued to navigate through this challenging environment in concert with our distribution partners, ensuring we have not sacrificed in any way our high standards for customer experience. While the top-line growth outlook may get more difficult depending on the depth and duration of the economic downturn, we will maintain a disciplined approach to underwriting, seeking to obtain risk-adjusted pricing that meets or exceeds our loss trend expectations. We are extremely pleased with the quality and embedded profitability of our overall in-force book and are well-positioned to continue to generate strong financial results. Our success is built on three primary competitive advantages. Number one, franchise relationships with best-in-class distribution partners. Two, a unique field model enabled by sophisticated tools and technology. Three, the ability to deliver a superior omnichannel customer experience.
These competitive strengths have served us well for decades and have positioned us for continued success over the long term. We also recognize that without a highly engaged, aligned, and committed team, our success could not be realized. Our employees remain our greatest competitive advantage. We have a unique culture at Selective, one built on diversity, acceptance, and inclusion, key values to driving innovative thought. Recent events, some violent and tragic, have focused long-deserved attention on racial and social injustice. As an industry, we can and must do more to advance racial equality. At Selective, we continue to challenge ourselves to do more to increase diversity at all levels in the company, and in the ranks of our distribution partners, and foster an environment of even greater inclusion. We have always believed that if we deliver for our employees, our customers, and our distribution partners, our shareholders will be consistently rewarded.
This focus is highlighted in our inaugural ESG report published earlier this year. It can be found on the investor relations page of our website, and I encourage you to read it. With that, we will open the call up for questions. Operator?
Thank you, speakers. We will now open up the queue for the question and answer session. Participants who would like to ask a question over the phone, please press star and the number one. Record your name and company during the prompts. To cancel your request, just press star and then number two. Again, star one to ask a question over the phone. Our first question comes from Mike Zaremski from Credit Suisse. Your line is open.
Morning, Mike.
Hey, guys. Hey, it's Charlie on for Mike. Good morning, guys.
Morning, Charlie.
Good morning. Forgive me if I missed this in the opening remarks, but, in the past, you've kind of given rate and retention metrics for higher quality versus lower quality accounts in Standard Commercial Lines. Would you be able to kind of give us those metrics and maybe some color around trends there?
Yeah. We did not include those in our prepared comments, but that was not for any change in the actual results. I can tell you that the variation between best and worst performing segments on a forward outlook basis remains around seven points of rate differential. When you think about it, our highest quality accounts are continuing to retain in the, call it, low 90% on a point-of-renewal basis, and we're seeing an offsetting reduction in our low and very low expected buckets, call it in the mid-70s to lower 80% range. You've got about a 5% differential in retentions and about a 7% differential in rate. Remember that above average cohort represents about half of our premium. That continues to drive our mix improvement. When we talk about profit improvement, you've got two factors driving it.
Number one is the differential between earn rate and loss trend. The second is mix of business change. We think that's the best way to measure that mix change.
Got it. Thank you. That's helpful. Then, on the $15 million in reserve development in the quarter, can you kind of give us a feel of what lines that was in?
Yeah. I'll start, and then Mark can follow on. We had $15 million of favorable prior year coming out of Comp, Workers' Comp, and then $10 million coming out of the General Liability line. We did have an offset of $10 million of the adverse prior year in the Commercial Auto. I would say that Commercial Auto adjustment is spread out, as Mark put it, as had in his prepared comments over the four prior accident years of 2016 through 2019. Small adjustments to each of those prior years. In the 2016, 2017, 2018 periods, the primary driver there was a little bit of movement in severity. In the 2019 year, it was a small combination of a little bit of frequency and a little bit of severity.
Okay, thanks. That's helpful. One more, if I can. You detailed a lot of the moving parts in the core loss ratio in your opening remarks. I'm just wondering if you can maybe just pull it apart again and to give us a sense of what may be recurring versus more one-time benefiting from less activity in the quarter.
Mark can give you the specific pieces. I think clearly the biggest driver in the improvement from an underlying combined ratio basis when you strip out all the moving parts is the benefit to non-cat property being lower than expected and lower than prior year. I would say that makes up the majority of it. In terms of how that looks going forward, as we've said, you do have some volatility in both catastrophe and non-catastrophe losses in normal times. As long as the economic environment remains under some strain, you could very well see some of that favorable volatility persist. I think, and it's no different than we talk about on the catastrophe line side, your severity on those losses, whether individual losses or catastrophe losses, could bounce around from period to period. That's the primary driver.
Yeah, that's exactly right. Charlie, the only thing I'd add is that obviously it's been an unusual year with a lot of moving parts between catastrophe losses, a reduced level of economic activity that's impacted non-catastrophe property losses and expenses, and then obviously the COVID-19 specific accruals. When you kind of parse through all of that and all of the moving parts, I'll take you back to the beginning of the year as we laid out our combined ratio forecast, which was essentially 140 basis points of margin improvement from last year, an expectation of a 91.5% for the full year on an ex-cat basis accident year. If you look at where we are year to date, we're at 90.4% on the accident year ex-cat basis. Our guidance that we put forward for the full year at 90%-91%, that's on an ex-cat basis.
If you adjust for the reserve development that we've recorded on a year-to-date basis, kind of annualize that puts the underlying combined ratio expectation at a 91%-92% for the full year. Kind of split the difference. It sort of gets you back to where we were at the beginning of the year, the guidance of 91.5%. Now embedded in that are quite a few moving parts. You have the earned impact of the audit premium accrual. You have all the bad debt that we recorded and as John mentioned, the $10 million of COVID-19 related specific IBNR for the potential for some specific coverages for BI within property. Then you also have some offsets, as John mentioned, related to non-cat property losses and a reduced level of underlying expenses.
I would kind of take you back and keep you back to kind of the 91.5% expectations for the full year when you kind of parse through all the moving parts in the quarter.
Got it. Thanks, guys. Congrats on the quarter.
Thank you.
Thank you.
Thank you. Our next question comes from Matthew Carletti from JMP Securities. Your line is open.
Morning, Matt.
Hey, good morning.
Morning, how are you?
Good, thank you.
Just a few questions. I was hoping to start off maybe just on the top line on premiums. I was hoping you could help us get a feel for just how things progressed across the quarter, because clearly, conditions economically and the lockdowns and stuff changed from April to May to June. Whether that's premium growth levels or submission flow or just any way you can help us kind of get a little bit of the picture of the progression as we went across the quarter. Of course, I know it's just the last day of July, but if you have any insight into how July looked, that'd be helpful too.
Yeah. Thanks, Matt. This is John. I'm going to focus my comments on our predominant segment, which is Standard Commercial Lines, call it 80% of our premium. I would say you definitely saw over the course of the quarter, progressive improvement from our top-line perspective. You saw the overall number of 3%, which actually is 6%, if you strip out the impact of those audit premium. For Commercial Lines, it was about 2 points on that 5% growth for commercial. Actually, a pretty solid, more than solid overall growth rate for Standard Commercial Lines. Got slightly better as the quarter went on. I don't know that it was that dramatic. I think our performance has been pretty consistent. I will tell you, July, we still have 2 booking days left today and tomorrow for premium to be booked.
I would expect July Commercial Lines premium to be in excess of what you saw for the second quarter, and I think that's a combination of pricing and retention holding strong, but also very solid new business performance. I think this is an important point, and I know companies talk about their competitive advantages and their great relationships and their sophisticated tools. We continue to thrive in this environment. The ability to produce a 3% growth rate, even if you include those premium credits in a quarter where you all see what's happening to GDP in the quarter, I think speaks volumes about our positioning in the marketplace, and the fact that our distribution partnerships want to continue to grow with us, and they continue to provide us with opportunities.
We continue to use the tools we have, including a tool we recently rolled out a couple of quarters ago that allows us to work with an agency to evaluate their entire portfolio relative to our underwriting appetite and identify accounts that we think would have a better home when selected. I think that's feeding a fair amount of our growth opportunities. Overall, I think we feel good about our ability to grow the Commercial Lines business despite what's going to continue to be some economic headwinds as we move through the year.
Yeah, I think.
Go ahead.
I was just going to add just one observation to that. John's exactly right. The performance has been exceptional, and the growth rate has continued through July. The one caveat I think we'd be remiss not to mention is we did lift the billing holds in early July. Depending on whether our customers come in line with their premium payments, there could be a little bit of an offset in terms of some cancellations coming through into August and September. That's a little bit of a wild card at this point. We don't expect that to be meaningful, but there is some potential for some pressure on the top line related to some cancellations due to the leniencies we had in place.
Okay. Perfect. Makes sense. The other question I want to ask you is, there's been in the press in the past week, kind of just, I guess, a task committee, the New Jersey COVID presumption bill for workers' comp. I know it's a rebuttable form. Just your thoughts on it and kind of in relation to your book of business and your workers' comp exposures and what you make of it.
Yeah. Thanks, Matt. This is John again. I think we talked about this a little bit on the first quarter call. I think as long as the presumption laws or regulations remain appropriately focused on essential employees who are required to interact with the public in the course of their employment, they're very manageable. I think what you're seeing, what the New Jersey law proposed, and I think it's actually scheduled for the assembly floor today, assembly or Senate floor today. I would say that bill as currently constructed is reasonable. I'll also say that we're far enough into this pandemic to have a good sense in terms of reported claim activity for Workers' Compensation, and that includes those that would be covered and those that would not be covered.
These presumption bills, when you think about the claims adjudication process for Workers' Compensation, you would be hard-pressed to deny one of those claims, whether there's a presumption law in place or not, for an employee who was required to come to their job because they were deemed essential in an essential business and could reasonably prove that they contracted the virus in the course of their employment. I will tell you that what we've seen to this point, and it doesn't mean that things couldn't change and frequencies couldn't go higher, as we move through the balance of the year. To this point, there's nothing in actual reported frequencies to suggest that with or without a presumption law in any given state, the activity for working age population is going to result in that much frequency of severity.
I think there are clearly segments of the employee population, and specifically first responders and medical professionals who work in hospitals and are routinely exposed to COVID-positive patients. I think that's an entirely different story. That's not really what our Workers' Compensation book is made up of, so I can't speak to the experience on that front.
Great. One last just numbers question, I apologize if I missed it, the cat losses in the commercial line segment, do you have the split between those kind of three different lines that at least historically catch cat, the Commercial Property, the Commercial Auto and the BOP?
Yeah, just give us a second here.
Yeah. We can get you that breakdown.
You want within commercial lines?
Within commercial lines.
Yeah. Within commercial, yeah.
Yeah. For the quarter, the impact, just about to say, the cat loss is also non-cat prop. Yeah. 37 points on the Commercial Property line. Commercial Auto was just under a point at 80 basis points, BOP was 52.1 points on the combined ratio in the quarter.
Right. For a total of 10.1 points for commercial in total.
Got it. Great. Thank you very much.
Thank you, Matt.
Thank you, Matt. Next question comes from Paul Newsome from Piper Sandler. Your line is open.
Good morning, Paul.
Good morning. Good morning to you guys. I was hoping you could talk a little bit more broadly about the competitive environment at the moment, particularly amongst your regionals, where you saw a heck of a lot of growth and items of that nature . It doesn't seem like we're seeing some of the pullback from a competitive environment amongst similar companies that we were seeing elsewhere. Maybe that's wrong. Your thoughts on whether or not that's really, you've seen an uptick or downtip in competition given the crazy environment.
Yeah. Paul, this is really hard to evaluate because I think the information flow with the pandemic ongoing is a little bit more challenged, and it's also hard to really unpack some of the drivers of different companies' performance between new business and stronger retentions. We pick our spots, and we always have picked our spots, and our agents are providing us with opportunities, as I've said, and our hit ratios. Actually, if you want to think about hit ratios as a proxy for the competitive environment, our hit ratios have actually been fairly stable across small, middle, and large accounts, which I think would suggest that there hasn't been a radical shift in the competitive environment. I qualify that by saying that I do think some companies have struggled to maintain the level of interaction with their distribution partners because of the disruption in their operation.
I can't speak for other companies, whether regional or national, but our operating model has underwriters that are specifically assigned to agents as opposed to broken out by class of business. What that does is it gives you a great line of communication to the individual producers on an account. Our ability to feed off of those relationships and maintain them with outbound calls to request opportunities is different from companies who might have more of a centralized underwriting approach, where there's not an established relationship between the account producer and the individual making that underwriting decision. For companies that are structured like us, and there might be one or two others that you would put in that category, are probably having an easier time identifying opportunities and creating submission flow.
Actually, a little bit relatedly, again, can you broadly talk about what you think a little bit more about the claim cost inflation underneath? We've had some contradictory comments, I think may be a good way to put it, for various companies about whether or not we're seeing an uptick in the underlying inflation for the business. Obviously, it's not easy to tell with all the other things going on at the same time. Do you have any further thoughts on that?
Yeah. I don't know that I would consider our commentary to be contradictory of what you're hearing. I think what we often point to is that we have always had a disciplined approach in making our casualty loss picks and always embedded an expectation for future loss trend. While actual frequency and severity trends over the last several years will influence a loss ratio pick for a casualty line, we would always add in an expectation for future loss trend. Over the last couple of years, that expectation has gone up, and we've been fairly transparent about this. It would've been in the 3% range, typically a few years back, and over the last couple of years, we've inched that up to just under 4% for commercial lines.
I think to your point, you've got a couple of quarters now where it's hard to make any determinations as to whether or not that trend has been modified in any way. I think for us and our ability over 10 years, when you look at the track record and lay our rate and retention over the top of that loss trend, we've been meeting or exceeding that number on a consistent basis for 10 years. Turning that dial up a little bit, which I think in our pricing outlook discussion, we do think there is a need and an opportunity to dial up price a little bit going forward, and it's driven by a number of factors. While one of them might be a movement from a loss trend perspective.
You also have this cat and non-cat loss volatility, but most importantly, you've got this lower for longer investment environment that for all companies, and we certainly embed this into our approach, will lower your effective target combined ratio. Because you can fully expect that through the balance of this year and into 2021, at a minimum, you're going to generate less ROE from your investment portfolio unless you're willing to dial up the risk profile, which is not how we do business. You're going to need to lower your combined ratio target, which will raise your pricing indications, and that's how we'll work that through.
Long way of saying, I think we recognize some increase in loss trend, but also with our portfolio of smaller to mid-sized accounts of a generally lower limits profile, we don't see the sort of headline loss trend movements that some other companies may be pointing to.
My apologies, I didn't mean to say you were contradictory in the industry. I just think we've seen a lot of different views.
Yeah
from everybody this quarter.
No offense taken.
Thank you very much.
Thank you. Thank you, Paul.
Thank you. Next question comes from Sean Reitenbach from KBW. Your line is open.
Morning, Sean. Good morning.
Can you guys walk us through what you saw with workers' comp claim counts through the quarter, and as it got towards the end, and also maybe just some words on pricing as we've heard some talk about pricing potentially nearing a bottom?
I'll start. We don't get into a lot of details or specifics around individual line claim counts in the quarter. Suffice it to say that based on my prior comments relevant to the workers' comp presumption discussion, we have not seen a significant level of COVID-related workers' comp claims reported. I think clearly we have seen a drop-off in non-COVID claims reported over the course of the quarter. I will say, you have started to see it return to a little bit more of a normal run rate, but still below what we've historically seen. As Mark and I both indicated in our prepared comments, we haven't reacted to that frequency for our casualties.
I think it's not prudent to do so because of the severity driver on the casualty loss ticks and the need to allow those to age a little bit more before reacting to that. That would be the point relative to claim counts. In terms of pricing, I've seen the commentary relative to Workers' Comp bottoming, the price reaching a bottom. I'm not going to disagree. I think that's probably accurate, but you want to put that in the proper context, which is it's bottoming at a significant negative rate level and will likely continue to be negative. It might be less negative as we move into 2021, but it's still going to be a negative influence on the forward loss ratios for that line of business.
I do think what you might start to see is, we've commented on this in the past, in addition to the bureau-filed rate changes, which have continued to be negative, I think you've seen some aggressive pricing activity in the market on top of that. That might start to change, which will make pricing look a little bit better. Our expectation is you're going to continue to see negative filed rate changes, albeit slightly lower, less negative than they have been to this point.
Thank you. That's helpful. Secondly, what kind of feedback have you guys gotten on the Personal Auto rebates, how are you thinking about Personal Line exposures to some of the bigger auto insurers potentially enacting rate decreases?
Yeah. We did provide the premium credits for the months of April and May, at this point, have not extended that. I will tell you what we've seen is the actual reported claim activity as the quarter went on, has bounced back a fair amount. It's still a little bit below where it had historically been, but not meaningfully below. With regard to the actions of the bigger auto writers, it's just not an area we compete in. We are generally writing companion accounts that package up the auto and home, and we're generally competing for more of what we would describe as a consultative buyer who's going to focus a little bit less on price and a little bit more on making sure they're buying the right product with the right coverages to protect their, not just their auto, but their home as well.
I will say that change in competitive environment amongst the bigger players won't put pressure on auto hit ratios. Listen, it's a small segment of business for us. You've seen us struggle to generate consistent top-line growth in auto, in part because of that competitive pricing environment and the pressure that puts on our hit ratios. We think that'll probably continue with some of the actions that we've seen from some of the bigger players.
Okay. Thank you very much. Be well.
Thank you. Thank you. Operator, we have any more questions on the line?
Yes, sir. We have a question from Bob Hoffman from Boenning & Scattergood. Your line is open.
Yeah. Hi there, and good morning. It's actually two smaller pieces here. I wanted to talk about the Excess and Surplus line market. You've had a lot of companies saying they're pretty excited about the prospects in that business, rates going up, submissions going up. I just kind of want to get a feel for what you guys are seeing in that line and what we should expect going forward.
Yeah, thanks. We saw a solid growth quarter out of E&S, not extraordinary, obviously, but in light of the economic circumstances, pretty solid growth and pretty solid improvement from a pricing perspective. I think it's important to recognize that what we write in E&S tends to be the smaller. It's a $3,000 average policy size, predominantly in the binding authority space, kind of lower end from a severity perspective and complexity perspective in the E&S market. I think some of what you might see in terms of the headlines relevant to E&S tend to be focused on cat exposed or coastal property and some of the higher casualty, and certainly excess is one of the areas that's running pretty hard from a market firming perspective.
I would say the one area that we have seen some migration from the admitted to the non-admitted market would be habitational, and that's a segment that typically does bounce back and forth between admitted and non-admitted at times like this, and that is presenting some opportunities for us. That's also a bit of a challenge segment from a pricing perspective and is an area in need of rate level.
Got it. Okay. One other smaller point. Apologies to Mark, maybe I missed it, other income went up in the quarter more than I expected it to. What was driving that? Is that one-time or can we expect some strength there going forward?
The other income line, there's a couple different items in there. We net that off against other expenses within the expense ratio. When you look at the combined ratio, there's nothing in particular that stands out in terms of kind of ongoing run rate in other income.
Okay, great. Thanks.
Thank you.
Thank you. Our next question comes from Charlie Lederer of Credit Suisse. Your line is open.
Morning.
Hey, guys. Just one more. On the Standard Commercial Lines pricing, just wondering if there's anything to kind of glean from it decelerating quarter-over-quarter. Just looking at the supplement.
Yeah, no. I hesitate to even call it decelerating. I mean, it was 4.39%. The two slight movements by line, when I say slight, we're talking 10 or 20 basis points, would be Workers' Comp down a little bit. That could be mix of business generated, then Commercial Property was probably down about a similar amount to 4.5% in the quarter versus 4.7% on a year-to-date basis. I would characterize this as stable pricing over the last few quarters. We do think there's an opportunity in Commercial Property. Certainly, you might see some improvement, albeit still negative in Comp and the GL line continuing to move further north. Then Commercial Auto, excuse me, we would expect to continue to be at the kind of run rate we've seen.
I think we feel good about the pricing environment, but you did see a stable quarter in our results. I want to also highlight, and I know I said this a couple of times in the prepared commentary, we've got a really high quality and adequately priced in-force book of business driving our results in commercial lines. To a certain extent, your underwriters are going to make sure they're focusing on protecting that renewal book. I think you might have seen some of that in the quarter with all of the struggles in the economy. There was certainly a desire to protect that renewal inventory.
Got it. All right. Thanks again, guys.
Thank you.
Thank you. Currently speakers, we don't have any more questions on queue. I'll turn the call back to John for closing remarks.
Well, thank you all for your participation today. We appreciate the engagement, the questions, and feel free to reach out to Rohan or Mark with any follow-ups. Thank you all.
Thank you.
Thank you. That concludes today's conference. Thank you all for joining. You may now disconnect.