Good day, everyone, and welcome to Selective Insurance Group's First Quarter 2021 Earnings Call. At this time, for opening remarks and introductions, I would like to turn the call over to our Senior Vice President, Investor Relations and Treasurer, Rohan Pai. Please begin.

Good morning, everyone. We're simulcasting this call on our website, selective.com, and the replay will be available until May 28, 2021. Our supplemental investor package, which provides GAAP reconciliations of any non-GAAP financial measures referenced today, also is available on the Investors page of our website. Today, we will discuss our results and business operations using GAAP financial measures that are also included in our annual, quarterly and current report filed with the U.S. Securities and Exchange Commission. Non-GAAP operating income and non-GAAP operating return on common equity, which we use to analyze trends in operations and believe make it easier for investors to evaluate our insurance business. Non-GAAP operating income is net income available to common stockholders, excluding the after-tax impact of net realized gains or losses on investments and unrealized gains or losses on equity securities. And non-GAAP operating return on common equity is measured as non-GAAP operating income divided by average common shareholders' equity and statements and projections about our future performance.

Thank you, Rohan, and good morning. I'll make some opening remarks on our first quarter financial performance and outlook, and then turn it over to Mark to provide the details on our results. I'll return to provide an update on some of our strategic growth initiatives before opening the call up to questions. We're off to an excellent start in 2021 with a 16.2% annualized non-GAAP operating ROE. This was an exceptional result in the context of a challenging economic backdrop, continued overall low interest rate environment and elevated catastrophe losses for the industry. It is also well above our operating ROE target of 11%, continuing our strong track record of consistent and superior results. Our first quarter results reflected strong contributions from both underwriting and investment operations. Our solid premium growth of 11%, when adjusted for the prior year COVID-19-related audit premium accrual, was driven by overall renewal pure price increases averaging 5.4% and strong retention rates. Our continued ability to generate solid premium growth in the current economic climate is driven in large part by our extremely strong distribution partner relationships, sophisticated and granular pricing and underwriting tools and superior customer servicing capabilities. Our 89.3% combined ratio for the quarter benefited from catastrophe losses that were in line with our expectations and 4.8 points of favorable prior year casualty reserve development. Our solid underlying combined ratio of 90% is a testament to the quality of our book of business. While we have seen early signs of a return towards normal economic activity, depending on geography and class of business, overall claim frequencies in the quarter have remained below pre-COVID levels. That said, much uncertainty remains regarding the impact of late reported claims and increased severities. Therefore, our 2021 accident year casualty loss ratios remain on plan, and our 2020 casualty loss ratios remain at the levels booked at year-end 2020.

Thank you, John, and good morning. I'll review our consolidated results, discuss our segment operating performance and finish with an update on our capital position and guidance for 2021. For the quarter, we recorded excellent net income available to common stockholders per diluted share of $1.77 and first quarter non-GAAP operating earnings per share of $1.70. We reported an annualized ROE of 16.8% and a non-GAAP operating ROE of 16.2%, with meaningful contributions from both our insurance and investment operations. Our results for the quarter compared favorably with our 2021 non-GAAP operating ROE target of 11% set earlier this year, which translated to an approximately 400 basis points spread over our weighted average cost of capital. Overall, we are off to a very strong start to 2021 from a growth and profitability perspective.

Thank you, Mark. I'd like to highlight some of our major areas of strategic focus as we move through 2021. We continue to execute on our plans to generate profitable growth that significantly outperforms Commercial Lines industry results. Our solid capital position provides us with the flexibility to evaluate various growth opportunities, and focus is on those that enhance our market position with our customers and distribution partners while generating attractive returns for our shareholders. We continue to identify ways to bring additional value to our various stakeholders to further build a franchise that is positioned for long-term strategic and financial outperformance. The major drivers of our organic growth strategy in Commercial Lines are increasing share of our distribution partners' overall premium to 12%, appointing new distribution partners to achieve a 25% agent market share and expanding it to new states. As we've been highlighting on recent calls, we continue to invest in tools and technology that enhance our market position with our agents. The MarketMax tool, which provides our distribution partners with insights into their overall portfolio and identifies opportunities for them to grow their business with us, has now been rolled out to approximately 300 of our distribution partners, and we expect to increase this to 400 by year-end. The tool has seen strong acceptance among our partners, who are often eager to consolidate their business with fewer carriers that can offer superior service and offerings while optimizing their overall relationship. We rolled out our new small business platform for BOP products to all agents in the fourth quarter of 2020. We significantly streamlined the quoting and issuance process for these accounts and experienced a strong increase in BOP small business submission since the rollout. During the first quarter, we expanded the platform to include coverages such as…

. Speakers, our first question is coming from the line of Matt Carletti from JMP.

Just a couple of questions on Standard Commercial. Mark, I always struggle to keep up. You speak fast. I believe you split out the audit premium, COVID-related headwind, the $75 million across. I think I caught $29 million on workers comp. Maybe I'm making that up. And across, I'm assuming GL is the other piece of it. Is that correct? Are those the buckets?

You have it correct, Matt. It was $29 million in workers compensation in Q1 2020 and $46 million in general liability in Q1 2020 for a total of $75 million. I just wanted to provide those because the growth rate for those lines of business looks a little overstated on a comparative quarter if you don't adjust for that.

Yes. Perfect. And then yes, so following on that, I mean, if we adjust particularly workers comp for that, it was a pretty nice acceleration in growth even adjusted for that. Can you talk a little bit about what's going on there? Is it just the return to better work activity? So is it more kind of payrolls on your existing accounts? Or is it more new business pushing that?

Yes, Matt. This is John. I'll take that. So I think you've got a few things happening there, and part of it is price related, more so for general liability than it is for workers comp where pricing is still relatively flat. And we also see exposure starting to improve. So we saw on an all-lines basis, and I'm not breaking out specifically the individual lines. But on an all-lines basis, in Commercial Lines in Q1, our exposure was up just under 1.5%. So I think that's the other part of it. And then you add to that about 100 basis point increase in retention rates, and those are all contributing to growth. New business was relatively flat overall. And again, mix matters in terms of the segments that we write. And I think we saw a little bit stronger growth in the quarter in manufacturing, a little bit flatter in contracting. So some of that will also push around your individual lines a little bit. I would say those were the major drivers. You got strong retention, a little bit of bump up in exposure on your renewal portfolio, and so price working through there.

Okay. Great. And then just one other modeling question. The $16 million of cats in that segment, do you have the buckets? The -- I'm assuming the bulk was commercial property, but maybe some fell into BOP and commercial auto.

Yes. Just give us a second to get to that.

Yes. Most of it sits in commercial property, but I can kind of break that out if you like. So of the 16 -- call it, $16.1 million of cats in Standard Commercial Lines in Q1, $13.7 million came out of commercial property; and then the balance came out of BOP, which is $2.2 million. There was a little bit in commercial auto, but that was approximately $200,000. So those were the 3 -- of the breakout of the cats into the three different lines of business.

Okay. Perfect. Well, that's all I got. Congrats on a nice start to the year.

Thank you, Matt.

Speakers, our next question is coming from the line of Meyer Shields from KBW.

Great. John, I'm trying to understand some of the marketplace dynamics and the impact on your expectations. Basically, the premise is that we're seeing Travelers' retention rate on smaller accounts decline. And I'm wondering, is that influencing growth? And is there a difference in the quality of accounts that you write when you win them from bigger competitors compared to what you win from smaller competitors?

Yes. So first of all, tough questions to answer. I'll hit the second one first, which was relative to where the competitor that the business was priorly written. I don't necessarily see a difference there in terms of expected performance because we look very closely each quarter at what our new business pricing is relative to target by previous insurer. So we know where the business is coming from. We know where it is by class and what our pricing deviation is against each of those competitors. So we look at it at a fairly low level of detail. And I would say there's no difference in the pricing we need to win accounts from a larger company than from a smaller company. So there's nothing I would see there that would suggest that the profitability expectation going forward would be any different. With regard to your first -- the first part of your question, yes, I can't speak for Travelers, who is a great competitor in the marketplace. But on the small commercial side, for us, we pride ourselves on driving retentions higher because our book of business is so strong. And we focus really on 2 areas, one of which is being as granular as possible in how we manage our pricing strategy. That's why we disclose each quarter what our pricing is for the -- what we expect to be the best cohorts versus those that we think need a little bit more price and the relative retentions on both. And I think that's an important consideration. But the other part of this is -- and I know we continue to point to this, but the track record over 10 years of managing pricing on a consistent basis relative to expected loss trends allows us to be a very consistent player in the market for our distribution partners. So you're not getting that big rate movement from 1 year to the next, which causes a fair amount of disruption. And then the final point that I'll make, and this is not relative to any individual competitor, our books of business are different in terms of what we write. And I think if you look at our small business makeup, it does tend to be a little bit less focused on small retail restaurants, some of the most heavily impacted accounts from a pandemic perspective. And I think that has probably helped our -- because it's more contractors-focused, it's probably helped our retentions hold up a little bit stronger than some that might have a slightly different mix of business.

Okay. That's very, very helpful. The second question, assuming -- and this is maybe my words, not yours. Assuming that we have sort of unprecedented audit premiums coming over the next 12 months, are there any G&A expenses associated with that?

Yes. Well...

There's no G&A per se, but you would have the commission associated with it. So it doesn't come through -- or come through on a written and an earned basis but would have the associated commission associated with it, but not necessarily incremental G&A.

Yes. And I think the other part of it is -- because that premium does bring with it exposure. So from a loss ratio perspective, I don't know that I would anticipate that there's a big uplift in profitability. And again, I realize companies will try to parse exposure that acts like rate versus exposure that doesn't act like rate, and that could get challenging when you're adding a vehicle. That's exposure that obviously brings with it additional losses. If your payrolls are driving exposure increase but your number of employees are staying stable, you're still getting some additional exposure there because your indemnity costs are going to go higher on a relative basis. But I also want to make sure -- I mean, we were very careful in terms of taking the action on our audit premium accrual that we thought was appropriate. So we carried on our premium reserve. We built an obligation to reasonably estimate that amount. We did, and we recorded that, and it really allowed us to manage the change in exposure a lot more proactively. I don't know that I would necessarily anticipate some massive rise in exposure for companies that's just going to be driven by a bounce-back in the economy because for the most part, you've got -- certainly comp and GL are influenced by audit premium and exposure change. But you've got a lot of other non-auditable lines, whether it's the business owners line or the property line. And again, property line will be influenced if building values go higher, and you've got some inflationary adjustments built in there. But I'm not sure you're going to see this massive bounce-back in exposure come through and positively influence some companies in terms of profitability.

No, that's very helpful. I was really looking for some thoughts on the expense ratio, but that was immensely informative.

. Speakers, our next question is coming from the line of Scott from RBC Capital Markets.

Yes, just had a few here. The first, just wondering if you could touch a little bit on, yes, frequency versus severity kind of across a couple of the major lines. Yes, I'd imagine, obviously, the frequency part of it is pretty favorable right now, given where the economy has been in the past few quarters, and we've seen that across a number of companies. But I wonder if you could talk about the severity part of it as well, particularly in workers comp, GL and commercial auto. We've heard, particularly in commercial auto and workers comp, a few companies talking about some increases in severity even though the frequency is down. And just wondering what you're seeing in your book in some of those key lines.

Yes. I think -- this is John. I think what we're seeing is fairly similar, but I wouldn't suggest that the severity is that much different from expected and certainly isn't to a level where it's overcoming the frequencies that have generally come in better than expected. And again, I want to put this in context of our -- the approach we've always taken, which is you're talking about evaluating actual severities versus expected severities looking back at your more recent prior accident year. So the question is, what do you have embedded in there? And I think the fact that we have routinely included an increasing expected loss trend in those loss picks has allowed us to absorb what might be a little bit of a movement from a severity perspective. But I would say, generally speaking, you're spot on with regard to GL and comp, which is frequencies have run much better than expected, severities have emerged a little bit worse than expected, although not enough to overcome that improvement in frequency. I think auto has been a little bit different, and I think we've cited this pretty consistently, which has been more of a frequency-driven, at least for us. Looking back, it's more of a frequency-driven impact that's impacted those prior loss ratios, less so severity. But again, these are things you want to monitor going forward. I think it's very hard to comment at this point on the most recent accident years. Certainly, in 2020, with the immaturity of that book and the fact that frequencies did perform much better than expected, we've highlighted the uncertainties around severity. But just a quarter out from year-end, it's really hard to put any credence in what we're seeing in terms of incurred severity.

Okay. That's helpful. That makes sense. And then just -- I wonder if you could give a little more detail on the reserve releases. I know you mentioned -- for Commercial Lines, you mentioned in 2018 and previous accident years, this is the highest level of releases we've seen in a while. And I'm assuming it's in workers comp and GL mostly. So if you could comment on that as well as E&S line, which had releases for the first time in quite a long time. And wondering if you can just give a little more detail on some of those areas.

Sure, Scott. This is Mark. Why don't I start, and John can jump in as well. So you're absolutely right, the net favorable casualty reserve development was pretty significant in the first quarter, $35 million or 4.8 points of benefit on the combined ratio. $30 million of that, as I mentioned, was in Standard Commercial Lines and $15 million of that in each of workers compensation and general liability. And then for the first time, we did see favorable claims emergence within E&S, and that was $5 million, so that $35 million in total. As I mentioned in my prepared comments, it was really 2018 and prior. And if you were to break that out, just provide a little bit more specificity, about $13 million came out of the '18 year, $11 million out of '17, $4 million out of '16, and $2 million out of '15, and that's the majority of $30 million of the $35 million. And that's where we essentially saw a very favorable claims emergence, which we responded to in the quarter.

So I think when you look at it by individual accident years, these are not big numbers coming through on an individual accident year basis. But the other thing for comparative purposes is, if you look back over the last couple of years, we did have probably an offsetting movement in commercial auto going the other way that probably tempered some of the overall reserve release impact, which is not the case.

Yes. And as John mentioned in his prepared comments, we haven't made any adjustments to the loss picks of the 2020 year, so it's still a little bit too early to respond to any trends that might be coming through on the 2020 year.

All right. Perfect. The last question, just on the renewal pricing. It ticked up a little bit in Q1 versus Q4. Some of the other companies we've seen have sort of kind of seen a leveling off or even a slight deceleration in their pricing. And wondering if you can talk a little bit about -- I know you mentioned some detail on what you're kind of seeing on pricing. But do you expect that kind of the trend to continue to build as the year goes on? And are you able to share anything with what you're seeing in April pricing-wise?

So we haven't and don't plan on sharing anything about April on this call. And let me just talk a little bit about the market on a go-forward basis. And I do think, Scott, I know we've mentioned this in the past, each company's portfolio is different, and their line of business mix is different. And I still think what we're seeing in the marketplace from a headline price change number is being driven by a lot of the high exposure lines that we don't really play in. So whether it's your professional lines, your high-hazard property, your excess limits, significant excess limits on more hazardous classes, those are the numbers that were really driving the high reported pricing that you saw. And I think you probably are starting to see a little bit of tempering there. But on the smaller and middle market end of the pricing scale, when you look at the various surveys, I would say it's been holding pretty steady. And at least at the smallest end of the market, you've seen some other companies see some sequential improvement in their underlying pricing on a go-forward basis, similar to what we saw. And again, I think it's always important to reinforce, and I'm not projecting out our rate expectation for the year but just want to talk about the market dynamics that we think continue to push in a manner that suggests weight will remain strong relative to expected loss trends. And #1 is the low prolonged interest rate environment. And again, we're pleased with our results, but we also don't get overwhelmed by the fact that we had a strong alternative investment quarter. And on the core fixed income for us and everybody else, your new money rates are still running below what is rolling…

Currently, we don't have any questions in the queue. . Speakers, at this time, we don't have any questions in the queue. So with that, I'll go ahead and turn the call over back to John. John, please go ahead.

Great. Well, thank you all for your time this morning. We appreciate your participation and your questions. And as always, feel free to follow up with Rohan or Mark with any follow-ups. Thank you.

Thank you.

Thank you. And that concludes today's call. Thank you so much for your participation. You may now disconnect.