Good day, everyone. Welcome to Selective Insurance Group’s Second Quarter 2021 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. Thank you. You may begin.

Thanks, and good morning, everyone. We’re simulcasting this call on our website, selective.com, and the replay will be available until August 20, 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 and 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. Non-GAAP operating return on common equity is measured as non-GAAP operating income divided by average common stockholders’ equity.

Thank you, Rohan, and good morning. I’ll make some introductory comments on the results and then highlight some of the higher-level themes impacting the industry and our company. Mark then will discuss our financial results, and I’ll return to provide an update on some of our strategic initiatives that position us for sustained financial and operating outperformance. We generated excellent financial results in the second quarter with a 17.1% annualized non-GAAP operating ROE. Both our underwriting and investment operations were strong contributors to the financial results for the quarter. For the first half of the year, our annualized non-GAAP operating ROE of 16.4% was well above our full year operating ROE target of 11%, continuing on our strong track record of excellent results. Similar to the first quarter, favorable prior year casualty reserve development and strong alternative investment income drove the outperformance, while underlying underwriting and investment performance are in line with our ROE target for the year. For the quarter, our solid net premiums written growth of 12% after adjusting for the prior year COVID ‘19 related personal and commercial auto credits was driven by overall renewal pure price increases averaging 5.1%, strong new business growth and stable retention rates. Our 89.8% combined ratio for the quarter benefited from moderate catastrophe losses and 2.3 points of favorable prior year casualty reserve development. The underlying combined ratio of 89% reflects our superior underwriting capabilities and the quality of our book of business. Net investment income after tax totaled $67 million in the quarter, benefiting from the exceptional performance from our alternative investment portfolio. While our alternative investments, particularly private equity, have generated outsized returns so far this year, we expect performance to normalize in the coming quarters.

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 second quarter, we reported excellent net income available to common stockholders per diluted share of $1.98 and non-GAAP operating earnings per share of $1.85. We reported an annualized ROE of 18.3% and a non-GAAP operating ROE of 17.1%, with meaningful contributions from both our insurance and investment operations. For the 6 months ended June 30, our annualized non-GAAP operating ROE of 16.4% is well above our 11% target for the year. Overall, we are extremely pleased with our performance so far this year. Consolidated net premiums written for the second quarter increased 15% compared with a year ago or 12% when adjusted for $19.7 million of COVID-19 related premium credits in the prior year period. The primary drivers of our top line growth was strong renewal pure price increases, solid retention rates and very strong new business growth in our Standard Commercial Lines and E&S segments. Year-to-date, net premiums written have increased 19% or 11% when adjusted for the prior year COVID-19 related premium items. We reported an extremely strong consolidated combined ratio of 89.8% for the second quarter. Included in the combined ratio of $22.6 million of catastrophe losses or 3.1 points and $17 million of net favorable prior year casualty reserve development or 2.3 points.

Thanks, Mark. We continue to execute on our objective of generating consistent and profitable growth by identifying ways to bring additional value to our customers and our distribution partners. Our long-term goal in Commercial Lines is to increase our market share of 3%, which is predicated on increasing our share of our distribution partners overall premium to 12% and appointing new distribution partners to achieve a 25% agent market share. We seek to augment these initiatives by expanding into new states. Let me highlight some of our ongoing strategic initiatives. The rollout of our MarketMax tool, which provides our distribution partners with insights into their overall portfolio and identifies target accounts to grow their business with us continues to progress well. MarketMax has currently been deployed in approximately 320 of our distribution partners and is targeted to grow to over 400 by year-end. The tool has seen strong acceptance among our distribution partners and has been a key contributor to our strong new business growth over the past year. We are still just beginning to realize the full value of this investment. Our updated small business platform continues to roll out successfully. Our business owners, general liability, automobile, umbrella and cyber lines for eligible small business customers are now available on a new platform. We significantly streamlined the quoting and issuance process for eligible accounts and are experiencing a strong increase in small business submissions since the rollout. The business owners line of business, which became available to our agents in the new platform in the fourth quarter of 2020 saw new business premium increase from that line by more than 20%. In Personal lines, we successfully launched our homeowners product changes targeting the mass affluent market at the end of June. This customer base tends to place greater value…

Our first question comes from Matt Carletti from JMP Securities.

John, I appreciated your comments on inflation. And at least my read is that you have a healthy respect for it. My question is, what’s your view of the industry from kind of twofold. One is, do you think others in the industry are kind of taking the inflation that we’re seeing seriously? Or do you think some people are treating it more transitory? And then the follow-on to that is, what impact do you think it will have on the longevity of the pricing cycle?

Yes. Thanks, Matt. Great question. And I always hesitate to comment too much on the industry. And certainly, we have read the comments and the responses to the questions from a number of peers who have reported to this point. And they all have different perspectives. And I think they’ll all confidently state that they’ve got it factored into their loss picks and factored into reserves. I can only speak to the discipline with which we have always managed loss trends and earned pure rate to offset loss trend in our own portfolio and the discipline we had around that because I think the important part to understand is inflation doesn’t just manifest itself in expected loss trend on a go-forward basis, inflation will also manifest itself in some ways in your actual historical loss trends versus what you expected. And as you know, looking back over at least a decade, we’ve been not just disciplined around that, but highly transparent to our shareholders and the investor community in terms of how we view loss trends and the pure rate, renewal pure rate in our loss picks. So that’s the first point I would make. I can’t speak to whether other companies take the same approach that we do, but we maintain discipline on that. Now when you think about inflation and the impact on frequency and severity, I think it’s important to put it in context. And clearly, for everybody in the industry right now, evaluating frequency and severity trends is complicated by a few different factors. I mean, obviously, one is social inflation and social inflation is one that while it will impact your future loss trend expectations it’s also going to be seen in your historical loss trends. So when you look back at those prior accident…

That’s great. Very insightful and really helpful. A quick follow-up, just a numbers answers probably for Mark. The cat losses in standard commercial, do you have those by line, I think you’ve given them in the past between property, commercial auto and BOP?

Sure, Matt. So in the quarter, in standard commercial lines, the catastrophe losses were $11.3 million or 1.9 percentage points on the combined ratio for the standard commercial lines, and that’s really spread across 3 lines of business. Within commercial property, it’s $9.2 million. In commercial auto, it’s about $500,000. And in the BOP line is $1.6 million for a total of $11.3 million or again 1.9 points on the combined ratio.

All right, great. Congrats on a really nice start to the year.

Thank you, Matt. Our next question comes from Paul Newsome from Piper Sandler.

Congratulations in the quarter. I want to ask you kind of a big picture question. You’re getting rate above what you think, knock on wood, to what the claims inflation is. What factors should we consider that might keep you from having underlying underwriting margin expansion in 2022 versus ‘21, just maybe you could think about the pieces that we should be thinking about that might offset or change that embedded underwriting improvements?

Yes. So Paul, it’s a great question. I do think, in part, it ties back to the discussion we just had relative to loss trend and the impacts on loss trends. And we’ve tried to stress this, and I know it gets complicated but when you think about a forward loss picks, I think about ‘21 into ‘22, it’s not just about what is the impact of expected loss trend and what is the impact of expected written rate? That certainly influences your loss pick for the upcoming year, but the equal influence, at least for those of us who have a fairly disciplined and rigorous process around it is looking back over the last 5 accident years and saying, okay, how with each passing quarter has my actual frequency and severity emerged? That’s your historical loss trend. So when you look back and bring all those prior accident years to a fully trended basis based on actual changes in frequency and severity and then bring them to present rates. So what was my earned rate in each of those years, that’s your starting point. That starting point could be influenced by social inflation. So to the extent social inflation hit the prior accident years, and therefore, your loss trend in those years is emerging a little worse than expected, either driven by frequency or severity, that is influencing up the pick for your upcoming year before you load on the expected future trend and expected written rate and I think that’s the one piece that we’re certainly diligent about. And fortunately, for us, when we look back, the actual trends have been fairly stable with what we’ve embedded in there, and we’ve been earning rate at a very consistent basis to offset that trend. For everybody in the industry, that will be a big influence when they do their planning for 2022 on the casualty lines. And I think that’s the one area and I’m not prognosticating for us or anybody else, but that is the one, I would say, unknown or the information you would probably would not have from a lot of the companies when you think about rolling forward from this year to next.

Our next question comes from James Bach from KBW.

So I was just wondering on the -- on pricing. Can you give us an idea of your outlook for your trajectory for pricing on the commercial side? I know that it’s 5%, 5.1%, it was 5.7% last quarter. Can you give us a sense of is that decelerating? Or kind of where do you see rate increases going from here?

Yes. So I mean, obviously, if you look at our performance over the first 2 quarters, it’s been relatively stable. And while the market dynamic is an influence on how we manage pricing, we also have taken a very measured approach in terms of understanding our own pricing targets based on our starting point profitability and our expectation of trend, and we’re going to manage rate in that context as opposed to just trying to maximize rate in the short-term because the market may or may not be conducive. I guess what I would point you to and what -- how we think about this going forward and why we think the current pricing environment is sustainable is what’s driving the pricing environment and whether those forces continue to be present when we look forward, and we would argue that they are. So let me just hit the key ones. So #1 is the low interest rate environment. We don’t know where that is. And I think as we try to point out in our prepared comments, while we think we’ve got a high-quality alternative investment portfolio and it’s been generating really strong returns for us. We realize that, that that to a certain extent for the entire industry is masking the pressure on the core fixed income portfolios. And when you roll forward the investment income impact from those declining yields, that is something that will put pressure on underwriting margins. The second piece is, when you think about -- and a number of companies, we would -- not us, but other companies have continued to point to a little bit more volatility in their non-cat losses in the more recent quarters. But if you look back over the last couple of years, you’ve seen higher and elevated and…

Perfect. And then just -- you mentioned some -- I think Mark mentioned some expense ratio improvement outside of the temporary COVID savings. Can you comment on that sort of map out what the expense savings strategies are moving forward?

Yes. Certainly. So when we went into 2021, we put forth our expectations for the full year after the combined ratio, which was a 91% underlying combined ratio. And embedded within that guidance, we talked about 40 basis points of expense ratio improvement. And that was off an adjusted 2020 expense ratio. As you know, 2020 had a number of COVID-19 items. It was 33.8% on a reported basis, but adjusted for the pluses and minuses, it was really a 33.4%. So our expectation going into 2021, was for a 33 expense ratio, 80 basis points of actual improvement or 40% on an underlying basis. Year-to-date, we’re at 32.4%, so about 60 basis points of improvement versus expectations. And really, a couple of drivers there. It really is our travel and entertainment. We had expected T&E to be a little bit lower-than-expected in the first half of the year than the run rate, but it’s actually come in less than expected. And then we have just some overall general and overhead items that have come in below expected. And that includes things like rent, stationary, supplies, consulting fees, audit fees and things like that, that’s benefited the expense ratio. We expect some of those items to perhaps revert back to more normal levels, so maybe a little bit of upward pressure on the expense ratio, getting us back to more at the expected level for the full year 2021. But going into 2022 and into 2023, we do have a plan in place, line of sight and a path to continuing to be more efficient as a company. And that will be reflected in as an expense ratio that we expect to be able to bring down. We’ve talked in the past about an appropriate expense ratio for our company, for our mix of business as we stand today of around a 32%. And we think there’s a pathway to get there by the end of next year going into 2023. So that’s sort of how we’re thinking about the overall expense ratio.

Our next question comes from Grace Carter from Bank of America.

Thinking about the recent increases in severity in personal lines. I was wondering where the pricing outlook is today versus when ya’ll originally started thinking about the transition towards the mass affluent book? And as we kind of wait to see how these current severity trends play out, if there’s any impact on your growth appetite or the expected speed of the rollout or uptake in the meantime?

Yes, sure. And I don’t know that our view has changed at all. I mean, honestly, when you look at what we’re seeing in our own portfolio, and again, we’ve always talked about the frequency drop in auto, and it was certainly higher on the personal side than it was on a commercial side, but even the pickup in severity offsetting that was a lot more pronounced on the commercial auto side than it was on the personal auto side. So I don’t -- we don’t have anything in our data suggesting that there’s been a significant shift from a severity perspective in personal auto. And of course, in a lot of -- with regard to the pricing environment, I’m actually surprised that the pricing actions were as dramatic as they were in the middle of COVID. So rather than providing the auto credits that were deemed to be appropriate, the notion of significantly adjusting your base rate on a go-forward basis, assuming some permanent shift in frequency and severity, I think, is what caught some of the market participants short. We didn’t do that. We kept our auto pricing relatively flat. And it hurt a competitive position in the near term. I think our expectation is that the more recent results now are starting to put some upward pressure on personal auto pricing, and we think that will start to make its way through the marketplace. But again, we’re moving into a segment of business that we think is not as price sensitive. And certainly, home is as big of a consideration in that account decision-making as auto is and where we think about it more on a package basis. So that’s how we think about the market going forward.

Okay. Thanks. And then I had a quick one on standard commercial. We’ve heard a lot of peers talk about elevated property losses in the quarter. But, if I look at those non-cat property losses in standard commercial, they don’t look particularly out of line with recent quarters. So I was just wondering to the extent which you all saw that as well? Or if you didn’t -- if there’s anything particular about the makeup of your book that helps you avoid that?

Our non-cat property relative to our own expectations, has been a little bit better-than-expected for the first half of the year. When you compare it to the prior year, last year was an exceptionally light non-cat property year. But when we think about our normal run rate, we’re a little bit better-than-expected on non-cat properties from a frequency driven. And I mentioned earlier in the response to the question around inflationary impacts, some of those on the property side are impacting severity a little bit. But in our portfolio, there’s an offsetting frequency benefit. We put them all together, we’re a little bit better-than-expected on non-cat property.

Our next question comes from Scott Heleniak from RBC Capital Market.

Most of the questions have been answered, but I just had a couple of real quick. Is there any way you could quantify what the -- I’m assuming -- I think you mentioned it was a benefit of premium audit exposure units. Is there any way you can quantify what kind of impact that was in the second quarter on growth versus the past few quarters? And I would imagine that most of that benefit will be kind of in the second half and into next year. But wondering if you are able to talk a little more on that.

Yes. So let me try to answer this for you. So generally speaking, from our perspective, the best way for us to think about exposure change because there are different pieces that will move around in there that some companies consider exposure or others might not. We just look at the difference between the total premium change on our renewal book and the pure rate change. And in the quarter, that was about 2.7 points -- 2.7%. And then when you think about that in the overall portfolio. So that renewal business is about 81% of the premium in the quarter. So assume a little over 2 points of the growth in the quarter would have been attributable to exposure change.

Okay. That’s definitely helpful. And then I wanted to switch over to the share buybacks, you were active in share buybacks in Q1 and you weren’t in Q2. So I wonder if you could just provide just your thoughts on your appetite, how you’re thinking about buybacks at current levels? And obviously, the market is still attractive and you’re running a lot of business, but I’m just wondering how buybacks might be factored in and come into play as you look for the rest of the year?

Sure. Scott, this is Mark. We put the buyback program in place back in December. And as we mentioned, it’s an opportunistic share buyback program. We’re right now seeing very attractive opportunities to grow our business. And you’ve seen the growth rate is significantly above where we’ve been for the last number of years. And so for us, the strong profitability we’re generating the capital that we’re generating, the best use of capital is just to put it back into the business and grow our core operations because it’s very attractive returns for our shareholders. When we think about the buyback program, it is going to be opportunistic. We would like to deploy it over a period of time, but we’ll be patient and judicious and look for an opportunity to enter the market to execute the buyback program. We don’t have a budget per se or plan to execute over a set number of quarters. It really is opportunistic.

Okay. And I guess the last question I had was just on E&S, it sounds like you had good momentum, premium there, and it sounds like you have good momentum going into the second half of the year. And you mentioned a new platform. And so is some of this just expanding with distribution partners. And if you can talk more on that in terms of -- obviously, there’s a lot more risk going to E&S than standard. But can you talk about how much of that is just is kind of organic expansion through distribution? And where you see that playing out into 2022?

Yes. It’s all organic through distribution. We occasionally will add a new distribution partner, but we’ve just seen a lot more submission activity coming through in the E&S space. And that’s really driving the increase. The reference to the automation platform is that pretty -- we talked a lot and other market participants talk a lot about small business platform enhancements, which as we mentioned, we’re rolling out. For E&S, we’re rolling out something very similar, which is a full quote rate and bind system for the small E&S business, which we think will really enhance our competitive positioning with those wholesalers as that continues to roll out through the balance of this year and into early next year. So we like the position in the market and the market is benefiting from strong rate, as you saw, our rate level of just under 7% in the quarter in E&S, but also pretty strong submission flow. But if the profile of the business we’re writing is very similar to the profile of our book. It’s that small binding authority business, casualty driven, smaller contractors, habitational, those types of accounts.

Thank you, Scott. Speakers, we do not have any questions in queue.

Great. Well, thank you. If there’s no further questions, We appreciate all your time this morning. And as always, please follow up with Rohan with any additional questions. Thank you.

That concludes today’s conference. Thank you, everyone, for joining. You may now disconnect.