SELECTIVE INSURANCE GROUP INC Q3 2025 earnings call

Good morning. Thank you for joining Selective Insurance Group's third quarter 2025 earnings conference call. Yesterday, we posted our earnings press release, financial supplement, and investor presentation on selective.com's investors section. A replay of the webcast will be available there shortly after this call. John Marchioni, our Chairman of the Board, President and Chief Executive Officer, and Patrick Brennan, Executive Vice President and Chief Financial Officer, will discuss third quarter results and take your questions. We will reference non-GAAP measures that insurance and investment professionals use to evaluate operational and financial performance. These non-GAAP measures include operating income, operating return on common equity, and adjusted book value per common share. The financial supplements on our website include GAAP reconciliations to any referenced non-GAAP financial measures. We will also make statements and projections about our future performance.

These are forward-looking statements under the Private Securities Litigation Reform Act of 1995, not guarantees of future performance. These statements are subject to risks and uncertainties that we disclose in our annual, quarterly, and current reports filed with the SEC. We undertake no obligation to update or revise any forward-looking statements. Now, I'll turn the call over to John.

Thanks, Brad, and good morning. This quarter, we delivered an operating return on equity of 13.2%, driven by strong investment income, which increased 18% year-over-year. We are on track to deliver a full-year operating ROE in the 14% range. However, our combined ratio guidance of 97%-98% exceeds our 95% long-term target. To address this, we are prioritizing profit improvement and moderating premium growth. Risk selection, granular and accurate risk pricing, and prompt, fair claims adjudication are foundational capabilities we have built over many decades. We have a solid foundation, but are continuing to strengthen these core competencies to compete effectively in this dynamic environment. Across the company, we are sharpening our focus on a set of key priorities. First, relentlessly improving on the fundamentals across risk selection, individual policy pricing, and claim outcomes. Second, diversifying revenue and income within and across our three insurance segments.

Third, further leveraging our use of data, analytics, and technology, including artificial intelligence, to drive operational efficiency and improved underwriting and claim outcomes. Turning to results, we recorded unfavorable prior-year casualty reserve development of $40 million, or 3.3 points in the quarter. $35 million relates to commercial auto and $5 million to personal auto. Unfavorable prior-year development in both lines is attributed to the 2024 accident year and is primarily driven by the state of New Jersey. With recent prior accident year reserve strengthening in each of the last two quarters, we refined our view of the current accident year for commercial auto. This adjustment added just under five points to the current year casualty loss cost for the line's year-to-date combined ratio. For the quarter, the pressure in casualty lines was offset by light property catastrophe activity and favorable non-catastrophe property results.

In total, our combined ratio for the quarter was 98.6%. As you know, we book our best estimate each quarter, incorporating new and emerging information as it becomes available. Consistent with our longstanding practice, we continue to engage an independent party to conduct semi-annual reserve reviews and sign our actuarial statement of opinions. Over the past 15 months, we have supplemented these external reviews by engaging other independent third parties to evaluate our reserving, planning, and claims processes. Through their reviews, the outside firms have provided us with additional industry perspective on current loss trends and best practices. Their reviews confirm that our actuarial processes are reasonable and consistent with best practices for methodology, data, and approach. Most recently, we had an independent review of our overall casualty reserve adequacy completed. It indicated that our book reserves were in a reasonable range and, importantly, above the third party's central estimate.

The third party review confirmed that our approach was somewhat more responsive to recent elevated trends they are seeing industry-wide. Consequently, we have greater confidence in our overall reserves, and we maintained our actuarial approach and management processes to determine our best estimate for the quarter. The claims reviews included evaluations of samples from both open and closed claim files. The findings on open claims indicate that our claims management and reserving practices are consistent with internal guidelines, aligned with industry best practices, and that valuations have been reasonable. The review of closed claims is ongoing. We will continue to incorporate enhancement recommendations from these reviews, augmenting our other ongoing claims handling and litigation management process and system improvements. Last quarter, we took reserving action in commercial auto liability, responding to increasing paid severities. This quarter, these trends escalated in specific jurisdictions, most notably New Jersey.

Otherwise, auto liability loss ratios have been in line with our expectations, with improving accident year loss ratios driven by consistent rate increases. While rate increases continue to be an important lever, rate alone will not be sufficient to drive and maintain long-term profitability in this line, particularly in certain jurisdictions. The legislative, regulatory, and judicial environments in these jurisdictions present specific challenges, and we intend to take significant targeted underwriting actions. Specifically for commercial auto, several actions are underway. In early September, we deployed an updated rating plan and predictive modeling to provide more granular pricing segmentation for the auto line, incorporating several enhanced variables, including additional vehicle and driver-specific criteria. We've implemented tighter underwriting guidelines on fleet exposures, supported by state-level tactics and analytics to better identify and target risks. We are targeting certain segments and states for higher penetration of Compass, our Telematics solution.

In further support of our risk management specialists' engagement on fleet safety with our insureds, we are actively promoting increased use of commercial auto self-assessments in our risk management center, which provides customers online risk management guidance and expertise. We continue to invest in processes and tools to further elevate our underwriting pricing and claim sophistication. While this is not a new initiative, there are opportunities to sharpen fundamental disciplines, including risk selection, individual risk pricing, and claims adjudication. Maintaining our focus and sense of urgency is critical to improving underwriting margins and supporting long-term profitable growth. We continue to diversify our portfolio by expanding our standard commercial lines footprint. Since 2017, we have strategically added 14 states, with two more planned in 2026. Geographic expansion has significantly increased our addressable market, and we've advanced our stated goal of operating our standard commercial lines business with a near-national footprint.

Going forward, we will continue to pursue opportunities to further diversify our business within and across our three insurance segments. Before I turn the call over to Patrick, I want to reinforce three foundational points shaping our performance and long-term strategy. First, we firmly believe that insurance requires a long-term perspective, particularly with long-tail casualty lines. To that end, we will trade short-term impacts for long-term sustainable success. By reacting quickly to current claim trends, we are better positioned to ensure our pricing indications are appropriately positioned to achieve our long-term underwriting margin targets. Second, we believe that prudent decisions made now, with the best information available, are the surest way to deliver value over time. Analyzing new information requires us to constantly refine our views of the market and take appropriate and sometimes difficult actions. This ongoing process reinforces the importance of maintaining a long-term perspective.

Third, we continue to invest to deliver long-term profitable growth, even as the market is increasingly competitive. Growth levers include achieving greater market share and segment diversification in Standard Commercial Lines, potential geographic expansion in Personal Lines, and increasing our product and distribution capabilities in Excess and Surplus Lines and other specialty lines. We also prioritize returning approximately 20%-25% of earnings through our shareholder dividend. In addition, guided by our capital strength and evaluation of our stock, we will opportunistically repurchase shares as we did this quarter. The $36 million of repurchases in the quarter, the new $200 million share repurchase authorization, and the 13% dividend increase reflect our confidence in the path forward and the value we perceive in our stock.

Our full-year guidance implies an underlying combined ratio of 91%-92%, up one point from our expectation at the beginning of the year, driven by our actions to strengthen the current accident year. We remain committed to taking a longer-term perspective, making tough decisions when necessary, and investing in profitable growth to deliver long-term value to shareholders. Now, I will turn it over to Patrick, who will provide more details about our financial results.

Thanks, John, and good morning, everyone. For the quarter, fully diluted EPS was $1.85, up 26% from a year ago. Non-GAAP operating EPS was $1.75, up 25%. Our return on equity was 14%, and our operating return on equity was 13.2%, with continued strong performance from the investment portfolio. The GAAP combined ratio was 98.6, elevated primarily due to 3.3 points of unfavorable prior-year casualty reserve development and 6.2 points of higher current-year casualty loss costs. Catastrophe losses were 2.1 points, significantly better than anticipated, and 11.3 points better than the prior year period. Our full-year guidance now includes a 4-point catastrophe load, reflecting lower than expected catastrophe losses through the first nine months. The overall underlying combined ratio for the quarter was 93.2, up from 86.1 in the third quarter, 2024, reflecting higher current-year casualty loss costs.

Non-catastrophe property losses, although better than expected, were 0.9 points higher than last year. Year-to-date, the underlying combined ratio was 91.6, 2.6 points higher than the first nine months of 2024. Non-catastrophe property losses were 14.7 points year to date. This was an 80 basis point improvement year over year and reflected the continued benefits from property lines' earned rate and the tightening of terms and conditions over the past few years. Year-to-date, these benefits were eclipsed by a 3.1 point increase in current-year casualty loss costs. The expense ratio increased by 40 basis points, primarily driven by higher expected employee compensation compared to last year's lower profit-based payouts. We remain disciplined in managing expenses but continue to invest across our business to support scale, enhance decision-making, and improve operational efficiency.

In Standard Commercial Lines, we reported a 101.1 combined ratio this quarter, which included 3.7 points of unfavorable prior-year casualty development and 6.6 points of higher current-year casualty loss costs. As John described, the current environment demands strong underwriting and pricing discipline. Consequently, premium growth in the quarter slowed to 4%. Renewal Pure Price increased 8.9%, or 10% excluding Workers' Compensation. The biggest increases were in General Liability at 11.4% and Commercial Auto at 10%. Renewal premium change for property was 15.5%, including 5.1 points of exposure increase. Retention for the quarter was 82%, down four points from a year ago and one point from last quarter. The decrease reflects our pricing and underwriting actions, as well as an increasingly competitive environment. Excess and Surplus Lines grew 14% in the quarter, driven by average renewal Pure Price increases of 8.3%. The combined ratio was 76.2.

We see continued growth opportunities in this segment, despite an increasingly competitive market. Our deliberate Excess and Surplus Lines strategies include introducing new products, expanding our brokerage business, investing in operational efficiency, and piloting expanded distribution by giving retail agents access to our Excess and Surplus Lines offerings. We are excited about this segment's forward growth prospects. The Personal Lines combined ratio was 110.1 this quarter, 12 points better than a year ago. However, our New Jersey personal auto reserving actions added 4.9 points of unfavorable prior-year casualty development from the 2024 accident year. It also drove the 7.2 point increase in current-year casualty loss costs this quarter. Personal Lines net premiums written declined 6%. However, target business grew 12% in the quarter, with nearly all new business being in our target mass affluent market. Renewal Pure Price for the quarter was 16.9%.

Third quarter after-tax net investment income was $110 million, up 18% from a year ago. This income generated 13.6 points of return on equity, up 50 basis points from the third quarter of 2024. Our investment portfolio continues to be positioned conservatively, and we have not significantly changed our investment strategy, with an average credit quality of A+ and duration of 4.1 years. We delivered strong operating cash flow in the quarter, supporting continued portfolio growth. The average new purchase yield was an attractive 5.8% pre-tax, exceeding the quarter-end average pre-tax book yield of 5.1%. We expect this embedded book yield to provide a durable source of future investment income, even if interest rates decline. Turning to capital management, as John mentioned, we continue to prioritize profitable growth within our insurance business and aim to return 20%-25% of our earnings through dividends. We also opportunistically repurchased shares.

These actions reflect our commitment to delivering long-term value to shareholders. We are pleased to announce a 13% increase in our quarterly dividend, our 12th consecutive annual increase. We also repurchased $36 million of common stock during the quarter, with year-to-date repurchases through September totaling $56 million. Given the increased level of share repurchases in 2025, our Board of Directors authorized a new $200 million share repurchase program. This replaces the previous authorization, and we expect to deploy it opportunistically. We ended the quarter with $3.5 billion of GAAP equity and $3.4 billion of statutory surplus. Book value per share increased 13% in the first nine months of the year, driven by our profitability and a $2.77 per share reduction in after-tax net unrealized losses. Debt to total capital declined modestly to 20.5%, below our internal threshold of 25%.

In light of results through the first nine months of the year, we have revised our 2025 guidance as follows. First, we expect our 2025 GAAP combined ratio to be between 97% and 98%, in line with our prior guidance. Our guidance now includes four points of catastrophe losses, lower than our previous six-point estimate, reflecting favorable results through the first nine months of the year. Guidance also includes the impact of prior-year casualty reserve development reported through the third quarter, which equals approximately two points on the full-year combined ratio. It also assumes no additional prior-year casualty reserve development and no further change in loss cost estimates. We do not make assumptions about future reserve development as we book our best estimate each quarter. Second, we also expect after-tax net investment income of $420 million, up from prior guidance of $415 million.

We also expect an overall effective tax rate of 21.5% and an estimated 61.1 million fully diluted weighted average shares, reflecting repurchases in the first nine months of the year, and we assume no additional repurchases under our share repurchase authorization. With that, I'll now turn it over to Q&A. Operator, please start our question and answer session.