Selective Insurance Group 2026 Q3 Earnings Call

Thank you for joining Selective's third quarter 2026 earnings conference call. Yesterday, we posted our earnings press release, financial supplement, and investor presentation on the investors section of selective.com. A replay of today's webcast will be available there shortly after this call. Joining me are John Marchioni, our Chairman, President, and Chief Executive Officer, and Patrick Brennan, Executive Vice President and Chief Financial Officer. They will discuss our results and take your questions. During the call, we will reference non-GAAP measures used by insurance and investment professionals to evaluate financial and operating performance, including operating income, operating return on common equity, and adjusted book value per common share. Reconciliations to the most comparable GAAP measures are available in our press release and financial supplement on the investor section of selective.com. We will also make forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements and projections about future performance are subject to risks and uncertainties that we disclose in our SEC filings. We undertake no obligation to update or revise any forward-looking statements. Now, I'll turn the call over to John.

Thanks, Brad. We delivered a strong third quarter, highlighted by a 16.9% operating ROE, improved underwriting margins, and excellent net investment income, which increased 16% year-over-year. This was our ninth consecutive quarter of double-digit operating returns, bringing us to 14.3% year to date. Our combined ratio of 96.8 improved 1.8 points from a year ago, driven by improvement in Standard Commercial Lines and Personal Lines, and E&S delivered an 86.5 combined ratio. Overall, the quarter demonstrated the earnings strength of our underwriting and investment operations. We remain focused on generating profitable growth by applying greater pricing and underwriting granularity, improving retention on our best-performing business, and increasing new business production in areas that meet our profitability objectives. While executing on these actions to further improve underwriting profitability going forward, we are also laying the foundation for our next phase of growth.

In E&S, our retail access initiative has moved from build-out to execution. The structural investments are largely complete. Agency appointments and our underwriting model are in place, and early indicators are encouraging. In addition, we are finding opportunities to thoughtfully expand our brokerage appetite to deepen our longstanding wholesale relationships. We believe this combination, strengthening our wholesale distribution while giving our retail partners access to our E&S capabilities, is a long-term growth lever and supports our diversification objectives across products, geographies, and segments. In personal lines, profitability in our target mass affluent market continues to improve, with our homeowners portfolio gaining traction. Average new business home values remained in excess of $1.1 million for the first nine months of the year, and target market business now represents approximately 71% of our homeowners premium. We are focused on growth in our target market, where we believe our rates are adequate.

Year to date, target market homeowners' direct premiums written increased 8%, offset by a 12% decline in the more challenged auto line. Renewal pure price increased 8.1% in the quarter and 9.3% year to date, with continued refinement of our segmentation strategy. As a result of these actions, the year to date underlying combined ratio in personal lines improved by 3.3 points. As we continue to validate our ability to effectively compete in the high net worth market, near-term geographic expansion presents a real opportunity for additional growth potential. In Standard Commercial Lines, we continue to expand our geographic reach with early traction in Montana and Wyoming, where agency engagement has been encouraging. Year to date, we appointed 120 new agency locations across our footprint and will continue to identify new agency partners to support diversifying growth.

With roughly a 1.5% share of a highly fragmented commercial lines market, our long-term growth potential remains significant, and we remain fully committed to meaningfully expanding our market share when and where margins warrant it. In this environment, with headline rate increases softening, it is imperative to execute with precision. In Standard Commercial Lines, our liability pricing is generally holding up well, even as property pricing tempers. Importantly, the granularity and pace of mix improvement in our renewal portfolio accelerated in the third quarter. Retention in our best-performing cohorts remains strong at 90%, while retention in our lowest-performing cohorts, which represented approximately 10% of premium, declined to 52%, down from 79% a year ago. In our lowest-performing cohorts, renewal pure price increased 17.2%, up from 12.8% in the year ago period.

Targeted retention actions in the cohorts expected to perform worse than average contributed five points of the 8% decline in net premiums written. The remaining decline was driven by lower new business. Taken together, we feel good about the combination of rate increases and mix improvement in Standard Commercial Lines and where they stand relative to our view of expected loss trend. We believe these are the right actions to create long-term value. They have reduced near-term premium growth, but we are prioritizing improved underwriting returns over volume. Growth in our industry should be viewed over a longer-term horizon, especially in casualty-driven portfolios. Our commitment to underwriting and pricing discipline throughout the cycle underlies our long-term track record of growth and profitability.

With commercial casualty margins across the industry under pressure and market pricing generally below elevated severity trends, we are at a point in the cycle where underwriting and pricing discipline are paramount. Our efforts in the current environment are positioning us to generate strong growth and profitability moving forward. Technology, including artificial intelligence, is an important enabler of both margin improvement and long-term growth. We are moving beyond individual tools towards integrating analytics and decision support directly into underwriting and claims workflows. Our objective is to improve the consistency and quality of decisions while increasing the capacity of our professionals. We are introducing these capabilities in stages, measuring their effectiveness and maintaining appropriate human oversight through our AI and model governance framework. We are also evaluating and deploying AI-assisted software development tools where they can improve productivity and the return on our technology investments.

Before turning the call over to Patrick, I'll reinforce the priorities guiding us across the company. First, relentlessly improving the fundamentals across risk selection, individual policy pricing, and claim outcomes. Second, diversifying revenue and income within and across our three insurance segments. Finally, further leveraging data analytics and technology, including artificial intelligence, to drive operational efficiency and improved underwriting and claim outcomes. The actions we are taking today strengthen the earning power of our portfolio and position us to deliver long-term value for our policyholders, distribution partners, employees, and shareholders. Now I'll turn the call over to Patrick.

Thanks, John, and good morning. For the quarter, we reported fully diluted EPS of $2.11 and non-GAAP operating EPS of $2.37, resulting in a 15.1% ROE and a 16.9% operating ROE. Our GAAP combined ratio was 96.8, including 5.4 points of catastrophe losses. Year to date, strong after-tax net investment income and a GAAP combined ratio of 97.7 delivered 13.8% ROE and 14.3% operating ROE. As in the first half of the year, we recorded no prior year casualty reserve development at the segment or line of business level this quarter. Reserves in our underlying general liability line have now been stable for seven consecutive quarters. That follows the actions we took in 2024 to respond to elevated severities and increase our go-forward loss cost assumptions. Overall, loss trends have generally remained in line with our expectations.

Turning to pricing, for the quarter, Standard Commercial Lines renewal pure price increased 5.7%, or 6.4%, excluding workers' compensation. Property renewal premium increased 7%, including 3.5 points of exposure growth. General liability pricing increased 7.9%, and commercial auto pricing increased 7.6%. Commercial auto liability pricing was even stronger at 11.6%, reflecting our focus on delivering rate where it is most needed. Year to date, our underlying loss ratio improved 50 basis points compared to full year 2025. This reflects strong property results, which were partially offset by casualty lines. As we discussed last quarter, the underlying casualty loss ratio includes elevated severity trends we embedded in the current accident year as a part of our planning process. In commercial auto, it includes the actions we began booking in the second quarter to further strengthen the current accident year.

Commercial auto and general liability are not yet at our target level of profitability. We continue to push meaningful liability rate and sharpened risk selection and recognize that further improvement is needed. Our 32.1% expense ratio was elevated in the quarter, reflecting in part lower premium volume. We are carefully managing expenses in the context of our overall margin objectives. This includes balancing the need to maintain a competitive expense ratio with strategic investments to support future growth and operational efficiency. We remain committed to these investments because we believe they will increase our team's capacity and improve decision quality. We continue to expect our full year underwriting expense ratio to be approximately 31.5%. This implies a fourth quarter expense ratio of approximately 32%, in line with this quarter. Turning to capital management, our capital management priorities remain unchanged.

First, we invest in profitable organic growth, which we believe is the best source of sustainable long-term shareholder value. Second, we target returning 20%-25% of earnings through our regular dividends. Finally, when capital exceeds our expected needs and the valuation is attractive, we may repurchase shares after taking into account liquidity, regulatory requirements, ratings considerations, and other strategic opportunities. During the quarter, we returned approximately 63% of after-tax net income to shareholders through our regular dividend and $55 million of opportunistic share repurchases. Against that backdrop, our capital position remains strong and supports our commitment to delivering long-term value. We ended the quarter with $3.4 billion of GAAP equity and $3.7 billion of statutory surplus. Reflecting the strength of our capital position and operating performance, we are pleased to announce a 12% increase in our quarterly dividend. This marks our 13th consecutive annual increase.