Good day everyone. Welcome to Selective Insurance Group's First 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..

John Marchioni, President and Chief Executive Officer; and Mark Wilcox, Chief Financial Officer.And now I'll turn the call over to John..

Thank you, Rohan, and good morning. I'll make some introductory remarks and then focus on some high-level industry themes and the impact of the current environment on our performance and positioning.

Mark will then discuss our financial results, and I'll return to highlight how we remain positioned for continued superior performance.I'll begin with some thoughts on the COVID-19 pandemic, the impact it has had on our business and our ability to serve our policyholders and distribution partners.

These are clearly unprecedented times with the outbreak of COVID-19 impacting lives of countless people across the world, resulting in displacement of the nation's workforce, and significant volatility in the financial markets.

We owe a wealth of gratitude to the first responders, medical professionals and other essential employees who have worked tirelessly so that we can all be safer and get back on the road to recovery.Selective entered this volatile environment in the strongest financial position in our 94-year history, and we remain well positioned to navigate through these turbulent times.

I could not be more proud of how our company and in particular our employees responded to this crisis, continuing to serve our policyholders and distribution partners with the exceptional level of service they have come to expect from us.We have utilized a field-based model for over 25 years, including employees in underwriting, agency management, claims and safety management enabling us to continue to effectively provide our distribution partners with highly responsive personalized service and support, as they are dealing with disruption to their own operations.

Our entire company has been responding proactively to service our policyholders and agents, recognizing the challenges they face.Steps we have taken to ease the financial burden on our policyholders, include helping our customers maintain coverage by offering individualized payment flexibility and suspending policy cancellations, late payment notices and late or reinstatement fees through at least May 31.

In some states, in compliance with regulatory requirements, we've provided a deferral payments without cancellation for a period of up to 90 days.Also a program to credit 15% of monthly premiums for April and May related to the personal and commercial automobile classes, which amounts to approximately $20 million.

This premium credit will be recorded as other insurance expense in the second quarter and should be offset by reductions in claim frequencies and lower loss costs due to various stay-at-home directives in place.Finally, we are working with our customers and agents to make mid-term policy adjustments, rather than waiting until the end of the policy term to recognize reductions in auditable exposure basis, such as payrolls and sales, and in some cases reclassify those exposures to lower risk classes.

From a financial standpoint, for the first quarter of 2020, Selective reported non-GAAP fully diluted operating earnings per share of $0.84 and an annualized operating ROE of 9.4%. Underwriting results and investment income were both strong contributors to this result.

There are three COVID-19-related underwriting items I want to highlight.First, we recorded a $75 million return audit and mid-term endorsement premium accrual for policies in-force as of March 31 to reflect the anticipated decline in sales and payroll exposures on the workers' compensation and general liability lines of business, based on our estimate of reduced exposures due to the significant economic slowdown.Second, we booked $10 million in property IBNR reflecting the ultimate estimated net losses related to COVID-19 for a small portion of our in-force property policies, which has specific supplement coverage for the extra expense associated with the government order cleaning of the insured location due to the outrage of a communicable disease.Third, our expense ratio includes a $10.5 million increase in our allowance for uncollectible claims receivable, reflecting the previously mentioned suspension of policy cancellation for non-payment of premium.

The after-tax net impact of these three underwriting related items was approximately $19 million, or $0.32 per share, and increased our underlying combined ratio by 3.5 points.On the investment side, we report alternative investment income on a one quarter lag, so our second quarter results will include the negative performance from the first quarter.

Our current estimate is for an after-tax loss of $10 million to $15 million for alternative investments for 2020.In addition, we recorded $25 million in after-tax net other than temporary impairments in the first quarter of 2020 split evenly between securities we intend to sell and those we impaired for credit losses under the new credit loss accounting standard or CECL.

From a capital and liquidity perspective, we took a number of steps in March out of an abundance of caution to strengthen our balance sheet and liquidity position. This consisted of short-term borrowings of $302 million, including a $50 million drawdown on our line of credit and $252 million of borrowings from the Federal Home Loan Bank facilities.

We fully expect to repay them in coming quarters or as markets normalize and the regulatory and economic uncertainty declines.In terms of the broader outlook for our business, there are four main themes, I want to touch on. First is the outlook for top line growth, as we look out through the remainder of 2020 and into next year.

These are undoubtedly challenging times for our economy and small to midsized businesses are particularly volatile.We continue to work with our policyholders and distribution partners on a case-by-case basis to assess changes to their exposure and business conditions and determine how to best help them through premium returns, waiving non-pay cancellations, and other relief measures.Reflecting the decline in the overall economy, we expect pressure on premium growth for the next few quarters manifested in the aforementioned return audit premium adjustment and lower average policy size for new business.

We do expect retention rates however to remain strong and likely improve.Second, with respect to pricing, Selective's first quarter commercial lines renewal pure pricing was 4% continuing an upward trajectory since early last year.

For April, which reflects the first full month of economic strain, commercial lines renewal pure price increases averaged 4% and overall premium growth remained strong at 7%.

It remains early days in a crisis that is still evolving and we will continue to closely monitor business trends.Our approach to pricing remains the same as it has always been to leverage our sophisticated modeling and underwriting tools to assess risk on an extremely granular basis and administer the appropriate price for the exposure we are assuming.

We remain committed to maintaining underwriting discipline even as we work with our policyholders and agents to navigate this challenging economic environment.Third, there has been considerable discussion and focus on the potential for industry losses arriving from COVID-19.

All of our standard commercial lines property and business owner policies require direct physical loss of or damage to property by a covered cost of loss to trigger coverage.While each potential claim will be adjusted on its unique facts and based on the terms and conditions of the specific policy, COVID-19-related contamination, the existence of a pandemic, and/or the resulting preventative government shutdown orders generally are not insured under the standard commercial property and business owner policy.Our standard commercial property and business owner policies also specifically exclude all loss or damage caused by or resulting from a virus or bacteria.

We believe this exclusion will apply to preclude coverage for losses related to the COVID-19 virus.Approximately 6% of our policyholders purchased a sub-limited extra expense coverage that provides up to $25,000 in limit for the extra expense associated with cleaning the property when ordered by a Board of Health after an outbreak of a communicable disease at the insured premises.For our E&S book our property forms contain the same language as standard commercial requiring direct physical loss or damage to property but do not contain a specific virus or bacteria exclusion.Property accounts for approximately 30% of our E&S business.

And of that amount only about a quarter of our property policies include business interruption coverage. Combining both, standard commercial and E&S, 90% -- 95% of our property policies include virus or bacteria exclusions.The impact of COVID-19 on other lines of business will vary.

For example the exposure reduction in workers' compensation and general liability in the form of lower payrolls or sales will likely be offset by a commensurate reduction in claims incurred.However, we could see some increased workers' compensation frequency from employees in high-risk roles and essential businesses who contracted COVID-19 in the workplace.We are experiencing decreases in claim frequencies for personal auto and to a slightly lower extent commercial auto due to lower miles driven and have already announced programs to return premiums for these classes which are traditionally not subject to audit.

For commercial property lower economic activity will generally result in less claim frequency but the longer the downturn persists the risk of frequency rises.Finally, the sharp decline in equity markets during the first quarter and what appears to be a clearly prolonged low interest rate environment, continue to put downward pressure on industry-wide investment portfolio returns.

The only way for insurers to compensate for lower expected investment returns is to continue to strive for improved underwriting performance.We are well-positioned with our sophisticated underwriting and pricing tools, strong market position, and appropriately priced in-force book of business to continue to generate profitable underwriting results.Now, I'll turn the call to Mark to review the results for the quarter..

a GAAP combined ratio, excluding catastrophe losses of between 92% and 93%.This represents an increase from our prior guidance of 91.5% and is primarily due to pressure on the expense ratio. This also assumes no additional prior accident year reserve development.

Catastrophe losses of 4.5 points on the combined ratio, reflecting higher-than-expected CAT losses for April, combined with the lower-than-expected earned premium. The post COVID-19 has not been designated a PCS event.

Such losses are not included in this ratio.After-tax net investment income of approximately $160 million, down from our prior guidance of $185 million, principally due to an expected change in our full year after-tax net investment income from alternatives.

Although, there is uncertainty around this estimate, we now expect a range of between $10 million, $15 million in after-tax net investment losses from alternatives for the year, compared to our prior estimate of a $14 million gain.An overall effective tax rate of approximately 18.5%, which includes an effective tax rate of 18.5% for net investment income, reflecting a tax rate of 5.25% for tax advantage municipal bonds and a tax rate of 21% for all other items, and weighted average shares of $60.5 million on a diluted basis.

There is a high degree of uncertainty than usual around our full year guidance, given the ultimate impact of COVID-19 remains fluid.And with that, I'll turn the call back over to John for our closing comments..

Thanks, Mark. While we continue to navigate a generational economic event, along with our policyholders and distribution partners, we are extremely confident in the strength and positioning of the company.

We have consistently maintained a disciplined underwriting appetite and have effectively managed renewal pure price increases, in line with expected loss trend for a decade.Our field-based model, superior distribution relationships and customer experience focus, a strength in any environment, are only enhanced in the current one.

Our core competitive advantages have positioned us as a market of choice for our agency partners and our ability to continue to deliver for them and our mutual customers throughout this crisis have further solidified that position.We are cognizant of the economic and health-related hardships that so many people in our country are dealing with and we solute all the essential employees who selflessly go to work each day, so that we can all be safer and still have the basic necessities of life.

That said, we will not let the pandemic, market volatility or challenging economic conditions deter us from pursuing our objective of being an industry leader, one that is viewed as best-in-class in terms of product offerings and customer service, while also generating superior returns for our shareholders over time.With that, we will open the call up for questions.

Operator?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have our first question from Mike Zaremski of Credit Suisse. Mike, your line is open..

Good morning, Mike..

Hi, guys. This is actually Charlie on for Mike. Good morning..

Good morning, Charles..

Good morning..

Good morning.

My first question is, how are you thinking about workers' comp profitability being impacted due to the virus, other than top line pressure?.

Yes. So, clearly, we've seen a reduction in newly reported claims, with the shelter-in-place orders and a lot of nonessential businesses being closed, that has holistically reduced claim frequency.

But as we've talked about in the prepared commentary, we would expect to see some compensable claims and predominantly from first responders and from medical professionals that are working routinely in connection or in contact with COVID-19-positive patients.So that has not materialized as of yet in our portfolio.

In our portfolio, remember from a workers' comp perspective, we do have a heavy contractor portfolio. So about 40% of our overall premium and actually just under half of our workers' comp premium is in the contractor segment, which you wouldn't expect to see a lot of COVID-19 claims frequency from that group.

But, overall, we would expect to see some loss activity coming through.Comp is a line that, if you looked at us over the last couple of years, you've seen a flat-to-slightly declining top line because of the pricing pressures that have been coming through that line.

We've, obviously, benefited in terms of significant improvement in underlying loss ratios and that's continued. But with that pricing pressure and the reduction in exposures that are coming through and that is a big driver of the audit premium adjustment that we made in the first quarter, that will have an impact on profitability going forward..

Got it. Thanks.

And then, my second question is, for the instances where you guys are having to deny business interruption claims, is it reasonable for us to kind of expect legal defense reserves to come out of that? And then, if business interruption losses aren't as widespread for the industry as some may have initially thought and we're seeing contractions in business activity, can commercial P&C pricing really continue to accelerate? Thanks..

Thank you. Very good questions. Clearly, and you're already starting to see there is some litigation relative to business interruption coverage. Our sense is, much of that litigation is focused on policies that do not contain the virus exclusion.

And as we've mentioned in prepared comments and I'll reinforce again, 95% of our policies across both Standard Commercial and E&S do include a virus exclusion.And I think that's even less subject to litigation challenge than the physical damage, the property requirement, which in our view is also a solid policy form.

But I would expect you will see some increased litigation and that will impact loss adjustment expenses. But, again, you want to remember that this is all in the context of the economic downturn impacting frequencies down pretty holistically.

So I think that's point number one.Relative to the pricing environment and we did give you, in the prepared commentary, our April pricing, which had 4% and very strong retention in the month of April, I think, suggests that pricing at a reasonable level.

And, again, we've really made this point over the last several years with the embedded profitability in our book and our ability over 10 years now, to continue to manage a reasonable level of pricing relative to expected loss trends that we've been able to maintain very strong retentions.And we think that's still reasonable going forward.

In April, which was the first real full month of the economic strain that, we've seen, for pricing to remain at that level. We think that's a positive. Also overall profitability, before this crisis, started for the industry, still needed to improve.

And as we said earlier, with the continued low for longer investment return environment it's only going to put more pressure on underwriting results.So the underwriting results for the industry needed to improve. We're in a beneficial position, because our core profitability is so strong.

But we can't lose sight of the loss trends the normal loss trends which have in fact picked up of late and in our estimation would continue to run around three -- between 3% and 4% in a more normal environment. And I think that needs to be kept track of, as we move throughout this crisis.

So we would expect pricing to remain on the trajectory that it's been on for the last several quarters..

Got it. Thank you, that’s helpful. Be well guys..

Thank you, Charles..

[Operator Instructions] Speakers, we have our next question from Sean Reitenbach of KBW. Sean, your line is open sir..

Hi. Good morning. I had a follow-up on the workers' comp issue. We've seen I think more people who are opposed to the -- rightfully so the virus -- legislation on virus exclusion as such. But the reaction to presumption of compensability to more frontline essential workers, beyond health care has been more mixed.

Can you guys give your thoughts on that?.

Yeah, sure, so I think, as you said, we would certainly not be in opposition to legislation that would expand presumptions to first responders. And to health care professionals that are in close contact with COVID-19 patients. Quite honestly, whether, we're out of presumption those are going to oftentimes be viewed as compensable injuries.

And we also need to remember that, for the most part, the frequency of these will be low in terms of the incidence rate amongst working populations.And the average severity on both the medical and the indemnity side will also be low. So I think it's important to keep that in mind.

I do think, and again our philosophy in comp and overall is that the unique facts and circumstances presented in every individual claim are going to guide the outcome of that claim.And if you have an employee who was told when everybody else was told to shelter at home that they need to come to work, in order to provide an essential service and that essential service requires them to interact with the public on a regular basis.

And that individual tests positive for COVID-19 those facts are more than likely going to result, in a decision that that's a compensable injury and that applies with or without a legislative presumption.Now we do think, it's dangerous for these presumptions to just open up to all essential employees.

Because I think, the fact that the individual whether it's a grocery store worker or an individual working at an assisted living facility, I think it's important that the essential employee also had to interact with the public, in order to create that exposure, whereas all essential employees many of which were actually working from home, shouldn't gain the benefit of that presumption.And I think those handful of states that have pursued a very broad presumption would create a much more of a problematic situation for the industry, holistically.

But narrow presumptions, we think are reasonable expectations for essential employees who interact with the public..

Thank you.

And then, could you guys just compare and contrast what you've seen in your Commercial Auto versus your personal auto book, for frequency and severity trends?.

So severity trends are just way too early to talk about. I mean we've got, several weeks of data and that's a line, where your actual severity trends are going to develop over a much longer period.

But I think from a frequency perspective, we have seen reductions in both personal and Commercial Auto.I would say and we used this reference in our prepared commentary, it was slightly less of a reduction for Commercial than it was for personal which would make sense, because you still have a lot of contractors.

And a lot of other business vehicles on the road. Miles driven might not be the way to look at Commercial, Auto, frequency indicators, because miles driven might be relatively flat for certain business owners.But the amount of traffic and congestion on the road is likely to impact frequency on a favorable basis.

So, I'm not going to get overly specific about the reduction in actual claim frequencies. But let's just say Commercial Auto was down. But down a little bit less than what we saw in personal auto..

Okay. Thank you very much..

Thank you. And speakers we're showing no questions in queue, at this time..

Yeah, why don't we just give it another minute to make sure, nobody else wanted to queue up?.

Thank you. [Operator Instructions] Thank you. We show no questions, sir..

Okay. Well. Thank you all very much for joining. And if you have any follow-up questions, please feel free to reach out to, Rohan. Thank you very much..

Great. Thank you. Good morning..

Thank you. That concludes today's conference. Thank you all for joining. You may now disconnect..