Selective Insurance Group, Inc (SIGI) Q3 2021 Earnings Call Transcript

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Selective Insurance Group, Inc (SIGI -1.18%)
Q3 2021 Earnings Call
Oct 28, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone. Welcome to Selective Insurance Groups Third 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.

Rohan Pai -- Senior Vice President of Investor Relations & Treasurer

Good morning. When time and costing this call on our website, selective.com. The replay is available until November 27. We use three measures to discuss our results and business operations. First, we use GAAP financial measures reported in our annual, quarterly, and current reports filed with the SEC. Second, we use non-GAAP operating income and non-GAAP operating return on common equity to analyze trends in operations. We believe these measures 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 non-GAAP operating income divided by average common stockholders equity and GAAP reconciliations to any reference non-GAAP financial measures are in our supplemental investor package found on our website Investors page.

Third, we make statements and projections about our forward performance. These are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They are not guarantees of future performance and are subject to risks and uncertainties. We discuss these risks and uncertainties, including supplemental disclosures about the COVID-19 pandemic and detail in our annual, quarterly and current reports filed with the SEC, and we undertake no obligation to update or revise any forward-looking statements. Now, Ill turn the call over to John Marchioni, our President and Chief Executive Officer, who will be followed by Mark Wilcox, our EVP and Chief Financial Officer.

John J. Marchioni -- Chief Executive Officer, President & Employee Director

Thank you, Rohan, and good morning. Ill make some introductory comments about our results and highlight some of the higher-level themes impacting the industry and our company. Mark will discuss our financial results, and then Ill return with some brief closing comments before opening the call up for questions. We delivered another strong quarter despite elevated catastrophe losses principally related to Hurricane Ida. Our strong underlying profitability allows us to generate an underwriting profit even when net catastrophe losses are elevated as was the case in the third quarter. While negatively impacting our quarterly results, tragic events like Hurricane Ida provide us the opportunity to deliver great value to our customers at their time of greatest need. And Im proud to say that is exactly what our claims professionals have done. We generated a solid annualized operating ROE of 10.6% for the quarter. For the first nine months of the year, our annualized non-GAAP operating ROE was 14.5%, well above our full-year operating ROE target of 11%. It also builds on our 7-year track record of generating consistent double-digit operating ROEs, putting us among a very small group of peers that have achieved similar results. Im pleased to announce that our Board of Directors, underscoring our strong financial and operating performance, approved a 12% quarterly dividend increase to $0.28 per share.

Our underlying underwriting performance remains at expected levels, and our investment performance, particularly from alternative investments, contributed meaningfully to overall results for the quarter and year-to-date. For the quarter, our strong net premiums written growth of 13% was driven by renewal pure price increases averaging 5.3% for commercial lines and 5.6% for E&S. Exposure growth of approximately 3% on our renewable for commercial lines, solid commercial lines retention of 86%, and new business growth of 24% for commercial lines, and 20% for E&S. Our 98.6% combined ratio for the quarter included 10 points of net catastrophe losses, partially offset by 1.8 points of favorable prior year casualty reserve development. The underlying combined ratio was 90.4, reinforcing the high quality of our book of business. Net investment income after tax was $75 million in the quarter, benefiting from the exceptional performance from our alternative investments, particularly unrealized gains on our private equity limited partnership portfolio. Id like to highlight a few key themes: First, property losses across the industry remain volatile, and the third quarter was no exception. And theres nothing to suggest that this trend of increased volatility will reverse, and industry pricing does not currently reflect this reality. Individual company results should not be evaluated on an ex-cap basis, but rather over time, inclusive of an expected cat load. In our case, that cat load is four points in a typical year.

And as noted in our updated guidance, we expect 2021 to be above that level as Hurricane Ida is likely to be one of the costliest events in U.S. history. We seek to manage our catastrophe risk through strong risk modeling and oversight, disciplined underwriting guidelines and pricing actions, and prudent reinsurance purchases. Second, the industry faces increasing headwinds and higher uncertainty relative to loss trends, driven by both economic and social inflation. Neither is a new phenomenon, but both have increased ably. Additional uncertainty has been introduced by the pandemic-related reduction to claim frequencies that meaningfully impacted loss experience in 2020 and continued, albeit at a less significant level through the first nine months of 2021. These factors call for strong discipline around establishing forward loss selections and pricing targets and consistently achieving those targets over the long term. For ten consecutive years, our renewal pure price increases have met or exceeded expected loss trend. Third, the industry continues to face lower after-tax book yields on their investment portfolios as new money rates on core fixed income portfolios remain close to record lows. Many companies, including Selective, have benefited in recent quarters from the strong returns in alternative investments. These returns are likely to normalize in coming quarters, lowering the ROE contribution from investment income.

The ongoing industrywide pressure on after-tax investment portfolio book yields must be offset by improving underwriting results. It is a strong underwriting companies like Selective that are best positioned to thrive in this environment. Finally, we continue to execute on balancing our objectives around growth and profitability. Our consistent success is a testament to our excellent distribution partner relationships, sophisticated underwriting, and superior customer servicing capabilities. For the first nine months of the year, commercial lines renewal pure price increases averaged 5.5%. New business was up 13%, and the renewal retention was a solid 85%. For smaller commercial lines accounts with policy premium of less than $10,000, renewal pure price increased 4.7% in the first nine months of the year, while larger accounts in excess of $100,000 in premium generated renewal pure price increases of 6.1%. Across all size cohorts, our highest quality accounts based on future profitability expectations, which constituted 25% of our renewal premiums for the first nine months, produced 3.2% pure rate, and point of renewal retention of 93%. Our most challenged accounts, comprising 11% of our renewal premium, generated 10% pure rate and point of renewal retention of 85%.

Our ability to understand and price risk on a granular basis has allowed us to maintain strong retention while generating loss ratio improvement through an improved mix of business over time. We remain extremely well-positioned from an operating and financial standpoint. We continue to deliver on our plans to generate consistent profitable growth. Now Ill turn the call over to Mark to review the results for the quarter and return with some additional commentary before taking questions.

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

Thank you, John, and good morning. Ill review our consolidated results, discuss our segment operating performance, and finish with an update on our capital position and guidance for 2021. For the third quarter, we reported net income available to common stockholders per diluted share of $1.18 and non-GAAP operated earnings per share of $1.18. This translated to an annualized ROE and non-GAAP operating ROE of 10.6%, with a meaningful contribution from investments this quarter. The results were particularly strong in the context of an elevated catastrophe last quarter. For the nine months ended September 30, our annualized non-GAAP operating ROE of 14.5% is well above our 11% target for the year. Driven by strong, underlying, underwriting results, favorable reserve development, and alternative investment income. Overall, we are extremely pleased with our performance so far this year. Consolidated net premiums written for the third quarter increased 13% compared with a year ago. The primary drivers of our top-line growth was strong renewal fuel price increases, exposure growth, solid retention rates, and strong new business growth in outstanding commercial lines and E&S segments.

Year-to-date, net premiums written increased 17% or 12% when adjusted for the prior year COVID-19 related premium items. We reported a consolidated combined ratio of 98.6% for the third quarter. Included in the combined ratio was $76.3 million of net catastrophe losses or 10 and $14 million of net favorable prior year casualty reserve development of 1.8 points. The principal driver of catastrophe losses in the quarter was Hurricane Ida, which accounted for $54 million of gross losses. Net losses from in were $43 million as we exceeded our catastrophe reinsurance program retention. The majority of our Hurricane Ida losses were incurred in the states of New Jersey, New York, Maryland, and Pennsylvania, and order losses represented a substantial component. After relatively benign first half of the year for catastrophe loss activity for Selective, year-to-date catastrophe losses are now running higher than expectations, principally driven by Hurricane Ida. On an underlying basis or excluding catastrophes and prior year casualty reserve development, the combined ratio was 90.4% for the quarter. For the nine months of the year, we reported a combined ratio of 92.6% and an underlying combined ratio of 89.8%.

This compares favorably to our initial 2021 guidance of a 91% underlying combined ratio and primarily reflects better-than-expected non-GAAP property losses and a lower-than-expected expense ratio. Moving to expenses. Our expense ratio was 32.6% for the quarter compared with 32.4% for the prior-year period. For the first nine months, our expense ratio of 32.4% reflects some of our cost containment initiatives as well as lower-than-expected travel and entertainment and overhead expenses. We continue to expect ongoing improvements to our run rate expense ratio over time while ensuring we dont sacrifice investments to support our long-term strategic objectives. Corporate expenses, which are principally comprised of holding company costs and long-term stock compensation, totaled $4.3 million in the quarter compared to $3.9 million a year ago. The increase was driven by stronger performance relative to our key group, which impacted the variable component of our long-term incentive compensation plan, offset in part by a decline in our stock price in the quarter. Turning to our segments: For the third quarter, standing commercial lines net premium written increased 13%, driven by renewal fuel price increases averaging 5.3%, solid and stable retention of 86%, and new business growth of 24%. Exposure to growth from revived economic activity also provided a healthy tailwind.

For the first time most of the year, net premiums revenue increased 19% or 13% when adjusted for the prior year COVID-19-related items. The commercial lines combined ratio was a profitable 97.2% for the third quarter and included 8.1 points of bank catastrophe losses and 2.3 points of net favorable prior year casualty reserve development. The favorable prior year casualty reserve development consisted of $8 million for locus compensation, $4 million for general liability, and $2 million for the BOP line, and related to lower-than-expected claims emergence for accident years 2018 and prior. The underlying combined ratio was 91.4%. In our postal line segment, net premiums written declined 2%, reflecting continued competitive market conditions, particularly for personal auto. Renewal fuel price increases averaged 1.2% for the quarter, retention was slightly up relative to a year ago at 84%, and new business was down 15%. The combined ratio in the quarter of 115.2% was impacted by 26.7 points of net catastrophe losses with Hurricane Ida contributing 13.6 points. The underlying combined ratio was 88.5%. In our E&S segment, net primes written grew at 32% for the quarter relative to a year ago.

Renewal fuel price increases averaged 5.6%. Retention was higher and new business was up 20%. The combined ratio for the segment was 93.7% in the quarter, which included 9.2 points of net catastrophe losses. The underlying combined ratio was 84.5%. And during the quarter, we entered into a transaction with ALGO with a total effective date to purchase the renewal rights for its E&S small commercial contract binding business. The book has a similar risk profile to us, with a focus on small contractors, habitation, and retail classes with an average premium per policy of approximately $2,000. We currently expect to renew between 20 and $40 million of premium, which is a small portion of ALGOs prior in-force book. From a financial standpoint, we view this as an attractive transaction for us, one in which we will not be assuming any legacy reserves of cost. This transaction benefits us strategically by increasing our distribution points with wholesale brokers. As part of the transaction, we are very pleased to welcome nine former ALGO E&S employees to select it, further building out and strengthening our E&S underwriting capabilities and team. Moving to investments. Our investment portfolio remains well-positioned.

As of quarter end, 91% of our portfolio was invested in fixed income and short-term investments with an average credit rating of a plus, and an effective duration of four years, offering us a high degree of liquidity. Risk assets, which include our high-yield allocation contained within fixed income, public equities, and limited partnership investments in private equity, private credit, and real asset strategies represent 10.8% of our portfolio. For the quarter, after-tax net investment income of $74.7 million was up $19.6 million from the year-ago period. The increase was primarily driven by $33.8 million of after-tax alternative investment gains compared to $14.7 million in the comparative period. As a reminder, net investment income from alternative investments is reported on a one-quarter lag. We have now experienced five consecutive quarters of very strong income from our alternatives. The returns over the last five consecutive quarters are well above longer-term expectations and are not sustainable. The after-tax yield on the portfolio was 3.8% for the quarter, delivering a strong 11-point of our recontribution with alternatives contributing about five points. The after-tax yield on fixed income securities was 2.5% in the third quarter, which was slightly down from 2.6% in the year-ago period. The total return on the portfolio was 0.8% for the quarter, primarily reflecting the strong alternative asset performance. The average after-tax common yield of fixed income purchases during the quarter was 1.8% compared with 2.2% for the year-ago period. Strong operating cash flow of $543 million for the first nine months equated to 22% of net premiums written. Turning to capital.

Our capital position remains extremely strong, with $2.9 billion of GAAP equity as of September 30. Book value per share has increased 7% during the first nine months of the year to $45.27, benefiting from our strong earnings. We have built significant financial flexibility with $515 million of cash and investments at our holding company. Our net previous right to surplus ratio is at the low end of our target range at 1.3 5 times. During the quarter, we repaid $50 million of Federal Home Loan Bank debt, which reduced our debt-to-capital ratio to 14.6%. Our significant financial flexibility gives us the ability to grow at rates above our sustainable growth rate, particularly while the pricing environment is strong, and it also allows us to evaluate attractive opportunities to advance our strategic objectives. We did not repurchase any shares during the third quarter or subsequent to quarter-end under our $100 million share repurchase program. We have $96.6 million of remaining capacity under the program, which we plan to use opportunistically. I will finish this in commentary on our updated outlook for 2021. We now expect a GAAP combined ratio, excluding catastrophe losses, of 88%. This is an improvement from our prior guidance of 89% and reflects strong profitability, inclusive of net favorable casualty reserve development in the first nine months of the year. Our guidance assumes no fourth quarter prior accident year casualty reserve development.

Weve increased our catastrophe loss assumption to five points on the combined ratio from four points, reflecting the elevated catastrophe losses in the third quarter, principally from marketing item. We now projected after tax and investment income of $240 million, including $75 million in after-tax gains from our alternatives. This is up from our prior guidance of 220 and $55 million, respectively, and principally reflects the very strong third quarter after-tax net investment income from alternatives. We continue to expect an overall effective tax rate of approximately 20.5%, which includes an effective tax rate of 19.5% for net investment income and 21% for other items. Our prior guidance was for an effective tax rate of 19% for net investment income. Finally, weighted average shares remain $60.5 million on a fully diluted basis. In summary, our ability to generate solid returns despite elevated catastrophe losses like the underlying profitability of our book of business, a well-positioned investment portfolio, and the ongoing successful execution of our strategic objectives. We are very pleased with our year-to-date 14.5% annualized operating ROE. While our reported results continue to reflect some nonrecurring benefit, such as higher-than-expected alternative grit investment income and favorable prior year casualty reserve development, our underlying results are very strong. Weve delivered on our objective of disciplined growth, and we remain exceptionally well-positioned. With that, Ill turn the call back over to John.

John J. Marchioni -- Chief Executive Officer, President & Employee Director

Thanks, Mark. We remain on track for 2021 to mark our eighth consecutive year of double-digit ROEs in an industry that struggles to consistently meet its cost of capital. It is our unique operating model, top-notch distribution partners, and talented and hard-working employees that have driven this performance, and have us positioned to maintain this top-tier performance well into the future. We also remain focused on making the investments necessary to further enhance our competitive position. Our enhanced small business platform is generating strong early returns in a segment of the market in which we have always excelled. To support our strong growth in the E&S segment, we are nearing completion of our new underwriting platform that will improve agents ease of interaction with us. In personal lines, the necessary product enhancements to compete in the affluent market have been deployed and are being well received in the market. While a decline in our nontarget segment is masking the growth we are experiencing in the mass affluent market, we expect first the personal line segment to generate growth in 2022.

We continue to invest in our digital customer offerings as adoption continues to accelerate. These platforms, along with our ongoing focus on innovation to expand our value-added service offerings are expected to generate future retention benefits. And we invest in our key distribution partners through various agency development programs in support of our goal of achieving a 12% share of their business. As we look to the remainder of the year and into 2022, we are confident about our ability to build on our long-term track record of superior financial performance. We have a strong market position that is bolstered by our franchise distribution partner relationship strategy. We also have the tools, technology, and people that will help us execute on our plans. Above all, we will remain prudent and disciplined in our approach to generating profitable growth, an approach that has been key to our delivering superior operating and financial performance over time. With that, we will open the call up for questions. Operator?

Questions and Answers:

Operator

Thank you, sir. At this time, we will begin the question-and-answer session. [Operator Instructions] Our first question will be from the line of Charlie Lederer of Wolfe Research. Your line is open. Please go ahead.

Charlie Lederer -- Wolfe Research -- Analyst

Hey guys. Good morning.

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

Morning.

Charlie Lederer -- Wolfe Research -- Analyst

My first question is your ex-cap combined ratio guide for the full year is a bit higher than the year-to-date performance. Can you talk directionally about some of the factors driving the outlook for 4Q?

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

Yes. Good observation. So when you think about the guidance for 2021, we started the year with a combined ratio of 95%, and that included four points of catastrophe losses and an underlying combined ratio of 91%. Our current guidance is for a combined ratio of 93%, which includes five points of cap losses, and then an ex-cat combined ratio of 88%. So, we have two points of improvement for when we started. If you look at it on an underlying basis, so ex-favorable reserve development, were at about 89.8% on a year-to-date basis, which compares very favorably to that 91% when we started out the year. And you can sort of back into the underlying for the full year if you take our year-to-date reserve development and allocate that across the full year. So that would be a 9.2% underlying combined ratio for the full year. When you then take a look at the expectations for the full year versus year-to-date, we are -- you can sort of back into what the Q4 expectations are, which would be a 94.2% combined ratio, 91.6% on an ex-cat basis, or 91.6% on an underlying basis. But really, what were reflecting is that expense ratio is sort of coming back to expenses coming back to normal expectations that we had going into the year, non-GAAP property losses going back to kind of original expectations for the full year. But overall, I think were very pleased to report very strong improvement in the underlying combined ratio versus expectations and an overall combined ratio that is better-than-expected when we started the year.

Charlie Lederer -- Wolfe Research -- Analyst

Okay. Great. And then I guess for my second question, the underlying loss ratio in the excess and surplus lines segment improved quite a bit. How can we think about the trend there? And then just a quick one. Sorry if I missed this, if this isnt the remarks, but was there any notable benefit in personal lines from your flood program? Or should we expect one in the fourth quarter?

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

Yes. Maybe I can start, and John can jump in. So starting with E&S, just to make sure were looking at the same numbers. If I take the underlying combined ratio and back out expenses, and then back out non-GAAP property losses, the underlying, call it, casualty loss ratio within E&S is -- I have is at 47.1% versus 45.1% in the comparative third quarter period. So thats actually up a little bit. But if you look at just the pure loss ratio, we did benefit from lower non-GAAP property losses in the current quarter, which I think is the difference. We are booking the E&S casualty loss ratio a little bit higher in 2021 that we had in 2020.

John J. Marchioni -- Chief Executive Officer, President & Employee Director

But overall, I would say, and Mark hit the key points there. What youre seeing in terms of the outperformance this year is largely related to better-than-expected non-GAAP property, but we still like the directional improvement that weve seen over the last couple of years in the E&S segment. We like the rate level were getting there. Were seeing good strong growth. So were pretty pleased with the forward potential with regard to both growth and profitability improvement in the E&S segment. Thats exactly right.

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

And then just back to the comments on personal lines. I think the question was, was there any slight benefit? And do we expect any more in the fourth quarter? Clearly, as one of the top writers in the right growing plug program, one of our jobs is to adjudicate claims after a big event. And for us, Hurricane Ida, the industry was a big event. We had relatively underweight market share in the state of Louisiana. So, the flood claim benefit there was not that significant. But in the Northeast, particularly in New Jersey, we have a pretty healthy market share in the right years own programs. S,o we adjusted a lot of clients in Q3 related to Hurricane Ida. We recorded about $2.2 million of claims handling fees within the quarter, about $1.5 million related to Hurricane Ida. And that was reflected as a benefit within the postal line segment in Q3. Essentially, all of that has been recorded in Q3. If we see some development from a flood perspective into Q4, they might be a little bit more to come, but our expectation is thats all been reflected in Q3

Charlie Lederer -- Wolfe Research -- Analyst

Thanks guys.

Operator

Thank you. Our next question would come from the line of Grace Carter of Bank of America. Your line is open. Please go ahead.

Grace Carter -- Bank of America -- Analyst

Hi, everyone.

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

Good morning, Grace.

Grace Carter -- Bank of America -- Analyst

Good morning. In the past, you all talked about loss cost trend of around 4% for commercial lines. I was wondering, just given the recent uptick in inflation, how you all see that trending from here or if its still an accurate forecast?

John J. Marchioni -- Chief Executive Officer, President & Employee Director

Yes. I guess -- and I addressed a little bit of this in my prepared comments from an industry perspective, but just in terms of how we think about it. I think the first important point to make is we have always been very transparent about our view of expected loss trends, and we build that into the reconciliation that underlies our combined ratio guidance. And over the last couple of years, what weve seen and youve seen in that guidance is an incremental movement up from about 3% to about 4% on an overall basis. And I would say that was fairly reflected relative to commercial lines as well. As we sit here today, and I know we spent a lot of time on this last quarter as well, there are some dynamics in the current loss trend environment that I think need to be reflected going forward. And from our perspective, there -- we could be looking at an incremental move higher in forward loss trend.

But I think what creates the uncertainty is we continue to be in this environment where our frequencies continue to run lower than expected. And while its not at the level of what 2020 was, it continues to run a little bit lower than expectations through 2021. And then youve got this offsetting impact on the severity side. And the severity is driven in part by that lower frequency, but in part by other factors being economic inflation and social inflation. And I think thats what we work through as part of our year-end process, and well be very transparent as we get into January or later January with our 2022 guidance relative to how we think about that. But theres no question, other impacts. I think you just have to factor in what happens with regard to frequency going forward? And at what point does it return to normal? And then what is the offsetting severity impact if and when that happens?

Grace Carter -- Bank of America -- Analyst

Thank you and I guess, just another one on inflation. Across the industry, it seems like a lot of the conversations around inflation are focused on personal lines. So, I was wondering if you are seeing any differences in kind of the elevated severity from repair costs in commercial lines versus personal lines or if it feels pretty consistent?

John J. Marchioni -- Chief Executive Officer, President & Employee Director

I think theyve actually become more consistent. I think last quarter, we saw a little bit of a difference, specifically on the property side, where personal lines was more elevated as an impact from inflation at commercial, largely because of the higher prevalence of lumber in personal property repair than commercial property repair with lumber, backing back down, we see current blended construction cost index change in the third quarter. Thats about the same for personal and commercial property. And Ill come back and hit auto in a second, but its kind of back down to that 6% sort of range, which you would expect to see come through in severity. But again, well continue to live in a lower frequency environment. So theres an offset there. On the auto side, again, commercial is a little bit different because the range of auto types is a lot different than it is in personal lines.

But just to give you a sense from an industry number perspective, in Q3, and this comes from one of the primary auto material damage vendors, the blended claim cost increase on auto physical damage in the quarter is up about 15%, and thats a combination of total loss continuing to be up north of 30% and repair costs being up about 8%. So it blends together that way. And if you look at our results in the auto lines, you can see that non-GAAP property comes through a little bit higher on a year-over-year basis, and you would attribute some of that to that cost of repair thats running higher. So, I think it is normalizing, but youve got this higher starting point that needs to be worked through. And then the longer-term question becomes when does frequency return to pre-pandemic levels which has been an offset to this point. So, I apologize for the long-winded answer, but thats kind of how we would think about the claim cost impact of economic inflation coming through.

Grace Carter -- Bank of America -- Analyst

Thank you.

Operator

Our next question will be from the line of Scott Heleniak up, RBC Capital Markets. Your line is open. Please go ahead.

Scott Heleniak -- RBC Capital Markets -- Analyst

Yes. Good morning. Just wondering, you mentioned personal lines you expect to return to growth for 2022, which Im assuming is going to be driven by the high net worth and some of the initiatives you have there. You mentioned what youre changing some parts of the portfolio. But could you give an update on, or just expand on where you see that growth coming from? Is that going to be high net worth? And how many -- can you refresh us how many states youre in now? And what your plans are for 2022 on that front?

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

Yes, sure. Let me just state expansion first. Were currently in 15 states for personal lines. Thats been the case for a couple of years. We did expand into Arizona and Utah, along with our commercial -- or right after our commercial lines expansion into those states a few years back. We dont have any near-term plans to open up additional states. So, the growth looking forward, and our current plans will be coming from that existing 15 state footprint. In terms of the growth we are seeing, and again, as I said in the prepared comments, the overall portfolio of growth showing negative in the quarter is masking some of the growth in our target market because we are seeing some pressure on the retention and drop-off in new business in what we would consider our nontarget market going forward. And we do expect, as we move through 2022, quarter-by-quarter, we expect to see that start -- that balance start to shift. And in the latter half of the year, we expect to be in a stronger growth more than we are in the first or second quarter.

But that is driven entirely by our new target market business. We still, although its less dependent on a competitive auto environment to drive the growth. It is still somewhat dependent on that. And what were seeing with -- over the last 18 months as a lot of the larger players in personal auto rather than just continuing to provide credits opted to modify their rate plans down. We saw a fairly significant move in a competitive landscape on auto, which is still hurting our ability to grow the overall segment. Our expectation is that well start to reverse. And youve heard all the public commentary about lower rate filing expectations for a number of players. We opted to handle the pandemic-related drop in frequency through Craigs as opposed to making a wholesale change to our filed rate plan on the belief that the driving environment would return to normal over time. So I think that puts us in a better position going forward.

Scott Heleniak -- RBC Capital Markets -- Analyst

Okay. Thats definitely helpful. And just moving on to the -- you mentioned the ALGO renewal rights transaction, the $20 million to $40 million in premium. Was there any premium included in Q3 within that? And then also, could you talk about if theres any difference between that loss ratio business versus SIGIs B&S loss ratio? Is there any material difference in there?

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

Great question. First question is, no, theres really no third quarter premium impact from that. This will largely be a fourth quarter and then into the first three quarters of 2022. With regard to the pricing or profitability impact, I think its important to recognize, and thats why we have the assumption we have relative to the premium we will acquire, which is a portion of the premium thats currently in that portfolio because this business will be offered a renewal on our forms on our -- with our rating structure and our terms. So we do expect to see a certain retention level that is underlying that $20 million to $40 million number that Mark gave you. So we fully expect this to mirror what we write, not just by class of business, but in terms of price per unit of exposure and the terms and conditions.

Scott Heleniak -- RBC Capital Markets -- Analyst

Okay. That makes sense. And then lastly, just wanted to touch on the dividend. Really nice dividend increase. Obviously, good to see. And I believe this is the second year in a row, a pretty significant dividend increase. So just wondering if you could share the dividend policy. Obviously, you look at payout ratio, a lot of different factors that you would obviously consider. But anything you can share on that, how we should be looking at the dividend going forward compared to maybe how you looked at it in the past?

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

Yes. Good question. Perhaps Ill start, and then John can provide some additional color as necessary. So generating good returns for our shareholders, for us, means, one, generating strong operating ROEs as well as the good stewards of our shareholders capital. And I think the dividend strategy is a reflection of that. So for us, we are focused on disciplined and profitable growth. And the key contributor of funding that growth is profitability and retained earnings. So, we as a company that has a relatively high growth rate relative to the industry as a whole, focusing hard on the dividend payout ratio, ensuring we have a good sustainable growth rate, its something that we focus on. So, we think about a sustainable growth rate is a function of our forward ROE and the dividend payout ratio, and we target a dividend payout ratio from around 20% to 25% of votings wed like to get through the third quarter, get through hurricane for the most product we hurricane season before we reset the quarterly dividend. But we think its a good way to return some capital to our shareholders while also retaining profitability in the form of capital to fund our future growth. So we felt very good about the 12% dividend increase up to $0.28. I think we all felt very comfortable with our capital position, our growth prospects, and our forward earnings expectations. And thats how we think about the dividend.

Scott Heleniak -- RBC Capital Markets -- Analyst

Okay. Thats a good comprehensive answer. I appreciate all your answers. Thanks.

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

Thank you.

Operator

Thank you sir. Our next question will be from the line of James Bach of KBW. yOur line is open. Please go ahead.

James Bach -- KBW -- Analyst

Good morning, guys. Thank you. Can you discuss a little bit more what some of your plans are to achieve more savings outside of kind of the T&E movement thats going on with the pandemic, kind of explain what the cost containment efforts are focused on and how youre sort of balancing that with your growth plans?

John J. Marchioni -- Chief Executive Officer, President & Employee Director

Yes. Ill start, and Mark can certainly provide some additional commentary. From our perspective, this is all about continuing to gain operational efficiency, working smarter, leveraging technology, to allow our employees to handle an additional workload without needing to create more effort on their part. So we really think about managing our fixed expenses and the growth in our fixed expenses at a lower rate than our top line is growing as a way to build those economies of scale. And again, thats a combination of working smarter, but also better leveraging technology. And weve made a lot of investments in this area. I know weve highlighted some of them in the past, but theres been a number of investments toward underwriting tools, best management tools that really help our underwriters become more efficient. The result of that is they could handle a larger renewal portfolio with the same result from an underwriting perspective. And I think thats really where our focus is. This is not about cutting expenses out. And as Mark indicated previously, were going to continue to make the investments. And I highlighted a couple of them relative to technology, from a small business and an NS perspective were personalized product development were going to make those investments. This is not about cutting expenses, its about making sure that were better leveraging the resources we have and growing our fixed expense rate at a much lower rate than were growing our net credit as written. And I think that will be to continue to be the primary driver.

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

Yes. Thats exactly right. And I think from our perspective, in order to generate continued consistent profitability being efficient in terms of how we think about expenses is important. As weve mentioned in the past, when we think about our mix of business, a heavy way toward standard commercial lines and E&S. So a slightly lighter weighted toward post aligns and some of our players, we think, an appropriate expense ratio for us on a long-term basis is around 32%. And if you go back a couple of years, we were in the low 35% range from an expense ratio perspective. Our guidance for this year was 33%, with 32% four year today. So weve been able to make those significant long-term investments to drive underwriting profitability to support our organization, to hire really strong and talented underwriting and individuals, but also prove expense ratio down and as we look ahead to 2022, and in particular, 2023, we do have line of sight on [twenty] getting down to that 32% expense ratio.

John J. Marchioni -- Chief Executive Officer, President & Employee Director

And James, the only plan Ill make, and I think this might be stating the obvious, but I think weve also learned a lot through the last 19 months about our ability to deliver services virtually that used to be delivered in person and whether its in the claims area and virtual inspections for certain claim types or in our safety management area, where we can now deliver much more efficient safety services to a broader population of our customers and do that much more efficiently by leveraging a lot of these virtual capabilities. I think thats a permanent benefit that will help on the efficiency side going forward, but also help on the customer experience side. And I think thats a real beneficial outcome over the last 19 months.

James Bach -- KBW -- Analyst

Thank you. That covers it for me.

John J. Marchioni -- Chief Executive Officer, President & Employee Director

Thank you.

Operator

[Operator Instructions] Our next question will be from the line of Matt Carletti of JMP. Your line is open. Please go ahead.

Matt Carletti -- JMP. -- Analyst

Hey. Thanks Good morning.

John J. Marchioni -- Chief Executive Officer, President & Employee Director

Hi, Meyer.

Matt Carletti -- JMP. -- Analyst

Just a couple of questions. One, just a follow-up on the ALGO renewal rights book. Your current E&S book is about 2/3, 1/3 split casualty versus property. Should we expect something similar of that $20 million to $40 million that you expect to renew? Or is there a reason to believe that it will be materially different?

John J. Marchioni -- Chief Executive Officer, President & Employee Director

We dont expect this will change our mix. And this is largely in the binding segment. We think about our BNS business in two in -- predominantly two distinct segments, one being the Binding Authority segment, which is where this renewal Rex portfolio is. And the other for us is our brokerage segment, which is the smaller end of the broker, its really the business that just falls outside of our binding constraints. This is all in the binding area. And actually, if you were to look at the split in our binding area, its probably a little bit higher casualty weighted, whereas brokerage is a little bit more of a 50-50, 60-40 split casualty to property. So, no change in that mix. If anything, its a little bit more casualty-driven.

Matt Carletti -- JMP. -- Analyst

Great. And then for Mark, could you give the split of the cat losses in standard commercial in the quarter? And then I apologize, I know you mentioned it, but you talked too fast for me to keep up the prior-year development, I think you gave by line. I just wasnt able to catch it all.

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

Yes. So lets start with the catastrophe loss activity in the quarter, it standing commercial lines by individual line of business. So in total, it was $50 million or 8.1 percentage points understanding commercial loans combined. In commercial property, it was 32.8% or 29.3 points total or $3.7 million commercial property combined commercial auto, $8.2 million or 4.4 points, 5-plus $8.9 million or $38.7 million, and rounded, that should get you to $59 million or 8.1 points on standard commercial lines. And then in terms of the casualty reserve development, it was $14 million in total or 2.3 points on the standard commercial lines combined ratio in the quarter. Where all the development was in state and commercial lines. It was $8 million favorable in workers comp, $4 million favorable in TL, and $2 million favorable in the BOP line.

Matt Carletti -- JMP. -- Analyst

Perfect. Thank you very much and sorry to make you go over that again.

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

No problem, Meyer. My pleasure.

Matt Carletti -- JMP. -- Analyst

Thanks.

Operator

Thank you. I see no further questions. I would like to turn the call back over to you, sir, for closing remarks.

John J. Marchioni -- Chief Executive Officer, President & Employee Director

Great. Well, thank you all very much for joining us this morning, and we look forward to talking to you again soon. Thank you.

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Rohan Pai -- Senior Vice President of Investor Relations & Treasurer

John J. Marchioni -- Chief Executive Officer, President & Employee Director

Mark Alexander Wilcox -- Executive Vice President & Chief Financial Officer

Charlie Lederer -- Wolfe Research -- Analyst

Grace Carter -- Bank of America -- Analyst

Scott Heleniak -- RBC Capital Markets -- Analyst

James Bach -- KBW -- Analyst

Matt Carletti -- JMP. -- Analyst

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