Selective Insurance Group's (SIGI) CEO Greg Murphy on Q2 2016 Results - Earnings Call Transcript

| About: Selective Insurance (SIGI)

Selective Insurance Group, Inc. (NASDAQ:SIGI)

Q2 2016 Earnings Conference Call

July 28, 2016 08:30 AM ET

Executives

Dale Thatcher - EVP, CFO and Treasurer

Greg Murphy - CEO

John Marchioni - President and COO

Ron Zaleski - Chief Actuary

Analysts

Arash Soleimani - KBW

Mark Dwelle - RBC Capital Markets

Operator

Good day, everyone. Welcome to the Selective Insurance Group's second quarter 2016 earnings call. At this time for opening remarks and introduction, I would like to turn the call over to Executive Vice President, Chief Financial Officer and Treasurer, Dale Thatcher.

Dale Thatcher

Good morning and welcome to my final Selective Insurance Group quarterly conference call. This call is being simulcast on our website, and the replay will be available through August 29, 2016. A supplemental investor package, which includes GAAP reconciliations of non-GAAP financial measures referred to on this call, is available on the Investors page of our website, www.selective.com. Certain GAAP financial measures will be stated during my prepared remarks that will also include in our quarterly report on Form 10-Q. To analyze trends and our operations we use operating income, non-GAAP measure that the investment community also uses to evaluate performance of the insurance operations. Operating income is net income excluding the after-tax impact of both net realized investment gains or losses and discontinued operations.

As a reminder, some of the statements and projections made during this call are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. We refer you to Selective's annual report on Form 10-K and any subsequent Form 10-Qs filed with the US Securities and Exchange Commission for a detailed discussion of these risks and uncertainties. Please note that Selective undertakes no obligation to update or revise any forward-looking statement. Joining me today on the call are the following members of Selective's executive management team; Greg Murphy, CEO; John Marchioni, President and Chief Operating Officer; and Ron Zaleski, Chief Actuary.

Now I will turn the call over to Greg for introductory remarks.

Greg Murphy

Thank you Dale, and good morning. The second quarter was a continuation of our ongoing efforts to consistently generate an operating return on equity of 300 basis points above our weighted average cost of capital. 2015 was a record year for Selective since becoming listed on the NASDAQ both in terms of underwriting profit and net premiums written. And we reported an operating return on equity that was 310 basis points above our weighted average cost of capital. In the first half of 2016, many key metrics across the organization improved and we are ahead of last year’s record pace. As we focus on underwriting and claims improvements as well as achieving rate increases that match or exceed expected claim inflation. Year-to-date our annualized operating return on equity was 11%, 320 basis points above our weighted average cost of capital as net premiums written grew 9% and we delivered 26% increase in operating earnings per share.

At Selective, we remain focused on leveraging competitive advantages to improve our position in marketplace. Our first competitive advantage, true franchise value with ivy league distribution partners have been the cornerstone of Selective success. One way we measure how distribution partners view their relationship with Selective is through an Annual Agency Survey that measures overall satisfaction on a scale of 1 to 10. In the previous three surveys, Selective consistently received a score of 8.6 and we’re pleased that in our most recent survey the score improved to 8.8. In the quarter, we continued to engage with our distribution partners about the value of customer experience. Our second competitive advantage, our unique field model coupled with sophisticated underwriting and claims capabilities has enabled us to implement underwriting and claims improvements effectively balance rate and retention and improve profitability in most recent years.

Standard commercial line renewal price increases met or exceeded expected claim inflation at the last 27 consecutive quarters. During the 26 quarters that we had access to Willis Towers Watson Commercial Lines Price Monitoring Survey data, we have exceeded industry pricing on a compound cumulative basis by approximately 1500 basis point. Our field model and sophisticated pricing capabilities are also important part of our ability to grow the organization going forward as we work closely with our distribution partners to underwrite new business and granularly manage the renewal inventory. Over time, the goal is to increase our agents combined state market share from 17% to 25% and our share of wallet from 7% to 12%. Within our commercial lines of business which in total represent about $2.5 billion additional premium opportunity. Both share of wallet and agency market share improved incrementally in 2015 as our market share increased from 1.1% to 1.2% and we’re currently ranked 41st in A.M. Best annual ranking of top 200 carriers in the US based on 2015 net premiums written.

As we think about growth, we prioritize opportunities in our current footprint where we have established relationship and an operating history. However, we are evaluating opportunities for geographic expansion in our standard lines operation. Over time, we expect to add new footprint space to improve geographic diversification and grow the organization. We will provide more details on these efforts as they develop. Our third competitive advantage, superior customer experience delivered by best in class employees has been and will continue to be critical to our success. We tried a number of metrics related to customer experience including net promoter scores, voice of the customer survey results that are trending in a positive direction. Also we evaluated more than 20 key customer interactions that surfaced through our contact center, survey responses and omni-channel assessment to pinpoint process disruptions that could negatively impact customer experience. Through that evaluation we identify the most significant friction points among customers Selective and our distribution partners and efforts are underway to eliminate them. These changes will help us increase efficiency and improve our first call response resolution of customer enquiries and overall customer satisfaction. In addition, we’re investing in technology and employee development that support our strategic focus on customer experience. With the first half of the year behind us and having achieved better than expected results so far, we provide the following expectations for the full year 2016. A combined statutory ratio, excluding catastrophe losses of approximately 89.5, which is a 1.5 improvement from previous guidance of 91. This assumes no additional prior year casualty reserve development, catastrophe losses of 3.5 points, after-tax investment income of approximately 95 million and weighted average shares outstanding of 58.5 million.

Now, I’ll turn the call over to Dale to review the second quarter results.

Dale Thatcher

Thanks, Greg. For the quarter, we reported net income per diluted share of $0.74 and operating income per diluted share of $0.72, up from $0.58 and $0.62 a year ago. These increases were driven by superior performance within insurance operations. With two quarters completed, we are ahead of last year's pace when we achieved a record setting statutory combined ratio. This was a result of ongoing renewal pure price increases, strong premium growth, favorable prior year casualty reserve development and lower cat and non-cat property losses in the first half of the year. Our statutory combined ratio in the quarter was 90.1%, a 3.4 point improvement from the same period last year.

On an underlying basis, excluding catastrophes and prior-year casualty reserve development, the combined ratio was 90.4%, which was 2.3 points better than the second quarter of 2015. Catastrophe losses in the quarter added 1.6 points to the combined ratio, which is better than our full-year expectation of 3.5 points and 3.3 points below the reported amount in the second quarter of 2015. Also, non-catastrophe property losses were 2.3 points lower than the same period last year. Our reserve position is strong and we recorded favorable prior year casualty reserve development in the quarter of $10 million or 1.9 statutory combined ratio points. This is compared to $20 million or 4.1 points a year ago.

In the second quarter of 2016, favorable development was driven by improving claims trends within the general liability and workers’ compensation lines of business, which respectively reported $11 million and $9 million of favorable prior year casualty development. Partially offsetting this benefit was $8 million of unfavorable prior year casualty development in commercial auto, primarily in the 2011, 2013 and 2015 accident years as well as $2 million of unfavorable prior year casualty development in excess and surplus lines from the 2014 accident year. As we've discussed in the past, given the size of our excess and surplus lines book, we expect some volatility in reported results.

Top line growth was robust and overall statutory net premiums written increased 9% in the quarter. This was driven by renewal pure price increases, stable retention levels and higher new business. We continue to achieve pricing levels which exceed increases reported by the broader market, while maintaining retention. We believe this is an indicator of our strong agency relationships and granular pricing capabilities. In standard commercial lines, renewal pure price for the quarter was 2.6%, which was in line with the level of expected claim inflation. Personal lines and excess and surplus lines are achieving greater levels of rate increases with homeowners renewal pure price at 6.7%, personal auto renewal pure price at 3.6% and excess and surplus lines overall rate at a 4.8% increase.

On the reinsurance front, excess of loss treaties were successfully placed on July 1, 2016 with a structure that remained largely the same. Our casualty excess of loss treaty covers $88 million in excess of a $2 million retention and renewed with stable rates and some improvement in terms. Our total property excess of loss coverage is currently 58 million, in excess of 2 million, which includes the $20 million property excess of loss letter that was placed last January. This treaty experienced some loss activity in recent years, and as a result, rate increased at renewal.

Our investment portfolio contributed 6.2 points to operating ROE in the quarter, as after-tax net income decreased 5% to $23.5 million from $24.8 million in the prior year period. Fixed income, which represents 92% of our portfolio, experienced a 4% increase in pre-tax net investment income as the higher asset base helped to offset the effects of the continued low interest rate environment and lower returns from our alternative portfolio. Alternative investments, which report on a one quarter lag, reported a pre-tax loss of $600,000, compared to income of $1.4 million in the second quarter of 2015. Over time, the market value of our alternative portfolio has declined due to its maturity with many of our funds in the distribution phase of their life cycle.

In the quarter, after-tax new money yields on our fixed income portfolio averaged 2.4%, as we invested in high-quality fixed-income investments and also added a modest amount of high yield products during the quarter. Our fixed income portfolio is highly rated with an average credit quality of AA- and a 3.7 year duration, including short-term investments. Given the sharp decline in treasury yields this year, our pre-tax unrealized gain position increased to $191 million at June 30 from $69 million at the end of 2015. As a result of the change in unrealized gains, the year-to-date ROE declined by approximately 30 basis points as the ratio of invested assets to stockholders equity was reduced.

The pre-tax unrecognized gain position in the fixed-income held to maturity portfolio was $7 million, or $0.08 per share on an after-tax basis. Surplus and stockholders’ equity were 1.5 billion and 1.6 billion respectively at the end of the second quarter. Book value per share increased 10% to $26.86 from year-end 2015, as our balance sheet benefited from strong profitability and a decline in interest rates. As Greg stated earlier, we achieved year-to-date annualized operating return on equity of 11%, 320 basis points above our quarter end weighted average cost of capital of 7.8%.

Now, I’ll turn the call over to John to review insurance operations.

John Marchioni

Thanks, Dale. Our insurance operations are focused on delivering excellent growth and profitability. For the first six months, we achieved an overall statutory combined ratio of 90.4 and net premiums written growth of 9%. While we cannot control the headwinds that we face as an industry such as moderating price or historically low investment yields, we are executing on our strategies and believe our results highlight the ongoing efforts of our employees and distribution partners. Year-to-date, growth in standard commercial lines through June 30 was a strong 9%, driven by stable retention of 83%, new business growth and renewal pure price increases of 2.7%. Our commercial lines statutory combined ratio was 89.1%, a 0.8 point improvement over a year ago. On an underlying basis, year-to-date results improved 0.4 points, compared to the prior year period.

In our renewal portfolio, we successfully balanced rate and retention through the use of our dynamic portfolio manager. For our highest quality standard commercial lines accounts, which represent 50% of our premium, we achieved renewal pure rate of 1.5% and point of renewal retention of 91%. On our lower quality accounts, which represent 10% of premium, we achieved pure rate of 7.2% and point of renewal retention of 77%. Workers’ compensation continues to deliver strong results, driven by our focused underwriting and claims efforts and renewal pure price increases.

Year-to-date, we achieved an 84.3 statutory combined ratio that included $21 million or 13.9 points of favorable prior year reserve development. This was driven by lower severities in accident years 2013 and prior due to the significant changes in our claims handling and outcome management as well as a lower prevailing loss cost inflation. This was the 10th consecutive quarter of either no development or favorable development in this line.

Our largest line of business, general liability reported a year-to-date combined ratio of 83.4, which included $22 million or 8.5 points of favorable prior year reserve development. Commercial auto has presented challenges for the industry in recent years and we have not been immune to this dynamic. Year-to-date, commercial auto reported a statutory combined ratio of 106, that included $13 million or 6.7 points of unfavorable prior-year casualty reserve development. The increase in our commercial auto liability reserves related mainly to higher severities in accident years 2011 and ‘13, as well as higher frequencies in the 2015 accident year. To address profitability in commercial auto, we continue to achieve rate increases and are taking targeted underwriting actions. Through June 30, year-to-date renewal pure price in auto liability was 4.6% and auto physical damage was 5.9%.

On the underwriting side, we are restricting new business and non-renewing existing policy in certain challenged segments. For the six months of 2016, the excess in surplus line statutory combined ratio was 100.6%. On an underlying basis, excluding catastrophes and prior-year casualty reserve development, the statutory combined ratio was 94.4%, an improvement of 2.5 points compared to the prior-year period.

Margin improvement in E&S is being addressed through a shift in mix of business, claims improvements, and targeted price increases. In 2015, we moved E&S claims management responsibility into our corporate claims group to implement our best practices across both property and liability. The team is in place and we completed the review of the overall claims portfolio, following our complex claims review at the end of 2015.

Part of the transition includes the use of more robust monitoring tools to better manage the claims process and outcomes. These changes and aggressive pricing actions are expected to provide benefits, and we'll continue to focus on refining our E&S claims management practices to improve profitability. Within personal lines, the statutory combined ratio improved 15.1 points to 90.1% through June 30. On an underlying basis, the statutory combined ratio improved 8.1 points and benefited from a lower non-cat property losses.

Following a 5% decline in the first quarter, net premiums written in personalized moderated in the second quarter and finished down 0.5% from a year ago. Last month, we launched a comprehensive marketing campaign, aimed at our distribution partners to emphasize our commitment to personal lines and our target customer the consultative buyer. Within homeowners, both the quarter and year-to-date underwriting results benefitted from lower catastrophe and non-catastrophe property losses. We set a goal to achieve a 90% combined ratio in a normal catastrophe year and are implementing rate increases to move us to that goal.

In personal auto, the year-to-date statutory combined ratio improved by two points compared to the prior-year period, and benefited from rate increases that we’ve implemented in that book. We work hard to create our position in the market and have no intention of slowing down. As an organization, we remain focused on continuous improvement and outperform the industry in terms of both growth and profitability.

Now, I’ll turn the call back to Greg.

Greg Murphy

Thanks, John. As you know, arithmetic has no mercy, and the industry will continue to be pressured to produce underwriting profits as we face the on-going possibility of low for longer. Interest rates are already at our near historical low levels. We believe that the goal post for acceptable industry returns should not be moved and we are focused on consistently achieving an operating return on equity of 300 basis points above our weighted average cost of capital.

As we look forward, franchise value and superior Omni-channel experience for customers will be critical for success in the insurance industry and we’re strongly positioned to capitalize on our competitive advantages.

Before moving onto your questions, I’d like to take a moment to recognize and thank Dale. In March, Dale announced his retirement and his last day at Selective will be September 1st. Since joining Selective in 2000, as Chief Financial Officer, Dale has made significant contributions to our organization as we grew net premiums written 2.5 times, increased total assets 2.7 times and quadrupled our market capitalization, as well as expanded in the E&S business with two acquisitions.

We wish Dale well, and I thank him for his leadership and guidance. With that, I'd be happy to take your questions, operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Arash Soleimani of KBW. Your line is open.

Arash Soleimani

Thank you, and Dale, congrats on your final earnings call.

Dale Thatcher

Thank you, and good morning, Arash.

Arash Soleimani

Good morning. So, just first question, can you provide a bit more color in terms of the new footprints states, you’re thinking about which states you might be thinking of going into and perhaps how long do you think it’ll take to sort of get the agent traction there that you have in some of your existing states?

John Marchioni

Yes, thanks. Great question, this is John, and I can start and Dale and Greg will certainly fill in. So, I would say the focus of our expansion at this point will be the south-western part of the country, starting with Arizona, and building it out from there and building a regional operation there overtime similar to the five regional operations we have in place in our existing footprint and using the same successful model we have used which has Greg indicated in his prepared comments around an empowered field model and deep relationships with the smaller group of high powered agents.

As we build out that footprint overtime, we’ll also continue to add contiguous states to our existing footprint where it makes sense, somewhere we think there is opportunity to build out our existing regional structure as well, and we’ll do this over a period of years.

So, the work has begun in earnest on the first couple of states, and generally speaking we would expect to be operational there in the later part of next year with the first states which means that we’ll be shortly in the market for agents and employees in those territories to build them out and be able to hit the ground running, and then you would expect to see premium ramp up, starting a little bit more slowly in the first year or two as we get our footing with our people and our agency partners and then building up from there.

Greg Murphy

Yeah, the only thing I would to that obviously will be leveraging our existing relationships with our distribution partners who have footprints and existing footprints in those states, but also just to give a sense, we’re always out looking for opportunities in the marketplace, but because we’re so unique as the way we distribute our product and our high-franchise value, we just constantly come to the point is that the only way we could do it is Greenfield and so that’s the way we feel that we can successfully replicate our model and I think you’ll see us continue to build out, I don’t think we’ll be full service everywhere, and the rest of the country there are probably about 10 states over a period of time that we would be full service.

The rest of the states that we’ll enter, we’ll enter because our agents have business opportunities in those states and it will give us a [indiscernible], but that would take a longer time, but we don’t want to lose business that we have that grows up to a 50-state operation that we can’t write because we can’t service it. So, we know we lose opportunities particularly on the larger end of that, I think longer term that’s the problem that we’re also trying to solve in this equation.

Dale Thatcher

The other color I’ll add is, keep in mind, we’re currently growing a 8% to 9% in our current existing footprint well in excess of what the industry is able to achieve because of the capabilities that we built here. So, a stead-measured approach and our new states with Greenfield method, to us, the appropriate way to maintain profitability for our shareholders and provide an opening up of additional growth opportunity, which really is kind of gravy on the overall scheme of things. So, to me, it’s an excellent way to continue to build this company.

Arash Soleimani

Thank you for all of those answers. On the commercial rate increases, I mean not a big change but it went from chasing 2.8% last quarter to 2.6% this quarter, is there anything to read into there or would you consider that basically continuation of the status quo?

John Marchioni

We view those results as stable quarter-on-quarter, and when you look at our rate level relative to where the industry is we’re very happy with those results. Retentions remained strong, rate level is pretty much in line with our expected claims inflation targets and when you look at our commercial lines performance relative to our target returns, we want to make sure we continue to maintain those margins and therefore getting rate level in that amount is what we’re striving to achieve.

Greg Murphy

And just understand that a fair amount of that rate also came in the commercial auto which John prefaced his comments were our liability which represents commercial liability, auto liabilities about 76% of the auto premium. And that was up 4.3% in the quarter and fiscal damage which represents about 24% of the commercial auto premium was up 6.4%. So good healthy increases in that line and we’ve pretty much always been ahead, 1,500 basis points ahead of the industry, 27 consecutive quarters of renewal pricing increases that equaled or exceeded expected claim inflation in my mind is quite a track record to stand on.

Arash Soleimani

I guess the expectation is still to keep pace at least will loss inflation this year?

Greg Murphy

Our goal - here is how I would say it, we have underwriting capability and vertically to the entire organization that our inside underwriters can sit across the table agency by agency 60 to 90 days out in advance with their renewable book, now which accounts they have to play hardball on and are able to do that and because we have that relationship and knowledge base we are able to scratch out premium increases where most of our competitors cannot.

Arash Soleimani

And I know you mentioned in the prepared remarks but obviously you are not immune in commercial auto from some of the industry trends you're seeing and obviously you’re getting good rate there. I guess my question is, I know a lot of competitors as mentioned that they’re staying away from commercial auto is because of what's going on, I guess what gives you a confidence to grow the way you've been growing in that line?

John Marchioni

This is John again, I think if you look at a track record over a long period of time, our performance in commercial auto has been very strong relative to the industry. We continue to believe we got high-caliber underwriters with excellent tools to make good risk selection and pricing decisions. And those headwinds that we mentioned in our prepared comments that you're referring to certainly do affect everybody whether it's the economic rebalance and specifically with contractors, the cost of gasoline coming down, unemployment coming down, which are driving up miles driven but you've also got the continued impact of the attractive driving as well as the cost to refer vehicles because of technology in vehicles that will continue to be on the rise. So, we think there are some staying power to pricing in that segment because it is impacting the industry but we still believe as an account underwriter, again we don't write a lot of monoline auto, we write account business property, auto, GL umbrella, workers comp, we view it as an entirety and not that we would have the intentional subsidization between lines of business but we think the stresses that are on that line are something of an advantage going forward bringing it to profitability and on overall account basis to continue to compete effectively.

Greg Murphy

But you cannot be the account underwriter and not write commercial order. This was the same issue everybody had several years ago with workers comps, we’re an account underwriter, we write the whole account, GLs are lead line in that, it’s our biggest line followed by commercial auto next to comp, and we had, you know, and our comp was running higher than we would like, we had a concentrated effort to pull the combined ratio down and success of that has been phenomenal as our client ratio have dropped substantially and I think that we got very good grip on what is it that we’re doing, we’re driving rates well above expected for our claim inflation, we’re working around some of the underwriting and other claim improvements, you can’t operator and expected to win and get the rest of the account. So you got to manage your way through the profitability on the line and get agents that are willing to work with you to make the improvements in the segmentations that need to be improved.

Arash Soleimani

My last question just on E&S, I know you mentioned on the prepared remarks just due to the size of the books there will be some volatility in there but you know obviously it seems like a line you are growing pretty strongly and as we saw this quarter does that imply that kind of as those written premiums earn in, there is an expectation for those premiums to be at a combined ratio below a 100 consistently, I guess how do you look at that going forward?

John Marchioni

We expect all three of our major segments to achieve our targets returns over time and certainly consider E&S in that category. I think a couple of points I would make of course, number one our ability to change the make-up of that book of business more quickly than we do in standard commercial lines is there because retention in that segment are generally lower than they are in standard commercial lines usually in the 50 to 60 kind of range, you're turning that inventory over a lot more quickly. Second thing is maybe we commented on this in the past, we measure our pricing levels at a very specific segment on a very specific segment basis for new business and we are actually acquiring new business at or above our targeted pricing levels and again that makes up a more significant portion of the book for the segment than it does in standard commercial which we also think will contribute to improvement in performance going forward and going forward rather quickly.

And then the final point I would highlight which is also the in the prepared comments is we are just now starting to realize the expected benefits from migrating the claims management to our overall claims platform and we think there are significant opportunity for improvement both in terms of outcomes and loss adjustment expenses and you haven't really seen that started to come through the numbers. So on an accident year basis and on underlying basis when you strip out the CATs and the development, we’re seeing improvement as we say we have a 2.5 points of improvement in the underlying combined ratio so far and we think we can continue that trend while we're growing it because we’re so comfortable with the strength of new business pricing in that segment.

Operator

Thank you. [Operator Instructions] Our next question is from Mark Dwelle of RBC Capital Markets. Your line is open.

Mark Dwelle

Few questions, in the commercial line segment the expense ratio had moved up about a point, is there anything in particular behind that obviously the overall combined ratio was good, so I was kind of surprised at that.

Greg Murphy

A little bit is supplemental commission as a profitability continues to improve and its actually better than we had expected to be, we are adding more to the supplemental side, so that’s a tradeoff that you’re going to remember that we reward performance, we’re a pay for performance organization, when our agents generate the results they get more supplemental commission and to some extent even in our own annual cash incentive plan, which is as you guys know is heavily based on combined ratio performance and achieving very, very specific strategic initiatives both of those things are doing very well. That's not all of it but that's a fair amount of it.

Mark Dwelle

Okay that makes sense. Some questions in the alternative investment continue to kind of struggle and I appreciate there is kind of portfolio management aspect but how are you thinking about that in terms of an allocation it doesn't seem like it’s something that’s really rewarding you as much as the rest of the businesses?

Dale Thatcher

I think it's important to note, so alternatives at our peak we are up around $160 to $170 million of an allocation to the alternative space as things kind of blew up in ‘07, ‘08 time frame we really allowed kind of the alternatives to drift downward as we kind of retrenched and really got our arms around exactly what we had in there and where we want to go with that class of investment. We have since rebuilt our capabilities around being able to invest in the space and we feel much better about that now but you do have that ongoing drag from some of those old legacy investments that are if you think about towards the end of their normal life cycle. So they are the lower performing of the overall alternatives, so until we get fully back ramped up and fully allocated to the alternative space the net income that you are going to see from those for a while is not going to be nearly as robust as we would expect. But once we achieve the right kind of diversification across vintage years and across classes of alternative investments then our expectation is to have more consistent performance coming from that class of investment.

Mark Dwelle

I guess staying with the investments, I hope this isn't my last question for you Dale, but I fear it may be, you noted that the new money yields were above your book yields, is that because you are shifting into more high yield or that surprised me?

Dale Thatcher

That's really just what drove it this particular quarter as we moved a little bit in the high yield, but as you can see, we didn't move so much in to high yield that it changed the overall credit quality of the portfolio to AA-. It's been an area of investment allocation that for us has been zero for a very long time. And as we look at comparing our portfolio to our peers, you can see that there is clearly a belief in allocating some level of the portfolio to a high yield credit strategy and we believe in that also. Again, it was an area that we didn't invest in because we didn't feel like we had all the right horses in place to be able to do that effectively, but we think that we have the right kind of strategy to be able to appropriately manage that. So, it will not be a large allocation in the overall scheme of things, but just starting to ramp that up this quarter and you see purchases with those kind of yields, that's really what drove the purchase yield just for this quarter.

Mark Dwelle

Okay, that makes sense. I guess my last question is for John, the improvement in E&S underwriting margin, the two points that you’ve mentioned a couple of times, is that driven by a change in the business mix or is that actually better pricing, better underwriting, better class of business, whatever you might want to call it, and I'm just curious because the unit has had a number of hits and starts, and improvement is obviously good, but I'm wondering if it's more driven by risk or if it’s selection or whether it’s class?

John Marchioni

I would say it's actually been driven by both. There are a couple of targeted segments that are geographic and industry vertical in nature that we have in certain cases gotten off of, in other cases, stopped writing entirely or the third instance would be areas that we dramatically changed our pricing structure or to drive improvement. And if you were to look at our mix of business, relative to a couple of those segments, it has in fact shifted quite a bit. So that's point number one.

The second point is, while the growth has been there and new business has been strong and that new business pricing strength relative to target levels has been strong for the last couple of quarters at least and the better part of the last two years. So as that new business makes its way into the renewal portfolio, that will also have a positive impact on loss ratios. So I would say it’s those two drivers. The claims improvements to the extent they’re in, what we’re seeing right now would be probably slight, we would expect to see those really ramp up on a go forward basis.

Mark Dwelle

Okay, that's helpful.

Greg Murphy

Remember this, there is a good size amount of turnover in this business every year. So to improve your performance, you really got to look heavily at the new - John commented this earlier that of the new business that we're writing, it is really at or above our target surcharge levels and it’s well in excess of what we wrote a year ago and also in excess of our renewal inventory. So we've seen improvement in our renewal inventory quarter-to-quarter and, but it’s still - our renewal inventory is still below our new business level and it’s something that we are trying to quickly close the gap on?

John Marchioni

And Mark, the other point I would add is, we've seen improvement on the renewal pricing side, but understand, the dynamic there is a little different than it is in the admitted business, because you do have a wholesaler that’s getting that business to a retailer and they know that that retailer would rather place that business on renewal in the admitted market if they can. So it does make it a little bit harder to achieve rate increases there based on that dynamic on your renewal portfolio, but the strength of our new business pricing would really account for it.

Mark Dwelle

Okay, that's very helpful and good luck for you Dale. Please continue to stay in touch.

Dale Thatcher

Thanks, Mark.

Greg Murphy

Operator, any other questions?

Operator

[Operator instructions] There are no more questions as of this time. I will turn the call back to Mr. Greg Murphy.

Greg Murphy

Well, thank you for participating on the call this morning. If you have any other additional questions, please contact Dale. Thank you very much.

Operator

And that concludes today's conference. Thank you for your participation. You may now disconnect.

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