Selective Insurance Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. Selective is a property and casualty insurer with Standard Commercial, Standard Personal, Excess and Surplus (E&S), and Investments segments.
Financial results and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $846.1 million | $803.9 million; up 5% |
| Net premiums written | $889.8 million | $798.2 million; up 11% |
| Net premiums earned | $812.3 million | $725.0 million; up 12% |
| Net income | $56.3 million | $109.3 million; down 48% |
| Net income available to common stockholders; diluted EPS | $54.0 million; $0.89 | $106.8 million; $1.77 |
| Non-GAAP operating income; diluted per-share amount | $85.9 million; $1.41 | $102.8 million; $1.70 |
| Combined ratio | 93.1% | 89.3%; worsened 3.8 points |
| Net investment income, after tax | $58.5 million | $56.3 million; up 4% |
| Operating cash flow | $92.7 million | $130.3 million |
Investment results included $40.4 million of net realized and unrealized investment losses in earnings, versus $5.1 million of gains in Q1 2021. Separately, other comprehensive loss was $244.9 million after tax, largely reflecting fixed-income valuation declines. These market-related effects contributed to a decline in GAAP stockholders’ equity from $3.0 billion at year-end 2021 to $2.8 billion; book value per common share fell 8% from $46.24 to $42.73. Adjusted book value per common share, which excludes unrealized investment gains and losses, was $43.80, up from $43.23 at year-end.
At March 31, total assets were $10.3 billion and total investments were $7.8 billion. Long-term debt was $505.6 million; debt-to-capital was 15.4%. Statutory surplus was $2.4 billion. Parent cash and investments totaled $518 million, and the company reported $435.2 million of remaining FHLB borrowing capacity. Operating, investing, and financing activities used cash overall; cash and restricted cash ended the quarter at $17.9 million, including $17.5 million restricted for flood claims.
Material changes and segment performance
- Underwriting income declined to $55.8 million from $77.7 million. The combined ratio deterioration reflected higher non-catastrophe property losses and less favorable prior-year casualty reserve development, partly offset by lower catastrophe losses. Prior-year reserve development was favorable by $14.1 million, versus $33.8 million favorable in Q1 2021.
- Standard Commercial Lines premiums written grew 11%, but underwriting income fell to $42.4 million from $69.5 million; its combined ratio increased to 93.6% from 88.2%. Commercial automobile reported a 105.6% combined ratio, with management citing inflation- and supply-chain-driven repair costs and higher claim frequency.
- Standard Personal Lines premiums written were flat; underwriting income decreased to $6.5 million from $7.7 million and the combined ratio rose to 91.0% from 89.6%. Management cited automobile competition and elevated physical-damage claim costs.
- E&S premiums written grew 29%; underwriting income increased to $6.9 million from $0.5 million, and the combined ratio improved to 91.1% from 99.2%, helped by lower catastrophe losses.
- Net investment income increased 4%, while investment losses in earnings and higher credit-loss expense weighed on reported income. Management attributed portfolio unrealized losses to rising Treasury rates and wider credit spreads; it said it did not intend or expect to be required to sell the securities discussed as being in unrealized-loss positions.
Outlook, risks, and other notable items
- Management maintained full-year 2022 expectations of a 91.0% GAAP combined ratio excluding net catastrophe losses, assuming no additional prior-year casualty reserve development; catastrophe losses of 4.0 combined-ratio points; after-tax net investment income of $205 million, including $15 million from alternative investments; an effective tax rate of approximately 20.5%; and 61 million weighted-average diluted shares.
- Q1 annualized non-GAAP operating ROE was 12.8%, above the full-year target of 11%, but below 16.2% in Q1 2021. Management warned that persistent inflation could raise claim severity and pressure profitability, while rising rates and wider spreads reduced equity in the quarter. It also expected alternative-investment losses in Q2, while anticipating higher fixed-income reinvestment yields over the rest of 2022.
- Standard Commercial renewal pure price increases were 4.8% in Q1, reaching 5.1% in February and March; the company reported 5.2% in April. Management said it would pursue pricing and underwriting actions to keep pace with expected loss trends.
- The company cited the Russia-Ukraine war as contributing to global market volatility, inflation, and supply-chain disruption, but reported no direct insurance-operation exposure in Russia or Ukraine and no material investment or reinsurance exposure related to embargoes or Russian counterparties.
- Management said it had no pending legal proceeding believed likely to materially affect consolidated financial condition, results, or cash flows. It noted ongoing uncertainty in COVID-19 business-interruption and virus-exclusion litigation, and that unpredictable adverse outcomes in other claims or business-practice litigation could affect particular periods.
- After quarter-end, an insurance subsidiary borrowed $35 million from FHLBNY; the borrowing was refinanced at 1.10% and matures June 27, 2022. The board declared a $0.28 common dividend payable June 1, 2022.
Most important facts for investors to verify
- Whether pricing and underwriting improvements keep pace with inflation-driven loss severity, particularly in commercial and personal auto.
- Whether the full-year combined-ratio and investment-income guidance remains achievable, including catastrophe losses and alternative-investment performance.
- How interest rates, credit spreads, and equity markets affect investment values, OCI, GAAP equity, and book value.
- Reserve development trends, especially the sustainability of favorable casualty development and property-reserve adequacy.
- Liquidity and capital availability, including subsidiary dividend capacity, FHLB borrowing, debt obligations, and committed investment funding.
- Developments in coverage litigation, other claims litigation, and the economic effects of geopolitical and supply-chain disruption.