Selective Insurance Group, Inc. — 2021 Form 10-K
Business context and reporting period. This is the company’s annual report for the fiscal year ended December 31, 2021, not a standalone fourth-quarter report. Selective is a U.S. property and casualty insurer operating through ten insurance subsidiaries and independent agents and brokers. Its reportable segments are Standard Commercial Lines, Standard Personal Lines, E&S Lines, and Investments.
Financial performance and position
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $3.379 billion | $2.922 billion | +16% |
| Net premiums written | $3.190 billion | $2.773 billion | +15% |
| Net premiums earned | $3.017 billion | $2.682 billion | +13% |
| Net income | $403.8 million | $246.4 million | +64% |
| Net income available to common shareholders | $394.5 million | $246.4 million | +60% |
| Diluted EPS | $6.50 | $4.09 | +59% |
| Combined ratio | 92.8% | 94.9% | Improved 2.1 points |
| Net operating income (non-GAAP) | $380.6 million | $249.7 million | +52% |
| Non-GAAP operating ROE | 14.3% | 10.5% | Improved 3.8 points |
| Operating cash flow | $771.4 million | $554.0 million | +39% |
Insurance underwriting income rose 60% to $218.6 million. Net investment income before tax increased 44% to $326.6 million; after-tax net investment income was $263.0 million, up 42%. The investment result benefited substantially from alternative investments, which contributed $93.0 million after tax in 2021 versus $20.9 million in 2020. Net realized and unrealized investment gains were $17.6 million, compared with a $4.2 million loss in 2020.
At December 31, 2021, total assets were $10.46 billion, stockholders’ equity was $2.98 billion, and statutory surplus was $2.39 billion. Total invested assets were $8.03 billion. Long-term debt was $506.1 million; the company reported a 14.5% debt-to-capital ratio. Parent cash and investments totaled $527 million. No borrowings were made under the Parent’s $50 million revolving credit facility during 2021.
Net cash used in investing activities was $618.8 million and net cash used in financing activities was $122.8 million. The company paid $60.1 million in common dividends and $9.4 million in preferred dividends. The Board raised the quarterly common dividend 12% to $0.28 per share in October 2021.
Material changes versus 2020
- Revenue, written premiums, net income, and diluted EPS increased, with growth in commercial and E&S business and stronger investment income.
- The combined ratio improved to 92.8%, reflecting lower catastrophe losses than in 2020, favorable prior-year reserve development, and a lower underwriting expense ratio. Catastrophe losses remained elevated relative to longer-term averages.
- Net favorable prior-year reserve development increased to $82.9 million from $72.9 million. Favorable development in workers compensation and general liability was partly offset by unfavorable commercial auto development.
- Common book value per share increased 9% to $46.24. Lower unrealized gains on fixed-income securities partly offset earnings and retained capital; unrealized gains on investments before tax fell to $255.7 million from $395.2 million.
- Standard Personal Lines returned to underwriting profitability, with a 98.6% combined ratio versus 105.2% in 2020. E&S Lines improved to 94.3% from 99.9%; Standard Commercial Lines improved to 91.9% from 92.9%.
- Commercial automobile remained a pressure point: its 2021 combined ratio was 103.2%, versus 100.5% in 2020, amid rising claim severity and unfavorable prior-year development.
- AM Best upgraded the company’s financial strength rating to A+ from A in November 2021 and changed the outlook from Positive to Stable.
Outlook, commentary, and risks
Management set a 2022 non-GAAP operating ROE target of 11%. Full-year guidance includes a 91.0% GAAP combined ratio excluding catastrophe losses, assuming no prior-year casualty reserve development; catastrophe losses of 4.0 combined-ratio points; after-tax net investment income of $200 million, including $20 million from alternative investments; an effective tax rate of approximately 20.5%; and 61 million weighted-average diluted shares.
Management cited disciplined profitable growth, renewal pricing aligned with expected loss trends, expansion of Standard Commercial Lines into Vermont, Alabama, and Idaho subject to regulatory approvals, and a continued focus on customer retention and digital service. The company’s 2022 property catastrophe reinsurance program was increased to $835 million of coverage above a $40 million retention. Management expected modestly higher ceded catastrophe reinsurance premiums.
- Catastrophes and reinsurance: Severe weather, including Hurricane Ida, caused significant 2021 losses. Catastrophe modeling may understate actual exposure, and reinsurance protection has limits and exclusions; the renewed property treaty excludes communicable disease and limits first-party cyber coverage.
- Reserving and inflation: Loss reserves are estimates subject to uncertainty, especially in long-tail casualty lines. Recorded gross reserves were $4.58 billion; the company’s estimated reasonable net reserve range was $3.56 billion to $4.24 billion. Inflation, social inflation, legal changes, and claims trends could lead to adverse development.
- Unusual and judgment-sensitive items: Favorable reserve development and strong alternative-investment returns supported 2021 results. Alternative-investment valuations are less observable and reported on a one-quarter lag. Rising interest rates reduced fixed-income fair values and could further pressure book value.
- Other risks: The filing highlights COVID-19 uncertainty, commercial auto severity, abuse and molestation claims and statute-of-limitations changes, cyber risk, investment and credit risk, and reliance on independent distribution partners.
- Liquidity and capital constraints: Insurance subsidiary dividends are regulated; the subsidiaries’ maximum ordinary dividends to the Parent in 2022 were $322 million. Parent liquidity and distributions are also affected by debt covenants and preferred-stock dividend terms.
Important facts for investors to verify
- Whether 2022 premium growth and renewal pricing keep pace with loss-cost inflation, particularly in commercial automobile and casualty lines.
- How catastrophe losses compare with the 4.0-point 2022 guidance assumption and whether renewed reinsurance provides adequate protection at an acceptable cost.
- Whether favorable reserve development continues, and how inflation, litigation, and abuse-related claims affect reserve adequacy.
- Whether alternative-investment returns normalize from 2021 levels and how changes in interest rates affect investment income, portfolio values, and book value.
- Progress against the 11% non-GAAP operating ROE target and the stated $200 million after-tax investment-income guidance.
- Parent liquidity, regulated subsidiary dividend capacity, debt maturity and covenant terms, and the company’s dividend and repurchase decisions.
The independent auditor issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting. The reserve estimate was identified as a critical audit matter.