Select Insurance Group, Inc. — Q1 2021 Form 10-Q
Business context and period. Selective Insurance Group is a property-and-casualty insurer reporting four segments: Standard Commercial Lines, Standard Personal Lines, E&S Lines, and Investments. This unaudited report covers the quarter ended March 31, 2021, compared with Q1 2020. Dollar figures below are in millions unless stated otherwise.
Financial results and condition
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net premiums written | $798.2 | $647.3; up 23% |
| Net premiums earned | $725.0 | $651.7; up 11% |
| Total revenues | $803.9 | $664.8; up 21% |
| Net investment income | $69.7 | $56.0; up 25% |
| Net realized and unrealized investment gains (losses) | $5.1 | $(44.7) |
| Net income | $109.3 | $15.2 |
| Net income available to common stockholders | $106.8 | $15.2 |
| Diluted earnings per common share | $1.77 | $0.25 |
| Non-GAAP operating income / diluted share | $102.8 / $1.70 | $50.5 / $0.84 |
| Combined ratio | 89.3% | 96.7%; improved 7.4 points |
| Operating cash flow | $130.3 | $39.3 |
The combined ratio improvement reflected lower catastrophe losses, favorable prior-year casualty reserve development, and lower underwriting expenses. Q1 2021 included $35.0 million of favorable prior-year casualty development versus $10.0 million in Q1 2020. Catastrophe losses were $29.9 million, or 4.1 points of the loss ratio, versus $33.2 million, or 5.1 points.
Segment results were mixed. Standard Commercial Lines underwriting income rose to $69.5 million from $17.1 million, with an 88.2% combined ratio. Standard Personal Lines income was $7.7 million versus $0.4 million, and its combined ratio improved to 89.6%; written premiums declined 4%, reflecting competitive pressure in personal auto. E&S underwriting income fell to $0.5 million from $3.8 million, and its combined ratio worsened to 99.2%, mainly due to higher catastrophe and other property losses. Investment-segment income was $74.8 million versus $11.3 million, including the swing in investment gains and losses.
At March 31, total assets were $9.85 billion, investments were $7.56 billion, and stockholders’ equity was $2.74 billion. Long-term debt was $550.9 million; debt-to-capital was 16.7%. Statutory surplus was $2.2 billion. Book value per share was $42.38, unchanged from year-end: earnings were offset by lower unrealized investment gains and common dividends.
Operating cash flow was $130.3 million; investing activities used $110.9 million and financing activities used $25.6 million. Cash and restricted cash ended at $8.9 million. The filing also reports $490 million of Parent cash and investments at both March 31 and year-end, and a Parent liquidity target of at least twice estimated annual needs of approximately $180 million. These Parent figures are distinct from consolidated balances.
Material changes and notable items
- Net income and EPS rose sharply year over year, but the comparison was affected by Q1 2020’s $44.7 million investment loss during COVID-related market disruption. Non-GAAP operating income, which excludes after-tax investment gains and losses, also more than doubled.
- Net investment income growth was driven primarily by alternative investments, whose results are recorded on a one-quarter lag and reflected strong fourth-quarter 2020 markets.
- Direct premiums written increased 22%. Management said 11 percentage points of the increase reflected a $75 million Q1 2020 return-audit and mid-term endorsement premium accrual related to reduced exposures during the pandemic; growth also reflected pricing and commercial retention.
- Higher Treasury rates contributed to a $97.7 million decrease in pre-tax unrealized investment gains during the quarter. Other comprehensive loss was $85.6 million, reducing accumulated other comprehensive income to $134.6 million.
- The company repurchased 52,781 shares under its $100 million authorization for $3.4 million, leaving $96.6 million available. Q1 common dividends declared were $0.25 per share.
Outlook, risks and contingencies
Management reported a Q1 annualized non-GAAP operating ROE of 16.2%, above its 11% full-year 2021 target. It revised its 2021 guidance to: GAAP combined ratio excluding catastrophe losses of 90% (previously 91%), assuming no additional prior-year casualty development; catastrophe losses of 4.0 combined-ratio points; after-tax net investment income of $195 million (previously $182 million), including $31 million from alternative investments (previously $16 million); an approximately 20.5% effective tax rate; and 60.5 million weighted-average diluted shares.
Management cited disciplined growth, expansion into additional states subject to regulatory approval, improved retention and customer service, and pricing intended to meet or exceed expected loss trends. Q1 overall renewal pure price increases were 5.4%. Management cautioned that forward-looking statements are not guarantees and results may differ.
- Underwriting and catastrophe exposure: Results depend on claims severity, catastrophe frequency, pricing, and estimates of loss reserves. Q1 reserve development was favorable, but estimates may change.
- Coverage litigation: The company cannot predict litigation outcomes concerning COVID-19 business-interruption claims, physical-loss interpretations, and virus exclusions. It reported no material pending proceeding expected to materially affect financial condition, but adverse outcomes could materially affect results or cash flows in particular periods.
- Investment and credit risk: Interest-rate movements affected unrealized gains; alternative investment returns can be volatile. Remaining commitments to additional investments totaled $218.0 million for alternative investments, within $292.4 million of listed potential investment commitments overall. The filing says funding is not certain to be required.
- Liquidity and capital: Insurance-subsidiary dividends require regulatory approval and are subject to restrictions. The company reported $338 million of remaining Federal Home Loan Bank borrowing capacity, subject to collateral and other requirements, and $97.1 million of remaining intercompany loan capacity.
- The company said it met its credit-line covenants, reported no material change in previously disclosed risk factors, and concluded disclosure controls were effective.
Key facts for investors to verify
- How much of reported earnings and underwriting improvement is repeatable versus attributable to favorable reserve development, reduced expenses, and the prior-year comparison.
- Whether commercial premium growth and renewal pricing persist, and whether personal auto competitiveness and E&S loss trends improve.
- Performance and valuation sensitivity of alternative investments, including the effect of their one-quarter reporting lag, and progress toward the $195 million investment-income guidance.
- Reserve adequacy, catastrophe experience, and developments in COVID-19 coverage litigation.
- Parent-level liquidity, regulatory availability of subsidiary dividends, debt maturities, and the use of remaining share-repurchase authorization.