Selective Insurance Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. Selective is a property-and-casualty insurer with Standard Commercial Lines, Standard Personal Lines, Excess and Surplus (E&S) Lines, and Investments segments. Comparisons below are with the corresponding 2022 periods unless stated otherwise.
Financial performance and condition
- Third quarter: Revenue was $1.081 billion, up 21%; net income was $89.2 million, up 110%; diluted EPS was $1.42, versus $0.66. Net income available to common stockholders was $86.9 million.
- Nine months: Revenue was $3.121 billion, up 20%; net income was $240.4 million, up 74%; diluted EPS was $3.83, versus $2.16. Net income available to common stockholders was $233.5 million.
- Premiums and underwriting: Nine-month net premiums written increased 15% to $3.143 billion and net premiums earned increased 13% to $2.826 billion. The combined ratio was 96.8% in the quarter, unchanged year over year, and 97.5% for nine months, 2.3 points higher. A ratio below 100% indicates underwriting profit.
- Investment income: Net investment income rose 58% in the quarter to $100.9 million and 40% for nine months to $290.1 million. After-tax investment income was $80.2 million and $231.1 million, respectively, reflecting higher portfolio yields. Net realized and unrealized investment losses were $6.9 million for the quarter and $9.0 million for nine months, both substantially lower than the prior-year periods.
- Cash flow and liquidity: Nine-month operating cash flow was $522.3 million, compared with $485.4 million; investing cash outflow was $470.0 million and financing cash outflow was $64.1 million. Cash and restricted cash totaled $13.3 million at September 30. Parent cash and investments were $486 million; management’s target is at least $180 million in highly liquid investments.
- Capital and debt: Total assets were $11.43 billion, total liabilities $8.78 billion, and stockholders’ equity $2.64 billion. Long-term debt was $504.6 million and the reported debt-to-capital ratio was 16%. Book value per common share was $40.35, up from $38.57 at year-end 2022; adjusted book value per share was $48.54.
Material changes and segment results
- Standard Commercial Lines produced nine-month underwriting income of $102.4 million, down 8%; its combined ratio increased to 95.5% from 94.5%. Commercial automobile remained loss-making, though its combined ratio improved to 104.2% from 107.6%.
- Standard Personal Lines was the main underwriting pressure point: nine-month underwriting loss widened to $62.2 million from $7.2 million, and the combined ratio rose to 123.6% from 103.3%. Higher catastrophe and non-catastrophe property losses, automobile claim frequency and severity, and unfavorable reserve development contributed.
- E&S Lines improved: nine-month underwriting income rose to $29.1 million from $16.3 million and the combined ratio declined to 89.7% from 93.3%.
- Investment gains and losses were less adverse than in 2022, while investment income rose. In contrast, nine-month catastrophe losses increased to $219.9 million, or 7.8 combined-ratio points, from $100.2 million, or 4.0 points. Favorable prior-year reserve development was $5.8 million, versus $44.0 million in 2022.
- Unrealized losses on available-for-sale fixed-income securities were $635.5 million at September 30, 2023, versus $537.2 million at year-end 2022. The company attributed the increase mainly to higher U.S. Treasury rates, partially offset by tighter credit spreads; it said it did not intend, and did not expect to be required, to sell the securities.
Outlook, commentary, and risks
- For full-year 2023, management expected a 96.5% GAAP combined ratio, including 6.5 points of catastrophe losses and assuming no additional prior-year casualty reserve development. It forecast $310 million of after-tax net investment income, including $20 million from alternative investments, an effective tax rate of approximately 21%, and 61.0 million fully diluted weighted-average shares, assuming no further repurchases.
- Management reported nine-month net premiums written growth of 15% and non-GAAP operating ROE of 13.2%, above its 12% full-year target. It cited pricing, new business, retention, and higher investment yields, while noting catastrophe losses and lower favorable reserve development weighed on underwriting results.
- Management expected Standard Personal Lines written renewal rate increases of about 9% in fourth-quarter 2023 and approximately 20%–25% in 2024, subject to regulatory approval. It described profitability as likely to remain pressured near term while rate changes catch up with loss costs, and cited planned policy-term changes for older roofs and wind/hail deductibles.
- At July 2023 reinsurance renewal, the property treaty’s first-layer retention increased from $3 million to $5 million; the casualty treaty retained substantially the same structure, with a higher deposit premium. Higher catastrophe activity remains a material earnings risk; the company said 2023 events had not attached to its catastrophe reinsurance treaty.
- Other risks include economic and social inflation, claim severity and frequency, investment-market and interest-rate volatility, reserve-estimation uncertainty, reinsurer collectability, and litigation. Management said it had no pending legal proceeding it believed would materially adversely affect consolidated financial condition, results, or cash flows, but noted that adverse litigation outcomes could affect particular periods.
- On November 1, 2023, the Board declared a 17% increase in the quarterly common dividend to $0.35 per share. Insurance-subsidiary dividends are subject to regulatory review and are an important potential source of parent-company liquidity.
Most important facts for investors to verify
- Whether Standard Personal Lines rate increases and underwriting actions reduce its elevated combined ratio and loss-making results.
- Whether catastrophe losses, casualty trends, and reserve development diverge from the full-year guidance assumptions.
- Whether investment income meets the $310 million after-tax outlook, including the assumed alternative-investment contribution, and how rates affect portfolio values and book value.
- Whether reinsurance protection, subsidiary capital, and parent-company liquidity remain adequate as claims, dividends, and investment commitments develop.
- How the 2023 full-year results compare with management’s combined-ratio and operating-return targets; the filing does not provide a separate full-year earnings or EPS forecast.