Selective Insurance Group, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are primarily with 2019. Selective is a U.S. property and casualty insurer operating through ten insurance subsidiaries and distributing products exclusively through independent agents.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $2.922 billion | $2.846 billion |
| Net premiums written | $2.773 billion | $2.679 billion |
| Net premiums earned | $2.682 billion | $2.597 billion |
| Net income available to common shareholders | $246.4 million | $271.6 million |
| Diluted EPS | $4.09 | $4.53 |
| Underwriting income / combined ratio | $136.3 million / 94.9% | $164.0 million / 93.7% |
| After-tax net investment income | $184.6 million | $181.2 million |
| Operating cash flow | $554.0 million | $477.5 million |
| Total assets / stockholders’ equity | $9.688 billion / $2.739 billion | $8.797 billion / $2.195 billion |
| Debt-to-capitalization ratio | 16.7% | 20.1% |
Net income declined 9% and diluted EPS fell 10%, despite 3% revenue growth. The reported combined ratio remained below 100%, indicating an underwriting profit. Catastrophe losses were $215.4 million, or 8.0 combined-ratio points, versus $81.0 million and 3.1 points in 2019. Favorable prior-year reserve development was $72.9 million, compared with $50.3 million.
Operating cash flow was $554.0 million; investing cash flow was an outflow of $688.2 million and financing cash flow was an inflow of $141.4 million. Cash and restricted cash totaled $15.2 million at year-end. Invested assets were $7.506 billion, and the after-tax investment yield declined to 2.6% from 2.9%. Book value per common share rose 15% to $42.38, supported in part by fixed-income unrealized gains.
Material changes and segment results
- Standard Commercial Lines NPW grew 4% to $2.231 billion; its combined ratio was 92.9%, unchanged from 2019.
- Standard Personal Lines reported a $15.5 million underwriting loss and a 105.2% combined ratio, compared with $8.3 million of underwriting income and a 97.3% ratio in 2019. Higher losses, including catastrophe losses, were significant factors.
- E&S Lines NPW rose 4% to $247.3 million, but underwriting income fell to $0.1 million from $9.7 million; its combined ratio increased to 99.9% from 95.9%.
- Renewal pure price increases across insurance operations were 4.3%. COVID-19-related exposure adjustments and auto premium credits reduced NPW growth by approximately four percentage points.
- The company issued $200 million of 4.60% non-cumulative perpetual preferred stock in December, receiving approximately $195 million net, and authorized a $100 million common-stock repurchase program. No program repurchases occurred in 2020.
Outlook, risks and unusual items
Management set a 2021 non-GAAP operating ROE target of 11%. Its 2021 guidance calls for a 91.0% GAAP combined ratio excluding catastrophe losses, assuming no prior-year casualty reserve development; catastrophe losses of 4.0 points; after-tax net investment income of $182 million, including $16 million from alternative investments; an effective tax rate of approximately 20.5%; and diluted weighted-average shares of 60.5 million. These are forecasts, not results.
- COVID-19 reduced payroll and sales exposures and prompted a $75 million return-premium accrual; $24.8 million remained accrued at year-end. Auto premium credits totaled $19.7 million. The company also increased its premium-receivable credit-loss allowance to $21.0 million.
- Management identified uncertainty from pandemic-related economic conditions, potential coverage disputes and legislation, claims inflation and delayed reporting, and possible future premium credits. About 95% of standard commercial property and businessowners’ policies include a virus exclusion, but related litigation remains unresolved.
- Reinsurance pricing rose at January 2021 renewals, and coverage for communicable-disease losses was excluded from the renewed property catastrophe program. Management said these higher reinsurance costs are expected to pressure 2021 underwriting profitability.
- Net loss reserves were $3.706 billion; management’s reasonable estimate range was $3.250 billion to $3.893 billion. The range excludes certain asbestos, environmental, and continuous-exposure claim uncertainties. Reserve adequacy is a critical estimate and the auditor identified it as a critical audit matter.
- Other exposures include catastrophe risk, social and economic inflation, abuse-related “reviver” claims, reinsurance counterparty risk, investment-market and interest-rate changes, and cybersecurity. The company reported no material pending legal proceeding expected to materially affect its consolidated financial condition, results, or cash flows.
- Year-end long-term debt was $550.7 million; pandemic-related short-term borrowings of $302 million were repaid by year-end. Parent cash and investments were $490 million, and subsidiaries’ maximum ordinary dividend capacity for 2021 was $241 million, subject to regulatory constraints.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of year-end.
Important facts for investors to verify
- Whether 2021 pricing and underwriting actions offset higher reinsurance costs, catastrophe losses, and loss-cost inflation.
- Development of casualty reserves, especially general liability, workers compensation, and commercial automobile, and whether favorable prior-year development continues.
- Performance and retention in Standard Personal Lines, which recorded an underwriting loss and a combined ratio above 100% in 2020.
- Actual pandemic-related premium returns, receivable write-offs, and claims outcomes compared with year-end estimates.
- Progress against 2021 guidance, including catastrophe losses, investment income, and the 11% non-GAAP operating ROE target.
- Use of the preferred-stock proceeds and the authorized repurchase program, alongside dividend capacity, debt maturities, and regulatory limits on subsidiary distributions.