Selective Insurance Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. Amounts are U.S. dollars. The filing presents unaudited consolidated interim results.
Financial results and position
| Metric | Q1 2023 | Comparable period / change |
|---|---|---|
| Total revenue | $999.8 million | $846.1 million; up 18% |
| Net premiums written | $999.8 million | $889.8 million; up 12% |
| Net premiums earned | $902.3 million | $812.3 million; up 11% |
| Net investment income | $91.5 million pre-tax; $73.1 million after tax | Pre-tax up 26%; after-tax up 25% |
| Net income / diluted EPS | $92.6 million / $1.48 | $56.3 million / $0.89 |
| Combined ratio | 95.7% | 93.1%; up 2.6 points |
| Operating cash flow | $135.8 million | $92.7 million |
| Total assets / stockholders’ equity | $11.02 billion / $2.67 billion | At March 31, 2023 |
| Long-term debt | $504.2 million | Debt-to-capital ratio 15.9% |
Net cash used in investing activities was $98.2 million and net cash used in financing activities was $27.1 million. Cash and restricted cash totaled $35.7 million at quarter-end; restricted cash is principally NFIP funds for flood claims. Book value per common share was $40.82, up from $38.57 at December 31, 2022; adjusted book value per share was $46.61.
Material changes and segment performance
- Underwriting: Underwriting income fell 30% to $39.2 million. The combined ratio worsened primarily from higher catastrophe losses and less favorable prior-year casualty reserve development, partly offset by lower non-catastrophe property losses.
- Standard Commercial Lines: Premiums written grew 10%; underwriting income declined 8% to $38.9 million and the combined ratio rose to 94.7% from 93.6%.
- Standard Personal Lines: Premiums written grew 31%, but underwriting shifted to a $13.1 million loss from $6.5 million of income. The combined ratio increased to 116.0% from 91.0%, reflecting catastrophe and auto physical-damage losses, inflationary repair costs, and unfavorable prior-year development.
- E&S Lines: Premiums written grew 16%; underwriting income increased to $13.3 million from $6.9 million, and the combined ratio improved to 85.0% from 91.1%.
- Investments: After-tax investment income rose to $73.1 million, led by higher fixed-income yields in the higher-rate environment. Net realized and unrealized investment results improved to a $3.3 million gain from a $40.4 million loss, primarily due to lower AFS credit-loss expense. Net-of-tax OCI was positive $67.7 million versus negative $244.9 million; accumulated other comprehensive loss narrowed to $430.3 million.
Outlook, liquidity, and risks
- 2023 guidance unchanged: GAAP combined ratio of 96.5%, including catastrophe losses of 4.5 points and assuming no additional prior-year casualty reserve development; after-tax investment income of $300 million, including $30 million from alternatives; effective tax rate of approximately 21%; and fully diluted weighted-average shares of 61 million, assuming no additional authorized repurchases.
- Management reported Q1 non-GAAP operating ROE of 14.6%, above its full-year 2023 target of 12%. It cited disciplined pricing and growth initiatives, while noting ongoing inflation, higher interest rates, and financial-market volatility.
- Management expects elevated personal-auto physical-damage severity and rate increases below loss trends to pressure personal-lines profitability near term. It is filing state-by-state rate increases, expected to continue through 2023. Overall renewal pure price increases were 6.6% in Q1 versus 4.6% a year earlier.
- Parent cash and investments were $497 million. Its target is to maintain highly liquid investments of at least $180 million. Insurance subsidiaries paid $40 million in dividends to the Parent in Q1; ordinary dividend capacity for 2023 was $283 million, subject to regulatory review. The Parent had an unused $50 million revolving credit facility and $469.1 million of remaining FHLB borrowing capacity. A subsidiary borrowed $20 million from FHLBNY on April 6, 2023, at 5.00%, due May 8, 2023.
- Investment portfolio risks include interest-rate and valuation sensitivity: AFS fixed-income securities had $463.4 million of gross unrealized losses at quarter-end. Management stated it did not intend, and did not expect to be required, to sell the securities represented in its unrealized-loss analysis. Alternative-investment commitments were $239.6 million.
- The filing reports no material pending legal proceeding expected to materially affect consolidated financial condition, results, or cash flows. Ordinary-course insurance litigation, including COVID-19 property-coverage disputes, remains inherently unpredictable. Management said disclosure controls were effective and there were no material Q1 changes to internal control over financial reporting.
Important facts for investors to verify
- Whether personal-lines rate actions can catch up with auto repair-cost and claim-severity trends, and when segment underwriting may improve.
- How catastrophe losses and reserve development compare with the assumptions embedded in the 96.5% full-year combined-ratio outlook.
- Whether investment income growth is sustained, and how interest rates, unrealized securities losses, and alternative-investment returns affect earnings and book value.
- The availability and regulatory limits of subsidiary dividends and borrowing capacity relative to debt service, shareholder dividends, and the Parent’s liquidity target.
- Whether the $300 million after-tax investment-income outlook and other 2023 guidance remain achievable; guidance is forward-looking and subject to the risks described in the filing.