Selective Insurance Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the same 2021 periods. Selective writes standard commercial, standard personal, and excess and surplus insurance, alongside its investment segment. Dollar amounts below are in millions unless noted.
Financial results and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $895.0 | $865.0 | $2,605.9 | $2,509.5 |
| Net premiums earned | $853.9 | $767.2 | $2,500.6 | $2,232.7 |
| Net income | $42.5 | $73.7 | $138.4 | $304.9 |
| Net income available to common shareholders | $40.2 | $71.4 | $131.5 | $297.8 |
| Diluted EPS | $0.66 | $1.18 | $2.16 | $4.92 |
| Combined ratio | 96.8% | 98.6% | 95.2% | 92.6% |
| Non-GAAP operating income | $60.5 | $71.3 | $217.5 | $285.7 |
| Non-GAAP operating income per diluted share | $0.99 | $1.18 | $3.57 | $4.72 |
Q3 revenue rose 3% and nine-month revenue rose 4%; common net income fell 44% and 56%, respectively. Investment results were a major drag: net realized and unrealized investment losses were $25.7 million in Q3 and $108.9 million for nine months, versus a small gain and a $15.4 million gain in the comparable 2021 periods. Lower alternative-investment returns also reduced net investment income, despite stronger fixed-income income.
Insurance premiums written increased 11% in both Q3 and the first nine months. The all-lines combined ratio improved to 96.8% in Q3, chiefly reflecting lower catastrophe losses than in Q3 2021, but worsened to 95.2% for the nine-month period. The filing reports Q3 catastrophe losses of $34.1 million, including $10.0 million from Hurricane Ian; nine-month catastrophe losses were $100.2 million. Favorable prior-year casualty reserve development was $16.0 million in Q3 and $48.0 million for nine months, compared with $14.0 million and $66.0 million in 2021.
- Segment results: Q3 underwriting income was $22.5 million in Standard Commercial Lines, a $1.4 million loss in Standard Personal Lines, and $6.0 million in E&S Lines. Nine-month underwriting income was $111.6 million, a $7.2 million loss, and $16.3 million, respectively.
- Drivers and pressure points: Commercial auto remained challenged, with combined ratios of 114.8% for Q3 and 107.6% for nine months, amid inflation-driven property claim severity and unfavorable prior-year auto development. Personal Lines’ nine-month combined ratio was 103.3%; management cited higher auto losses and renewal price increases below loss trend. E&S’s nine-month combined ratio improved to 93.3%.
- Investment portfolio: Pretax net investment income was $63.9 million in Q3 and $206.7 million for nine months, down 31% and 16%. Fixed-income income increased, while alternative-investment results weakened. AFS fixed-income unrealized losses were $586.5 million at September 30, versus $17.4 million at year-end 2021; management attributed the change mainly to higher Treasury rates and wider credit spreads and said it did not intend or expect to be required to sell the securities.
- Cash flow: Nine-month operating cash flow was $485.4 million versus $543.3 million; investing cash outflow was $450.9 million versus $417.8 million; financing cash outflow was $70.6 million versus $106.0 million. Cash and restricted cash ended at $9.0 million, including $8.5 million restricted for NFIP flood claims.
- Balance sheet and capital: Total assets were $10.52 billion and liabilities $8.09 billion at September 30. Long-term debt was $505.2 million; debt-to-capital ratio was 17.2%. GAAP stockholders’ equity was $2.43 billion, down from $2.98 billion at year-end, largely reflecting investment-related accumulated other comprehensive losses. Book value per common share was $36.96, while adjusted book value per share, excluding after-tax unrealized investment gains and losses, was $44.59. Statutory surplus was $2.4 billion.
Material changes, outlook and risks
Management said nine-month non-GAAP operating ROE was 11.6%, above the full-year target of 11%, but below 14.5% in the prior-year period. It cited lower underwriting and alternative-investment income, inflation-related property loss severity, and weaker investment markets. Despite falling GAAP equity and book value, management described the company’s capital position as strong.
Updated full-year 2022 expectations were: GAAP combined ratio excluding catastrophe losses of 91.5% (previously 90.5%), assuming no additional prior-year casualty reserve development; catastrophe losses of 3.5 combined-ratio points (previously 4.0); after-tax net investment income of $215 million, including $7 million from alternatives (previously $15 million); effective tax rate of approximately 20.5%; and 61 million diluted weighted-average shares, assuming no further repurchases. Management noted higher fixed-income reinvestment yields but expected alternative-investment weakness to offset much of the near-term benefit.
Management expects inflation to persist into 2023 and pressure property losses and potentially expenses. It also anticipates higher reinsurance prices and less favorable terms amid reduced industry capacity, which could weigh on underwriting profitability. The July 2022 excess-of-loss treaty renewals had higher deposit premiums: casualty up $16.2 million, or 23%, and property up $11.3 million, or 28%. In Q3, Standard Commercial Lines renewal pure price increases were 5.8%, with exposure growth of 3.8%.
- Liquidity and shareholder returns: Parent cash and investments were $506 million; the company’s stated minimum target for highly liquid investments is $180 million. Insurance subsidiaries paid $120 million in dividends to the parent during the first nine months. The parent’s $50 million revolving credit facility matured December 20, 2022; no borrowings were outstanding under it during the period. The Board declared a 7% increase in the quarterly common dividend to $0.30 per share on November 2, 2022.
- Other risks and contingencies: Reinsurance availability, pricing, and counterparty performance are risks; management highlighted uncertainty around the January 2023 property catastrophe treaty renewal. The filing reports no pending legal proceeding believed likely to materially affect consolidated financial condition, results, or cash flows, while noting that litigation outcomes—including COVID-19 coverage disputes—are uncertain and could affect particular periods.
- Unusual items: The substantial decline in fixed-income fair values affected equity through other comprehensive loss; investment losses recognized in earnings also reduced reported profit. Hurricane Ian contributed to Q3 claims and increased NFIP-related recoverables. The company recorded a $164.6 million deferred tax asset at quarter-end, primarily due to investment unrealized losses.
Most important facts for investors to verify
- Whether renewal pricing and underwriting actions keep pace with loss-cost inflation, particularly in commercial auto, property, and personal auto.
- Actual catastrophe losses, reserve development, and the effect of casualty treaty reinstatement premiums on future combined ratios.
- Whether alternative-investment returns recover and higher fixed-income yields translate into sustained net investment income.
- How investment valuations, credit-loss allowances, and unrealized losses affect GAAP equity, book value, and reported earnings.
- Terms and cost of the January 2023 catastrophe reinsurance renewal, and the company’s capacity to maintain adequate coverage.
- Liquidity, subsidiary dividend approvals, debt-facility arrangements, and the company’s ability to meet its stated financial targets.