Selective Insurance Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods. Selective operates Standard Commercial Lines, Standard Personal Lines, E&S Lines, and Investments. Amounts below are in millions except per-share data and ratios.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $840.5 | $682.4 | $1,644.4 | $1,347.3 |
| Net premiums earned | $740.5 | $630.7 | $1,465.5 | $1,282.4 |
| Net investment income | $83.7 | $34.4 | $153.4 | $90.4 |
| Net income | $121.9 | $34.2 | $231.2 | $49.4 |
| Net income available to common | $119.6 | $34.2 | $226.4 | $49.4 |
| Diluted EPS | $1.98 | $0.57 | $3.74 | $0.82 |
| Combined ratio | 89.8% | 98.4% | 89.5% | 97.6% |
| Operating income, non-GAAP | $111.6 | $24.2 | $214.4 | $74.7 |
| Diluted non-GAAP operating EPS | $1.85 | $0.40 | $3.54 | $1.24 |
Net premiums written rose 15% in Q2 and 19% year to date. Q2 underwriting income was $75.9 million, versus $9.9 million a year earlier; six-month underwriting income was $153.6 million versus $31.2 million. Six-month operating cash flow was $292.5 million, compared with $197.4 million in 2020; investing activities used $258.7 million and financing activities used $39.7 million.
Material changes and drivers
- Earnings and combined ratio improved substantially, chiefly reflecting much lower catastrophe losses than in 2020, stronger alternative-investment returns, and favorable prior-year casualty reserve development. Catastrophe losses were $22.6 million in Q2 and $52.6 million for six months, compared with $83.2 million and $116.4 million, respectively, in 2020.
- Six-month favorable prior-year reserve development was $51.8 million, including $52.0 million favorable casualty development. Net premiums earned increased 14% year to date; net premiums written growth also benefited from new business, pricing, retention, and comparisons against 2020 COVID-19 premium credits and return-premium accruals.
- After-tax investment income increased to $67.4 million in Q2 and $123.8 million year to date, driven largely by alternative investments whose reported results are recorded on a one-quarter lag. Six-month net realized and unrealized investment gains were $15.2 million, versus a $32.0 million loss in 2020.
- By segment, six-month combined ratios were 88.4% for Standard Commercial, 90.9% for Standard Personal, and 97.8% for E&S. Personal Lines premiums written were down 1% year to date amid a challenging personal-auto competitive environment. E&S six-month combined ratio weakened 0.6 points year over year, with higher catastrophe and non-catastrophe property losses partly offset by favorable reserve development and lower expenses.
- Six-month other comprehensive loss was $50.8 million, largely reflecting unrealized investment losses as benchmark interest rates rose; accumulated other comprehensive income declined to $169.4 million from $220.2 million at year-end 2020.
Financial position, liquidity, and capital
- At June 30, total assets were $10.17 billion, investments $7.76 billion, total liabilities $7.28 billion, and stockholders’ equity $2.89 billion. Book value per common share was $44.78, up from $42.38 at December 31, 2020.
- Long-term debt was $550.9 million; management reported a 16% debt-to-capital ratio. Statutory surplus was $2.3 billion. The $50 million revolving credit facility was undrawn and all covenants were met. Cash and restricted cash totaled $9.3 million; Parent cash and investments together were $505 million.
- Insurance subsidiaries paid $70 million in dividends to the Parent in the first half. Parent liquidity target is at least twice estimated annual needs, currently $180 million. Federal Home Loan Bank borrowing capacity was $339 million at June 30, before a subsequent repayment increased capacity to $364 million.
- The company declared common dividends of $0.25 per share in each of the first two quarters. It repurchased $3.4 million of shares under its authorization in Q1 and had $96.6 million of authorization remaining at June 30.
Guidance, outlook, risks, and unusual items
- Management revised 2021 guidance to an 89% GAAP combined ratio excluding catastrophe losses, assuming no additional prior-year casualty reserve development; catastrophe losses of 4.0 combined-ratio points; after-tax net investment income of $220 million, including $55 million from alternative investments; an effective tax rate of approximately 20.5%; and 60.5 million diluted weighted-average shares.
- Six-month annualized non-GAAP operating ROE was 16.4%, above the company’s full-year 2021 target of 11%. Management highlighted disciplined growth, renewal pricing above expected loss trend, agency expansion, customer retention, and planned geographic expansion subject to regulatory approval. Overall renewal pure price increases were 5.1% in Q2 and 5.2% year to date.
- Economic inflation emerged as a heightened risk. Management warned it could raise claims severity and reserve development; higher interest rates could also increase unrealized fixed-income losses and reduce returns on other investments. Other key exposures include catastrophe losses, reserve-estimation uncertainty, investment market and credit risk, and reinsurance recoverability.
- COVID-19-related coverage litigation remains uncertain, including disputes over physical loss or damage and virus exclusions. The company said it had no pending legal matter believed likely to materially affect consolidated financial condition, results, or cash flows, while acknowledging adverse outcomes could affect results or cash flows in particular periods.
- The first-half result includes comparison effects from 2020 COVID-related auto premium credits, return-audit and endorsement premium estimates, and a higher prior-year premium-receivable credit allowance. The $75 million 2020 return-premium accrual was fully exhausted by June 30, 2021; management reported no material accrual for additional or return premium at quarter-end.
- On July 21, 2021, the company repaid a $25 million FHLBNY borrowing. The filing reports subsequent common and preferred dividends declared July 28, payable in September.
Important facts for investors to verify
- How much of earnings and the favorable combined ratio persists after unusually low catastrophe losses and favorable reserve development; guidance assumes no further prior-year casualty development.
- Whether alternative-investment returns support the increased $220 million full-year investment-income guidance, given one-quarter reporting lag and market sensitivity.
- Personal-auto competitiveness, renewal retention, pricing adequacy, and the effect of inflation on claims severity and reserves.
- Investment portfolio credit quality and interest-rate sensitivity: weighted-average rating declined to A+ from AA- while 96% remained investment grade; fixed-income duration was 3.9 years.
- Liquidity and capital flexibility, including regulatory constraints on subsidiary dividends, debt maturities, reinsurance protection, and remaining share-repurchase authorization.
- Developments in COVID-19 insurance-coverage litigation and catastrophe claims that could affect specific future periods.