Selectivity Insurance Group, Inc. — Q2 2022 Form 10-Q
Business context and period: Selective Insurance Group is a U.S. property-and-casualty insurer with Standard Commercial Lines, Standard Personal Lines, Excess and Surplus (E&S) Lines, and Investments segments. This filing covers the quarter and six months ended June 30, 2022, compared with the same 2021 periods. Financial statement amounts below are in millions of dollars unless otherwise noted.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $864.8 | $840.5 | $1,710.9 | $1,644.4 |
| Net premiums earned | $834.4 | $740.5 | $1,646.7 | $1,465.5 |
| Net income | $39.5 | $121.9 | $95.9 | $231.2 |
| Net income available to common stockholders | $37.2 | $119.6 | $91.3 | $226.4 |
| Diluted EPS | $0.61 | $1.98 | $1.50 | $3.74 |
| Net premiums written | $930.7 | $833.2 | $1,820.5 | $1,631.4 |
| Combined ratio | 95.5% | 89.8% | 94.3% | 89.5% |
| Net investment income earned | $70.2 | $83.7 | $142.8 | $153.4 |
| Net realized and unrealized investment losses (gains) | $(42.9) | $10.1 | $(83.2) | $15.2 |
Operating performance: Net premiums written grew 12% in both the quarter and six-month period. The combined ratio increased 5.7 points in Q2 and 4.8 points year to date, reflecting higher catastrophe and non-catastrophe property losses and less favorable prior-year casualty reserve development. Underwriting income fell 50% in Q2 to $37.7 million and 39% year to date to $93.5 million. Six-month prior-year reserve development was favorable by $22.7 million, versus $51.8 million in 2021.
Segment highlights: Standard Commercial Lines remained profitable, but its combined ratio worsened to 93.1% in Q2 from 88.7%. Standard Personal Lines posted a $12.4 million Q2 underwriting loss and a 116.9% combined ratio, versus a 92.3% ratio a year earlier. E&S Lines improved to a 95.8% Q2 combined ratio from 96.6% and grew six-month written premiums 21%.
Cash flow, investments, debt and capital
- Cash flow: For the six months, operating cash flow was $243.5 million, down from $292.5 million; investing cash outflow was $234.5 million and financing cash outflow was $46.5 million. The filing does not provide a standalone quarterly cash-flow statement. Cash and restricted cash totaled $7.6 million at June 30; restricted cash is primarily NFIP claim funds.
- Investment portfolio: Total investments were $7.586 billion, down 5% from year-end 2021. Rising Treasury rates and wider credit spreads drove substantial unrealized fixed-income losses. Six-month other comprehensive loss was $451.5 million; accumulated other comprehensive loss was $336.4 million at June 30.
- Equity: GAAP stockholders’ equity was $2.594 billion, down from $2.983 billion at December 31, 2021. Book value per common share was $39.68, down 14% from year-end; adjusted book value per share, excluding after-tax unrealized investment gains and losses, was $44.18.
- Debt and liquidity: Long-term debt was $505.1 million; debt-to-capital was 16.3%. Statutory surplus was $2.4 billion. Parent cash and investments were $510 million. Insurance subsidiaries paid $80 million in dividends to the parent during the first half. The company reported $435.8 million of remaining FHLB borrowing capacity and compliance with its credit-line covenants.
Outlook, commentary and risks
Management reaffirmed a full-year 2022 target of an 11% non-GAAP operating return on equity; first-half annualized non-GAAP operating ROE was 12.1%. Updated full-year expectations were a 90.5% GAAP combined ratio excluding catastrophe losses (previously 91.0%), catastrophe losses of 4.0 combined-ratio points, after-tax net investment income of $215 million (previously $205 million), an approximately 20.5% effective tax rate, and 61 million fully diluted weighted-average shares. The combined-ratio estimate assumes no additional prior-year casualty reserve development.
Management cited inflation and supply-chain disruption as increasing claim severity, including labor, material and vehicle-repair costs; higher claim frequency as driving activity normalized; and Midwest wind and thunderstorm events as contributing to Q2 catastrophe losses. Personal Lines profitability is expected to face near-term pressure, and the company is filing rate increases. Standard Commercial renewal pure price increases were 5.3% in Q2, up from 4.8% in Q1.
Higher rates and credit spreads reduced investment valuations and stockholders’ equity. Management expects higher reinvestment yields and floating-rate income to benefit fixed-income investment income, but said this may be largely offset by weaker alternative-investment valuations reported on a one-quarter lag. The July 2022 excess-of-loss treaty renewals increased deposit premiums 23% for casualty and 28% for property; the property treaty added $10 million of coverage in its highest layer.
Other disclosed risks include unpredictable insurance claims and litigation, including COVID-19 property-coverage disputes; adverse outcomes in ordinary-course litigation could affect results or cash flows in particular periods. The company also noted indirect exposure to economic and market disruption from the Russia-Ukraine war. Management reported no material pending legal proceeding expected to adversely affect consolidated financial condition, results or cash flows.
Important facts for investors to verify
- Whether pricing and underwriting actions keep pace with inflation-driven loss trends, particularly in personal auto and property.
- How catastrophe losses and reserve development compare with the assumptions underlying full-year combined-ratio guidance.
- Whether the $215 million after-tax investment-income expectation is achieved, including the impact of alternative-investment valuations.
- Whether unrealized investment losses, credit-loss allowances, or further market changes materially affect equity, book value or capital.
- How higher reinsurance costs and regulatory limits on subsidiary dividends affect parent-company liquidity and capital flexibility.