Selective Insurance Group, Inc. — FY 2022 Form 10-K
Business and period. This annual report covers the year ended December 31, 2022. Selective is a U.S. property and casualty insurer operating through ten insurance subsidiaries and selling exclusively through independent agents and brokers. Its reportable segments are Standard Commercial Lines, Standard Personal Lines, E&S Lines, and Investments.
Financial results and key metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $3.558 billion | $3.379 billion |
| Net premiums written | $3.574 billion (+12%) | $3.190 billion |
| Net income | $224.9 million | $403.8 million |
| Net income available to common shareholders | $215.7 million; diluted EPS $3.54 | $394.5 million; diluted EPS $6.50 |
| Non-GAAP operating income | $306.4 million; diluted per-share $5.03 | $380.6 million; diluted per-share $6.27 |
| Combined ratio | 95.1% | 92.8% |
| Operating cash flow | $802.4 million | $771.4 million |
| Stockholders’ equity | $2.528 billion | $2.983 billion |
| Book value per common share | $38.57 | $46.24 |
Underwriting and segments. Insurance underwriting income fell 24% to $166.8 million as the combined ratio worsened 2.3 points. Standard Commercial Lines produced $143.7 million of underwriting income (94.8% combined ratio); Standard Personal Lines recorded a $7.2 million underwriting loss (102.4%); E&S Lines earned $30.3 million (90.9%). Commercial auto remained challenged, with a 107.8% combined ratio; commercial property was also unprofitable at 101.4%. E&S improved to a 90.9% combined ratio.
Investments, margins, and cash flow. After-tax net investment income declined 12% to $232.2 million, mainly reflecting lower alternative-investment returns, partly offset by higher fixed-income income. The company reported $114.8 million of net realized and unrealized investment losses, versus $17.6 million of gains in 2021. These losses contributed to GAAP net income and ROE falling; ROE was 8.8% versus 14.8%, while non-GAAP operating ROE was 12.4% versus 14.3%. Operating cash flow was $802.4 million; investing cash outflow was $734.4 million and financing cash outflow was $87.8 million.
Balance sheet and liquidity. Total investments were $7.837 billion. Rising Treasury rates and wider credit spreads drove substantial unrealized fixed-income losses: AFS fixed-income securities had $537.2 million of gross unrealized losses at year-end, and accumulated other comprehensive loss was $498.0 million. Management said it did not intend, and was not required, to sell the securities summarized in its loss analysis. Long-term debt was $504.7 million, with a 5.5% weighted-average effective interest rate; debt-to-capital was 16.6%. Parent cash and investments totaled $484 million, and the Parent maintained a $50 million revolving credit facility, expandable to $125 million with lender consent. Insurance subsidiaries’ 2023 ordinary dividend capacity was approximately $283 million, subject to regulatory requirements.
Changes versus prior year
- Revenue rose 5% and NPW rose 12%, supported by rate increases, new business, retention, and exposure growth.
- Net income available to common shareholders fell 45%; non-GAAP operating income declined 19%. Higher non-catastrophe property losses, lower alternative-investment income, and investment losses were principal factors.
- The combined ratio increased from 92.8% to 95.1%, primarily reflecting inflation-driven property severity and higher current-year casualty loss costs. Net catastrophe losses were lower overall than in 2021, but included Winter Storm Elliott.
- Net favorable prior-year loss development was $78.9 million, compared with $82.9 million in 2021, driven principally by workers compensation; commercial auto had unfavorable development.
- Book value per share declined 17%, largely due to unrealized fixed-income losses and dividends; adjusted book value per share, excluding those investment marks, rose to $45.49 from $43.23.
Outlook, risks, and unusual items
2023 guidance: Management targeted a 96.5% GAAP combined ratio, including 4.5 catastrophe-loss points and assuming no prior-year casualty reserve development; $300 million of after-tax net investment income, including $30 million from alternative investments; an approximately 21% effective tax rate; and 61 million diluted weighted-average shares, assuming no share repurchases. The non-GAAP operating ROE target was raised to 12% from 11% for 2022.
Management expects elevated inflation to continue pressuring property claims and potentially expenses, while tighter reinsurance capacity and higher pricing may weigh on underwriting results. It intends to pursue renewal pricing at or above expected loss trends, improve underwriting and insurance-to-value, expand commercial-lines geography, and continue repositioning personal lines toward mass-affluent customers. Fixed-income reinvestment yields had improved, supporting the investment-income outlook.
- Winter Storm Elliott: The December 2022 event generated $135.0 million gross losses, approximately $46.1 million net losses, and $11.7 million of reinstatement premium; total pre-tax impact was $57.8 million.
- Reserve uncertainty: Gross loss and loss expense reserves were $5.145 billion, with $4.387 billion net of reinsurance. Management’s estimated reasonable range for net reserves was $3.920 billion to $4.662 billion. The auditor identified reserve estimation as a critical audit matter; the financial-statement audit opinion was unqualified.
- Loss-cost exposures: Inflation, social inflation, commercial-auto severity, and abuse/molestation claims—including claims potentially revived by state statutes—could affect reserves and future profitability. The company reported $20.3 million of net asbestos and environmental reserves.
- Reinsurance: The January 2023 catastrophe treaty increased limits and retention, but the company expected considerably higher ceded premiums and less favorable terms. The renewed program excludes communicable disease and has limitations for certain cyber and other perils. Reinsurance does not relieve the insurer of obligations to policyholders if reinsurers fail to pay.
- Other risks: Catastrophes, cybersecurity and system outages, investment-market and credit risk, LIBOR-to-SOFR transition, regulatory restrictions on subsidiary dividends, and litigation outcomes. The company reported no material pending legal proceeding expected to materially affect consolidated financial condition; COVID-19 coverage disputes remained subject to litigation.
Important facts for investors to verify
- Whether pricing and underwriting actions keep pace with loss-cost inflation, particularly in commercial auto, personal auto, and property lines.
- Whether reserve development remains favorable and how actual claims emergence compares with the disclosed reserve range and sensitivities.
- How 2023 reinsurance renewal costs, exclusions, and catastrophe protection affect the combined ratio and net exposure.
- Whether higher reinvestment yields offset lower alternative-investment returns and whether unrealized fixed-income losses remain manageable without forced sales.
- Whether statutory dividend capacity, Parent liquidity, debt covenants, and the $50 million revolving facility remain sufficient to support debt service and shareholder distributions.
- Progress against 2023 guidance and the 12% non-GAAP operating ROE target; these are management targets, not guarantees.