Selective Insurance Group, Inc. — Q3 2021 Form 10-Q
Business and period: Selective is a property-and-casualty insurer reporting four segments: Standard Commercial Lines, Standard Personal Lines, Excess and Surplus (E&S) Lines, and Investments. This filing covers the quarter and nine months ended September 30, 2021, compared with the same 2020 periods. Figures below are in millions unless noted.
Financial and operating results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $865.0 | $776.6 | $2,509.5 | $2,123.8 |
| Net premiums earned | $767.2 | $694.5 | $2,232.7 | $1,976.9 |
| Net investment income earned | $93.0 | $68.2 | $246.5 | $158.6 |
| Income before tax | $92.6 | $85.3 | $381.5 | $143.9 |
| Net income | $73.7 | $69.9 | $304.9 | $119.3 |
| Net income available to common shareholders | $71.4 | $69.9 | $297.8 | $119.3 |
| Diluted earnings per common share | $1.18 | $1.16 | $4.92 | $1.98 |
| Combined ratio | 98.6% | 97.0% | 92.6% | 97.4% |
| Non-GAAP operating income | $71.3 | $63.8 | $285.7 | $138.5 |
| Annualized return on common equity | 10.6% | 11.9% | 15.1% | 6.9% |
Net cash from operating activities for the nine months was $543.3 million; investing activities used $417.8 million and financing activities used $106.0 million. Cash and restricted cash totaled $34.8 million at September 30, 2021.
At September 30, total assets were $10.44 billion, total liabilities $7.52 billion, and stockholders’ equity $2.92 billion. Long-term debt was $500.9 million; management reported a 14.6% debt-to-capital ratio and $2.3 billion of statutory surplus. Total investments were $7.86 billion. Parent cash and investments together were $515 million; the stated target is highly liquid holdings of at least twice estimated annual Parent needs of $180 million.
Material changes versus the prior comparable periods
- Nine-month revenue rose 18%, net premiums written increased 17%, and net income rose 156%. Q3 revenue rose 11%, while net income increased 5%.
- Nine-month underwriting results improved: the combined ratio fell 4.8 points to 92.6%, and underwriting income increased to $164.5 million from $52.3 million. Q3 underwriting income declined to $10.9 million from $21.0 million, and the combined ratio worsened 1.6 points.
- Higher alternative-investment returns materially lifted investment income. Alternative investments contributed $42.8 million of Q3 and $92.9 million of nine-month investment income, versus $18.7 million and $8.9 million, respectively, a year earlier. Results on these holdings are reported on a one-quarter lag and principally reflected private-equity valuation gains.
- Nine-month results benefited from lower catastrophe losses and $66 million of favorable prior-year casualty reserve development, compared with $50 million in the prior year. Q3 included $76.3 million of net catastrophe losses, including $43 million net from Hurricane Ida; catastrophe losses were lower than Q3 2020, but favorable prior-year casualty development was also smaller.
- Premium growth comparisons reflect the absence of 2020 COVID-related premium reductions, including a $75 million return-premium accrual and automobile premium credits. Management said the accrual was fully exhausted by June 30, 2021, with no material additional or return-premium accrual at September 30.
- After-tax unrealized investment gains declined: accumulated other comprehensive income was $140.2 million at September 30, versus $220.2 million at year-end 2020. Management attributed lower unrealized gains largely to higher longer-dated Treasury rates, partly offset by tighter credit spreads.
Outlook, commentary, and risks
- Current 2021 guidance: GAAP combined ratio excluding catastrophe losses of 88% (previously 89%), assuming no Q4 prior-year casualty reserve development; catastrophe losses of 5.0 combined-ratio points (previously 4.0); after-tax net investment income of $240 million (previously $220 million), including $75 million from alternative investments (previously $55 million); effective tax rate of approximately 20.5%; and diluted weighted-average shares of 60.5 million. These are full-year estimates, not results.
- Management reported renewal pure price increases of 4.9% in Q3 and 5.1% for the nine months, which it said met or exceeded expected loss trend. Its priorities include disciplined commercial growth, geographic expansion subject to regulatory approval, retention, and a greater focus on the mass-affluent personal-lines market. No specific 2022 financial guidance is provided in the supplied filing text.
- Personal Lines remained challenged: nine-month premiums written declined 2%, and Q3 underwriting remained loss-making, with a 115.2% combined ratio. Commercial automobile also had a 106.8% Q3 combined ratio.
- Catastrophe activity, including Hurricane Ida, materially affected claims. Inflation is identified as a heightened risk that could increase claims severity and reserve development, and potentially reduce investment values as interest rates rise. Supply-chain, product, service, and labor shortages may also affect costs and staffing.
- COVID-19 business-interruption and virus-exclusion coverage litigation remains unpredictable. The company said no pending legal proceeding was believed likely to materially affect its consolidated financial condition, but adverse outcomes in certain cases could materially affect results or cash flows in particular periods.
- Insurer dividends to the Parent are subject to regulatory review or approval; restrictions could affect debt service and shareholder dividends. The company reported compliance with its credit-facility covenants and no material off-balance-sheet arrangements.
- Other notable items: the company repaid $50 million of Federal Home Loan Bank borrowings in Q3; it had $96.6 million of remaining capacity under its $100 million share-repurchase authorization. The board declared a $0.28 common dividend payable in December 2021.
Important facts for investors to verify
- Whether the $240 million full-year after-tax investment-income target is achieved, and how much depends on volatile, lagged alternative-investment gains.
- Whether pricing keeps pace with claims inflation and whether catastrophe losses, including Ida-related claims, remain within guidance.
- Whether favorable reserve development continues and how loss trends evolve in commercial auto and personal lines.
- Whether regulatory limits on subsidiary dividends, debt obligations, and investment commitments affect Parent liquidity or capital returns.
- Developments in COVID-19 coverage litigation and the potential effect of inflation and supply-chain disruption on claims, expenses, and investment values.