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SELECTIVE INSURANCE GROUP INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements The terms "Company," "we," "us," and "our" refer toSelective Insurance Group, Inc. (the "Parent"), and its subsidiaries, except as expressly indicated or the context otherwise requires. In this Quarterly Report on Form 10-Q, we discuss and make statements about our intentions, beliefs, current expectations, and projections for our future operations and performance. Such statements are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. These forward-looking statements often are identified by words such as "anticipates," "believes," "expects," "will," "should," and "intends" and their negatives. We caution prospective investors that forward-looking statements are not guarantees of future performance. Risks and uncertainties are inherent in our future performance. Factors that could cause actual results to differ materially from those indicated in forward-looking statements include, without limitation, those discussed in Item 1A. "Risk Factors." in Part II. "Other Information" of this Form 10-Q. Our stated risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We can neither predict such new risk factors nor can we assess the impact, if any, such new risk factors may have on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied in any forward-looking statement. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this report might not occur. We make forward-looking statements based on currently available information and assume no obligation, other than as may be required under the federal securities laws, to publicly update or revise any forward-looking statements for any reason.
Introduction
We classify our business into four reportable segments:
•Standard Commercial Lines;
•Standard Personal Lines;
•Excess and surplus ("E&S Lines"); and
•Investments.
For more details about these segments, refer to Note 9. "Segment Information" in
Item 1. "Financial Statements." of this Form 10-Q and Note 12. "Segment
Information" in Item 8. "Financial Statements and Supplementary Data." of our
Annual Report on Form 10-K for the year ended December 31, 2020 ("2020 Annual
Report").
We write our Standard Commercial and Standard Personal Lines products and
services through nine of our insurance subsidiaries, some of which participate
in the federal government's National Flood Insurance Program's ("NFIP") Write
Your Own Program ("WYO"). We write our E&S products through another subsidiary,
Mesa Underwriters Specialty Insurance Company , which provides us with a
nationally-authorized non-admitted platform for customers who generally cannot
obtain coverage in the standard marketplace. Collectively, we refer to our ten
insurance subsidiaries as the "Insurance Subsidiaries."
The following is Management's Discussion and Analysis ("MD&A") of the
consolidated results of operations and financial condition, as well as known
trends and uncertainties, that may have a material impact in future periods.
Investors should read the MD&A in conjunction with Item 1. "Financial
Statements." of this Form 10-Q and the consolidated financial statements in our
2020 Annual Report filed with the U.S. Securities and Exchange Commission .
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In the MD&A, we will discuss and analyze the following:
•Critical Accounting Policies and Estimates;
•Financial Highlights of Results for the third quarters ended September 30, 2021
("Third Quarter 2021") and September 30, 2020 ("Third Quarter 2020") and the
nine-month periods ended September 30, 2021 ("Nine Months 2021") and
September 30, 2020 ("Nine Months 2020");
•Results of Operations and Related Information by Segment;
•Federal Income Taxes;
•Financial Condition, Liquidity, and Capital Resources;
•Ratings;
•Off-Balance Sheet Arrangements; and
•Contractual Obligations, Contingent Liabilities, and Commitments.
Critical Accounting Policies and Estimates
Our unaudited interim consolidated financial statements include amounts for
which we have made informed estimates and judgments for transactions not yet
completed. Such estimates and judgments affect the reported amounts in the
consolidated financial statements. As outlined in our 2020 Annual Report, those
estimates and judgments most critical to the preparation of the consolidated
financial statements involved the following: (i) reserves for loss and loss
expense; (ii) investment valuation and the allowance for credit losses on
available-for-sale ("AFS") fixed income securities; (iii) reinsurance; (iv)
allowance for credit losses on premiums receivable, and (v) the accrual for
auditable premium. These estimates and judgments require the use of assumptions
about matters that are highly uncertain, and therefore are subject to change as
facts and circumstances develop. If different estimates and judgments had been
applied, materially different amounts might have been reported in the financial
statements.
We have made no material changes in the critical accounting policies disclosed
on pages 37 through 46 of our 2020 Annual Report.
The following estimates materially changed in Nine Months 2021: •Investment valuation and the allowance for credit losses on AFS fixed income securities - See Note 4. "Investments" and Note 5. "Fair Value Measurements" in Item 1. "Financial Statements." of this Form 10-Q; •Reserves for loss and loss expense - See Note 8. "Reserve for Loss and Loss Expense" in Item 1. "Financial Statements." of this Form 10-Q; •Reinsurance - See Note 7. "Reinsurance" in Item 1. "Financial Statements." of this Form 10-Q; •Allowance for credit losses on premiums receivable - See Note 6. "Allowance for Credit Losses on Premiums Receivable" in Item 1. "Financial Statements." of this Form 10-Q; and •Accrual for auditable premium - In the first quarter of 2020, we recorded a$75 million return audit and mid-term endorsement premium accrual in response to the COVID-19 pandemic and the anticipated decline in payroll and sales exposures on the workers compensation and general liability lines of business. The remaining accrual was$24.8 million as ofDecember 31, 2020 . During 2021, we applied premium adjustments for audits, fully exhausting this accrual as ofJune 30, 2021 . SinceApril 2020 , through active engagement among our underwriters, insureds, and distribution partners, we have established exposure levels to reflect our best estimate of how the current environment may impact our policies. As a result, we did not have material accruals for additional or return premium as ofSeptember 30, 2021 . 25 -------------------------------------------------------------------------------- Table of Contents Financial Highlights of Results for Third Quarter and Nine Months 2021 and Third Quarter and Nine Months 20201 Quarter ended September 30, Change Nine Months ended September 30, Change ($ and shares in thousands, except per share amounts) 2021 2020 % or Points 2021 2020 % or Points Financial Data: Revenues$ 865,044 776,566 11 %$ 2,509,469 2,123,842 18 % After-tax net investment income 74,690 55,131 35 198,474 129,156 54 After-tax underwriting income 8,642 16,619 (48) 129,984 41,291 215 Net income before federal income tax 92,636 85,257 9 381,466 143,947 165 Net income 73,705 69,875 5 304,858 119,294 156 Net income available to common stockholders 71,405 69,875 2 297,805 119,294 150 Key Metrics: Combined ratio 98.6 % 97.0 1.6 pts 92.6 % 97.4 (4.8) pts Invested assets per dollar of common stockholders' equity$ 2.89 3.04 (5) %$ 2.89 3.04 (5) % Annualized return on common equity ("ROE") 10.6 11.9 (1.3) pts 15.1 6.9 8.2 pts Statutory premiums to surplus ratio 1.35 x 1.39 (0.04) 1.35 x 1.39 (0.04) Per Common Share Amounts: Diluted net income per share$ 1.18 1.16 2 %$ 4.92 1.98 148 % Book value per share 45.27 40.00 13 45.27 40.00 13 Dividends declared per share to common stockholders 0.25 0.23 9 0.75 0.69 9 Non-GAAP Information: Non-GAAP operating income2$ 71,265 63,776 12 %$ 285,676 138,488 106 % Diluted non-GAAP operating income per common share2 1.18 1.06 11 4.72 2.30 105 Annualized non-GAAP operating ROE2 10.6 % 10.9 (0.3) pts 14.5 % 8.0 6.5 pts 1Refer to the Glossary of Terms attached to our 2020 Annual Report as Exhibit 99.1 for definitions of terms used of this Form 10-Q. 2 Non-GAAP operating income, non-GAAP operating income per diluted common share, and annualized non-GAAP operating ROE are measures comparable to net income available to common stockholders, net income available to common stockholders per diluted common share, and annualized ROE, respectively, but exclude after-tax net realized and unrealized gains and losses on investments. They are used as important financial measures by us, analysts, and investors because the timing of realized investment gains and losses on sales of securities in any given period is largely discretionary. In addition, net realized and unrealized investment gains and losses on investments that are charged to earnings could distort the analysis of trends. Reconciliations of net income available to common stockholders, net income available to common stockholders per diluted common share, and annualized ROE to non-GAAP operating income, non-GAAP operating income per diluted common share, and annualized non-GAAP operating ROE, respectively, are provided in the tables below: Reconciliation of net income available to common stockholders to non-GAAP operating income Quarter ended September 30, Nine Months ended September 30, ($ in thousands) 2021 2020 2021 2020 Net income available to common stockholders$ 71,405 69,875$ 297,805 119,294 Net realized and unrealized (gains) losses, before tax (177) (7,721) (15,353) 24,296 Tax on reconciling items 37 1,622 3,224 (5,102) Non-GAAP operating income$ 71,265 63,776$ 285,676 138,488 Reconciliation of net income available to common stockholders per diluted common share Quarter ended September 30, Nine Months ended September 30, to non-GAAP operating income per diluted common share 2021 2020 2021 2020 Net income available to common stockholders per diluted common share$ 1.18 1.16 $ 4.92 1.98 Net realized and unrealized (gains) losses, before tax - (0.13) (0.25) 0.40 Tax on reconciling items - 0.03 0.05 (0.08) Non-GAAP operating income per diluted common share$ 1.18 1.06 $ 4.72 2.30 Reconciliation of annualized ROE to annualized non-GAAP operating ROE Quarter ended September 30, Nine Months ended September 30, 2021 2020 2021 2020 Annualized ROE 10.6 % 11.9 15.1 % 6.9 Net realized and unrealized (gains) losses, before tax - (1.3) (0.8) 1.4 Tax on reconciling items - 0.3 0.2 (0.3) Annualized non-GAAP operating ROE 10.6 % 10.9 14.5 % 8.0 26
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The components of our annualized ROE and non-GAAP operating ROE are as follows:
Annualized ROE and non-GAAP
operating ROE Components Quarter ended September 30, Nine Months ended September 30,
2021 2020 Change Points 2021 2020 Change Points
Standard Commercial Lines
Segment 2.1 % 5.7 (3.6) 6.2 % 3.5 2.7
Standard Personal Lines Segment (1.3) (1.9) 0.6 0.1 (0.9) 1.0
E&S Lines Segment 0.5 (1.0) 1.5 0.3 (0.2) 0.5
Total insurance operations 1.3 2.8 (1.5) 6.6 2.4 4.2
Investment income 11.0 9.4 1.6 10.1 7.5 2.6
Net realized and unrealized
investment gains (losses) - 1.0 (1.0) 0.6 (1.1) 1.7
Total investments segment 11.0 10.4 0.6 10.7 6.4 4.3
Other (1.7) (1.3) (0.4) (2.2) (1.9) (0.3)
Annualized ROE 10.6 % 11.9 (1.3) 15.1 % 6.9 8.2
Net realized and unrealized
(gains) losses, after tax - (1.0) 1.0 (0.6) 1.1 (1.7)
Annualized Non-GAAP Operating
ROE 10.6 % 10.9 (0.3) 14.5 % 8.0 6.5
Our Nine Months 2021 annualized non-GAAP operating ROE of 14.5% was above our
full-year 2021 target of 11% and our Nine Months 2020 annualized non-GAAP
operating ROE of 8.0%, driven by strong investment and underwriting income.
Non-GAAP operating income per diluted common share increased (i) $0.12 in Third
Quarter 2021 compared to Third Quarter 2020, and (ii) $2.42 in Nine Months 2021
compared to Nine Months 2020.
The increase in non-GAAP operating income per diluted common share in Third
Quarter and Nine Months 2021 compared to Third Quarter and Nine Months 2020 was
primarily driven by:
•Net catastrophe losses (lower by $0.14 in Third Quarter 2021 and $1.20 in Nine
Months 2021) driven by industry-wide U.S. catastrophe loss activity in 2020 that
significantly exceeded the 10-year historical median; and
•Investment income (higher by $0.32 in Third Quarter 2021 and $1.14 in Nine
Months 2021) driven by alternative investments in our other investments
portfolio. These results principally reflect unrealized gains on our private
equity holdings that benefited from the upward movement in private market
valuations in the three and nine-month periods ending June 30, 2021 , as our
results on these holdings are recorded on a one-quarter lag.
Partially offsetting the increase in non-GAAP operating income per diluted
common share in Third Quarter 2021 was the following:
•Non-catastrophe property loss and loss expenses that increased by
Third Quarter 2021 compared to Third Quarter 2020; and
•Favorable prior year casualty reserve development that was less in Third
Quarter 2021 by
Outlook
We entered 2021 in the strongest financial position in our Company's long history and were well positioned to continue generating disciplined and profitable growth. Through Nine Months 2021 we have generated 17% growth in NPW and a 14.5% annualized Non-GAAP Operating ROE. For the remainder of the year and looking ahead to 2022, we continue to focus on several areas to position us for ongoing success: •Delivering on our strategy for continued disciplined growth by (i) continuing to expand our Standard Commercial Lines market share by increasing our share of wallet with existing agents and strategically appointing new agents, (ii) investing in geographic expansion, with a plan to commence writing Standard Commercial Lines business in the states ofVermont ,Alabama , andIdaho , subject to regulatory approval, in the near-term, and other states over time, (iii) increasing customer retention by delivering a superior omnichannel experience and offering value-added technologies and services, and (iv) shifting our focus towards the mass affluent market within our Standard Personal Lines segment, which is a customer base that derives greater value from coverage and service. •Continuing to achieve written renewal pure price increases that meet or exceed expected loss trend, while delivering on our strategy for continued disciplined growth. We achieved overall renewal pure price increases of 4.9% in Third Quarter 2021 and 5.1% in Nine Months 2021, which is at or above our expected loss trend. •Continuing to build on a culture centered on the values of diversity, equity, and inclusion that fosters innovation, idea generation, and development of a group of specially trained leaders who can guide us successfully into the future. 27 -------------------------------------------------------------------------------- Table of Contents For more details about our major areas of strategic focus, refer to the "Outlook" section in "Financial Highlights of Results for Years EndedDecember 31, 2020 , 2019, and 2018" within Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of our 2020 Annual Report.
For 2021, our current full-year guidance is as follows:
•A GAAP combined ratio, excluding net catastrophe losses, of 88% (prior guidance 89%) that assumes no fourth quarter prior-year casualty reserve development; •Net catastrophe losses of 5.0 points (prior guidance 4.0 points) on the combined ratio; •After-tax net investment income of$240 million (prior guidance$220 million ) that includes$75 million (prior guidance$55 million ) in after-tax net investment income from our alternative investments; •An overall effective tax rate of approximately 20.5%, that includes an effective tax rate of 19.5% (prior guidance 19.0%) for net investment income and 21.0% for all other items; and •Weighted average shares of 60.5 million on a diluted basis.
Results of Operations and Related Information by Segment
Insurance Operations
The following table provides quantitative information for analyzing the combined
ratio:
All Lines Quarter ended September 30, Nine Months ended September 30,
($ in thousands) 2021 2020 Change % or Points 2021 2020 Change % or Points
Insurance Operations Results:
Net premiums written
("NPW") $ 812,906 719,508 13 % $ 2,444,289 2,091,587 17 %
Net premiums earned
("NPE") 767,247 694,541 10 2,232,725 1,976,915 13
Less:
Loss and loss expense
incurred 505,269 447,802 13 1,340,293 1,252,075 7
Net underwriting expenses
incurred 250,033 225,103 11 724,484 670,531 8
Dividends to policyholders 1,006 599 68 3,411 2,042 67
Underwriting income $ 10,939 21,037 (48) % $ 164,537 52,267 215 %
Combined Ratios:
Loss and loss expense
ratio 65.9 % 64.5 1.4 pts 60.0 % 63.4 (3.4) pts
Underwriting expense ratio 32.6 32.4 0.2 32.4 33.9 (1.5)
Dividends to policyholders
ratio 0.1 0.1 - 0.2 0.1 0.1
Combined ratio 98.6 97.0 1.6 92.6 97.4 (4.8)
The NPW growth in Third Quarter and Nine Months 2021 compared to the prior year
periods reflects our strong relationships with best-in-class distribution
partners, sophisticated underwriting and pricing tools, and excellent customer
servicing capabilities. This solid growth included (i) overall renewal pure
price increases, and (ii) new business growth, as shown in the following table:
Quarter ended September 30, Change Nine Months ended September 30, Change
% or % or
($ in millions) 2021 2020 Points 2021 2020 Points
Direct new business $ 168.3 140.8 20 % $ 497.3 443.6 12 %
Renewal pure price increases 4.9 % 4.4 0.5 pts 5.1 % 4.1 1.0 pts
The NPW growth in Nine Months 2021 was further impacted by the 2020
COVID-19-related $75 million estimate of return audit and mid-term endorsement
premium and $19.7 million of premium credits to our personal and commercial
automobile customers, which reduced NPW by $94.7 million in Nine Months 2020.
The $94.7 million reduction in NPW in Nine Months 2020 from COVID-19-related
adjustments had the impact of increasing Nine Months 2021 NPW growth by 5
percentage points.
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Loss and Loss Expenses
The loss and loss expense ratio increased 1.4 points in Third Quarter 2021 and
decreased 3.4 points in Nine Months 2021 compared to Third Quarter and Nine
Months 2020, respectively, primarily due to the following:
Third Quarter 2021 Third Quarter 2020
Loss and Loss Impact on Loss and Loss Impact on
Expense Loss and Loss Expense Loss and Loss
($ in millions) Incurred Expense Ratio Incurred Expense Ratio Change in Ratio
Net catastrophe losses $ 76.3 10.0 pts $ 79.5 11.4 pts (1.4) pts
(Favorable) prior year casualty
reserve development (14.0) (1.8) (25.0) (3.6) 1.8
Non-catastrophe property loss and loss
expenses 123.7 16.1 105.6 15.2 0.9
Total $ 186.0 24.3 $ 160.1 23.0 1.3
Nine Months 2021 Nine Months 2020
Loss and Loss Impact on Loss and Loss Impact on
Expense Loss and Loss Expense Loss and Loss
($ in millions) Incurred Expense Ratio Incurred Expense Ratio Change in Ratio
Net catastrophe losses $ 128.9 5.8 pts $ 195.9 9.9 pts (4.1) pts
(Favorable) prior year casualty
reserve development (66.0) (3.0) (50.0) (2.5) (0.5)
Non-catastrophe property loss and loss
expenses 346.6 15.5 295.5 14.9 0.6
Total $ 409.5 18.3 $ 441.4 22.3 (4.0)
Third Quarter 2021 and Third Quarter 2020 included elevated levels of net
catastrophe losses with 10.0 points this year, including 5.6 percentage points
from Hurricane Ida, and 11.4 points last year. Both years compare unfavorably to
our longer-term net catastrophe loss averages. Catastrophe losses in Third
Quarter 2021 include $54 million of gross losses from Hurricane Ida, and $43
million of net losses, after factoring in the retention benefit from our
Property Catastrophe Excess of Loss Treaty, which attaches at $40 million . The
structure of our Property Catastrophe Excess of Loss Treaty is detailed in the
"Reinsurance" section of Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of our 2020 Annual Report. The
majority of the loss was attributable to property losses, including personal and
commercial automobiles, in New Jersey and the surrounding states. Losses in
Third Quarter 2020 were driven by the derecho in the Midwestern states of our
footprint, as well as Hurricane Isaias. Net catastrophe losses were lower in
Nine Months 2021 compared to Nine Months 2020, as the first half of 2020 was
also affected by a tornado and subsequent hail event that impacted Tennessee in
March, two large storms in April, and claims related to civil unrest in June
2020 .
Details of the prior year casualty reserve development were as follows:
(Favorable)/Unfavorable Prior Year Casualty
Reserve Development Quarter ended September 30, Nine Months ended September 30,
($ in millions) 2021 2020 2021 2020
General liability $ (4.0) (10.0) $ (29.0) (20.0)
Commercial automobile - - - 10.0
Workers compensation (8.0) (15.0) (28.0) (40.0)
Businessowners' policies (2.0) - (2.0) -
Total Standard Commercial Lines (14.0) (25.0) (59.0) (50.0)
E&S - - (7.0) -
Total (favorable) prior year casualty reserve
development $ (14.0) (25.0) $ (66.0) (50.0)
(Favorable) impact on loss ratio (1.8) pts (3.6) (3.0) (2.5)
For additional qualitative reserve development discussion, please refer to the
insurance segment sections below in "Results of Operations and Related
Information by Segment."
Underwriting Expenses
The underwriting expense ratio decreased 1.5 points in Nine Months 2021 compared
to Nine Months 2020. The underwriting expense ratio in Nine Months 2020 was
elevated by 1.5 points for COVID-19-related items. The decrease in the
underwriting expense ratio in Nine Months 2021 reflects the absence of these
COVID-19-related impacts.
The COVID-19-related items included in 2020 results were as follows: (i) lower
NPE from the estimate of return audit and mid-term endorsement premium recorded
in the first quarter of 2020 and premium credits given to our personal and
commercial
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automobile customer during the second quarter of 2020; and (ii) a $13.5 million
increase to our allowance for credit losses on premiums receivable in Nine
Months 2020.
Standard Commercial Lines Segment
Quarter ended September 30, Change Nine Months ended September 30, Change
% or % or
($ in thousands) 2021 2020 Points 2021 2020 Points
Insurance Segments Results:
NPW $ 652,603 577,752 13 % $ 1,995,297 1,679,526 19 %
NPE 619,571 558,085 11 1,808,466 1,575,669 15
Less:
Loss and loss expense incurred 393,503 331,045 19 1,048,170 950,240 10
Net underwriting expenses
incurred 207,649 183,723 13 602,035 546,813 10
Dividends to policyholders 1,006 599 68 3,411 2,042 67
Underwriting income $ 17,413 42,718 (59) % $ 154,850 76,574 102 %
Combined Ratios:
Loss and loss expense ratio 63.5 % 59.3 4.2 pts 57.9 % 60.3 (2.4) pts
Underwriting expense ratio 33.5 32.9 0.6 33.3 34.7 (1.4)
Dividends to policyholders ratio 0.2 0.1 0.1 0.2 0.1 0.1
Combined ratio 97.2 92.3 4.9 91.4 95.1 (3.7)
NPW growth was up 13% in Third Quarter 2021 and 19% in Nine Months 2021 compared
to the same prior-year periods, reflecting (i) renewal pure price increases,
(ii) stable retention, and (iii) direct new business increases, as shown in the
following table:
Quarter ended September 30, Change Nine Months ended September 30, Change
% or % or
($ in millions) 2021 2020 Points 2021 2020 Points
Direct new business $ 122.3 99.0 24 % $ 365.6 324.3 13 %
Retention 86 % 86 - pts 85 % 85 - pts
Renewal pure price increases 5.3 4.6 0.7 5.5 4.2 1.3
Consistent with our overall insurance operations, Nine Months 2021 NPW growth
was positively impacted by approximately six points from the following 2020
COVID-19-related items which did not recur in Nine Months 2021:
•A$75 million estimate of return audit and mid-term endorsement premium that reduced Nine Months 2020 NPW. •A$15.4 million premium credit to our commercial automobile customers that reduced Nine Months 2020 NPW.
The loss and loss expense ratio increased 4.2 points in Third Quarter 2021 and
decreased 2.4 points in Nine Months 2021 compared to the same prior-year
periods, principally driven by the following:
Third Quarter 2021 Third Quarter 2020
Impact on Loss and Loss Impact on
Loss and Loss Loss and Loss Expense Loss and Loss
($ in millions) Expense Incurred Expense Ratio
Incurred Expense Ratio Change in Ratio
Net catastrophe losses
$ 50.0 8.1 pts$ 39.3 7.0 pts 1.1 pts Non-catastrophe property loss and loss expenses 90.1 14.5 75.3 13.5 1.0 (Favorable) prior year casualty reserve development (14.0) (2.3) (25.0) (4.5) 2.2 Total 126.1 20.3 89.6 16.0 4.3 Nine Months 2021 Nine Months 2020 Impact on Loss and Loss Impact on Loss and Loss Loss and Loss Expense Loss and Loss ($ in millions) Expense Incurred Expense Ratio
Incurred Expense Ratio Change in Ratio
Net catastrophe losses
$ 77.3 4.3 pts$ 110.7 7.0 pts (2.7) pts Non-catastrophe property loss and loss expenses 248.4 13.7 215.7 13.7 - (Favorable) prior year casualty reserve development (59.0) (3.3) (50.0) (3.2) (0.1) Total 266.7 14.7 276.4 17.5 (2.8) Third Quarter 2021 and Third Quarter 2020 included elevated levels of net catastrophe losses with 8.1 points this year and 7.0 points last year. Both years compared unfavorably to our longer-term net catastrophe loss average for this segment. Net catastrophe losses for this segment are consistent with the discussion in the Insurance Operations section above. 30 -------------------------------------------------------------------------------- Table of Contents The current year loss and loss expense ratio was 0.5 points higher in Nine Months 2021 compared to Nine Months 2020, primarily driven by increased claim frequencies. Last year experienced lower claims frequencies in the commercial auto line reflecting reductions in miles driven due to the COVID-19-related governmental directives. Lower claims frequencies and lower non-catastrophe property losses provided an offset to the$15.4 million premium credit to customers in 2020.
For quantitative information on the favorable prior year casualty reserve
development by line of business, see the "Insurance Operations" section above,
and for qualitative information about the significant drivers of this
development, see the line of business discussions below.
The underwriting expense ratio decreased 1.4 points in Nine Months 2021 compared
to Nine Months 2020. The underwriting expense ratio in Nine Months 2020 was
elevated by 1.6 points for COVID-19-related items, as discussed in "Insurance
Operations" above. The decrease in the underwriting expense ratio in Nine Months
2021 reflects the absence of these COVID-19-related impacts.
The following is a discussion of our most significant Standard Commercial Lines
of business:
General Liability
Quarter ended September 30, Change Nine Months ended September 30, Change
% or % or
($ in thousands) 2021 2020 Points 2021 2020 Points
NPW $ 216,897 186,929 16 % $ 664,462 538,640 23 %
Direct new business 38,376 28,010 37 109,803 95,364 15
Retention 86 % 86 - pts 85 % 86 (1) pts
Renewal pure price increases 4.4 4.1 0.3 4.5 3.9 0.6
NPE $ 205,904 181,459 13 % $ 596,717 509,312 17 %
Underwriting income 29,993 32,182 (7) 97,611 70,364 39
Combined ratio 85.4 % 82.3 3.1 pts 83.6 % 86.2 % (2.6) pts
% of total Standard Commercial 33 32 33 32
Lines NPW
NPW grew 16% in Third Quarter 2021 and 23% in Nine Months 2021 compared to the
same prior-year periods due to renewal pure price increases, strong retention,
and direct new business growth. NPW growth in Nine Months 2021 also included a
10-point benefit from the 2020 COVID-19-related $46 million estimate of return
audit and mid-term endorsement premium recorded on this line in the first
quarter of 2020, which did not recur in Nine Months 2021.
The fluctuations in the combined ratios illustrated in the table above included
the following:
Third Quarter 2021 Third Quarter 2020
Loss and Loss Impact on Loss and Loss Impact on
($ in millions) Expense Incurred Combined Ratio Expense Incurred Combined Ratio Change in Ratio
(Favorable) prior year casualty
reserve development $ (4.0) (1.9) pts $ (10.0) (5.5) pts 3.6 pts
Nine Months 2021 Nine Months 2020
Loss and Loss Impact on Loss and Loss Impact on
($ in millions) Expense Incurred Combined Ratio Expense Incurred Combined Ratio Change in Ratio
(Favorable) prior year casualty
reserve development $ (29.0) (4.9) pts $ (20.0) (3.9) pts (1.0) pts
The favorable prior year casualty reserve development in Third Quarter and Nine
Months 2021 was primarily attributable to lower loss severities in accident
years 2018 and prior. The Third Quarter and Nine Months 2020 reserve development
was primarily attributable to favorable reserve development on loss severities
in accident years 2017 and prior.
In addition to the items above, the combined ratio was favorably impacted by a
decrease in the underwriting expense ratio of 1.4 points in Nine Months 2021
compared to Nine Months 2020, the drivers of which are consistent with the items
discussed in the Standard Commercial Lines Segment above.
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Commercial Automobile
Quarter ended September 30, Change Nine Months ended September 30, Change
% or % or
($ in thousands) 2021 2020 Points 2021 2020 Points
NPW $ 197,459 169,885 16 % $ 594,011 498,892 19 %
Direct new business 28,968 26,808 8 91,120 87,808 4
Retention 87 % 87 - pts 86 % 86 - pts
Renewal pure price increases 7.9 8.4 (0.5) 8.6 7.8 0.8
NPE $ 185,610 160,937 15 % $ 535,519 449,162 19 %
Underwriting income (loss) (12,547) 2,603 (582) (5,514) (5,877) 6
Combined ratio 106.8 % 98.4 8.4 pts 101.0 % 101.3 (0.3) pts
% of total Standard Commercial
Lines NPW 30 29 30 30
NPW growth benefited from renewal pure price increases, strong retention, and
growth in direct new business, as shown in the table above. Additionally, NPW
growth included a 4-point benefit in Nine Months 2021 due to the $15.4 million
premium credit given to our commercial automobile customers as a result of the
2020 COVID-19 pandemic in the second quarter of 2020, as discussed in the
Standard Commercial Lines discussion above, which did not recur in Nine Months
2021.
The fluctuations in the combined ratios illustrated in the table above included
the following:
Third Quarter 2021 Third Quarter 2020
Loss and Loss Loss and Loss
Expense Impact on Expense Impact on
($ in millions) Incurred Combined Ratio Incurred Combined Ratio Change in Ratio
Net catastrophe losses $ 8.3 4.4 pts $ 1.6 1.0 pts 3.4
pts
Non-catastrophe property loss and loss expenses 35.2 18.9 23.7 14.7 4.2 Total$ 43.5 23.3$ 25.3 15.7 7.6 Nine Months 2021 Nine Months 2020 Loss and Loss Impact on Loss and Loss Impact on ($ in millions) Expense Incurred Combined Ratio Expense Incurred Combined Ratio Change in Ratio Net catastrophe losses $ 8.9 1.7 pts $ 3.0 0.7 pts 1.0
pts
Non-catastrophe property loss and loss expenses 90.8 16.9 63.8 14.2 2.7 Unfavorable prior year casualty reserve development - - 10.0 2.2 (2.2) Total$ 99.7 18.6$ 76.8 17.1 1.5
Third Quarter and Nine Months 2021 experienced significant net catastrophe
losses, predominately due to Hurricane Ida.
The Nine Months 2020 prior year casualty reserve development was primarily attributable to unfavorable reserve development on loss severities in accident years 2016 through 2019, and higher than expected claim frequencies in accident year 2019. In addition to the items in the tables above, the combined ratio variances included the following: •A 0.6-point increase in the current year loss and loss expense ratio in Third Quarter and Nine Months 2021 compared to the same prior-year periods, primarily driven by increased claim frequencies in 2021. Last year experienced lower claim frequencies reflecting reductions in miles driven due to the COVID-19-related governmental directives impacting this line of business. Lower claim frequencies and lower non-catastrophe property losses provided an offset to the$15.4 million of premium credits to customers in 2020. •A 2.4-point decrease in the underwriting expense ratio in Nine Months 2021 compared to Nine Months 2020, the drivers of which are consistent with the items discussed in the Standard Commercial Lines Segment above. 32 --------------------------------------------------------------------------------
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Workers Compensation
Quarter ended September 30, Change Nine Months ended September 30, Change
% or % or
($ in thousands) 2021 2020 Points 2021 2020 Points
NPW $ 76,317 73,009 5 % $ 249,099 199,189 25 %
Direct new business 15,408 11,477 34 47,355 39,446 20
Retention 86 % 85 1 pts 86 % 84 2 pts
Renewal pure price (decreases)
increases - (2.0) 2.0 - (2.5) 2.5
NPE $ 78,318 75,595 4 % $ 230,845 204,207 13 %
Underwriting income 15,527 21,567 (28) 44,631 48,322 (8)
Combined ratio 80.2 % 71.5 8.7 pts 80.7 % 76.3 4.4 pts
% of total Standard Commercial
Lines NPW 12 13 12 12
NPW increased 5% in Third Quarter 2021 and 25% in Nine Months 2021 compared to
the same prior-year periods due to higher retention and increased direct new
business. Additionally, NPW growth in Nine Months 2021 included a 16-point
benefit due to the 2020 COVID-19-related $29 million estimate of return audit
and mid-term endorsement premium recorded on this line in the first quarter of
2020, which did not recur in Nine Months 2021.
The increase in the combined ratio in Third Quarter and Nine Months 2021
compared to the same prior-year periods was driven by lower favorable prior year
casualty reserve development, as follows:
Third Quarter 2021 Third Quarter 2020
Loss and Loss Loss and Loss
Expense Impact on Expense Impact on
($ in millions) Incurred Combined Ratio Incurred Combined Ratio Change in Ratio
(Favorable) prior year casualty
reserve development $ (8.0) (10.2) pts $ (15.0) (19.8) pts 9.6 pts
Nine Months 2021 Nine Months 2020
Loss and Loss Loss and Loss
Expense Impact on Expense Impact on
($ in millions) Incurred Combined Ratio Incurred Combined Ratio Change in Ratio
(Favorable) prior year casualty
reserve development $ (28.0) (12.1) pts $ (40.0) (19.6) pts 7.5 pts
The favorable prior year casualty reserve development in Third Quarter and Nine
Months 2021 was primarily due to lower severities in accident years 2018 and
prior, and the development in Third Quarter and Nine Months 2020 was primarily
due to lower severities in accident years 2017 and prior.
In addition, the combined ratio was favorably impacted by a decrease in the
underwriting expense ratio of 1.8 points in Nine Months 2021 compared to Nine
Months 2020, the drivers of which are consistent with the items discussed in the
Standard Commercial Lines Segment above.
Commercial Property
Quarter ended September 30, Change Nine Months ended September 30, Change
% or % or
($ in thousands) 2021 2020 Points 2021 2020 Points
NPW $ 124,725 106,219 17 % $ 357,248 313,405 14 %
Direct new business 28,024 22,515 24 82,237 70,958 16
Retention 85 % 84 1 pts 84 % 84 - pts
Renewal pure price increases 6.4 4.4 2.0 6.0 4.2 1.8
NPE $ 111,981 97,997 14 % $ 320,904 287,279 12
%
Underwriting income (loss) (12,137) (11,903) (2) 11,449 (34,794) 133
Combined ratio 110.8 % 112.1 (1.3) pts 96.4 % 112.1 (15.7) pts
% of total Standard
Commercial Lines NPW 19 18 18 19
NPW grew 17% in Third Quarter 2021 and 14% in Nine Months 2021 compared to the
same prior-year periods due to renewal pure price increases, strong retention,
and direct new business growth.
33
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The decrease in the combined ratio in Third Quarter and Nine Months 2021
compared to the same prior-year periods was driven by the following:
Third Quarter 2021 Third Quarter 2020
Loss and Loss
Expense Impact on Loss and Loss Impact on
($ in millions) Incurred Combined Ratio Expense Incurred Combined Ratio Change in Ratio
Net catastrophe losses $ 32.8 29.3 pts 28.5 29.1 pts 0.2 pts
Non-catastrophe property loss and
loss expenses 48.8 43.6 44.0 44.9 (1.3)
Total $ 81.6 72.9 72.5 74.0 (1.1)
Nine Months 2021 Nine Months 2020
Loss and Loss
Expense Impact on Loss and Loss Impact on
($ in millions) Incurred Combined Ratio Expense Incurred Combined Ratio Change in Ratio
Net catastrophe losses $ 55.7 17.3 pts 83.4 29.0 pts (11.7) pts
Non-catastrophe property loss and
loss expenses 133.7 41.7 127.9 44.5 (2.8)
Total $ 189.4 59.0 211.3 73.5 (14.5)
Third Quarter and Nine Months 2021 and 2020 experienced significant net
catastrophe losses driven by the events discussed in the "Insurance Operations"
section above.
Standard Personal Lines Segment
Quarter ended September 30, Change Nine Months ended September 30, Change
% or % or
($ in thousands) 2021 2020 Points 2021 2020 Points
Insurance Segments Results:
NPW $ 78,247 79,697 (2) % $ 221,883 225,511 (2) %
NPE 73,362 75,976 (3) 220,476 223,737 (1)
Less:
Loss and loss expense incurred 65,123 69,667 (7) 160,273 182,150
(12)
Net underwriting expenses incurred 19,385 20,713 (6) 58,010 61,929 (6) Underwriting income (loss)$ (11,146) (14,404) 23 %$ 2,193 (20,342) 111 % Combined Ratios: Loss and loss expense ratio 88.8 % 91.7 (2.9) pts 72.7 % 81.4 (8.7) pts Underwriting expense ratio 26.4 27.3 (0.9) 26.3 27.7 (1.4) Combined ratio 115.2 119.0 (3.8) 99.0 109.1 (10.1) NPW decreased 2% in both Third Quarter and Nine Months 2021 compared to the same prior-year periods, primarily driven by direct new business that was not sufficient to compensate for the policies lost at renewal due to the challenging competitive environment in the personal auto line of business. Offsetting this decrease in Nine Months 2021 was the impact of the COVID-19-related premium credits to our personal automobile customers, which reduced NPW by$4.3 million in Nine Months 2020, and added two points of growth in Nine Months 2021 compared to Nine Months 2020, as these premium credits did not recur in Nine Months 2021. Quarter ended September 30, Change Nine Months ended September 30, Change % or % or ($ in millions) 2021 2020 Points 2021 2020 Points Direct new business1$ 10.2 12.1 (15) % $ 31.0 33.8 (8) % Retention 84 % 83 1 pts 83 % 83 - pts Renewal pure price increases 1.2 1.8 (0.6) 1.0 2.9
(1.9)
1Excludes our Flood direct premiums written which is 100% ceded to the NFIP and
therefore, has no impact on our NPW.
34
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The loss and loss expense ratio decreased 2.9 points in Third Quarter 2021
compared to Third Quarter 2020 and 8.7 points in Nine Months 2021 compared to
Nine Months 2020 driven by the following:
Third Quarter 2021 Third Quarter 2020
Loss and Loss Impact on Loss and Loss Impact on
Expense Loss and Loss Expense Loss and Loss
($ in millions) Incurred Expense Ratio Incurred Expense Ratio Change in Ratio
Net catastrophe losses $ 19.5 26.7 pts 28.4 37.4 pts (10.7) pts
Non-catastrophe property loss and
loss expenses 28.7 39.1 22.4 29.5 9.6
Flood claims handling fee
reimbursement (2.9) (4.0) (1.4) (1.8) (2.2)
Total $ 45.3 61.8 49.4 65.1 (3.3)
Nine Months 2021 Nine Months 2020
Loss and Loss Impact on Loss and Loss Impact on
Expense Loss and Loss Expense Loss and Loss
($ in millions) Incurred Expense Ratio Incurred Expense Ratio Change in Ratio
Net catastrophe losses $ 30.1 13.7 pts 66.4 29.7 pts (16.0)
pts
Non-catastrophe property loss and loss expenses 76.7 34.8 60.5 27.1 7.7 Flood claims handling fee reimbursement (4.5) (2.0) (2.9) (1.3) (0.7) Total$ 102.3 46.5 124.0 55.5 (9.0) Our Third Quarter 2021 losses were impacted by 18 events that were designated as catastrophes by Property Claims Services ("PCS"), a statistical reporting company, including Hurricane Ida in lateAugust 2021 and earlySeptember 2021 , which had the most significant impact on results. Partially offsetting these losses were$1.5 million of increased claims handling fee reimbursement, which is a benefit to loss and loss expenses incurred, on our flood book of business in Third Quarter 2021 compared to Third Quarter 2020, predominately related to Hurricane Ida. Nine Months 2021 results were also impacted by two severe thunderstorms, accompanied by wind and hail, occurring in March andJune 2021 . Third Quarter 2020 was impacted by 13 events that were designated as catastrophes by PCS, which included the derecho in the Midwestern states of our footprint, and Hurricane Isaias. Nine Months 2020 was affected by a March tornado inTennessee and two severe April storms with damaging winds and tornadoes that impacted parts of the Midwestern andEastern United States . The underwriting expense ratio decreased 0.9 points in Third Quarter 2021 compared to Third Quarter 2020, driven mainly by a decrease of 0.5 points in profit-based compensation. The underwriting expense ratio decreased 1.4 points in Nine Months 2021 compared to Nine Months 2020. The underwriting expense ratio was elevated by 1.4 points in Nine Months 2020 for COVID-19-related items, as discussed in "Insurance Operations" above. The decrease in the underwriting expense ratio in Nine Months 2021 reflects the absence of these COVID-19-related impacts. E&S Lines Segment Quarter ended September 30, Change Nine Months ended September 30, Change % or % or ($ in thousands) 2021 2020 Points 2021 2020 Points Insurance Segments Results: NPW$ 82,056 62,057 32 %$ 227,109 186,550 22 % NPE 74,314 60,480 23 203,783 177,509 15 Less: Loss and loss expense incurred 46,643 47,090 (1) 131,850 119,685 10 Net underwriting expenses incurred 22,999 20,667 11 64,439 61,789 4 Underwriting income (loss)$ 4,672 (7,277) 164 %$ 7,494 (3,965) 289 % Combined Ratios: Loss and loss expense ratio 62.8 % 77.8 (15.0) pts 64.7 % 67.4 (2.7) pts Underwriting expense ratio 30.9 34.2 (3.3) 31.6 34.8 (3.2) Combined ratio 93.7 112.0 (18.3) 96.3 102.2 (5.9) 35
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NPW grew 32% in Third Quarter 2021 and 22% in Nine Months 2021 compared to the
same prior-year periods reflecting (i) renewal pure price increases, and (ii)
direct new business increases, as shown in the following table:
Quarter ended September 30, Change Nine Months ended September 30, Change
% or % or
($ in millions) 2021 2020 Points 2021 2020 Points
Direct new business $ 35.7 29.7 20 % $ 100.7 85.5 18 %
Renewal pure price increases 5.6 7.0 (1.4) 6.5 5.8 0.7
The loss and loss expense ratio decreased 15.0 points in Third Quarter 2021 and
2.7 points in Nine Months 2021 compared to the same prior-year periods,
primarily driven by the items outlined in the table below:
Third Quarter 2021 Third Quarter 2020
Loss and Loss Impact on Loss and Loss Impact on
Expense Loss and Loss Expense Loss and Loss
($ in millions) Incurred Expense Ratio Incurred Expense Ratio Change in Ratio
Net catastrophe losses $ 6.8 9.2 pts $ 11.8 19.5 pts (10.3) pts
Non-catastrophe property loss and
loss expenses 4.8 6.5 8.0 13.2 (6.7)
Total $ 11.6 15.7 $ 19.8 32.7 (17.0)
Nine Months 2021 Nine Months 2020
Loss and Loss Impact on Loss and Loss Impact on
Expense Loss and Loss Expense Loss and Loss
($ in millions) Incurred Expense Ratio Incurred Expense Ratio Change in Ratio
Net catastrophe losses $ 21.5 10.5 pts $ 18.8 10.6 pts (0.1) pts
Non-catastrophe property loss and
loss expenses 21.5 10.5 19.3 10.9 (0.4)
(Favorable) prior year casualty
reserve development (7.0) (3.4) - - (3.4)
Total $ 36.0 17.6 $ 38.1 21.5 (3.9)
Both Third Quarter 2021, driven by Hurricane Ida, and Third Quarter 2020, driven
by Hurricane Laura, experienced elevated net catastrophe losses that exceeded
our longer-term historical average. Nine Months 2021 was also impacted by a
series of large storms that significantly impacted Texas and other Southern and
Midwestern states. Nine Months 2020 included losses related to the civil unrest
that occurred throughout the country in June of that year.
The favorable prior year casualty reserve development in Nine Months 2021 was
primarily attributable to lower loss severities in accident years 2016 through
2018. There was no prior year casualty reserve development in Third Quarter 2021
or in Third Quarter and Nine Months 2020.
The underwriting expense ratio decreased 3.3 points in Third Quarter 2021
compared to Third Quarter 2020 and 3.2 points in Nine Months 2021 compared to
Nine Months 2020. The primary drivers were (i) decreased labor expenses of 1.6
points in the quarter and 1.4 points in the year-to-date period, and (ii)
decreased compensation to our distribution partners of 1.1 points in the quarter
and 0.8 points in the year-to-date period as a result of the mix of premiums and
corresponding commission rates. In addition, the underwriting expense ratio in
Nine Months 2020 was elevated by 0.8 points for COVID-19-related increases in
our allowance for credit losses on premiums receivable as discussed in
"Insurance Operations" above. The decrease in the underwriting expense ratio in
Nine Months 2021 reflects the absence of this COVID-19-related impact.
Reinsurance
We successfully completed negotiations of ourJuly 1, 2021 excess of loss treaties, which provide coverage for our Standard Commercial Lines, Standard Personal Lines, and E&S Lines. The Casualty Excess of Loss ("Casualty Treaty") was renewed with the same structure as the expiring treaty. The fiscal year 2022 treaty ceded deposit premium increased$9.5 million , or 16%, reflecting a slight rate increase coupled with higher projected subject earned premium. The Property Excess of Loss ("Property Treaty") was renewed with an increase in the retention on the first layer to$3.0 million from$2.0 million , thereby decreasing the coverage in excess of retention to$7.0 million from$8.0 million . The subsequent layers remained the same. The fiscal year 2022 treaty deposit premium increased$0.5 million , or 1%, reflecting a risk-adjusted rate increase along with an increase in projected subject premium, which was driven by growth in total insured values, insured locations, and rate increases. The increase was offset by the premium reduction benefit of the first layer retention increase. 36
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Table of Contents
The following table summarizes the Property Treaty and the Casualty Treaty
arrangements covering our Insurance Subsidiaries:
KEMPER CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Part I – Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 2.
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