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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. Certain statements in this Quarterly Report on Form 10-Q, including information incorporated by reference, are "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995 ("PSLRA"). The PSLRA provides a safe harbor under the Securities Act of 1933 and the Securities Exchange Act of 1934 for forward-looking statements. These statements relate to our intentions, beliefs, projections, estimations, or forecasts of future events and financial performance. They involve known and unknown risks, uncertainties, and other factors that may cause our or industry actual results, activity levels, or performance to materially differ from those expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by words such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "target," "project," "intend," "believe," "estimate," "predict," "potential," "pro forma," "seek," "likely," "continue," or comparable terms. Our forward-looking statements are only predictions, and we can give no assurance that such expectations will prove correct. We undertake no obligation, other than as federal securities laws may require, to publicly update or revise any forward-looking statements for any reason. Factors that could cause our actual results to differ materially from what we project, forecast, or estimate in forward-looking statements are discussed in further detail in Item 1A. "Risk Factors." in Part II. "Other Information" of this Form 10-Q. These risk factors may not be exhaustive. We operate in a constantly changing business environment, and new risk factors may emerge at any time. We can neither predict these new risk factors nor assess their impact, if any, on our businesses or the extent any factor or combination of factors may cause actual results to differ materially from any forward-looking statements. Given these risks, uncertainties, and assumptions, the forward-looking events we discuss in this report might not occur.
Introduction
We classify our business into four reportable segments:
•Standard Commercial Lines;
•Standard Personal Lines;
•Excess and Surplus Lines ("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, 2021 ("2021 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. We write our E&S products through another subsidiary, Mesa
Underwriters Specialty Insurance Company , 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
2021 Annual Report filed with the United States ("U.S.") Securities and Exchange
Commission .
In the MD&A, we will discuss and analyze the following:
•Critical Accounting Policies and Estimates;
21 -------------------------------------------------------------------------------- Table of Contents •Financial Highlights of Results for the first quarters endedMarch 31, 2022 ("First Quarter 2022") andMarch 31, 2021 ("First Quarter 2021"); •Results of Operations and Related Information by Segment; •Federal Income Taxes; •Liquidity and Capital Resources; and •Ratings. 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 2021 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; and (iii) reinsurance. 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. For additional information regarding our critical accounting policies and estimates, refer to pages 35 through 43 of our 2021 Annual Report.
Financial Highlights of Results for First Quarter 2022 and First Quarter 20211
Quarter ended March 31, Change
($ and shares in thousands, except per share amounts) 2022 2021 % or Points
Financial Data:
Revenues $ 846,062 803,907 5 %
After-tax net investment income 58,515 56,343 4
After-tax underwriting income 44,105 61,391 (28)
Net income before federal income tax 69,890 135,632 (48)
Net income 56,330 109,270 (48)
Net income available to common stockholders 54,030 106,817 (49)
Key Metrics:
Combined ratio 93.1 % 89.3 3.8 pts
Invested assets per dollar of common stockholders' equity $ 3.02 2.97 2 %
Annualized return on common equity ("ROE") 8.1 16.8 (8.7) pts
Net premiums written to statutory surplus ratio 1.36 x 1.33 0.03
Per Common Share Amounts:
Diluted net income per share $ 0.89 1.77 (50) %
Book value per share 42.73 42.38 1
Dividends declared per share to common stockholders 0.28 0.25 12
Non-GAAP Information:
Non-GAAP operating income2 $ 85,908 102,773 (16) %
Diluted non-GAAP operating income per common share2 1.41 1.70 (17)
Annualized non-GAAP operating ROE2 12.8 % 16.2 (3.4) pts
Adjusted book value per common share2 $ 43.80 38.73 13 %
1Refer to the Glossary of Terms attached to our 2021 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 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 ROE, respectively, but exclude after- tax net
realized and unrealized gains and losses on investments included in net income.
Adjusted book value per common share is a measure comparable to book value per
common share, but excludes total after-tax unrealized gains and losses on
investments included in accumulated other comprehensive (loss) income. They are
used as important financial measures by us, analysts, and investors because the
timing of realized and unrealized investment gains and losses on securities in
any given period is largely discretionary. In addition, net realized and
unrealized investment gains and losses on investments could distort the analysis
of trends.
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Reconciliations of net income available to common stockholders, net income
available to common stockholders per diluted common share, annualized ROE, and
book value per common share to non-GAAP operating income, non-GAAP operating
income per diluted common share, annualized non-GAAP operating ROE, and adjusted
book value per common share, respectively, are provided in the tables below:
Reconciliation of net income available to common stockholders
to non-GAAP operating income
Quarter ended March 31, ($ in thousands) 2022 2021 Net income available to common stockholders$ 54,030 106,817
Net realized and unrealized investment losses (gains) included
in net income, before tax
40,352 (5,119) Tax on reconciling items (8,474) 1,075 Non-GAAP operating income$ 85,908 102,773
Reconciliation of net income available to common stockholders
per diluted common share to non-GAAP operating income per
Quarter endedMarch 31 , diluted common share 2022 2021
Net income available to common stockholders per diluted common
share
$ 0.89 1.77
Net realized and unrealized investment losses (gains) included
in net income, before tax
0.66 (0.08) Tax on reconciling items (0.14) 0.01 Non-GAAP operating income per diluted common share$ 1.41 1.70
Reconciliation of annualized ROE to annualized non-GAAP
operating ROE
Quarter ended
2022 2021 Annualized ROE 8.1 % 16.8
Net realized and unrealized investment losses (gains) included
in net income, before tax
6.0 (0.8)
Tax on reconciling items (1.3) 0.2
Annualized non-GAAP operating ROE 12.8 % 16.2
Reconciliation of book value per common share to adjusted book
value per common share Quarter ended March 31,
2022 2021
Book value per common share $ 42.73 42.38
Total unrealized investment losses (gains) included in
accumulated other comprehensive (loss) income, before tax
1.35 (4.62) Tax on reconciling items (0.28) 0.97 Adjusted book value per common share$ 43.80 38.73
The components of our annualized ROE and non-GAAP operating ROE are as follows:
Annualized ROE and non-GAAP operating ROE Components
Quarter ended
2022 2021 Change Points
Standard Commercial Lines Segment 5.0 % 8.6 (3.6)
Standard Personal Lines Segment 0.8 1.0 (0.2)
E&S Lines Segment 0.8 0.1 0.7
Total insurance operations 6.6 9.7 (3.1)
Investment income 8.7 8.9 (0.2)
Net realized and unrealized investment (losses) gains (4.7) 0.6 (5.3)
Total investments segment 4.0 9.5 (5.5)
Other (2.5) (2.4) (0.1)
Annualized ROE 8.1 % 16.8 (8.7)
Net realized and unrealized investment losses (gains),
after tax
4.7 (0.6) 5.3 Annualized Non-GAAP Operating ROE 12.8 % 16.2 (3.4) Our First Quarter 2022 annualized non-GAAP operating ROE of 12.8% was above our full-year 2022 targeted non-GAAP operating ROE of 11%, but below our First Quarter 2021 annualized non-GAAP operating ROE of 16.2%. The decrease compared to First Quarter 2021 was primarily driven by a$17.3 million , or 3.1-point, reduction in after-tax underwriting income, resulting from (i) an increase in non-catastrophe property loss and loss expenses in First Quarter 2022, and (ii) lower favorable prior year casualty reserve development in First Quarter 2022; partially offset by a decrease in net catastrophe losses in First Quarter 2022. 23 -------------------------------------------------------------------------------- Table of Contents Our First Quarter 2022 results included$245 million of after-tax net unrealized investment losses recorded in stockholders' equity. These investment losses reduced ourMarch 31, 2022 stockholders' equity position, which resulted in an approximate 50 basis point benefit to our First Quarter 2022 annualized ROE and non-GAAP operating ROE. In addition to the above drivers of the year-over-year change in our annualized non-GAAP operating ROE, the 8.7-point reduction in the annualized ROE was due to a decrease of 5.3 points in net realized and unrealized investment gains in First Quarter 2022 compared to First Quarter 2021. The decrease was primarily driven by (i) active trading of our fixed income securities to opportunistically increase yield in the rising interest rate environment, and (ii) higher credit loss expense on our AFS fixed income securities portfolio.
Outlook
We entered 2022 in the strongest financial position in our 95-year history, with a record level of GAAP equity, statutory capital and surplus, and holding company cash and investments. We were well positioned to continue executing on our strategic objectives and delivering growth and profitability. Although First Quarter 2022 financial results were not as favorable as First Quarter 2021, our overall First Quarter 2022 financial results were strong with 11% growth in NPW and a 12.8% annualized non-GAAP operating ROE, which was above our full-year target of 11%. While we recorded strong financial results in First Quarter 2022, this quarter included elevated economic inflation, which resulted in a significant increase in interest rates, a widening of credit spreads, lower public equity valuations, and significant financial market volatility. The higher interest rates and widening of credit spreads reduced the value of our fixed income securities, which lowered our stockholders' equity by 8% during First Quarter 2022. The higher economic inflation impacted our non-catastrophe property loss and loss expenses with increased severities in our property lines, particularly commercial and personal automobile physical damage results. Should these trends continue in the near-term, it could negatively impact our profitability. We will continue to focus on achieving written renewal pure price increases, along with underwriting improvements, that meet or exceed expected loss trend. We achieved Standard Commercial Lines renewal pure price increases of 4.8% in First Quarter 2022. Renewal pure price increased throughout the quarter, with both February and March rate at 5.1%. This trend continued intoApril 2022 with renewal pure rate increases of 5.2%. In addition, the higher interest rates and the widening of credit spreads provide an opportunity to invest our cash flows in new fixed income securities with higher yields, which over time will likely increase the overall book yield on our fixed income securities investment portfolio.
We continue to focus on several other foundational areas to position us for
ongoing success:
•Delivering on our strategy for continued disciplined and profitable growth by: •Continuing to expand our Standard Commercial Lines market share by (i) increasing our share towards our 12% target of our agents' premiums, (ii) strategically appointing new agents, and (iii) maximizing new business growth in the small business market through utilization of our enhanced small business platform; •Expanding our geographic footprint, with a plan to commence writing Standard Commercial Lines business in the states ofVermont ,Alabama , andIdaho in the near-term, and other states over time; •Increasing customer retention by delivering a superior omnichannel experience and offering value-added technologies and services; •Shifting our focus towards targeting new and renewal customers in the mass affluent market within our Standard Personal Lines segment, where we believe we can be more competitive with the strong coverage and servicing capabilities that we offer; and •Deploying our new underwriting platform in our E&S segment that will improve agents' ease of interactions with us. •Continuing to build on a culture centered on the values of diversity, equity, and inclusion that fosters innovation, idea generation, and developing a group of specially trained leaders who can guide us successfully into the future.
Our full-year expectations are as follows:
•A GAAP combined ratio, excluding net catastrophe losses, of 91.0%. Our combined ratio estimate assumes no additional prior-year casualty reserve development; •Net catastrophe losses of 4.0 points on the combined ratio; •After-tax net investment income of$205 million (prior guidance$200 million ) that includes$15 million (prior guidance$20 million ) in after-tax net investment income from our alternative investments; 24 -------------------------------------------------------------------------------- Table of Contents •An overall effective tax rate of approximately 20.5% that assumes an effective tax rate of 19.5% for net investment income and 21.0% for all other items; and •Weighted average shares of 61 million on a fully diluted basis.
Results of Operations and Related Information by Segment
Insurance Operations
The following table provides quantitative information for analyzing the combined
ratio:
All Lines Quarter ended March 31,
($ in thousands) 2022 2021 Change % or Points
Insurance Operations Results:
Net premiums written ("NPW") $ 889,798 798,178 11 %
Net premiums earned ("NPE") 812,283 724,960 12
Less:
Loss and loss expense incurred 494,236 413,401 20 Net underwriting expenses incurred 260,639 232,626 12 Dividends to policyholders 1,579 1,223 29 Underwriting income$ 55,829 77,710 (28) % Combined Ratios: Loss and loss expense ratio 60.8 % 57.0 3.8 pts Underwriting expense ratio 32.1 32.1 - Dividends to policyholders ratio 0.2 0.2 - Combined ratio 93.1 89.3 3.8
The 11% NPW growth in First Quarter 2022 compared to First Quarter 2021
reflected (i) overall renewal pure price increases, and (ii) higher direct new
business, as shown in the following table:
Quarter ended March 31,
($ in millions) 2022 2021
Direct new business premiums $ 177.2 155.6
Renewal pure price increases on NPW 4.6 %
5.2
In addition, our NPW growth in First Quarter 2022 benefited from strong retention and exposure growth driven by increased economic activity in theU.S. , which resulted in our customers increasing their sales, payrolls, and exposure units, all of which favorably impacted our NPW.
The increase in NPE in First Quarter 2022 compared to First Quarter 2021
resulted from the same impacts to the NPW increase described above.
Loss and Loss Expenses
The loss and loss expense ratio increased 3.8 points in First Quarter 2022
compared to First Quarter 2021, primarily due to the following:
First Quarter 2022 First Quarter 2021
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 $ 20.6 2.5 pts $ 29.9 4.1 pts (1.6) pts
(Favorable) prior year casualty
reserve development (20.0) (2.5) (35.0) (4.8) 2.3
Non-catastrophe property loss and
loss expenses 150.4 18.5 115.6 15.9 2.6
Total $ 151.0 18.5 $ 110.5 15.2 3.3
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-------------------------------------------------------------------------------- Table of Contents Details of the prior year casualty reserve development were as follows: (Favorable)/Unfavorable Prior Year Casualty Reserve Development Quarter ended March 31, ($ in millions) 2022 2021 General liability$ (5.0) (15.0) Workers compensation (10.0) (15.0) Bonds (5.0) - Total Standard Commercial Lines (20.0) (30.0) Homeowners - - Personal automobile - - Total Standard Personal Lines - - E&S - (5.0) Total (favorable) prior year casualty reserve development$ (20.0) (35.0) (Favorable) impact on loss ratio (2.5) pts (4.8) For additional qualitative discussion on reserve development and non-catastrophe property loss and loss expenses, refer to the insurance segment sections below in "Results of Operations and Related Information by Segment."
Standard Commercial Lines Segment
Quarter ended March 31, Change
% or
($ in thousands) 2022 2021 Points
Insurance Segments Results:
NPW $ 737,639 665,565 11 %
NPE 661,469 589,141 12
Less:
Loss and loss expense incurred 399,474 324,850 23
Net underwriting expenses incurred 218,032 193,569 13
Dividends to policyholders 1,579 1,223 29
Underwriting income 42,384 69,499 (39)
Combined Ratios:
Loss and loss expense ratio 60.4 % 55.1 5.3 pts
Underwriting expense ratio 33.0 32.9 0.1
Dividends to policyholders ratio 0.2 0.2 -
Combined ratio 93.6 88.2 5.4
NPW growth of 11% in First Quarter 2022 compared to First Quarter 2021 reflected
(i) renewal pure price increases, (ii) higher direct new business, and (iii)
stronger retention as shown in the table below. In addition, NPW growth in First
Quarter 2022 benefited from exposure growth.
Quarter ended March 31,
($ in millions) 2022 2021
Direct new business premiums $ 128.4 114.5
Retention 87 % 86
Renewal pure price increases on NPW 4.8
5.5
The increase in NPE in First Quarter 2022 compared to First Quarter 2021
resulted from the same impacts to the NPW increase described above.
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The 5.3-point increase in the loss and loss expense ratio in First Quarter 2022
compared to First Quarter 2021 was primarily driven by the following:
First Quarter 2022 First Quarter 2021
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 $ 14.9 2.3 pts $ 16.1 2.7 (0.4)
pts
Non-catastrophe property loss and loss expenses 115.7 17.5 83.6 14.2 3.3 (Favorable) prior year casualty reserve development (20.0) (3.0) (30.0) (5.1) 2.1 Total 110.6 16.8 69.7 11.8 5.0
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 following is a discussion of our most significant Standard Commercial Lines
of business:
General Liability
Quarter ended March 31, Change
% or
($ in thousands) 2022 2021 Points1
NPW $ 244,118 222,062 10 %
Direct new business 37,883 34,253 n/a
Retention 87 % 86 n/a
Renewal pure price increases 4.0 4.4 n/a
NPE $ 216,325 193,520 12 %
Underwriting income 28,817 36,573 (21)
Combined ratio 86.7 % 81.1 5.6 pts
% of total Standard Commercial Lines NPW 33 33
1n/a: not applicable.
NPW growth of 10% in First Quarter 2022 compared to First Quarter 2021 benefited
from renewal pure price increases, exposure growth, and higher direct new
business.
The 5.6-point increase in the combined ratio in First Quarter 2022 compared to
First Quarter 2021 was primarily driven by less favorable prior year casualty
reserve development, as follows:
First Quarter 2022 First Quarter 2021
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 $ (5.0) (2.3) pts $ (15.0) (7.8) 5.5 pts
The prior year favorable casualty reserve development in First Quarter 2022 was
primarily attributable to lower loss severities in accident years 2019 and
prior. The First Quarter 2021 prior year favorable casualty reserve development
was primarily attributable to improved loss severities in accident years 2018
and prior.
Commercial Automobile
Quarter ended March 31, Change
% or
($ in thousands) 2022 2021 Points1
NPW $ 212,595 190,646 12 %
Direct new business 31,413 28,746 n/a
Retention 87 % 87 n/a
Renewal pure price increases 7.4 9.0 n/a
NPE $ 193,830 171,881 13 %
Underwriting (loss) income (10,918) 2,792 (491)
Combined ratio 105.6 % 98.4 7.2 pts
% of total Standard Commercial Lines NPW 29 29
1n/a: not applicable.
27
-------------------------------------------------------------------------------- Table of Contents NPW growth of 12% in First Quarter 2022 compared to First Quarter 2021 benefited from renewal pure price increases, higher direct new business, and exposure growth that reflects 7% growth of in-force vehicle counts as ofMarch 31, 2022 compared toMarch 31, 2021 .
The 7.2-point increase in the combined ratio in First Quarter 2022 compared to
First Quarter 2021 was primarily driven by the following:
First Quarter 2022 First Quarter 2021
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 $ 0.3 0.2 pts $ 0.2 0.1 0.1 pts
Non-catastrophe property loss and
loss expenses 43.0 22.2 29.4 17.1 5.1
Total $ 43.3 22.4 $ 29.6 17.2 5.2
First Quarter 2022 experienced elevated non-catastrophe property loss and loss
expenses, due primarily to higher severities from recent inflationary and supply
chain impacts that have caused increases to labor and the cost of materials.
In addition, the combined ratio was impacted by a 1.6-point increase in current
year casualty loss costs in First Quarter 2022 compared to First Quarter 2021,
primarily due to an expected increase in claim frequencies resulting from a more
normalized amount of miles driven as the COVID-19-related restrictions continue
to lessen.
Commercial Property
Quarter ended March 31, Change
% or
($ in thousands) 2022 2021 Points1
NPW $ 130,905 113,382 15 %
Direct new business 27,817 24,270 n/a
Retention 86 % 85 n/a
Renewal pure price increases 6.2 6.0 n/a
NPE $ 120,062 102,810 17 %
Underwriting income 176 6,766 97
Combined ratio 99.9 % 93.4 6.5 pts
% of total Standard Commercial Lines NPW 18 17
1n/a: not applicable.
NPW growth of 15% in First Quarter 2022 compared to First Quarter 2021 benefited
from renewal pure price increases, exposure growth, stronger retention, and
higher direct new business.
The 6.5-point increase in the combined ratio in First Quarter 2022 compared to
First Quarter 2021 was primarily driven by the items in the table shown below.
First Quarter 2022 First Quarter 2021
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 $ 12.9 10.8 pts 13.7 13.3 (2.5) pts
Non-catastrophe property loss and
loss expenses 63.1 52.5 44.6 43.4 9.1
Total $ 76.0 63.3 58.3 56.7 6.6
First Quarter 2022 experienced elevated non-catastrophe property loss and loss
expenses, primarily due to increased severity compared to First Quarter 2021
that reflects the volatility from period to period that is normally associated
with our commercial property line of business.
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Workers Compensation
Quarter ended March 31, Change
% or
($ in thousands) 2022 2021 Points1
NPW $ 97,459 92,291 6 %
Direct new business 16,946 15,946 n/a
Retention 87 % 86 n/a
Renewal pure price increases (1.1) 0.2 n/a
NPE $ 84,680 78,190 8 %
Underwriting income 15,905 20,418 (22)
Combined ratio 81.2 % 73.9 7.3 pts
% of total Standard Commercial Lines NPW 13 14
1n/a: not applicable.
NPW growth of 6% in First Quarter 2022 compared to First Quarter 2021 benefited
from higher direct new business, exposure growth, and stronger retention.
The 7.3-point increase in the combined ratio in First Quarter 2022 compared to
First Quarter 2021 was the result of less favorable prior year casualty reserve
development, as follows:
First Quarter 2022 First Quarter 2021
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 $ (10.0) (11.8) pts $ (15.0) (19.2) 7.4 pts
The favorable prior year casualty reserve development in First Quarter 2022 was
primarily due to improved loss severities in accident years 2019 and prior. The
favorable prior year casualty reserve development in First Quarter 2021 was
primarily due to improved loss severities in accident years 2018 and prior.
Standard Personal Lines Segment
Quarter ended March 31, Change
% or
($ in thousands) 2022 2021 Points
Insurance Segments Results:
NPW $ 65,057 65,077 - %
NPE 72,642 73,821 (2)
Less:
Loss and loss expense incurred 48,547
47,166 3
Net underwriting expenses incurred 17,575
18,960 (7)
Underwriting income 6,520
7,695 (15)
Combined Ratios:
Loss and loss expense ratio 66.8 %
63.9 2.9 pts
Underwriting expense ratio 24.2 25.7 (1.5)
Combined ratio 91.0 89.6 1.4
NPW was flat in First Quarter 2022 compared to First Quarter 2021, continuing to
be impacted by the challenging personal automobile competitive environment. In
the third quarter of 2021, we transitioned our personal lines strategy to
targeting customers in the mass affluent market where we believe our strong
coverage and servicing capabilities can be more competitive.
Quarter ended March 31,
($ in millions) 2022 2021
Direct new business premiums1 $ 9.6 9.8
Retention 84 % 83
Renewal pure price increases on NPW 0.6
0.8
1Excludes our Flood direct premiums written, which is 100% ceded to the NFIP and
therefore, has no impact on our NPW.
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The 2.9-point increase in the loss and loss expense ratio in First Quarter 2022
compared to First Quarter 2021 was driven by the following:
First Quarter 2022 First Quarter 2021
Loss and Loss Impact on Loss and Loss Impact on
Expense Loss and Loss Expense Loss and Loss Expense
($ in millions) Incurred Expense Ratio Incurred Ratio Change in Ratio
Net catastrophe losses $ 4.3 6.0 pts 5.6 7.6 (1.6) pts
Non-catastrophe property loss and
loss expenses 25.6 35.2 23.1 31.3 3.9
Total $ 29.9 41.2 28.7 38.9 2.3
First Quarter 2022 experienced elevated non-catastrophe property loss and loss
expenses associated with physical damage losses on our personal automobile line
of business due to higher frequencies and severities from recent inflationary
and supply chain impacts that have caused increases to labor and the cost of
materials. The likely continuation of this trend, coupled with renewal pure
price increases below trend, may put pressure on this segment's profitability in
the near-term.
In addition, the loss and loss expense ratio was impacted by a 0.7-point
increase in current year casualty loss costs in First Quarter 2022 compared to
First Quarter 2021, primarily due to an expected increase in claim frequencies
resulting from a more normalized amount of miles driven as the COVID-19-related
restrictions continue to lessen.
The 1.5-point decrease in the underwriting expense ratio in First Quarter 2022
compared to First Quarter 2021 was primarily driven by (i) a 0.8-point reduction
in commissions, and (ii) a 0.5-point decrease in employee-related expenses.
E&S Lines Segment
Quarter ended March 31, Change
% or
($ in thousands) 2022 2021 Points
Insurance Segments Results:
NPW $ 87,102 67,536 29 %
NPE 78,172 61,998 26
Less:
Loss and loss expense incurred 46,215 41,385 12
Net underwriting expenses incurred 25,032 20,097 25
Underwriting income (loss) 6,925 516 1,242
Combined Ratios:
Loss and loss expense ratio 59.1 % 66.8 (7.7) pts
Underwriting expense ratio 32.0 32.4 (0.4)
Combined ratio 91.1 99.2 (8.1)
The strong NPW growth of 29% in First Quarter 2022 compared to First Quarter
2021 reflected renewal pure price increases and higher direct new business as
shown in the table below. In addition, NPW growth in First Quarter 2022
benefited from exposure growth driven by favorable economic conditions in E&S
lines in the U.S.
Quarter ended March 31,
($ in millions) 2022 2021
Direct new business premiums $ 39.2 31.3
Overall renewal price increases on NPW 7.7
7.3
The increase in NPE in First Quarter 2022 compared to First Quarter 2021
resulted from the same impacts to the NPW increase described above.
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The 7.7-point decrease in the loss and loss expense ratio in First Quarter 2022
compared to First Quarter 2021 was primarily driven by the items in the table
shown below.
First Quarter 2022 First Quarter 2021
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$ 1.3 1.7 pts$ 8.3 13.3 (11.6) pts Non-catastrophe property loss and loss expenses 9.1 11.6 8.9 14.3
(2.7)
(Favorable) prior year casualty reserve development - - (5.0) (8.1) 8.1 Total$ 10.4 13.3$ 12.2 19.5 (6.2) The decrease in net catastrophe losses in First Quarter 2022 compared to First Quarter 2021 was primarily due to a series of large storms in First Quarter 2021 that significantly impactedTexas and other Southern and Midwestern states, that did not reoccur in First Quarter 2022.
There was no prior year casualty reserve development in First Quarter 2022. The
favorable prior year casualty reserve development in First Quarter 2021 was
primarily due to improved loss severities in accident years 2016 through 2018.
In addition, the loss and loss expense ratio was impacted by a 1.4-point decrease in current year casualty loss costs in First Quarter 2022 compared to First Quarter 2021. Our E&S casualty lines results have improved over recent years, following a number of underwriting and claims initiatives, strong rate increases, and the decrease in current year casualty loss costs reflects the impacts of these actions.
Investments
The primary objectives of the investment portfolio are to maximize after-tax net investment income and generate long-term growth in book value by maximizing the overall total return of the portfolio. Each objective is balanced against prevailing market conditions, capital preservation considerations, and our enterprise risk-taking appetite. We maintain (i) a well-diversified portfolio across issuers, sectors, and asset classes, and (ii) a high credit quality core fixed income securities portfolio with a duration and maturity profile at an acceptable risk level that provides ample liquidity. The effective duration of the fixed income securities portfolio, including short-term investments, was 4.1 years as ofMarch 31, 2022 , compared to the Insurance Subsidiaries' net loss and loss expense reserves duration of 3.5 years atDecember 31, 2021 . Our fixed income and short-term investments represented 90% of our invested assets atMarch 31, 2022 , and 91% atDecember 31, 2021 . Additionally, as of both dates, our fixed income securities and short-term investments portfolio had a weighted average credit rating of "A+" with investment grade holdings representing 96% of the total portfolio.
For further details on the composition, credit quality, and the various risks to
which our portfolio is subject, see Item 7A. "Quantitative and Qualitative
Disclosures About Market Risk." of our 2021 Annual Report.
Total Invested Assets ($ in thousands) March 31, 2022 December 31, 2021 Change Total invested assets$ 7,774,711 8,026,988 (3) % Invested assets per dollar of common stockholders' equity 3.02 2.88 5 Unrealized (loss) gain - before tax1 (56,904) 255,658 (122) Unrealized (loss) gain - after tax1 (44,954) 201,970 (122)
1Includes unrealized losses on fixed income securities of
unrealized gains on equity securities of
Invested assets decreased$252.3 million atMarch 31, 2022 , compared toDecember 31, 2021 , reflecting an increase in pre-tax unrealized losses of$312.6 million , due to an increase in benchmarkU.S. Treasury rates and the widening of credit spreads, partially offset by operating cash flows during First Quarter 2022 that were 10% of NPW. 31 -------------------------------------------------------------------------------- Table of Contents Net Investment Income The components of net investment income earned were as follows: Quarter ended March 31, Change ($ in thousands) 2022 2021 % or Points Fixed income securities$ 53,925 52,823 2 % Commercial mortgage loans ("CMLs") 970 514 89 Equity securities 2,418 2,488 (3) Short-term investments 101 85 19 Other investments 19,305 17,433 11 Investment expenses (4,117) (3,627) 14 Net investment income earned - before tax 72,602 69,716 4 Net investment income tax expense (14,087) (13,373) 5 Net investment income earned - after tax$ 58,515 56,343 4 Effective tax rate 19.4 % 19.2 0.2 pts Annualized after-tax yield on fixed income investments 2.6 2.6 - Annualized after-tax yield on investment portfolio 3.0 3.0 - Net investment income earned increased 4% in First Quarter 2022 compared to First Quarter 2021, driven by income earned on fixed income securities and other investments. During First Quarter 2022, we actively traded our fixed income securities portfolio to opportunistically increase yield in the rising interest rate environment. The average after-tax new purchase yield on fixed income security purchases in First Quarter 2022 was 2.6%, which was up sequentially from 2.1% in the fourth quarter of 2021 and 1.7% in First Quarter 2021. In addition, as ofMarch 31, 2022 , 14% of our fixed income securities portfolio was invested in floating rate securities, which reset principally to 90-dayU.S. dollar-denominated London Interbank Offered Rate. As the returns on our alternative investments generally follow capital market performance, which was down during First Quarter 2022, we expect losses on these investments in the second quarter of 2022, which will impact net investment income. Over the remainder of 2022, we expect higher reinvestment yields within our fixed income securities portfolio, which will likely result in higher net investment income from these securities. Realized and Unrealized Gains and Losses When evaluating securities for sale, our general philosophy is to reduce our exposure to securities and sectors based on economic evaluations of whether the fundamentals for that security or sector have deteriorated or the timing is appropriate to opportunistically trade for other securities with better economic-return characteristics. Net realized and unrealized gains and losses for the indicated periods were as follows: Quarter ended March 31, ($ in thousands) 2022 2021 Change % Net realized losses on disposals$ (11,363) (795) 1,329 % Net unrealized (losses) gains on equity securities (2,154) 11,280 (119) Net credit loss expense on fixed income securities, AFS (22,052) (4,997) 341
Net credit loss expense on fixed income securities,
held-to-maturity
14 (7) (300) Losses on securities for which we have the intent to sell (4,797) (362) 1,225 Total net realized and unrealized investment (losses) gains$ (40,352) 5,119 (888) Net realized and unrealized investment gains decreased$45.5 million in First Quarter 2022 compared to First Quarter 2021, primarily driven by (i) active trading of our fixed income securities in First Quarter 2022 to opportunistically increase yield in the rising interest rate environment, and (ii) higher credit loss expense on our AFS fixed income securities portfolio. 32 -------------------------------------------------------------------------------- Table of Contents Federal Income Taxes The following table provides information regarding federal income taxes and reconciles federal income tax at the corporate rate to the effective tax rate: Quarter ended March 31, ($ in thousands) 2022 2021 Tax at statutory rate$ 14,677 28,483 Tax-advantaged interest (1,074) (1,178) Dividends received deduction (106) (109) Executive compensation 258 207 Stock-based compensation (731) (464) Other 536 (577) Federal income tax expense 13,560 26,362 Income before federal income tax, less preferred stock dividends 67,590 133,179 Effective tax rate 20.1 % 19.8 Liquidity and Capital Resources Capital resources and liquidity reflect our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet our operating and growth needs.
Liquidity
We manage liquidity by focusing on generating sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. We also adjust our liquidity in light of economic or market conditions, as discussed further below. Sources of Liquidity Sources of cash for the Parent historically have consisted of dividends from the Insurance Subsidiaries, the investment portfolio held at the Parent, borrowings under third-party lines of credit, loan agreements with certain Insurance Subsidiaries, and the issuance of equity (common or preferred) and debt securities. We continue to monitor these sources, considering both our short-term and long-term liquidity and capital preservation strategies. The Parent's investment portfolio includes (i) short-term investments that are generally maintained in "AAA" rated money market funds approved by theNational Association of Insurance Commissioners , (ii) high-quality, highly liquid government and corporate fixed income securities; (iii) equity securities; (iv) other investments, and (v) a cash balance. In the aggregate, Parent cash and total investments amounted to$518 million atMarch 31, 2022 , and$527 million atDecember 31, 2021 . The composition of the Parent's investment portfolio may change over time based on various factors, including the amount and availability of dividends from our Insurance Subsidiaries, investment income, expenses, other Parent cash needs, such as dividends payable to stockholders, asset allocation investment decisions, inorganic growth opportunities, debt retirement, and share repurchases. Our target is for the Parent to maintain highly liquid investments of at least twice its expected annual net cash outflow needs, or$180 million . Insurance Subsidiary Dividends The Insurance Subsidiaries generate liquidity through insurance float, which is created by collecting premiums and earning investment income before paying claims. The period of float can extend over many years. Our investment portfolio consists of maturity dates that continually provide a source of cash flow for claims payments in the ordinary course of business. To protect our Insurance Subsidiaries' capital, we purchase reinsurance coverage for significantly large claims or catastrophes that may occur. The Insurance Subsidiaries paid$40 million in total dividends to the Parent during First Quarter 2022. As ofDecember 31, 2021 , our allowable ordinary maximum dividend is$322 million for 2022. All Insurance Subsidiary dividends to the Parent are (i) subject to the approval and/or review of its domiciliary state insurance regulator, and (ii) generally payable only from earned statutory surplus reported in its annual statements as of the precedingDecember 31 . Although domiciliary state insurance regulators historically have approved dividends, there is no assurance they will approve future Insurance Subsidiary dividends.New Jersey corporate law also limits the maximum amount of dividends the Parent can pay our stockholders if either (i) the Parent would be unable to pay its debts as they became due in the usual course of business, or (ii) the Parent's total assets would be less than its total liabilities. The Parent's ability to pay dividends to stockholders is also impacted by (i) covenants in its credit agreement that obligate it, among other things, to maintain a minimum consolidated net worth and a maximum ratio of consolidated debt to total capitalization, and (ii) the terms of our preferred stock that prohibit dividends to be declared or paid 33 -------------------------------------------------------------------------------- Table of Contents on our common stock if dividends are not declared and paid, or made payable, on all outstanding preferred stock for the latest completed dividend period.
For additional information regarding dividend restrictions and financial
covenants, where applicable, see Note 11. "Indebtedness", Note 17. "Equity", and
Note 22. "Statutory Financial Information, Capital Requirements, and
Restrictions on Dividends and Transfers of Funds" in Item 8. "Financial
Statements and Supplementary Data." of our 2021 Annual Report.
Line of Credit OnDecember 20, 2019 , the Parent entered into a Credit Agreement with the lenders named therein (the "Lenders") and the Bank of Montreal,Chicago Branch, as Administrative Agent ("Line of Credit"). Under the Line of Credit, the Lenders have agreed to provide the Parent with a$50 million revolving credit facility that can be increased to$125 million with the Lenders' consent. No borrowings were made under the Line of Credit in First Quarter 2022. The Line of Credit will mature onDecember 20, 2022 , and has a variable interest rate based on, among other factors, the Parent's debt ratings. For additional information regarding the Line of Credit and corresponding representations, warranties, and covenants, refer to Note 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of our 2021 Annual Report. We met all covenants under our Line of Credit as ofMarch 31, 2022 . Four of the Insurance Subsidiaries are members ofFederal Home Loan Bank ("FHLB") branches, as shown in the following table. Membership requires the ownership of branch stock and includes the right to access liquidity. AllFederal Home Loan Bank of Indianapolis ("FHLBI") andFederal Home Loan Bank of New York ("FHLBNY") borrowings are required to be secured by investments pledged as collateral. For additional information regarding collateral outstanding, refer to Note 4. "Investments" in Item 1. "Financial Statements." of this Form 10-Q: Branch Insurance Subsidiary Member FHLBISelective Insurance Company of South Carolina ("SICSC")1
FHLBNY Selective Insurance Company of America ("SICA")
1These subsidiaries are jointly referred to as the "Indiana Subsidiaries" as
they are domiciled in
The Line of Credit permits aggregate borrowings from the FHLBI and the FHLBNY up to 10% of the respective member company's admitted assets for the previous year. As SICNY is domiciled inNew York , its FHLBNY borrowings are limited byNew York insurance regulations to the lower of 5% of admitted assets for the most recently completed fiscal quarter, or 10% of admitted assets for the previous year-end. As ofMarch 31, 2022 , we had remaining capacity of$435.2 million for FHLB borrowings, with a$17.1 million additional stock purchase requirement to allow the member companies to borrow their remaining capacity amounts. Short-term Borrowings We did not make any short-term borrowings from FHLB branches during First Quarter 2022. However, onApril 1, 2022 , SICA borrowed$35 million from the FHLBNY at an interest rate of 0.70% with repayment due onMay 2, 2022 . This borrowing was refinanced upon its maturity onMay 2, 2022 , at an interest rate of 1.10%. This borrowing now matures onJune 27, 2022 . These funds were used for general corporate purposes. Intercompany Loan Agreements The Parent has lending agreements with the Indiana Subsidiaries approved by theIndiana Department of Insurance that provide additional liquidity. Similar to the Line of Credit, these lending agreements limit the Parent's borrowings from the Indiana Subsidiaries to 10% of the admitted assets of the respectiveIndiana Subsidiary. The outstanding balance on these intercompany loans was$40.0 million as of bothMarch 31, 2022 , andDecember 31, 2021 . The remaining capacity under these intercompany loan agreements was$109.9 million as of bothMarch 31, 2022 , andDecember 31, 2021 . Capital Market Activities The Parent had no private or public issuances of stock during First Quarter 2022. In the fourth quarter of 2020, we enhanced our capital structure flexibility at the Parent by issuing$200 million of 4.60% non-cumulative perpetual preferred stock. Net proceeds after issuance costs were$195 million . The Parent is using these proceeds for general corporate purposes, which may include the repurchase of common stock under a$100 million share repurchase program authorized by our Board of Directors (the "Board") in conjunction with the preferred stock offering. During First Quarter 2022, we repurchased 1,000 shares of our common stock under this authorization at a cost of$75,488 , with a$75.49 average price per share, excluding commission costs paid. We have$96.5 million of remaining capacity under our share repurchase program. For additional information on the 34 -------------------------------------------------------------------------------- Table of Contents preferred stock transaction and share repurchase program, refer to Note 17. "Equity" in Item 8. "Financial Statements and Supplementary Data." of our 2021 Annual Report. Uses of Liquidity The Parent's liquidity generated from the sources discussed above is used, among other things, to pay dividends to our stockholders. Dividends on shares of the Parent's common and preferred stock are declared and paid at the discretion of the Board based on our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors. OnMay 4, 2022 , our Board declared: •A quarterly cash dividend on common stock of$0.28 per common share, that is payableJune 1, 2022 , to holders of record onMay 16, 2022 ; and •A cash dividend of$287.50 per share on our 4.60% Non-Cumulative Preferred Stock, Series B (equivalent to$0.28750 per depository share) payable onJune 15, 2022 , to holders of record as ofMay 31, 2022 . Our ability to meet our interest and principal repayment obligations on our debt, as well as our ability to continue to pay dividends to our stockholders, is dependent on (i) liquidity at the Parent, (ii) the ability of the Insurance Subsidiaries to pay dividends, if necessary, and/or (iii) the availability of other sources of liquidity to the Parent. Excluding the short-term borrowing described above, our next FHLB borrowing principal repayment is$60 million to FHLBI due onDecember 16, 2026 . Restrictions on the ability of the Insurance Subsidiaries to declare and pay dividends, without alternative liquidity options, could materially affect our ability to service debt and pay dividends on common and preferred stock. Capital Resources Capital resources ensure we can pay policyholder claims, furnish the financial strength to support the business of underwriting insurance risks, and facilitate continued business growth. AtMarch 31, 2022 , we had GAAP stockholders' equity of$2.8 billion and statutory surplus of$2.4 billion . With total debt of$505.6 million atMarch 31, 2022 , our debt-to-capital ratio was 15.4%. For additional information on our statutory surplus, see Note 22. "Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds" in Item 8. "Financial Statements and Supplementary Data." of our 2021 Annual Report. The following table summarizes certain contractual obligations we had atMarch 31, 2022 that may require us to invest additional amounts into our investment portfolio, which we would fund primarily with operating cash flows. Amount of Year of Expiration of ($ in millions) Obligation Obligation Alternative and other investments $ 238.0 2036
Non-publicly traded collateralized loan obligations in our
fixed income securities portfolio
60.0 2037 Non-publicly traded common stock within our equity portfolio 16.4 2027 CMLs 6.3 2024 Privately-placed corporate securities 65.1 2026 Total $ 385.8 There is no certainty that any such additional investment will be required. We expect to have the capacity to repay and/or refinance these obligations as they come due. Our current and long-term material cash requirements associated with (i) loss and loss expense reserves, (ii) contractual obligations pursuant to operating and financing leases for office space and equipment, and (iii) notes payable, funded primarily with operating cash flows, have not materially changed sinceDecember 31, 2021 .
Our other cash requirements include, without limitation, dividends to
stockholders, capital expenditures, and other operating expenses, including
commissions to our distribution partners, labor costs, premium taxes, general
and administrative expenses, and income taxes.
As ofMarch 31, 2022 andDecember 31, 2021 , we had no (i) material guarantees on behalf of others and trading activities involving non-exchange traded contracts accounted for at fair value, (ii) material transactions with related parties other than those disclosed in Note 18. "Related Party Transactions" in Item 8. "Financial Statements and Supplementary Data." of our 2021 Annual Report, and (iii) material relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, established to facilitate off-balance sheet arrangements or other contractually narrow or 35 -------------------------------------------------------------------------------- Table of Contents limited purposes. Consequently, we are not exposed to any material financing, liquidity, market, or credit risk related to off-balance sheet arrangements. We continually monitor our cash requirements and the amount of capital resources we maintain at the holding company and operating subsidiary levels. As part of our long-term capital strategy, we strive to maintain capital metrics that support our targeted financial strength relative to the macroeconomic environment. Based on our analysis and market conditions, we may take a variety of actions, including, without limitation, contributing capital to the Insurance Subsidiaries, issuing additional debt and/or equity securities, repurchasing existing debt, repurchasing shares of the Parent's common stock, and increasing common stockholders' dividends. Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our stockholders, while enhancing our financial strength and underwriting capacity. We have a profitable book of business and solid capital base, positioning us well to take advantage of market opportunities that may arise. Book value per common share decreased 8% to$42.73 as ofMarch 31, 2022 , from$46.24 as ofDecember 31, 2021 , driven by a$4.07 change in net unrealized losses on our fixed income securities portfolio and$0.28 in dividends to our common stockholders, partially offset by$0.89 in net income per diluted common share. The increase in net unrealized losses on our fixed income securities was primarily driven by an increase in benchmarkU.S. Treasury rates and the widening of credit spreads. Our adjusted book value per share, which is book value per share excluding total after-tax unrealized gains or losses on investments included in accumulated other comprehensive (loss) income, increased slightly to$43.80 as ofMarch 31, 2022 , from$43.23 as ofDecember 31, 2021 . Cash Flows Net cash provided by operating activities was$93 million in First Quarter 2022 compared to$130 million in First Quarter 2021. Cash flows from operations decreased in First Quarter 2022 primarily driven by reduced underwriting results in our insurance operations. For more information on our underwriting results, refer to "Insurance Operations" above in this MD&A.
Net cash used in investing activities was
compared to
First Quarter 2022 as a result of reduced cash flows from our insurance
operations.
Net cash used in financing activities remained relatively flat with
in First Quarter 2022 compared to
Ratings
Our ratings remain the same as reported in our "Overview" section of Item 1.
"Business." of our 2021 Annual Report and are as follows:
NRSRO Financial Strength Rating Outlook
AM Best Company A+ Stable
Moody's Investors Services A2 Stable
Fitch Ratings ("Fitch") A+ Stable
Standard & Poor's Global Ratings A
Stable
OnMarch 24, 2022 , Fitch reaffirmed our "A+" rating with a "stable" outlook. In taking this rating action, Fitch cited our (i) business profile as a regional commercial lines writer with strong independent agency relationships, (ii) strong capitalization, and (iii) strong financial performance with stable underwriting results and return metrics that have remained favorable compared to peers.
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