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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. 24 -------------------------------------------------------------------------------- Table of Contents 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 endedDecember 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'sNational 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 withthe United States ("U.S.")Securities and Exchange Commission .
In the MD&A, we will discuss and analyze the following:
•Critical Accounting Policies and Estimates; •Financial Highlights of Results for the second quarters endedJune 30, 2022 ("Second Quarter 2022") andJune 30, 2021 ("Second Quarter 2021"); and the six-month periods endedJune 30, 2022 ("Six Months 2022") andJune 30, 2021 ("Six Months 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 highly uncertain matters, making them 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. 25
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Financial Highlights of Results for Second Quarter and Six Months 2022 and
Second Quarter and Six Months 20211
Quarter ended June 30, Change Six Months ended June 30, Change
($ and shares in thousands, except per share amounts) 2022 2021 % or Points 2022 2021 % or Points
Financial Data:
Revenues $ 864,818 840,518 3 % $ 1,710,880 1,644,425 4 %
After-tax net investment income 56,658 67,441 (16) 115,173 123,784 (7)
After-tax underwriting income 29,793 59,952 (50) 73,898 121,342 (39)
Net income before federal income tax 49,904 153,198 (67) 119,794 288,830 (59)
Net income 39,520 121,883 (68) 95,850 231,153 (59)
Net income available to common stockholders 37,220 119,583 (69) 91,250 226,400 (60)
Key Metrics:
Combined ratio 95.5 % 89.8 5.7 pts 94.3 % 89.5 4.8 pts
Invested assets per dollar of common stockholders' equity $ 3.17 2.88 10 % $ 3.17 2.88 10 %
Annualized return on common equity ("ROE") 6.0 18.3 (12.3) pts 7.1 17.3 (10.2) pts
Net premiums written to statutory surplus ratio 1.41 x 1.33 0.08 1.41 x 1.33 0.08
Per Common Share Amounts:
Diluted net income per share $ 0.61 1.98 (69) % $ 1.50 3.74 (60) %
Book value per share 39.68 44.78 (11) 39.68 44.78 (11)
Dividends declared per share to common stockholders 0.28 0.25 12 0.56 0.50 12
Non-GAAP Information:
Non-GAAP operating income2 $ 71,095 111,638 (36) % $ 157,003 214,411 (27) %
Diluted non-GAAP operating income per common share2 1.17 1.85 (37) 2.58 3.54 (27)
Annualized non-GAAP operating ROE2 11.4 % 17.1 (5.7) pts 12.1 % 16.4 (4.3) pts
Adjusted book value per common share2 $ 44.18 40.56 9 % $ 44.18 40.56 9 %
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.
2Non-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. These are important financial
measures used 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.
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 June 30, Six Months ended June 30,
($ in thousands) 2022 2021 2022 2021
Net income available to common stockholders $ 37,220 119,583 $ 91,250 226,400
Net realized and unrealized investment losses
(gains) included in net income, before tax 42,880 (10,057) 83,232 (15,176)
Tax on reconciling items (9,005) 2,112 (17,479) 3,187
Non-GAAP operating income $ 71,095 111,638 $ 157,003 214,411
Reconciliation of net income available to common
stockholders per diluted common share to non-GAAP Quarter ended June 30, Six Months ended June 30,
operating income per diluted common share
2022 2021 2022 2021
Net income available to common stockholders per
diluted common share $ 0.61 1.98 $ 1.50 3.74
Net realized and unrealized investment losses
(gains) included in net income, before tax 0.70 (0.17) 1.37 (0.25)
Tax on reconciling items (0.14) 0.04 (0.29) 0.05
Non-GAAP operating income per diluted common
share $ 1.17 1.85 $ 2.58 3.54
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Reconciliation of annualized ROE to annualized
non-GAAP operating ROE Quarter ended June 30, Six Months ended June 30,
2022 2021 2022 2021
Annualized ROE 6.0 % 18.3 7.1 % 17.3
Net realized and unrealized investment losses
(gains) included in net income, before tax 6.9 (1.5) 6.4 (1.1)
Tax on reconciling items (1.5) 0.3 (1.4) 0.2
Annualized non-GAAP operating ROE 11.4 % 17.1 12.1 % 16.4
Reconciliation of book value per common share to
adjusted book value per common share Quarter ended June 30, Six Months ended June 30,
2022 2021 2022 2021
Book value per common share $ 39.68 44.78 $ 39.68 44.78
Total unrealized investment losses (gains)
included in accumulated other comprehensive (loss)
income, before tax
5.69 (5.34) 5.69 (5.34) Tax on reconciling items (1.19) 1.12 (1.19) 1.12 Adjusted book value per common share$ 44.18 40.56$ 44.18 40.56
The components of our annualized ROE and non-GAAP operating ROE are as follows:
Annualized ROE and non-GAAP operating
ROE Components Quarter ended June 30, Six Months ended June 30,
2022 2021 Change Points 2022 2021 Change Points
Standard Commercial Lines Segment 6.0 % 8.2 (2.2) 5.5 % 8.3
(2.8)
Standard Personal Lines Segment (1.6) 0.7 (2.3) (0.4) 0.8 (1.2) E&S Lines Segment 0.4 0.3 0.1 0.6 0.2 0.4 Total insurance operations 4.8 9.2 (4.4) 5.7 9.3 (3.6) Investment income 9.1 10.3 (1.2) 8.9 9.5 % (0.6) Net realized and unrealized investment (losses) gains (5.4) 1.2 (6.6) (5.0) 0.9 (5.9) Total investments segment 3.7 11.5 (7.8) 3.9 10.4 (6.5) Other (2.5) (2.4) (0.1) (2.5) (2.4) (0.1) Annualized ROE 6.0 18.3 (12.3) 7.1 17.3 (10.2) Net realized and unrealized investment losses (gains), after tax 5.4 (1.2) 6.6 5.0 (0.9) 5.9 Annualized Non-GAAP Operating ROE 11.4 17.1 (5.7) 12.1 16.4 (4.3) Our Second Quarter 2022 annualized non-GAAP operating ROE of 11.4% and our Six Months 2022 annualized non-GAAP operating ROE of 12.1% were both above our full-year 2022 targeted non-GAAP operating ROE of 11%, but they were below our Second Quarter and Six Months 2021 annualized non-GAAP operating ROE of 17.1% and 16.4%, respectively. The decrease in Second Quarter and Six Months 2022 compared to the same prior-year periods was primarily driven by a reduction in after-tax underwriting and investment income in both current year periods. After-tax underwriting income decreased (i)$30.2 million , or 4.4 ROE points, in Second Quarter 2022 compared to Second Quarter 2021, and (ii)$47.4 million , or 3.6 ROE points, in Six Months 2022 compared to Six Months 2021. The reduction in both periods resulted from (i) an increase in non-catastrophe property loss and loss expenses, in part driven by the higher inflationary environment, (ii) an increase in net catastrophe losses, and (iii) lower favorable prior year casualty reserve development. After-tax investment income decreased (i)$10.8 million , or 1.2 ROE points, in Second Quarter 2022 compared to Second Quarter 2021, and (ii)$8.6 million , or 0.6 ROE points, in Six Months 2022 compared to Six Months 2021. The reduction in both periods was driven by lower after-tax alternative investment income. In addition, our annualized ROE, which includes the impact of net realized and unrealized investment gains and losses, was further reduced by 6.6 ROE points in Second Quarter 2022 and 5.9 ROE points in Six Months 2022 from a decrease in net realized and unrealized investment gains in both current-year periods compared to the same prior-year periods. The decrease was primarily driven by (i) a decrease in valuations reflecting the current public equities market, (ii) active trading of our fixed income securities to increase the book yield of our fixed income portfolio, due to increasing new money rates, resulting in realized losses, and (iii) higher credit loss expense on our AFS fixed income securities portfolio. 27 -------------------------------------------------------------------------------- Table of Contents 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 and we are well positioned to continue executing on our strategic objectives and delivering growth and profitability. Although not as favorable as Six Months 2021, our overall Six Months 2022 financial results were strong with 12% growth in NPW and a 12.1% annualized non-GAAP operating ROE, which was above our full-year target of 11%. The elevated level of economic inflation has resulted in a significant increase in interest rates in 2022, and predictions of a recession in the near term have led to a widening of credit spreads. This has also led to lower public equity valuations and significant financial market volatility. The higher interest rates and widening of credit spreads reduced the fair value of our fixed income securities, negatively impacting stockholders' equity, which was down 13% during Six Months 2022. The higher economic inflation has also negatively impacted our non-catastrophe property loss and loss expenses through increased severities in our short-tail property lines. Should these trends continue, and in the absence of taking rate and other underwriting actions, our profitability could be negatively impacted in the near term. We will continue to focus on underwriting improvements and achieving written renewal pure price increases that meet or exceed expected loss trend. We achieved Standard Commercial Lines renewal pure price increases of 5.3% in Second Quarter 2022, which was up sequentially from 4.8% in the first quarter of 2022. While higher interest rates and wider credit spreads negatively impact investment valuations, these conditions provided us the opportunity to invest our cash flows at average pre-tax new money purchase rates for fixed income securities of 3.8% in Six Months 2022, compared to our average pre-tax fixed income investment yield of 3.5% for Six Months 2022. The pre-tax new money purchase rates for fixed income securities increased to 4.5% in Second Quarter 2022 compared to the Second Quarter 2022 average pre-tax fixed income investment yield of 3.8%. The portfolio's net investment income is benefiting from our 14% exposure to floating rate securities, which are primarily tied to 90-day LIBOR. These higher new money purchase rates for fixed income securities, combined with an expectation of higher earned yield from our floating rate securities, will contribute to higher net investment income from our fixed income securities. These assumptions are factored into our full-year after-tax net investment income expectations, as discussed below.
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. InJune 2022 , we began writing Standard Commercial Lines business inVermont . We expect to begin writing Standard Commercial Lines business inAlabama andIdaho by year-end, 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 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 and improving 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 90.5% (prior guidance was 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$215 million (prior guidance was$205 million ) that includes after-tax net investment income from our alternative investments of$15 million (prior guidance was$15 million ); •An overall effective tax rate of approximately 20.5%, which assumes an effective tax rate of 19.5% for net investment income and 21.0% for all other items; and •Weighted average shares of 61 million on a fully diluted basis, which assumes no additional share repurchases we may make under our authorization. 28
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Results of Operations and Related Information by Segment
Insurance Operations
The following table provides quantitative information for analyzing the combined
ratio:
All Lines Quarter ended June 30, Six Months ended June 30,
($ in thousands) 2022 2021 Change % or Points 2022 2021 Change % or Points
Insurance Operations
Results:
Net premiums written ("NPW") $ 930,741 833,205 12 % $ 1,820,539 1,631,383 12 %
Net premiums earned ("NPE") 834,439 740,518 13 1,646,722 1,465,478 12
Less:
Loss and loss expense
incurred 524,868 421,623 24 1,019,104 835,024 22
Net underwriting expenses
incurred 270,828 241,825 12 531,467 474,451 12
Dividends to policyholders 1,030 1,182 (13) 2,609 2,405 8
Underwriting income $ 37,713 75,888 (50) % $ 93,542 153,598 (39) %
Combined Ratios:
Loss and loss expense ratio 62.9 % 56.9 6.0 pts 61.8 % 56.9 4.9 pts
Underwriting expense ratio 32.5 32.7 (0.2) 32.3 32.4 (0.1)
Dividends to policyholders
ratio 0.1 0.2 (0.1) 0.2 0.2 -
Combined ratio 95.5 89.8 5.7 94.3 89.5 4.8
The NPW growth of 12% in Second Quarter and Six Months 2022 compared to the same
prior-year periods reflected (i) overall renewal pure price increases, and (ii)
higher direct new business, as shown in the following table:
Quarter ended June 30, Change Six Months ended June 30, Change
% or % or
($ in millions) 2022 2021 Points 2021 2020 Points
Direct new business premiums $ 182.0 173.3 5 % $ 359.2 329.0 9 %
Renewal pure price increases
on NPW 5.0 % 5.1 (0.1) pts 4.8 % 5.2 (0.4) pts
Our NPW growth in Second Quarter and Six Months 2022 benefited from strong
retention. In addition, increased economic activity and inflation in the U.S ,
resulted in our customers increasing their sales, payrolls, and exposure units,
all of which favorably impacted our NPW.
The increase in NPE in Second Quarter and Six Months 2022 compared to the same
prior-year periods resulted from the same impacts to NPW described above.
Loss and Loss Expenses
The loss and loss expense ratio increased 6.0 points in Second Quarter 2022 and
4.9 points in Six Months 2022 compared to the same prior-year periods, primarily
due to the following:
Second Quarter 2022 Second Quarter 2021
Loss and
Loss and Loss Impact on 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 $ 45.6 5.5 pts $ 22.6 3.1 pts 2.4 pts
(Favorable) prior year casualty
reserve development (12.0) (1.4) (17.0) (2.3)
0.9
Non-catastrophe property loss and loss expenses 138.6 16.6 107.3 14.5 2.1 Total$ 172.2 20.7$ 112.9 15.3 5.4 Six Months 2022 Six Months 2021 Loss and Loss and Loss Impact on 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$ 66.2 4.0 pts$ 52.6 3.6 pts 0.4 pts (Favorable) prior year casualty reserve development (32.0) (1.9) (52.0) (3.5)
1.6
Non-catastrophe property loss and loss expenses 288.9 17.5 222.9 15.2 2.3 Total$ 323.1 19.6$ 223.5 15.3 4.3 29
-------------------------------------------------------------------------------- Table of Contents Details of the prior year casualty reserve development were as follows: (Favorable)/Unfavorable Prior Year Casualty Reserve Development Quarter ended June 30, Six Months ended June 30, ($ in millions) 2022 2021 2022 2021 General liability $ - (10.0)$ (5.0) (25.0) Commercial automobile - - - - Workers compensation (10.0) (5.0) (20.0) (20.0) Bonds (2.0) - (7.0) - Total Standard Commercial Lines (12.0) (15.0) (32.0) (45.0) Homeowners - - - - Personal automobile - - - - Total Standard Personal Lines - - - - E&S - (2.0) - (7.0) Total (favorable) prior year casualty reserve development$ (12.0) (17.0)$ (32.0) (52.0) (Favorable) impact on loss ratio (1.4) pts (2.3) (1.9) (3.5) 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 June 30, Change Six Months ended June 30, Change
% or % or
($ in thousands) 2022 2021 Points 2022 2021 Points
Insurance Segments Results:
NPW $ 760,293 677,128 12 % $ 1,497,932 1,342,694 12 %
NPE 680,237 599,754 13 1,341,706 1,188,895 13
Less:
Loss and loss expense incurred 406,901 329,817 23 806,375 654,667
23
Net underwriting expenses incurred 225,598 200,817 12 443,630 394,386 12 Dividends to policyholders 1,030 1,182 (13) 2,609 2,405 8 Underwriting income 46,708 67,938 (31)$ 89,092 137,437 (35) Combined Ratios: Loss and loss expense ratio 59.7 % 55.0 4.7 pts 60.1 % 55.0 5.1 pts Underwriting expense ratio 33.2 33.5 (0.3) 33.1 33.2 (0.1) Dividends to policyholders ratio 0.2 0.2 - 0.2 0.2 - Combined ratio 93.1 88.7 4.4 93.4 88.4 5.0 NPW growth of 12% in both Second Quarter 2022 and Six Months 2022 compared to the same prior-year periods, 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 both current-year periods benefited from exposure growth. Quarter ended June 30, Six Months ended June 30, ($ in millions) 2022 2021 2022 2021 Direct new business premiums$ 129.0 128.7$ 257.4 243.2 Retention 86 % 85 86 % 85 Renewal pure price increases on NPW 5.3 5.5 5.1 5.5
The increase in NPE in Second Quarter 2022 and Six Months 2022 compared to the
same prior-year periods resulted from the same impacts to NPW described above.
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The loss and loss expense ratio increased 4.7 points in Second Quarter 2022 and
5.1 points in Six Months 2022 compared to the same prior-year periods, primarily
driven by the following:
Second Quarter 2022 Second 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 $ 22.3 3.3 pts $ 11.3 1.9 1.4 pts
Non-catastrophe property loss and
loss expenses 99.2 14.6 74.6 12.4
2.2
(Favorable) prior year casualty
reserve development (12.0) (1.8) (15.0) (2.5) 0.7
Total 109.5 16.1 70.9 11.8 4.3
Six Months 2022 Six Months 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 $ 37.3 2.8 pts $ 27.3 2.3 0.5 pts
Non-catastrophe property loss and
loss expenses 214.9 16.0 158.3 13.3
2.7
(Favorable) prior year casualty
reserve development (32.0) (2.4) (45.0) (3.8) 1.4
Total 220.2 16.4 140.6 11.8 4.6
For quantitative information on favorable prior year casualty reserve
development by line of business, see the "Insurance Operations" section above.
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 June 30, Change Six Months ended June 30, Change
% or % or
($ in thousands) 2022 2021 Points1 2022 2021 Points1
NPW $ 257,468 225,503 14 % $ 501,586 447,565 12 %
Direct new business 36,280 37,174 n/a 74,163 71,428 n/a
Retention 86 % 85 n/a 86 % 85 n/a
Renewal pure price increases 4.3 4.6 n/a 4.2 4.6 n/a
NPE $ 226,285 197,293 15 % $ 442,610 390,813 13 %
Underwriting income 25,005 31,045 (19) 53,822 67,618 (20)
Combined ratio 88.9 % 84.3 4.6 pts 87.8 % 82.7 5.1 pts
% of total Standard Commercial 34 33 33 33
Lines NPW
1n/a: not applicable.
NPW growth of 14% in Second Quarter 2022 and 12% in Six Months 2022 compared to
the same prior-year periods benefited from exposure growth, strong retention,
and direct new business.
The combined ratio increased 4.6 points in Second Quarter 2022 and 5.1 points in
Six Months 2022 compared to the same prior-year periods, primarily driven by
less favorable prior year casualty reserve development, as follows:
Second Quarter 2022 Second 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 $ - - pts $ (10.0) (5.1) 5.1 pts
Six Months 2022 Six Months 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) (1.1) pts $ (25.0) (6.4) 5.3 pts
The favorable prior year casualty reserve development in Six Months 2022 was
primarily attributable to lower loss severities in accident years 2019 and
prior. The Second Quarter and Six Months 2021 favorable prior year casualty
reserve development was primarily attributable to improved loss severities in
accident years 2018 and prior.
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Commercial Automobile
Quarter ended June 30, Change Six Months ended June 30, Change
% or % or
($ in thousands) 2022 2021 Points1 2022 2021 Points1
NPW $ 222,847 205,906 8 % $ 435,442 396,552 10 %
Direct new business 29,878 33,406 n/a 61,291 62,152 n/a
Retention 87 % 86 n/a 87 % 86 n/a
Renewal pure price increases 8.0 9.0 n/a 7.7 9.0 n/a
NPE $ 198,381 178,028 11 % $ 392,211 349,909 12 %
Underwriting (loss) income (4,260) 4,241 (200) (15,178) 7,033 (316)
Combined ratio 102.1 % 97.6 4.5 pts 103.9 % 98.0 5.9 pts
% of total Standard Commercial
Lines NPW 29 30 29 30
1n/a: not applicable.
NPW growth of 8% in Second Quarter 2022 and 10% in Six Months 2022 compared to
the same prior-year periods benefited from renewal pure price increases and
strong retention. NPW also benefited from exposure growth that reflects a 5%
growth of in-force vehicle counts as of June 30, 2022 , compared to June 30,
2021 .
The combined ratio increased 4.5 points in Second Quarter 2022 and 5.9 points in
Six Months 2022 compared to the same prior-year periods, primarily driven by the
following:
Second Quarter 2022 Second 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 $ 0.6 0.3 pts $ 0.5 0.3 - pts
Non-catastrophe property loss and loss
expenses 34.8 17.6 26.2 14.7 2.9
Total $ 35.4 17.9 $ 26.7 15.0 2.9
Six Months 2022 Six Months 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 $ 0.9 0.2 pts $ 0.7 0.2 - pts
Non-catastrophe property loss and loss
expenses 77.8 19.8 55.6 15.9 3.9
Total $ 78.7 20.0 $ 56.3 16.1 3.9
Second Quarter and Six Months 2022 experienced elevated non-catastrophe property
loss and loss expenses, primarily due to higher severities from inflationary and
supply chain impacts that have increased labor and material costs, as well as
the duration of claims, which impacts vehicle rental days.
In addition, the combined ratio was impacted by a 1.9-point increase in current
year casualty loss costs in Second Quarter 2022 and a 1.8-point increase in Six
Months 2022, compared to the same prior-year periods, primarily due to an
expected increase in claim frequencies from a more normalized amount of miles
driven as COVID-19-related impacts continue to lessen.
Commercial Property
Quarter ended June 30, Change Six Months ended June 30, Change
% or % or
($ in thousands) 2022 2021 Points1 2022 2021 Points1
NPW $ 140,148 119,140 18 % $ 271,053 232,524 17 %
Direct new business 31,318 29,943 n/a 59,135 54,212 n/a
Retention 85 % 84 n/a 85 % 84 n/a
Renewal pure price
increases 6.0 5.6 n/a 6.1 5.8 n/a
NPE $ 123,562 106,113 16 % $ 243,624 208,923 17 %
Underwriting income 2,817 16,820 (83) 2,993 23,586 (87)
Combined ratio 97.7 % 84.1 13.6 pts 98.8 % 88.7 10.1 pts
% of total Standard
Commercial Lines NPW 18 18 18 17
1n/a: not applicable.
NPW growth of 18% in Second Quarter 2022 and 17% in Six Months 2022 compared to
the same prior-year periods benefited from renewal pure price increases,
exposure growth, stronger retention, and higher direct new business.
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The combined ratio increased 13.6 points in Second Quarter 2022 and 10.1 points
in Six Months 2022 compared to the same prior-year periods, primarily driven by
the following:
Second Quarter 2022 Second 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 $ 19.1 15.5 pts 9.2 8.6 6.9 pts
Non-catastrophe property loss and loss
expenses 55.6 45.0 40.3 38.0 7.0
Total $ 74.7 60.5 49.5 46.6 13.9
Six Months 2022 Six Months 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 $ 32.1 13.2 pts 22.9 10.9 2.3 pts
Non-catastrophe property loss and loss
expenses 118.6 48.7 84.9 40.6 8.1
Total $ 150.7 61.9 107.8 51.5 10.4
Second Quarter and Six Months 2022 experienced (i) elevated catastrophe property
losses, primarily due to several large Midwest wind and thunderstorm events that
occurred throughout Second Quarter 2022, and (ii) elevated non-catastrophe
property loss and loss expenses, primarily due to increased severity compared to
the same prior-year periods that reflects period-to-period volatility that is
normally associated with our commercial property line of business and
inflationary pressures on building material and labor costs.
Workers Compensation
Quarter ended June 30, Change Six Months ended June 30, Change
% or % or
($ in thousands) 2022 2021 Points1 2022 2021 Points1
NPW $ 88,400 80,491 10 % $ 185,859 172,782 8 %
Direct new business 17,009 16,002 n/a 33,955 31,947 n/a
Retention 85 % 86 n/a 86 % 86 n/a
Renewal pure price increases (0.1) (0.1) n/a (0.6) 0.1 n/a
NPE $ 83,502 74,337 12 % $ 168,182 152,527 10 %
Underwriting income 15,631 8,686 80 31,536 29,104 8
Combined ratio 81.3 % 88.3 (7.0) pts 81.2 % 80.9 0.3 pts
% of total Standard Commercial
Lines NPW 12 12 12 13
1n/a: not applicable.
NPW growth of 10% in Second Quarter 2022 and 8% in Six Months 2022 compared to
the same prior-year periods benefited from higher direct new business, exposure
growth, and strong retention.
The combined ratio decreased 7.0 points in Second Quarter 2022 and increased 0.3
points in Six Months 2022 compared to the same prior-year periods, driven by
favorable prior year casualty reserve development, as follows:
Second Quarter 2022 Second 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) (12.0) pts $ (5.0) (6.7) (5.3) pts
Six Months 2022 Six Months 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 $ (20.0) (11.9) pts $ (20.0) (13.1) 1.2 pts
The favorable prior year casualty reserve development in Second Quarter and Six
Months 2022 was primarily due to improved loss severities in accident years 2019
and prior. The favorable prior year casualty reserve development in Second
Quarter and Six Months 2021 was primarily due to improved loss severities in
accident years 2018 and prior.
33
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Standard Personal Lines Segment
Quarter ended June 30, Change Six Months ended June 30, Change
% or % or
($ in thousands) 2022 2021 Points 2022 2021 Points
Insurance Segments Results:
NPW $ 82,564 78,559 5 % $ 147,621 143,636 3 %
NPE 73,338 73,293 - 145,980 147,114 (1)
Less:
Loss and loss expense incurred 66,586 47,984 39 115,133 95,150 21
Net underwriting expenses incurred 19,119 19,665 (3) 36,694 38,625 (5)
Underwriting income (12,367) 5,644 (319) $ (5,847) 13,339 (144) %
Combined Ratios:
Loss and loss expense ratio 90.8 % 65.5 25.3 pts 78.9 % 64.6 14.3 pts
Underwriting expense ratio 26.1 26.8 (0.7) 25.1 26.3 (1.2)
Combined ratio 116.9 92.3 24.6 104.0 90.9 13.1
NPW increased 5% in Second Quarter 2022 and 3% in Six Months 2022 compared to
the same prior-year periods, due to (i) higher direct new business, (ii)
stronger retention, and (iii) higher homeowner coverage amounts due to inflation
adjustments. 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 will be more competitive.
Quarter ended June 30, Six Months ended June 30,
($ in millions) 2022 2021 2022 2021
Direct new business premiums1 $ 13.5 10.9 $ 23.1 20.8
Retention 85 % 84 84 % 83
Renewal pure price increases on NPW 0.6 1.1 0.6 0.9
1Excludes our Flood direct premiums written, which is 100% ceded to the NFIP and
therefore, has no impact on our NPW.
The loss and loss expense ratio increased 25.3 points in Second Quarter 2022 and
14.3 points in Six Months 2022 compared to the same prior-year periods, driven
by the following:
Second Quarter 2022 Second 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 $ 21.1 28.7 pts 5.0 6.8 21.9 pts
Non-catastrophe property loss and loss
expenses 26.9 36.7 24.9 34.0 2.7
Total $ 48.0 65.4 29.9 40.8 24.6
Six Months 2022 Six Months 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 $ 25.4 17.4 pts 10.6 7.2 10.2 pts
Non-catastrophe property loss and loss
expenses 52.5 36.0 48.0 32.6 3.4
Total $ 77.9 53.4 58.6 39.8 13.6
Second Quarter and Six Months 2022 experienced (i) elevated catastrophe losses
as a result of several Midwest wind and thunderstorm that occurred throughout
Second Quarter 2022, and (ii) elevated non-catastrophe property loss and loss
expenses associated with personal automobile physical damage losses. Loss and
loss expense increases were due to higher frequencies resulting from increased
miles driven and greater severities resulting from inflationary and supply chain
impacts that have increased labor and material costs, as well as the duration of
claims, which impacts vehicle rental days. The likely continuation of elevated
non-catastrophe property loss and loss expenses, coupled with renewal pure price
increases below loss trend, will put pressure on this segment's profitability in
the near-term. We are filing rate increases to mitigate some of these
inflationary impacts.
In addition, the loss and loss expense ratio was impacted by a 0.6-point
increase in current year casualty loss costs in both Second Quarter 2022 and Six
Months 2022 compared to the same prior-year periods, primarily due to an
expected increase in claim frequencies resulting from a more normalized amount
of miles driven as COVID-19-related impacts continue to lessen.
34
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E&S Lines Segment
Quarter ended June 30, Change Six Months ended June 30, Change
% or % or
($ in thousands) 2022 2021 Points 2022 2021 Points
Insurance Segments Results:
NPW $ 87,884 77,518 13 % $ 174,986 145,053 21 %
NPE 80,864 67,471 20 159,036 129,469 23
Less:
Loss and loss expense incurred 51,381 43,822 17 97,596 85,207 15
Net underwriting expenses
incurred 26,111 21,343 22 51,143 41,440 23
Underwriting income (loss) 3,372 2,306 46 $ 10,297 2,822 265
Combined Ratios:
Loss and loss expense ratio 63.5 % 65.0 (1.5) pts 61.3 % 65.8 (4.5) pts
Underwriting expense ratio 32.3 31.6 0.7 32.2 32.0 0.2
Combined ratio 95.8 96.6 (0.8) 93.5 97.8 (4.3)
NPW growth of 13% in Second Quarter 2022 and 21% in Six Months 2022 compared to
the same prior-year periods reflected renewal pure price increases and higher
direct new business as shown in the table below. In addition, NPW growth in
Second Quarter and Six Months 2022 benefited from exposure growth driven by
favorable E&S Lines marketplace conditions.
Quarter ended June 30, Six Months ended June 30,
($ in millions) 2022 2021 2022 2021
Direct new business premiums $ 39.5 33.7 $ 78.7 65.0
Renewal pure price increases on NPW 6.9 6.9 7.3 7.1
The increase in NPE in Second Quarter and Six Months 2022 compared to the same
prior-year periods resulted from the same impacts to NPW described above.
The loss and loss expense ratio decreased 1.5 points in Second Quarter 2022 and
4.5 points in Six Months 2022 compared to the same prior-year periods, primarily
driven by the following:
Second Quarter 2022 Second 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 $ 2.2 2.8 pts $ 6.4 9.5 (6.7) pts
Non-catastrophe property loss and loss
expenses 12.5 15.4 7.8 11.5
3.9
(Favorable) prior year casualty reserve development - - (2.0) (3.0) 3.0 Total$ 14.7 18.2$ 12.2 18.0 0.2 Six Months 2022 Six Months 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$ 3.5 2.2 pts$ 14.7 11.3 pts (9.1) pts Non-catastrophe property loss and loss expenses 21.6 13.6 16.6 12.9
0.7
(Favorable) prior year casualty reserve development - - (7.0) (5.4) 5.4 Total$ 25.1 15.8$ 24.3 18.8 (3.0) The decrease in net catastrophe losses in Second Quarter and Six Months 2022 compared to the same prior-year periods was primarily due to a series of large storms in both Second Quarter and Six Months 2021 that significantly impactedTexas and other Southern and Midwestern states, that did not reoccur this year. Second Quarter and Six Months 2022 experienced elevated non-catastrophe property loss and loss expenses, primarily due to increased severity compared to the same prior-year periods that reflects the normal period-to-period volatility of our property lines of business in this segment and inflationary pressures on labor and material costs. There was no prior year casualty reserve development in Second Quarter and Six Months 2022. The favorable prior year casualty reserve development in Second Quarter and Six Months 2021 was primarily due to lower loss severities in accident years 2016 through 2018. 35 -------------------------------------------------------------------------------- Table of Contents In addition, the loss and loss expense ratio was impacted by a 1.5-point decrease in current year casualty loss costs in Second Quarter 2022 and a 1.4-point decrease in Six Months 2022 compared to the same prior year periods. Our E&S casualty lines results have improved over recent years after several underwriting and claims initiatives and strong rate increases. The decrease in current year casualty loss costs reflects the impacts of these actions. While the underwriting expense ratio was relatively flat for Six Months 2022 compared to Six Months 2021, the ratio increased 0.7 points in Second Quarter 2022 compared to Second Quarter 2021, primarily due to an increase of (i) 0.4 points in our allowance for credit losses on premiums receivable, and (ii) 0.3 points in travel expenses.
Reinsurance
We successfully completed negotiations of our
treaties, which cover our Standard Commercial Lines, Standard Personal Lines,
and E&S Lines.
We renewed the Casualty Excess of Loss Treaty ("Casualty Treaty") with
substantially the same structure as the expiring treaty. The treaty year 2022
deposit premium increased $16.2 million , or 23%, reflecting higher projected
subject earned premium due to growth in our book of business and pure renewal
rate increases, coupled with a modest risk-adjusted rate increase.
The Property Excess of Loss Treaty ("Property Treaty") was renewed with a $10
million increase in coverage in the highest layer. The treaty year 2022 deposit
premium increased $11.3 million , or 28%, reflecting (i) an increase in projected
subject premium, which was driven by our growth in total insured values, insured
locations, and rate increases on our underlying policies, (ii) the purchase of
additional coverage, and (iii) risk-adjusted rate increases. We anticipate the
increase in expected ceded premium will be partially offset by the premium
reduction benefit of reduced facultative reinsurance placements resulting from
the higher treaty limit.
The following table summarizes the Property Treaty and Casualty Treaty
arrangements covering our Insurance Subsidiaries:
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