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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, forward-looking statements include the words "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 anytime. 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 third quarters endedSeptember 30, 2022 ("Third Quarter 2022") andSeptember 30, 2021 ("Third Quarter 2021"); and the nine-month periods endedSeptember 30, 2022 ("Nine Months 2022") andSeptember 30, 2021 ("Nine 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 -------------------------------------------------------------------------------- Table of Contents Financial Highlights of Results for Third Quarter and Nine Months 2022 and Third Quarter and Nine Months 20211 Quarter ended September 30, Change Nine Months ended September 30, Change ($ and shares in thousands, except per share amounts) 2022 2021 % or Points 2022 2021 % or Points Financial Data: Revenues$ 895,020 865,044 3 %$ 2,605,900 2,509,469 4 % After-tax net investment income 51,533 74,690 (31) 166,706 198,474 (16) After-tax underwriting income 21,434 8,642 148 95,333 129,984 (27) Net income before federal income tax 52,639 92,636 (43) 172,433 381,466 (55) Net income 42,525 73,705 (42) 138,375 304,858 (55) Net income available to common stockholders 40,225 71,405 (44) 131,475 297,805 (56) Key Metrics: Combined ratio 96.8 % 98.6 (1.8) pts 95.2 % 92.6 2.6 pts Invested assets per dollar of common stockholders' equity$ 3.38 2.89 17 %$ 3.38 2.89 17 % Return on common equity ("ROE") 7.0 10.6 (3.6) pts 7.0 15.1 (8.1) pts Net premiums written ("NPW") to statutory surplus ratio 1.45 x 1.35 0.10 1.45 x 1.35 0.10 Per Common Share Amounts: Diluted net income per share$ 0.66 1.18 (44) %$ 2.16 4.92 (56) % Book value per share 36.96 45.27 (18) 36.96 45.27 (18) Dividends declared per share to common stockholders 0.28 0.25 12 0.84 0.75 12 Non-GAAP Information: Non-GAAP operating income2$ 60,514 71,265 (15) %$ 217,517 285,676 (24) % Non-GAAP operating income per diluted common share2 0.99 1.18 (16) 3.57 4.72 (24) Non-GAAP operating ROE2 10.5 % 10.6 (0.1) pts 11.6 % 14.5 (2.9) pts Adjusted book value per common share2$ 44.59 41.56 7 %$ 44.59 41.56 7 % 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 non-GAAP measures 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, ROE, and book value per common share to non-GAAP operating income, non-GAAP operating income per diluted common share, 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 Quarter ended September 30, Nine Months ended September 30, stockholders to non-GAAP operating income ($ in thousands) 2022 2021 2022 2021 Net income available to common stockholders$ 40,225 71,405$ 131,475 297,805
Net realized and unrealized investment losses (gains)
included in net income, before tax
25,681 (177) 108,913 (15,353) Tax on reconciling items (5,392) 37 (22,871) 3,224 Non-GAAP operating income$ 60,514 71,265$ 217,517 285,676 Reconciliation of net income available to common Quarter ended September 30, Nine Months ended September 30, stockholders per diluted common share to non-GAAP operating income per diluted common share 2022 2021 2022 2021 Net income available to common stockholders per diluted common share$ 0.66 1.18 $ 2.16 4.92
Net realized and unrealized investment losses (gains)
included in net income, before tax
0.42 - 1.79 (0.25) Tax on reconciling items (0.09) - (0.38) 0.05
Non-GAAP operating income per diluted common share
1.18 $ 3.57 4.72
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Reconciliation of ROE to non-GAAP operating ROE Quarter ended September 30, Nine Months ended September 30,
2022 2021 2022 2021
ROE 7.0 % 10.6 7.0 % 15.1
Net realized and unrealized investment losses (gains)
included in net income, before tax
4.4 - 5.8 (0.8) Tax on reconciling items (0.9) - (1.2) 0.2 Non-GAAP operating ROE 10.5 % 10.6 11.6 % 14.5 Reconciliation of book value per common share to Quarter ended September 30, Nine Months ended September 30,
adjusted book value per common share
2022 2021 2022 2021
Book value per common share $ 36.96 45.27 $ 36.96 45.27
Total unrealized investment losses (gains) included
in accumulated other comprehensive (loss) income,
before tax
9.67 (4.71) 9.67 (4.71) Tax on reconciling items (2.04) 1.00 (2.04) 1.00 Adjusted book value per common share$ 44.59 41.56$ 44.59 41.56
The components of our ROE and non-GAAP operating ROE are as follows:
ROE and non-GAAP operating ROE
Components Quarter ended September 30, Nine Months ended September 30,
2022 2021 Change Points 2022 2021 Change Points
Standard Commercial Lines Segment 3.1 % 2.1 1.0 4.7 % 6.2 (1.5)
Standard Personal Lines Segment (0.2) (1.3) 1.1 (0.3) 0.1 (0.4)
E&S Lines Segment 0.8 0.5 0.3 0.7 0.3 0.4
Total insurance operations 3.7 1.3 2.4 5.1 6.6 (1.5)
Investment income 8.9 11.0 (2.1) 8.9 10.1 % (1.2)
Net realized and unrealized investment
(losses) gains (3.5) - (3.5) (4.6) 0.6 (5.2)
Total investments segment 5.4 11.0 (5.6) 4.3 10.7 (6.4)
Other (2.1) (1.7) (0.4) (2.4) (2.2) (0.2)
ROE 7.0 10.6 (3.6) 7.0 15.1 (8.1)
Net realized and unrealized investment
losses (gains), after tax 3.5 - 3.5 4.6 (0.6) 5.2
Non-GAAP Operating ROE 10.5 10.6 (0.1) 11.6 14.5 (2.9)
Our Nine Months 2022 non-GAAP operating ROE of 11.6% was above our full-year
2022 targeted non-GAAP operating ROE of 11%, but below our Nine Months 2021
non-GAAP operating ROE of 14.5%.
The decrease in Nine Months 2022 compared to Nine Months 2021 was primarily driven by a reduction in after-tax underwriting and investment income. After-tax underwriting income decreased$34.7 million , or 1.5 ROE points, in Nine Months 2022 compared to Nine Months 2021, primarily from increased non-catastrophe property loss and loss expenses and lower favorable prior year casualty reserve development, offset partially by a decrease in net catastrophe losses. The higher non-catastrophe property loss and loss expenses were mainly due to the higher inflationary environment.
After-tax investment income decreased
Months 2022 compared to Nine Months 2021, from lower after-tax alternative
investment income in Nine Months 2022.
In addition, our ROE was reduced by the impact of net realized and unrealized
investment gains and losses, which was 5.2 ROE points in Nine Months 2022. Net
realized and unrealized investment losses in both current-year periods compared
to net realized and unrealized investment gains in the same prior-year periods
drove the reduction in our ROE. The increase in net realized and unrealized
losses resulted from (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.
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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 are well positioned to continue executing on
our strategic objectives and delivering growth and profitability. Although not
as favorable as Nine Months 2021, our overall Nine Months 2022 financial results
were strong, with 11% growth in NPW and a 11.6% non-GAAP operating ROE, which
was above our full-year target of 11%.
In 2022, the elevated level of economic inflation, the significant increase in
interest rates, and predictions of a recession in the near term, which have led
to a widening of credit spreads, have all contributed to lower investment
valuations and significant financial market volatility. The higher interest
rates and widening of credit spreads, with interest rates having the most
significant impact, have reduced the fair value of our fixed income securities,
which in turn has negatively impacted our stockholders' equity, which was down
19% during Nine Months 2022. The higher economic inflation has also negatively
impacted our property loss and loss expenses through increased severities in our
short-tail property lines, which has reduced our underwriting income. Should
these trends continue, and in the absence of taking rate and other underwriting
actions, our underwriting 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. In
Third Quarter 2022, we achieved Standard Commercial Lines renewal pure price
increases of 5.8% and exposure growth of 3.8%, resulting in total renewal
premium growth of 9.6%. These rates were up sequentially from the second quarter
of 2022, which experienced renewal pure price increases of 5.3% and exposure
growth of 3.9%, resulting in total renewal premium growth of 9.2%.
While higher interest rates, wider credit spreads, and financial market
volatility have negatively impacted our investment valuations and certain key
financial metrics, such as stockholders' equity and book value per common share,
they have also provided us with the opportunity to invest our cash flows at
significantly higher new money rates. Our pre-tax new money purchase rates for
fixed income securities averaged 4.2% in Nine Months 2022, compared to 2.2% for
Nine Months 2021. The pre-tax new money purchase rates for fixed income
securities increased to 5.1% in Third Quarter 2022, which was above our Third
Quarter 2022 average pre-tax fixed income investment yield of 4.2%. The
portfolio's net investment income also benefits from our 14% allocation to
floating rate fixed income securities, which are primarily tied to 90-day LIBOR,
which increased from 0.21% at December 31, 2021 , to 3.75% at September 30, 2022 .
These floating securities have reset quarterly at higher rates, which combined
with our higher new money purchase rates for fixed income securities, is
contributing to higher net investment income from our fixed income securities.
Partially offsetting the increase in net investment income from fixed income
securities, are lower returns from our allocation to alternative investments.
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 . InOctober 2022 , we began writing Standard Commercial Lines business inAlabama andIdaho . We plan to expand our Standard Commercial Lines footprint into other states over time; •Increasing customer retention by delivering a superior omnichannel experience and offering value-added technologies and services; •Shifting our Standard Personal Lines products and services towards customers in the mass affluent market, 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 91.5% (prior
guidance was 90.5%). Our combined ratio estimate assumes no additional prior
year casualty reserve development;
•Net catastrophe losses of 3.5 points (prior guidance 4.0 points) on the
combined ratio;
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•After-tax net investment income of $215 million (prior guidance was $215
million ) that includes after-tax net investment income from our alternative
investments of $7 million (prior guidance was $15 million );
•An overall effective tax rate of approximately 20.5%, which assumes an
effective tax rate of 19.5% for net investment income and 21.0% for all other
items; and
•Weighted average shares of 61 million on a fully diluted basis, which assumes
no additional share repurchases we may make under our authorization.
As we look ahead to 2023, we believe the elevated level of economic inflation
will persist and continue to negatively impact our short-tail property lines of
business and may impact our general and administrative expenses. In addition, we
expect reduced reinsurance capacity and higher demand for new and expanded
reinsurance purchases by U.S. primary companies will likely result in higher
reinsurance prices in 2023 and less favorable terms and conditions for the
industry. These factors could negatively impact our 2023 combined ratio and
underwriting profits, although we are well-positioned to navigate these
challenges and expect to continue generating strong overall returns.
Results of Operations and Related Information by Segment
Insurance Operations
The following table provides quantitative information for analyzing the combined
ratio:
All Lines Quarter ended September 30, Nine Months ended September 30,
($ in thousands) 2022 2021 Change % or Points 2022 2021 Change % or Points
Insurance Operations
Results:
Net premiums written ("NPW") $ 903,394 812,906 11 % $ 2,723,933 2,444,289 11 %
Net premiums earned ("NPE") 853,879 767,247 11 2,500,601 2,232,725 12
Less:
Loss and loss expense
incurred 547,826 505,269 8 1,566,930 1,340,293 17
Net underwriting expenses
incurred 277,988 250,033 11 809,455 724,484 12
Dividends to policyholders 933 1,006 (7) 3,542 3,411 4
Underwriting income $ 27,132 10,939 148 % $ 120,674 164,537 (27) %
Combined Ratios:
Loss and loss expense ratio 64.1 % 65.9 (1.8) pts 62.7 % 60.0 2.7 pts
Underwriting expense ratio 32.6 32.6 - 32.4 32.4 -
Dividends to policyholders
ratio 0.1 0.1 - 0.1 0.2 (0.1)
Combined ratio 96.8 98.6 (1.8) 95.2 92.6 2.6
The NPW growth of 11% in Third Quarter and Nine 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 September 30, Nine Months ended September 30,
($ in millions) 2022 2021 2022 2021
Direct new business premiums $ 184.3 168.3 $ 543.5 497.3
Renewal pure price increases on NPW 5.3 % 4.9 5.0 % 5.1
Our NPW growth in Third Quarter and Nine 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 Third Quarter and Nine Months 2022 compared to the same
prior-year periods resulted from the same impacts to NPW described above.
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Loss and Loss Expenses
The loss and loss expense ratio decreased 1.8 points in Third Quarter 2022 and
increased 2.7 points in Nine Months 2022 compared to the same prior-year
periods, primarily due to the following:
Third Quarter 2022 Third 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 $ 34.1 4.0 pts $ 76.3 10.0 pts (6.0) pts
(Favorable) prior year casualty
reserve development (16.0) (1.9) (14.0) (1.8)
(0.1)
Non-catastrophe property loss and loss expenses 167.5 19.6 123.7 16.1 3.5 Total$ 185.6 21.7$ 186.0 24.3 (2.6) Nine Months 2022 Nine 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$ 100.2 4.0 pts$ 128.9 5.8 pts (1.8) pts (Favorable) prior year casualty reserve development (48.0) (1.9) (66.0) (3.0)
1.1
Non-catastrophe property loss and loss expenses 456.4 18.3 346.6 15.5 2.8 Total$ 508.6 20.4$ 409.5 18.3 2.1 Net catastrophe losses in Third Quarter and Nine Months 2022 included$10.0 million , or 1.2 points in Third Quarter 2022, and 0.4 points in Nine Months 2022, of net losses from Hurricane Ian, which affected the Southeastern states of our footprint. These losses were partially offset by$1.9 million , or 0.2 points in Third Quarter 2022 and 0.1 points in Nine Months 2022, of flood claims handling fees. We had less losses from Hurricane Ian in Third Quarter and Nine Months 2022 than Hurricane Ida in Third Quarter and Nine Months 2021. Net catastrophe losses from Hurricane Ida contributed 5.6 percentage points in Third Quarter 2021 and 1.9 percentage points in Nine Months 2021. Losses from Hurricane Ida were primarily attributable to property losses, including personal and commercial automobiles, inNew Jersey and the surrounding states. Accordingly, we experienced lower net catastrophe losses in Third Quarter and Nine Months 2022 compared to the same prior-year periods. Also negatively impacting our loss and loss expense ratio was the recognition of$9.3 million of ceded earned casualty reinstatement premium on the second layer of our Casualty Excess of Loss Treaty ("Casualty Treaty"), which increased the ratio by 0.8 points in Third Quarter 2022 and 0.3 points in Nine Months 2022, compared to the same prior-year periods. The recognition of this reinstatement premium was principally due to development on one large loss from the 2018 treaty year and two large losses from the 2020 treaty year. Despite the development on this casualty treaty layer, our prior year loss development, on a net basis, remains favorable as reflected in the table below: (Favorable)/Unfavorable Prior Year Casualty Reserve Development Quarter ended September 30, Nine Months ended September 30, ($ in millions) 2022 2021 2022 2021 General liability $ - (4.0)$ (5.0) (29.0) Commercial automobile 15.0 - 15.0 - Workers compensation (20.0) (8.0) (40.0) (28.0) Businessowners' policies (8.0) (2.0) (8.0) (2.0) Bonds (3.0) - (10.0) - Total Standard Commercial Lines (16.0) (14.0) (48.0) (59.0) Homeowners - - - - Personal automobile - - - - Total Standard Personal Lines - - - - E&S - - - (7.0) Total (favorable) prior year casualty reserve development$ (16.0) (14.0)$ (48.0) (66.0) (Favorable) impact on loss ratio (1.9) pts (1.8) (1.9) (3.0) 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." 30 -------------------------------------------------------------------------------- Table of Contents Standard Commercial Lines Segment Quarter ended September 30, Change Nine Months ended September 30, Change % or % or ($ in thousands) 2022 2021 Points 2022 2021 Points Insurance Segments Results: NPW$ 727,463 652,603 11 %$ 2,225,395 1,995,297 12 % NPE 692,437 619,571 12 2,034,143 1,808,466 12 Less: Loss and loss expense incurred 438,264 393,503 11 1,244,639 1,048,170
19
Net underwriting expenses incurred 230,739 207,649 11 674,369 602,035 12 Dividends to policyholders 933 1,006 (7) 3,542 3,411 4 Underwriting income 22,501 17,413 29$ 111,593 154,850 (28) Combined Ratios: Loss and loss expense ratio 63.4 % 63.5 (0.1) pts 61.1 % 57.9 3.2 pts Underwriting expense ratio 33.3 33.5 (0.2) 33.2 33.3 (0.1) Dividends to policyholders ratio 0.1 0.2 (0.1) 0.2 0.2 - Combined ratio 96.8 97.2 (0.4) 94.5 91.4 3.1 NPW growth of 11% in Third Quarter 2022 and 12% in Nine Months 2022 compared to the same prior-year periods reflected (i) renewal pure price increases, (ii) higher direct new business, and (iii) strong retention as shown in the table below. In addition, NPW growth in both current-year periods benefited from exposure growth. Quarter ended September 30, Nine Months ended September 30, ($ in millions) 2022 2021 2022 2021 Direct new business premiums$ 128.2 122.3$ 385.6 365.6 Retention 86 % 86 85 % 85 Renewal pure price increases on NPW 5.8 5.3 5.3 5.5
The increase in NPE in Third Quarter and Nine 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 0.1 points in Third Quarter 2022 and
increased 3.2 points in Nine Months 2022 compared to the same prior-year
periods, primarily driven by the following:
Third Quarter 2022 Third 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 $ 18.2 2.6 pts $ 50.0 8.1 (5.5)
pts
Non-catastrophe property loss and
loss expenses 129.8 18.7 90.1 14.5 4.2
(Favorable) prior year casualty
reserve development (16.0) (2.3) (14.0) (2.3) -
Total 132.0 19.0 126.1 20.3 (1.3)
Nine Months 2022 Nine 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 $ 55.4 2.7 pts $ 77.3 4.3 (1.6)
pts
Non-catastrophe property loss and
loss expenses 344.7 16.9 248.4 13.7 3.2
(Favorable) prior year casualty
reserve development (48.0) (2.4) (59.0) (3.3) 0.9
Total 352.1 17.2 266.7 14.7 2.5
Compared to the same prior-year periods, Third Quarter and Nine Months 2022
included (i) lower net catastrophe losses, and (ii) an increase to the loss and
loss expense ratio of 0.9 points in Third Quarter 2022 and 0.3 points in Nine
Months 2022 due to higher ceded earned casualty reinstatement premium. See the
"Insurance Operations" section above for more information.
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.
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The following is a discussion of our most significant Standard Commercial Lines
of business:
General Liability
Quarter ended September 30, Change Nine Months ended September 30, Change
% or % or
($ in thousands) 2022 2021 Points1 2022 2021 Points1
NPW $ 234,975 216,897 8 % $ 736,561 664,462 11 %
Direct new business 38,537
38,376 n/a 112,700 109,803 n/a Retention 86 % 86 n/a 85 % 85 n/a Renewal pure price increases 4.9 4.4 n/a 4.4 4.5 n/a NPE$ 225,302 205,904 9 %$ 667,912 596,717 12 % Underwriting income 21,943 29,993 (27) 75,765 97,611 (22) Combined ratio 90.3 % 85.4 4.9 pts 88.7 % 83.6 5.1 pts % of total Standard Commercial 32 33 33 33 Lines NPW 1n/a: not applicable. NPW growth of 8% in Third Quarter 2022 and 11% in Nine Months 2022 compared to the same prior-year periods benefited from exposure growth, strong retention, renewal pure price increases, and direct new business. The combined ratio increased 4.9 points in Third Quarter 2022 and 5.1 points in Nine Months 2022 compared to the same prior-year periods, partly driven by less favorable prior year casualty reserve development, as follows: Third Quarter 2022 Third 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$ (4.0) (1.9) 1.9 pts Nine Months 2022 Nine 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) (0.7) pts$ (29.0) (4.9) 4.2 pts The favorable prior year casualty reserve development in Nine Months 2022 was primarily attributable to improved loss severities in accident years 2019 and prior. The Third Quarter and Nine Months 2021 favorable prior year casualty reserve development was primarily attributable to improved loss severities in accident years 2018 and prior.
The combined ratio increase in Third Quarter and Nine Months 2022 also included
the following loss and loss expense ratio impacts:
•An increase in ceded earned casualty reinstatement premium, adding 1.9 points
in Third Quarter 2022 and 0.7 points in Nine Months 2022 compared to the same
prior-year periods, as discussed in the "Insurance Operations" section above;
and
•An increase in current year casualty loss costs of 0.7 points in Third Quarter
2022 and 0.5 points in Nine Months 2022 compared to the same prior-year periods,
in anticipation of higher loss trend for this line.
Commercial Automobile
Quarter ended September 30, Change Nine Months ended September 30, Change
% or % or
($ in thousands) 2022 2021 Points1 2022 2021 Points1
NPW $ 223,809 197,459 13 % $ 659,251 594,011 11 %
Direct new business 31,503 28,968 n/a 92,795 91,120 n/a
Retention 87 % 87 n/a 86 % 86 n/a
Renewal pure price increases 8.7 7.9 n/a 8.0 8.6 n/a
NPE $ 207,129 185,610 12 % $ 599,340 535,519 12 %
Underwriting (loss) income (30,612) (12,547) 144 (45,790) (5,514) 730
Combined ratio 114.8 % 106.8 8.0 pts 107.6 % 101.0 6.6 pts
% of total Standard Commercial
Lines NPW 31 30 30 30
1n/a: not applicable.
32
-------------------------------------------------------------------------------- Table of Contents NPW growth of 13% in Third Quarter 2022 and 11% in Nine Months 2022 compared to the same prior-year periods benefited from renewal pure price increases, higher direct new business, and strong retention. NPW also benefited from 4% growth of in-force vehicle counts as ofSeptember 30, 2022 , compared toSeptember 30, 2021 . The combined ratio increased 8.0 points in Third Quarter 2022 and 6.6 points in Nine Months 2022 compared to the same prior-year periods, primarily driven by the following: Third Quarter 2022 Third 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$ 1.4 0.7 pts$ 8.3 4.4 (3.7) pts Non-catastrophe property loss and loss expenses 46.2 22.3 35.2 18.9
3.4
Unfavorable prior year casualty reserve development 15.0 7.2 - - 7.2 Total$ 62.6 30.2$ 43.5 23.3 6.9 Nine Months 2022 Nine 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$ 2.3 0.4 pts$ 8.9 1.7 (1.3) pts Non-catastrophe property loss and loss expenses 124.0 20.7 90.8 16.9
3.8
Unfavorable prior year casualty reserve development 15.0 2.5 - - 2.5 Total$ 141.3 23.6$ 99.7 18.6 5.0 Compared to the same prior-year periods, Third Quarter and Nine Months 2022 experienced (i) lower net catastrophe losses, as discussed in the "Insurance Operations" section above, and (ii) 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. The unfavorable prior year casualty reserve development in Third Quarter and Nine Months 2022 was primarily due to increased severities in the 2021 accident year. There was no prior year casualty reserve development in Third Quarter and Nine Months 2021. In addition, the combined ratio was impacted by a 0.9-point increase in current year casualty loss costs in Third Quarter 2022 and a 1.5-point increase in Nine Months 2022, compared to the same prior-year periods. The increase in current year casualty loss costs in both periods was 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 September 30, Change Nine Months ended September 30, Change % or % or ($ in thousands) 2022 2021 Points1 2022 2021 Points1 NPW$ 143,117 124,725 15 %$ 414,170 357,248 16 % Direct new business 30,691 28,024 n/a 89,826 82,237 n/a Retention 85 % 85 n/a 84 % 84 n/a Renewal pure price increases 6.2 6.4 n/a 6.1 6.0 n/a NPE$ 128,268 111,981 15 %$ 371,892 320,904 16 % Underwriting income (2,385) (12,137) 80 608 11,449 (95) Combined ratio 101.9 % 110.8 (8.9) pts 99.8 % 96.4 3.4 pts % of total Standard Commercial Lines NPW 20 19 19 18 1n/a: not applicable.
NPW growth of 15% in Third Quarter 2022 and 16% in Nine Months 2022 compared to
the same prior-year periods benefited from renewal pure price increases,
exposure growth, strong retention, and higher direct new business.
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The combined ratio decreased 8.9 points in Third Quarter 2022 and increased 3.4
points in Nine Months 2022 compared to the same prior-year periods, primarily
driven by the following:
Third Quarter 2022 Third 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 $ 13.3 10.4 pts 32.8 29.3 (18.9) pts
Non-catastrophe property loss and loss
expenses 69.4 54.1 48.8 43.6 10.5
Total $ 82.7 64.5 81.6 72.9 (8.4)
Nine Months 2022 Nine 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 $ 45.4 12.2 pts 55.7 17.3 (5.1) pts
Non-catastrophe property loss and loss
expenses 188.0 50.6 133.7 41.7 8.9
Total $ 233.4 62.8 189.4 59.0 3.8
Compared to the same prior-year periods, Third Quarter and Nine Months 2022
experienced (i) lower net catastrophe losses, as discussed in the "Insurance
Operations" section above, and (ii) elevated non-catastrophe property loss and
loss expenses. The elevated non-catastrophe property loss and loss expenses was
primarily due to increased severity compared to the same prior-year periods
reflecting period-to-period volatility generally associated with our commercial
property line of business and inflationary pressures on building material and
labor costs.
Workers Compensation
Quarter ended September 30, Change Nine Months ended September 30, Change
% or % or
($ in thousands) 2022 2021 Points1 2022 2021 Points1
NPW $ 74,698 76,317 (2) % $ 260,557 249,099 5 %
Direct new business 13,597 15,408 n/a 47,552 47,355 n/a
Retention 85 % 86 n/a 86 % 86 n/a
Renewal pure price increases (0.1) - n/a (0.4) - n/a
NPE $ 81,996 78,318 5 % $ 250,178 230,845 8 %
Underwriting income 23,220 15,527 50 54,756 44,631 23
Combined ratio 71.7 % 80.2 (8.5) pts 78.1 % 80.7 (2.6) pts
% of total Standard Commercial
Lines NPW 10 12 12 12
1n/a: not applicable.
NPW did not significantly change in Third Quarter 2022 compared to Third Quarter
2021, but NPW increased 5% in Nine Months 2022 compared to Nine Months 2021 due
to exposure growth and strong retention.
The combined ratio decreased 8.5 points in Third Quarter 2022 and 2.6 points in
Nine Months 2022 compared to the same prior-year periods, primarily driven by
favorable prior year casualty reserve development, as follows:
Third Quarter 2022 Third 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 $ (20.0) (24.4) pts $ (8.0) (10.2) (14.2) pts
Nine Months 2022 Nine 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 $ (40.0) (16.0) pts $ (28.0) (12.1) (3.9) pts
The favorable prior year casualty reserve development in Third Quarter and Nine
Months 2022 was primarily due to improved loss severities in accident years 2019
and prior. The favorable prior year casualty reserve development in Third
Quarter and Nine Months 2021 was primarily due to improved loss severities in
accident years 2018 and prior.
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Partially offsetting the increase in favorable prior year casualty reserve
development this year, was an increase in ceded earned casualty reinstatement
premium that impacted the loss and loss expense ratio by 4.2 points in Third
Quarter 2022 and 1.4 points in Nine Months 2022, compared to the same prior-year
periods, as discussed in the "Insurance Operations" section above.
Standard Personal Lines Segment
Quarter ended September 30, Change Nine Months ended September 30, Change
% or % or
($ in thousands) 2022 2021 Points 2022 2021 Points
Insurance Segments Results:
NPW $ 86,844 78,247 11 % $ 234,465 221,883 6 %
NPE 75,638 73,362 3 221,618 220,476 1
Less:
Loss and loss expense incurred 57,263 65,123 (12) 172,396 160,273 8
Net underwriting expenses incurred 19,760 19,385 2 56,454 58,010 (3)
Underwriting income (loss) (1,385) (11,146) 88 $ (7,232) 2,193 (430) %
Combined Ratios:
Loss and loss expense ratio 75.7 % 88.8 (13.1) pts 77.8 % 72.7 5.1 pts
Underwriting expense ratio 26.1 26.4 (0.3) 25.5 26.3 (0.8)
Combined ratio 101.8 115.2 (13.4) 103.3 99.0 4.3
NPW increased 11% in Third Quarter 2022 and 6% in Nine Months 2022 compared to
the same prior-year periods, due to (i) higher direct new business, (ii)
stronger retention, (iii) higher homeowner coverage amounts due to inflation
adjustments, and (iv) higher average policy sizes from our mass affluent market
strategy. 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 September 30, Nine Months ended September 30,
($ in millions) 2022 2021 2022 2021
Direct new business premiums1 $ 17.4 10.2 $ 40.5 31.0
Retention 85 % 84 85 % 83
Renewal pure price increases on NPW 0.5 1.2 0.6 1.0
1Excludes our Flood direct premiums written, which is 100% ceded to the NFIP and
therefore, has no impact on our NPW.
The increase in NPE in Third Quarter and Nine 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 13.1 points in Third Quarter 2022 and
increased 5.1 points in Nine Months 2022 compared to the same prior-year
periods, driven by the following:
Third Quarter 2022 Third 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 $ 11.3 14.9 pts 19.5 26.7 (11.8) pts
Non-catastrophe property loss and loss
expenses 29.0 38.4 28.7 39.1 (0.7)
Flood claims handling fee
reimbursement (2.7) (3.6) (2.9) (4.0) 0.4
Total $ 37.6 49.7 45.3 61.8 (12.1)
Nine Months 2022 Nine Months 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 $ 36.7 16.5 pts 30.1 13.7 2.8 pts
Non-catastrophe property loss and loss
expenses 81.5 36.8 76.7 34.8 2.0
Flood claims handling fee
reimbursement (4.0) (1.8) (4.5) (2.0) 0.2
Total $ 114.2 51.5 102.3 46.5 5.0
Third Quarter 2022 experienced lower net catastrophe losses compared to the same
prior-year period, as discussed in the "Insurance Operations" section above. Our
Third Quarter 2022 net catastrophe losses were impacted by Hurricane Ian, which
primarily affected the Southeastern states in our footprint in late September
2022 . Partially offsetting these losses was $1.9 million of flood claims
handling fees. Nine Months 2022 experienced elevated net catastrophe losses
compared to the same
35
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prior-year period as a result of several Midwest wind and thunderstorm events
that occurred throughout the second quarter of 2022.
Nine Months 2022 experienced elevated non-catastrophe property loss and loss
expenses, driven by higher personal automobile physical damage losses. These
higher losses resulted from (i) higher frequencies from increased miles driven,
and (ii) greater severities from inflationary and supply chain impacts that have
increased labor and material costs, and the duration of claims, which impacts
vehicle rental days. The likely continuation of elevated non-catastrophe
property loss and loss expenses, coupled with renewal pure price increases below
loss trend, will put pressure on this segment's profitability in the near-term.
We are filing rate increases to mitigate these inflationary impacts.
E&S Lines Segment
Quarter ended September 30, Change Nine Months ended September 30, Change
% or % or
($ in thousands) 2022 2021 Points 2022 2021 Points
Insurance Segments Results:
NPW $ 89,087 82,056 9 % $ 264,073 227,109 16 %
NPE 85,804 74,314 15 244,840 203,783 20
Less:
Loss and loss expense incurred 52,299 46,643 12 149,895 131,850 14
Net underwriting expenses
incurred 27,489 22,999 20 78,632 64,439 22
Underwriting income (loss) 6,016 4,672 29 $ 16,313 7,494 118
Combined Ratios:
Loss and loss expense ratio 61.0 % 62.8 (1.8) pts 61.2 % 64.7 (3.5) pts
Underwriting expense ratio 32.0 30.9 1.1 32.1 31.6 0.5
Combined ratio 93.0 93.7 (0.7) 93.3 96.3 (3.0)
NPW growth of 9% in Third Quarter 2022 and 16% in Nine 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
Third Quarter and Nine Months 2022 benefited from exposure growth driven by
favorable E&S Lines marketplace conditions.
Quarter ended September 30, Nine Months ended September 30,
($ in millions) 2022 2021 2022 2021
Direct new business premiums $ 38.6 35.7 $ 117.3 100.7
Renewal pure price increases on
NPW 6.7 % 5.6 7.1 % 6.5
The increase in NPE in Third Quarter and Nine 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 1.8 points in Third Quarter 2022 and
3.5 points in Nine Months 2022 compared to the same prior-year periods,
primarily driven by the following:
Third Quarter 2022 Third 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 $ 4.6 5.4 pts $ 6.8 9.2 (3.8)
pts
Non-catastrophe property loss and loss expenses 8.7 10.1 4.8 6.5 3.6 Total$ 13.3 15.5$ 11.6 15.7 (0.2) Nine Months 2022 Nine 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$ 8.1 3.3 pts$ 21.5 10.5 pts (7.2)
pts
Non-catastrophe property loss and loss expenses 30.2 12.4 21.5 10.5 1.9 (Favorable) prior year casualty reserve development - - (7.0) (3.4) 3.4 Total$ 38.3 15.7$ 36.0 17.6 (1.9) Third Quarter and Nine Months 2022 experienced lower net catastrophe losses compared to the same prior-year periods, primarily due to (i) Hurricane Ida in 2021, and (ii) a series of large storms that significantly impactedTexas and other Southern and Midwestern states in Nine Months 2021. These catastrophe events resulted in greater net catastrophe losses in Third 36 -------------------------------------------------------------------------------- Table of Contents Quarter and Nine Months 2021 compared to events in Third Quarter and Nine Months 2022. Third Quarter and Nine Months 2022 experienced elevated non-catastrophe property loss and loss expenses compared to the same prior-year periods, primarily due to increased severity 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 Third Quarter and Nine Months 2022. The favorable prior year casualty reserve development in Nine Months 2021 was primarily due to lower loss severities in accident years 2016 through 2018. In addition, the loss and loss expense ratio was favorably impacted by a 1.6-point decrease in current year casualty loss costs in both Third Quarter 2022 and Nine 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. The underwriting expense ratio increased 1.1 points in Third Quarter 2022 compared to Third Quarter 2021, primarily due to an increase of (i) 0.7 points in labor expenses, and (ii) 0.4 points in commissions. In addition, the underwriting expense ratio increased 0.5 points in Nine Months 2022 compared to Nine Months 2021, primarily due to increased 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 Treaty with substantially the same structure as the
expiring treaty. The treaty year 2022 deposit premium increased by
million
growth in our book of business and pure renewal rate increases, coupled with a
modest risk-adjusted reinsurance rate increase.
The Property Excess of Loss Treaty ("Property Treaty") was renewed with a $10
million limit increase in the highest layer. The treaty year 2022 deposit
premium increased by $11.3 million , or 28%, from 2021, reflecting (i) an
increase in projected subject premium driven by growth in total insured values,
insured locations, and rate increases on our underlying policies, (ii) the
purchase of additional coverage, and (iii) risk-adjusted insurance 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:
AM Best Affirms Credit Ratings of GreenStars BNP Paribas S.A.
2022 Q3 Fact Sheet
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