Selective Insurance Group, Inc. (“Selective”), a property and casualty insurer focused on the Eastern U.S., recently reported its second quarter 2023 results. The quarter was marked by excellent top-line growth and solid underlying underwriting profitability, partially offset by elevated catastrophe losses. However, strong investment income growth allowed Selective to maintain its full-year earnings guidance.
Selective’s Results – Growth and Profitability
In Q2, Selective grew its net premiums written by 17%, or $154 million, for total net premiums written of $1.08 billion. The Company’s growth resulted from a 6.4% increase in overall renewal pricing, strong retention, exposure increases, and new business growth compared to last year. Net income available to common shareholders declined to $56.3 million or $0.92 per share, compared to $37.2 million or $0.61 per share in Q2 2022. However, non-GAAP operating income, which excludes realized and unrealized investment gains/losses, was $60.6 million or $0.99 per share, compared to $71.1 million or $1.17 per share in the prior year quarter.
The company’s combined ratio increased 5.7% year-over-year to 100.2%
The combined ratio deteriorated 5.7 points from the prior-year period to 100.2%, including 10.6 points of catastrophe losses.
- Major storms across Selective’s Midwest and East Coast footprint resulted in $100 million of pre-tax catastrophe losses.
- There were 19 catastrophic events during the quarter, with no single event large enough to trigger Selective’s $60 million reinsurance retention.
- Excluding catastrophes, the underlying combined ratio improved by 1.4 points to 90%.
Commercial, excess and surplus, and personal lines all grew, but personal lines combined ratio hits 126.5%
- Selective posted 14% growth in standard commercial lines to $870 million, representing 80% of premiums.
- The combined ratio for commercial lines was 97.1%, including 8.2 points of catastrophe losses.
- Excess and surplus lines grew 20% to $106 million, with a 100.7% combined ratio impacted by 17.6 points of catastrophes.
- Standard personal lines increased 32% but incurred a 126.5% combined ratio, including 24.3 points from catastrophes.
Selective’s after-tax net investment income jumped 37% year-over-year to $78 million, benefiting from higher interest rates and active portfolio management. These investment results helped drive an annualized non-GAAP operating ROE of 9.8% for the quarter, near management’s 10% target.
Growth Drivers and Market Position
Despite elevated first-half catastrophe losses, Selective maintained its 96.5% GAAP combined ratio guidance for full-year 2023 based on an improved 91% underlying combined ratio outlook. Management sees growth opportunities by deepening its agency relationships, winning new business, achieving rate increases above its 6.5% loss cost assumption, and geographic expansion.
Selective plans to expand its commercial lines footprint by targeting five new states over the next 2-3 years. Renewal pure price increases are averaging close to 7% year-to-date, above the 6.5% loss cost view. Its consistent underwriting approach makes Selective a stable carrier amid market disruption.
Capital Position and Deployment
Management emphasized Selective boasts a strong balance sheet, with $2.5 billion of GAAP equity, $480 million of cash, and 16% financial leverage. Its capital position provides flexibility to absorb losses while supporting growth and shareholder payouts. However, due to its growth opportunities, Selective did not repurchase any shares in Q2.
Management’s Key Issues and Risks
According to Selective’s management, while underlying underwriting metrics remain solid, uncertainty persists around property loss trends and social inflation. Selective’s 90% year-to-date underlying combined ratio provides a buffer, but personal auto profitability needs to improve.
Catastrophes are reportedly running above plan this year, underscoring the potential for volatility from weather uncertainty. Climate change may be increasing the frequency and severity of events over time. Selective does utilize reinsurance but retains meaningful exposure to loss variability.
Selective Insurance Group is headquartered in Branchville, New Jersey, and has been in business since 1926. The Company employs more than 2,000 in its branch office network. Selective is currently the 39th largest U.S. property and casualty insurance group and holds an “A+” (Superior) rating from A.M. Best.
Selective is a super-regional carrier focused primarily on commercial lines customers in the Eastern United States, including Massachusetts. The Company has entered eight states for commercial lines since 2017 and expects to enter five more in the next two to three years.
The Company’s business mix comprises 81% standard commercial lines policies presently written across 30 states and 9% standard personal lines policies written in 15 states. The remaining 10% of its business mix comes from excess and surplus lines policies written in all fifty states.