Selective(SIGI) - 2021 Q4 - Annual Report

PART I Business Selective Insurance Group operates as a P&C insurance holding company in the U.S. through independent agents, with four main segments and a focus on competitive advantages and human capital Financial Strength Ratings | NRSRO | Financial Strength Rating | Outlook | | :--- | :--- | :--- | | AM Best | A+ | Stable | | Standard & Poor's Global Ratings ("S&P") | A | Stable | | Moody's Investors Services ("Moody's") | A2 | Stable | | Fitch Ratings ("Fitch") | A+ | Stable | - In Q4 2021, AM Best upgraded the company's financial strength rating to "A+" (Superior) from "A" (Excellent), citing strong balance sheet strength, strong operating performance, a favorable business profile, and appropriate enterprise risk management[13] Segment Revenue Contribution | Segment | Percentage of Consolidated Revenues | | :--- | :--- | | Standard Commercial Lines | 73% | | Standard Personal Lines | 9% | | E&S Lines | 8% | | Investments | 10% | - As of December 31, 2021, women represented 58% of the non-officer workforce and 32% of the officer workforce, with approximately 20% of the total workforce composed of Black, Latin, Asian, and other ethnicities[23] - Key performance measures include the combined ratio for insurance operations, after-tax net investment income for the investments segment, and a 2022 non-GAAP operating ROE target of 11% for overall financial performance[29][30][31] Risk Factors The company faces significant risks from catastrophic events, reserve inadequacy, reinsurance costs, investment fluctuations, regulatory changes, and cybersecurity threats - The company is subject to losses from natural and human-made catastrophes, including hurricanes, severe storms, and terrorism, with climate change noted as a factor that could increase the frequency and severity of these events[100][102] - Loss and loss expense reserves may be inadequate due to uncertainties such as inflation (medical and social), the ongoing impacts of COVID-19, and the enactment of "reviver" statutes that retroactively extend the statute of limitations for civil actions like sexual abuse[106][109][110] - The availability and cost of reinsurance are subject to market conditions, with the industry seeking to tighten terms, reduce capacity, and increase pricing, including new exclusions for cyber risk and communicable diseases[113][115] - Under the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), the company has a significant deductible of $419 million before federal assistance becomes available for certified acts of terrorism[117] - Approximately 15% of the company's fixed income portfolio consists of floating rate securities tied to LIBOR, which is scheduled to be eliminated on June 30, 2023, creating transition risk[140] - The business heavily relies on IT systems and is subject to malicious cyber-attacks which could interrupt operations, damage reputation, and result in monetary damages[164] Unresolved Staff Comments The company reports no unresolved staff comments - None[168] Properties The company owns its 315,000 sq ft headquarters in Branchville, New Jersey, and leases all other facilities - The company owns its headquarters in Branchville, New Jersey, and leases all other facilities[169] Legal Proceedings As of December 31, 2021, no material pending legal proceedings are expected to adversely affect the company's financial condition or operations - As of December 31, 2021, the company has no material pending legal proceedings that could have a material adverse effect on its consolidated financial condition, results of operations, or cash flows[170] Mine Safety Disclosures This item is not applicable to the company - Not applicable[171] PART II Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section covers common and preferred stock information, dividend policy, and share repurchase activity, including a $100 million program with $96.6 million remaining - The Board of Directors approved a 12% increase in the common stock dividend to $0.28 per share on October 27, 2021[174] - A $100 million share repurchase program was authorized on December 2, 2020, with approximately $96.6 million remained available under this program as of the end of Q4 2021[178] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2021 financial performance, highlighting a 14.3% non-GAAP operating ROE, critical accounting policies, segment results, and a 2022 target of 11% non-GAAP operating ROE Critical Accounting Policies and Estimates Critical accounting policies include loss and loss expense reserves ($4.0 billion net at year-end 2021), investment valuations, and reinsurance, with $82.9 million favorable prior year loss development Net Loss and Loss Expense Reserves by Segment (As of Dec 31, 2021) | Segment | Net Reserves ($ in thousands) | | :--- | :--- | | Standard Commercial Lines | 3,375,507 | | Standard Personal Lines | 161,758 | | E&S Lines | 464,997 | | Total | 4,002,262 | Prior Year Loss and Loss Expense Development (Favorable)/Unfavorable | ($ in millions) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | General liability | (29.0) | (35.0) | (5.0) | | Commercial Automobile | 13.3 | 7.1 | 0.7 | | Workers compensation | (58.0) | (60.0) | (68.0) | | E&S casualty lines | (7.0) | — | 2.0 | | Total | (82.9) | (72.9) | (50.3) | - The company recorded an allowance for credit losses of $9.7 million in 2021 and $4.0 million in 2020 on its AFS fixed income securities portfolio[230] Financial Highlights of Results for Years Ended December 31, 2021, 2020, and 2019 The company achieved a 14.3% non-GAAP operating ROE in 2021, with net income increasing 60% to $394.5 million, driven by strong underwriting and investment income Key Financial Metrics (2021 vs. 2020) | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Revenues ($ in thousands) | 3,379,164 | 2,922,274 | 16% | | Net Income Available to Common Stockholders ($ in thousands) | 394,484 | 246,355 | 60% | | Diluted Net Income Per Share | $6.50 | $4.09 | 59% | | Combined Ratio | 92.8% | 94.9% | (2.1) pts | | Return on Average Common Equity (ROE) | 14.8% | 10.4% | 4.4 pts | | Non-GAAP Operating ROE | 14.3% | 10.5% | 3.8 pts | | Book Value Per Share | $46.24 | $42.38 | 9% | - The 2022 outlook includes a non-GAAP operating ROE target of 11%, a GAAP combined ratio (ex-catastrophes) of 91.0%, and after-tax net investment income of $200 million[238][239] Results of Operations and Related Information by Segment Insurance operations saw 15% NPW growth to $3.2 billion in 2021, with a combined ratio of 92.8%, while investment income increased 42% to $263 million Insurance Operations Highlights (2021 vs. 2020) | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Net Premiums Written (NPW) | $3,189,713 | $2,773,092 | 15% | | Underwriting Income | $218,592 | $136,349 | 60% | | Combined Ratio | 92.8% | 94.9% | (2.1) pts | - Net catastrophe losses contributed 5.4 points to the 2021 combined ratio, a significant improvement from 8.0 points in 2020[242] - The company renewed its main property catastrophe reinsurance treaty effective January 1, 2022, extending coverage to $835 million in excess of a $40 million retention[284] Investments Segment Highlights (2021 vs. 2020) | ($ in thousands) | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Net investment income earned – before tax | 326,589 | 227,107 | 44% | | Net investment income earned – after tax | 263,000 | 184,612 | 42% | Federal Income Taxes Federal income tax expense increased by $44.9 million to $101.5 million in 2021, with an effective tax rate of 20.5% Federal Income Tax Summary | ($ in millions) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Federal income tax expense | 101.5 | 56.6 | 64.8 | | Effective tax rate | 20.5% | 18.7% | 19.3% | Liquidity and Capital Resources The company maintains strong liquidity with $527 million in Parent cash and investments, $771 million net cash from operations, and a 14.5% debt-to-capital ratio - The Parent holding company's cash and total investments amounted to $527 million at December 31, 2021, up from $490 million at year-end 2020[308] - The maximum allowable ordinary dividend from the Insurance Subsidiaries to the Parent for 2022 is $322 million[311] - At December 31, 2021, GAAP stockholders' equity was $3.0 billion, and the debt-to-capital ratio was 14.5%[325] Cash Flow Summary (2021 vs. 2020) | ($ in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | 771 | 554 | | Net cash used in investing activities | (619) | (688) | | Net cash (used in) provided by financing activities | (123) | 141 | Quantitative and Qualitative Disclosures About Market Risk The company manages market risks in its $8.0 billion investment portfolio, primarily interest rate, credit, and equity price, with 91% in fixed income and an 'A+' average credit rating - The investment portfolio allocation as of December 31, 2021 was 84% fixed income securities, 4% equity securities, 6% short-term investments, and 5% other investments[339] Interest Rate Sensitivity Analysis (as of Dec 31, 2021) | Interest Rate Shift | Fair Value Change ($ in thousands) | Fair Value Change (%) | | :--- | :--- | :--- | | +100 bps | (277,615) | (4.1)% | | +200 bps | (555,230) | (8.2)% | - The fixed income securities portfolio had an overall credit quality of "A+" as of December 31, 2021, with non-investment grade exposure representing approximately 4% of the total[347] - Significant credit concentrations (over 10% of invested assets) include special revenue municipal bonds (12%), financial sector corporate securities (16%), and collateralized loan obligations (CLOs) (11%)[350] Financial Statements and Supplementary Data This section presents audited consolidated financial statements, including balance sheets, income statements, and cash flows, with an unqualified audit opinion from KPMG LLP Consolidated Balance Sheet Highlights (As of Dec 31) | ($ in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total Investments | 8,026,988 | 7,505,599 | | Total Assets | 10,461,389 | 9,687,913 | | Reserve for Loss and Loss Expense | 4,580,903 | 4,260,355 | | Total Liabilities | 7,478,504 | 6,949,024 | | Total Stockholders' Equity | 2,982,885 | 2,738,889 | Consolidated Income Statement Highlights (Year Ended Dec 31) | ($ in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenues | 3,379,164 | 2,922,274 | | Total Expenses | 2,873,854 | 2,619,286 | | Net Income | 403,837 | 246,355 | - The independent auditor, KPMG LLP, identified the evaluation of the estimate of reserves for loss and loss expense as a critical audit matter due to the high degree of subjective auditor judgment and inherent uncertainties involved[371][372] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[598] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with an unqualified opinion from KPMG LLP - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[599] - Based on the COSO Framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2021[601] - No changes in internal control over financial reporting occurred during the fourth quarter of 2021 that materially affected, or are reasonably likely to materially affect, internal controls[602] Other Information This item is not applicable to the company - Not applicable[612] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[613] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference from the registrant's definitive Proxy Statement[615] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference from the registrant's definitive Proxy Statement[616] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the Proxy Statement and Item 5 - Information is incorporated by reference from the registrant's definitive Proxy Statement and Item 5 of this report[617] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference from the registrant's definitive Proxy Statement[618] Principal Accountant Fees and Services Information about principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference from the registrant's definitive Proxy Statement[619] PART IV Exhibit and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the report, including consents and certifications - This section lists all financial statements, schedules, and exhibits filed with the report, including consents of experts and certifications[620][621][622] Form 10-K Summary The company indicates that no Form 10-K summary is provided - None[649]