Selective Insurance Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. The company reports Standard Commercial Lines, Standard Personal Lines, Excess & Surplus (E&S) Lines, and Investments.
Financial results and condition
Amounts below are in millions, except per-share data and ratios.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenues | $682.4 | $708.2 | $1,347.3 | $1,407.2 |
| Net premiums earned | $630.7 | $642.6 | $1,282.4 | $1,275.2 |
| Net investment income | $34.4 | $58.5 | $90.4 | $109.1 |
| Net income | $34.2 | $72.3 | $49.4 | $133.6 |
| Diluted EPS | $0.57 | $1.21 | $0.82 | $2.23 |
| Combined ratio | 98.4% | 93.1% | 97.6% | 93.9% |
| Operating cash flow | — | $197.4 | $165.1 |
- Q2 underwriting income was $9.9 million, down from $44.6 million. For the first half, it was $31.2 million, down from $78.2 million. Combined ratios below 100% indicate underwriting profit.
- Catastrophe losses were $83.2 million in Q2 and $116.4 million in the first half, versus $29.5 million and $50.3 million, respectively, in 2019. Q2 events included April storms and civil unrest.
- At June 30, total assets were $9.31 billion, stockholders’ equity $2.30 billion, and statutory surplus $1.9 billion. Book value per share was $38.43, versus $36.91 at year-end 2019.
- Total debt was $802.6 million, including $252 million of short-term borrowings raised during the first quarter as a liquidity precaution; long-term debt was $550.6 million. Debt-to-capital was 25.9%. The company expected to repay the short-term borrowings by year-end.
- Cash and short-term investments totaled $371.1 million. The parent company reported $324 million of cash and investments. The portfolio’s average credit quality was AA-, and 72% of invested assets were classified as highly liquid.
Material changes and unusual items
- Net income fell 53% in Q2 and 63% year to date. Higher catastrophe losses, lower investment income, and COVID-19-related charges weighed on results. Q2 after-tax net investment income declined 40%; first-half income declined 17%.
- Alternative investments recorded pre-tax losses of $16.0 million in Q2 and $9.7 million for the first half; results are reported on a one-quarter lag. First-half investment results also included $27.3 million of other-than-temporary impairment expense, including $16.2 million on securities the company intended to sell and $11.1 million of credit-loss expense. Q2 recorded a $4.3 million impairment benefit as markets improved.
- COVID-19 measures included a $75 million first-quarter premium-return accrual for lower sales and payroll exposures, reduced to $61 million by June 30; $19.7 million of automobile premium credits; a $10 million IBNR estimate for limited property clean-up coverage; and increased allowance for uncollectible premiums. Management said these four items reduced pre-tax underwriting results by $9.6 million in Q2 and $34.0 million for the first half.
- First-half favorable prior-year reserve development was $20.9 million, while current-year catastrophe losses increased materially. The company reported Q2 combined ratios of 96.7% for Standard Commercial, 108.8% for Standard Personal, and 100.9% for E&S.
- Operating cash flow increased to $197.4 million from $165.1 million. Investing activities used $422.5 million, while financing activities provided $222.8 million, including borrowings.
Outlook, commentary, and risks
- Revised 2020 guidance: GAAP combined ratio excluding catastrophe losses of 90%–91%; catastrophe losses of 6.0 combined-ratio points; after-tax net investment income of approximately $170 million, including up to $5 million from alternative investments; effective tax rate of approximately 18.5%; and diluted weighted-average shares of 60.5 million. Management cautioned that guidance uncertainty is elevated because of COVID-19 and economic conditions.
- The company’s 2020 non-GAAP operating ROE target remained 11%; first-half annualized non-GAAP operating ROE was 6.7%. Six-month renewal pure pricing was 4.0%. Management emphasized disciplined pricing and growth, active investment and liquidity management, and longer-term expense efficiencies.
- Management expected no material COVID-19 business-interruption losses under its standard commercial property forms, citing physical-loss requirements and virus exclusions; it noted limited sub-limited coverages and uncertainty from litigation and potential legislative or regulatory changes. Workers’ compensation, liability, claim severity, premium collections, and future premium credits also remain uncertain.
- Reinsurance renewals effective July 1 retained the prior structure, but ceded deposit premiums increased $14.3 million, or 17%. The renewed property treaty excludes communicable disease. The filing describes potential litigation and legislative changes affecting coverage, as well as catastrophe, market, credit, interest-rate, and reinsurance-capacity risks.
- The company reported no material pending legal proceeding expected to adversely affect its financial condition, results, or cash flows, but noted that litigation outcomes are unpredictable and COVID-19 coverage disputes could affect results.
Key facts for investors to verify
- Whether catastrophe losses, claim trends, and reserve development evolve as assumed in the 2020 combined-ratio guidance.
- Whether premium-return estimates, payment accommodations, and the $21 million premium-receivable allowance adequately reflect customer collections and economic conditions.
- Whether investment income, alternative-investment results, credit-loss allowances, and fixed-income valuations support the $170 million full-year investment-income outlook.
- Repayment timing for the $252 million of short-term debt and maintenance of parent and insurance-subsidiary liquidity and capital.
- Developments in COVID-19 coverage litigation, legislation, regulatory premium actions, and reinsurance terms or capacity.
- Progress toward the 11% non-GAAP operating ROE target; the filing states that outlook carries greater uncertainty than in prior years.