Selective Insurance Group, Inc. — FY 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019. Selective is a U.S. property and casualty insurer with Standard Commercial Lines, Standard Personal Lines, E&S Lines, and Investments segments. Standard Commercial accounted for approximately 80% of insurance operations’ net premiums written. The company distributes insurance through independent agents. A.M. Best reaffirmed its “A (Excellent)” financial strength rating and upgraded the outlook to positive.
Financial performance and key metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $2,846.5 million | $2,586.1 million |
| Net premiums written | $2,679.4 million | $2,514.3 million |
| Net premiums earned | $2,597.2 million | $2,436.2 million |
| Net investment income | $222.5 million | $195.3 million |
| Underwriting income | $164.0 million | $121.2 million |
| Net income | $271.6 million | $178.9 million |
| Diluted earnings per share | $4.53 | $3.00 |
| Combined ratio | 93.7% | 95.0% |
| Non-GAAP operating income | $264.4 million | $218.6 million |
| Non-GAAP operating ROE | 13.3% | 12.5% |
- Net cash provided by operating activities was $477.5 million, compared with $454.9 million in 2018. Investing activities used $543.6 million; financing activities provided $57.2 million. Year-end cash and restricted cash totaled $8.0 million.
- At year-end, total assets were $8.80 billion, stockholders’ equity was $2.19 billion, and statutory surplus was $1.93 billion. Book value per share was $36.91, up 21% year over year.
- Long-term debt was $550.6 million; the reported debt-to-capitalization ratio was 20.1%. The company had no balance outstanding on its $50 million revolving credit facility. Parent-level cash and investments were $278 million, versus a stated liquidity target of approximately $160 million.
- Catastrophe losses were $81.0 million, or 3.1 combined-ratio points. The after-tax investment yield was 2.9%. The fixed-income portfolio had a weighted-average credit quality of AA- and a 3.6-year duration.
- Fourth-quarter 2019 revenue was $728.9 million and net income was $81.9 million, compared with $643.0 million and $45.8 million, respectively, in fourth-quarter 2018. Diluted EPS was $1.36 versus $0.76.
Material changes versus the prior comparable period
- Revenue grew 10%, net premiums written grew 7%, and net income increased 52%. Underwriting income rose 35%, while the combined ratio improved by 1.3 points.
- Underwriting results benefited from lower catastrophe and non-catastrophe property losses and greater favorable prior-year casualty reserve development. Prior-year reserve development was favorable by $50.3 million in 2019, versus $29.9 million in 2018, driven chiefly by workers’ compensation.
- After-tax net investment income increased 13%. Net realized and unrealized investment results improved to a $14.4 million gain from a $54.9 million loss, including $24.8 million of realized gains from public equity sales.
- Standard Commercial Lines NPW increased 8%; Standard Personal Lines declined 2%; and E&S Lines increased 4%. E&S returned to underwriting profit, with a 95.9% combined ratio versus 100.3% in 2018. Commercial automobile remained unprofitable despite improvement: its combined ratio was 107.9%, down from 115.7%.
- Debt increased following issuance of $300 million of 5.375% senior notes due 2049; proceeds partly funded redemption of $185 million of 5.875% notes. Debt retirement costs were $4.2 million before tax.
Outlook, risks, contingencies, and unusual items
- For 2020, management targeted 11% non-GAAP operating ROE, down from its 12% target for 2019. Guidance included a 91.5% GAAP combined ratio excluding catastrophe losses, assuming no prior-year casualty reserve development; catastrophe losses of 3.5 points; after-tax net investment income of $185 million, including $14 million from alternative investments; an effective tax rate of approximately 19.5%; and diluted weighted-average shares of 60.5 million.
- Management identified continued renewal pricing at or above expected loss trends, disciplined growth, investment portfolio management amid low interest rates, and expense efficiency as priorities. It also cited digital customer-service and underwriting technology investments. The 2020 guidance depends on assumptions about pricing, loss trends, underwriting and claims initiatives, reinvestment yields, and alternative investment income.
- Reserve estimation is a significant judgment area and the auditor identified reserves as a critical audit matter. Net favorable prior-year development included $68.0 million from workers’ compensation, while commercial automobile and other lines had unfavorable development. Management estimated a reasonable net reserve range of $3.16 billion to $3.74 billion; the range excludes certain latent exposures.
- Key risks include catastrophe severity and frequency, reserve adequacy and social inflation, auto claim frequency and severity, abuse-and-molestation claims and state “reviver” statutes, reinsurance availability and counterparty credit, investment and interest-rate risk, competition and technology disruption, cybersecurity, and regulatory or economic changes. About 12% of fixed-income investments were floating-rate securities primarily linked to LIBOR, which was scheduled to be discontinued after 2021; management said the transition’s impact was unclear.
- Catastrophe reinsurance modeling estimated a net after-tax loss of 5% of year-end equity for a 1-in-250-year hurricane event; the modeled program exhausts at approximately a 1-in-217-year return period. Terrorism coverage also carries exposure: the company’s 2020 TRIPRA deductible was approximately $359 million, and its reinsurance excludes nuclear, biological, chemical, and radioactive events in specified treaties.
- The company reported no material pending legal proceeding expected to materially affect consolidated financial condition. It noted ordinary-course litigation could still materially affect results or cash flows in a particular period. The 2018 tax year was under audit, with no material adjustment expected. KPMG gave an unqualified opinion on the financial statements and internal controls.
- After year-end, John J. Marchioni became President and CEO effective February 1, 2020. The Board increased the quarterly dividend 15% in October 2019 to $0.23 per share; a further $0.23 dividend was declared in January 2020.
Most important facts for investors to verify
- Whether workers’ compensation favorable reserve trends persist and whether medical inflation or claim changes reverse them.
- Whether commercial automobile pricing and underwriting actions bring the line below a 100% combined ratio, and whether personal-lines competitiveness stabilizes.
- How much earnings growth reflects recurring underwriting and investment income versus favorable reserve development and realized investment gains.
- Whether loss-cost trends support renewal price increases and the 2020 combined-ratio assumptions, particularly the assumption of no prior-year casualty reserve development.
- How low interest rates affect reinvestment income, pension assumptions, and the 11% operating-ROE target; and how alternative investment returns develop.
- Reserve sensitivity, including long-tail casualty exposures and abuse-and-molestation claims, and the adequacy and collectability of reinsurance protection.
- Parent liquidity and dividend capacity, considering insurance-subsidiary dividend restrictions, debt service, and credit-agreement covenants.