Selective Insurance Group, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods. Selective provides property and casualty insurance through Standard Commercial, Standard Personal, and Excess and Surplus (E&S) businesses; investments are reported as a separate segment. Figures below are in U.S. dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $614.5 million | $568.7 million | $1,215.0 million | $1,120.2 million |
| Net premiums earned | $568.0 million | $531.9 million | $1,128.9 million | $1,054.4 million |
| Net income | $41.4 million | $43.6 million | $91.9 million | $80.6 million |
| Diluted EPS | $0.70 | $0.74 | $1.55 | $1.38 |
| GAAP combined ratio | 94.7% | 91.8% | 93.0% | 92.0% |
| Operating income, non-GAAP | $40.3 million | $42.5 million | $91.4 million | $81.2 million |
| After-tax net investment income | $30.3 million | $23.5 million | $57.8 million | $47.1 million |
- Q2 revenue increased 8%, while net income and diluted EPS each declined 5%. Higher incurred losses, including catastrophe losses, contributed to weaker underwriting results.
- First-half revenue rose 8%, net income increased 14%, and diluted EPS increased 12%. Net premiums written grew 6% in both Q2 and the first half.
- First-half underwriting gain was $79.5 million versus $84.7 million. The GAAP combined ratio increased 1.0 point year over year. Favorable prior-year casualty reserve development was $28.7 million, compared with $27.0 million in the first half of 2016.
- Performance varied by segment: Q2 Standard Commercial Lines had a 92.2% GAAP combined ratio; Standard Personal Lines recorded an underwriting loss of $5.8 million and a 108.0% ratio; E&S recorded a $1.3 million underwriting gain and a 97.5% ratio. Commercial property catastrophe and other property losses, and elevated personal auto losses, pressured results.
Financial position, cash flow, and liquidity
- At June 30, 2017, total assets were $7.53 billion, total liabilities $5.88 billion, and stockholders’ equity $1.65 billion. Book value per share was $28.32, up 7% from $26.42 at year-end 2016.
- Long-term debt was $438.9 million, essentially unchanged from December 31, 2016. Debt-to-capital was approximately 21%. A $64 million short-term FHLBNY borrowing taken in February was repaid in March.
- Six-month operating cash flow was $123.7 million, compared with $59.1 million in 2016. Investing activities used $93.5 million and financing activities used $22.1 million. Cash at period-end was $8.6 million.
- Management reported $142 million of cash and short-term investments at June 30, including $21 million at the parent and $121 million at insurance subsidiaries. The parent’s $30 million credit line had no outstanding balance. The next principal debt repayment is due in 2021.
- Management anticipated $80 million of subsidiary dividends to the parent for 2017, of which $40 million had been paid by June 30. Such dividends remain subject to insurance-regulator approval.
Management commentary, outlook, and risks
- Management attributed premium growth to renewal pricing, new business, and retention, alongside underwriting and claims initiatives. Commercial Lines renewal retention was 83%; renewal pure price increases were 3.1% in the first half. Arizona and New Hampshire expansion agents began quoting in Q2, with policies effective on or after July 1.
- Management raised 2017 guidance after two quarters of better-than-expected results: statutory combined ratio excluding catastrophe losses of 89.5%, assuming no additional prior-year casualty reserve development; catastrophe losses of 3.5 points; after-tax investment income of $113 million; and weighted-average shares of 59.2 million.
- Investment results benefited from improved fixed-income yields and alternative-investment returns. Management said risk assets were 7% of invested assets and could rise to approximately 10% over time. It cited potential market volatility, interest-rate movements, and possible tax-law changes as portfolio risks.
- Insurance risks include catastrophe and property-loss volatility, commercial auto reserve development, and personal auto claim frequency and severity. Reserve adequacy, reinsurance recoverables, investment valuations, and reinsurance are identified as areas requiring significant estimates and judgment.
- The company disclosed ordinary-course insurance litigation and certain class-action and extra-contractual claims. It did not identify a pending matter it believed would materially affect consolidated financial condition, but acknowledged an adverse outcome could materially affect results or cash flows in a particular period.
- Ratings were unchanged: A.M. Best A, Moody’s A2, Fitch A+, and S&P A, all with stable outlooks. Management warned a downgrade below A.M. Best A- would trigger a line-of-credit default and could affect business relationships.
Most important facts for investors to verify
- Whether the elevated Q2 catastrophe and personal auto losses persist, and how actual catastrophe experience compares with the 3.5-point full-year assumption.
- Whether favorable reserve development continues; guidance assumes no additional prior-year casualty reserve development.
- Progress toward the 89.5% full-year statutory combined-ratio target excluding catastrophe losses and the $113 million after-tax investment-income target.
- Investment portfolio risk, including the planned potential increase in risk assets, floating-rate and CLO exposure, and sensitivity to interest rates, spreads, and tax-policy changes.
- Availability of subsidiary dividends and other parent-level liquidity, including regulatory limits, debt covenants, and potential alternative-investment commitments of up to $165 million.