Selective Insurance Group, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 19, 2018. Selective is a U.S. property and casualty insurance holding company with Standard Commercial, Standard Personal, E&S, and investment operations. Commercial insurance represented 78% of insurance net premiums written (NPW).
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $2,470 million | $2,284 million | +8% |
| Net premiums written | $2,371 million | $2,237 million | +6% |
| Net premiums earned | $2,291 million | $2,150 million | +7% |
| Net income | $168.8 million | $158.5 million | +7% |
| Diluted earnings per share | $2.84 | $2.70 | +5% |
| Underwriting income | $154.3 million | $151.9 million | +2% |
| Combined ratio | 93.3% | 92.9% | 0.4-point deterioration |
| After-tax net investment income | $118.5 million | $98.4 million | +20% |
| Operating cash flow | $370.7 million | $301.8 million | +23% |
- Combined ratio remained below 100%, indicating an underwriting profit. Catastrophe losses were $67.3 million, or 2.9 points of the combined ratio, versus $59.7 million and 2.8 points in 2016.
- Segment combined ratios: Standard Commercial 91.6% (91.2% in 2016); Standard Personal 96.2% (95.6%); E&S 103.0% (103.4%). E&S remained unprofitable.
- Net favorable prior-year reserve development was $39.2 million, down from $65.8 million in 2016. Favorable general liability and workers compensation development was partly offset by adverse commercial auto and E&S casualty development.
- Total assets were $7.69 billion and stockholders’ equity was $1.71 billion at year-end. Long-term debt was $439.1 million; debt-to-capitalization was approximately 20.4%. No balance was outstanding on the $30 million Parent credit line.
- Cash and short-term investments were $166 million, including $25 million at the Parent and $141 million at insurance subsidiaries. Parent cash and investments totaled $114 million; access to subsidiary dividends is subject to insurance regulation. The subsidiaries paid $80 million in dividends to the Parent during 2017 and could pay up to $211 million in ordinary dividends in 2018, subject to applicable restrictions.
Material changes versus prior year
- After-tax investment income rose 20%, supported by higher fixed-income book yields, a larger invested-asset base, and stronger alternative-investment returns.
- The combined ratio worsened as loss and loss expense rose to 58.7% of earned premiums from 57.4%, reflecting lower favorable reserve development and higher catastrophe and non-catastrophe property losses. A lower expense ratio partly offset this deterioration.
- Commercial auto remained a notable weakness: its 2017 combined ratio was 114.7%, compared with 110.8% in 2016. Management cited higher claim frequency and severity and reported rate and underwriting actions.
- Standard Personal Lines NPW increased 5% after declining 1% in 2016. E&S NPW grew 3%, but management prioritized profitability over volume.
- Book value per share rose to $29.28 from $26.42. The quarterly dividend was increased 13% in October 2017, to $0.18 per share; full-year declared dividends were $0.66 per share.
Outlook, management commentary, risks and unusual items
- Management’s 2018 targets were a GAAP combined ratio of approximately 91.0%, excluding catastrophe losses and assuming no prior-year casualty reserve development; catastrophe losses of 3.5 points; after-tax investment income of $144 million, including $10 million from alternatives; an effective tax rate of about 18%; and weighted-average shares of 59.6 million.
- The company set a 2018 non-GAAP operating ROE target of 12.0%, reflecting a 9.0% estimated weighted-average cost of capital and its long-term goal of operating ROE 300 basis points above that cost.
- Tax Reform reduced the statutory corporate tax rate to 21% beginning in 2018. Revaluing deferred tax assets generated a $20.2 million charge in 2017; excluding it, the 2017 effective tax rate was 27.8%. The charge contributed to fourth-quarter net income falling to $30.2 million from $39.4 million in the prior-year quarter. Management expected a future effective tax rate of approximately 18%.
- Subsequent to year-end, January 2018 insured property losses were estimated at $63 million, approximately $30 million above the month’s expectations, including $16 million of catastrophe losses.
- Key exposures include catastrophe losses concentrated in the Eastern and Midwestern U.S. (New Jersey accounted for 19.6% of 2017 NPW), reserve-estimation uncertainty, adverse commercial and personal auto trends, reinsurance availability and counterparty credit, and investment-market risk. The fixed-income portfolio had a 3.8-year duration and an average AA- credit rating; 3% was below investment grade.
- The National Flood Insurance Program was authorized only through March 23, 2018 at the filing date, creating uncertainty for Selective’s flood business. Flood premiums and losses under the Write Your Own program are 100% ceded to the federal government.
- Management reported no legal action believed likely to materially affect consolidated financial condition, results, or cash flows; it cautioned that unpredictable litigation outcomes could affect particular periods. The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether commercial auto pricing and underwriting changes reduce adverse claim trends and improve the line’s combined ratio.
- Whether favorable reserve development persists, particularly in general liability and workers compensation, and whether commercial auto and E&S adverse development intensifies.
- Actual catastrophe experience versus the 2018 assumption, including the impact of January 2018 losses and the sufficiency and cost of reinsurance protection.
- Progress toward the 2018 combined-ratio, investment-income, tax-rate, and non-GAAP operating ROE targets; these are management estimates, not guarantees.
- Tax Reform accounting, including the provisional treatment of loss-reserve discounting, and the effect of the new tax rate on investment income and earnings.
- Liquidity available at the Parent after considering regulatory limits on insurance-subsidiary dividends, debt service, shareholder dividends, and potential investment commitments.