Business context and reporting period
Selective Insurance Group, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015, with comparisons to the same 2014 periods. The company writes property and casualty insurance through standard commercial, standard personal, and excess and surplus (E&S) businesses, and invests the resulting premiums and capital.
Financial performance and position
Amounts below are in millions of dollars except per-share figures and ratios.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $522.0 | $506.8 | $1,045.9 | $1,015.9 |
| Net premiums earned | $490.3 | $463.6 | $966.4 | $920.1 |
| Net investment income | $32.2 | $36.8 | $59.1 | $72.3 |
| Income before tax | $46.8 | $39.5 | $103.1 | $64.6 |
| Net income | $33.8 | $29.3 | $73.5 | $47.3 |
| Diluted EPS | $0.58 | $0.51 | $1.27 | $0.83 |
| GAAP combined ratio | 94.1% | 97.8% | 94.3% | 99.4% |
| Operating income (non-GAAP) | $36.0 | $26.4 | $63.4 | $39.7 |
- Premium growth was supported by commercial and E&S business: net premiums written rose 11% in Q2 and 10% year to date. The overall GAAP combined ratio improved 3.7 points for Q2 and 5.1 points year to date.
- Q2 underwriting gain across insurance segments was $29.1 million, versus $10.1 million a year earlier. Six-month underwriting gain was $55.1 million, versus $5.1 million.
- Six-month operating cash flow was $165.6 million, compared with $72.7 million in 2014. Investing activities used $188.6 million; financing activities used $0.5 million. Cash at quarter-end was $0.4 million, while cash and short-term investments together were approximately $169 million.
- At June 30, total assets were $6.78 billion, stockholders’ equity $1.31 billion, and notes payable $394.3 million, up from $379.3 million at year-end. Debt-to-capital was approximately 23%; statutory surplus was $1.3 billion. Book value per share was $22.95, versus $22.54 at year-end.
- Investment portfolio assets totaled $4.92 billion. The annualized after-tax portfolio yield was 2.0% in Q2 and 1.9% for the first half, down from 2.3% in both 2014 comparison periods. Six-month other comprehensive income included a $32.1 million loss, primarily reflecting investment-market value declines.
Material changes versus prior periods
- Improved underwriting results and lower property losses lifted earnings; favorable prior-year casualty reserve development was $20 million in Q2 and $40 million in the first half, approximately 4.1 combined-ratio points in each period.
- Lower catastrophe and non-catastrophe property losses also helped. Q2 catastrophe losses were $24.0 million versus $27.2 million; first-half catastrophe losses were $49.3 million versus $61.6 million.
- Investment income weakened, partly because of lower fixed-income yields and energy-related alternative-investment results affected by falling oil prices. Q2 recorded $3.4 million of net realized losses, including $4.5 million of other-than-temporary impairment charges (OTTI), largely on equities. First-half net realized gains of $15.5 million included gains from equity sales following a change in the dividend-equity investment strategy, partly offset by $6.5 million of OTTI.
- Segment results were mixed: Standard Commercial Lines had a 90.7% Q2 and 91.2% first-half GAAP combined ratio; Standard Personal Lines remained unprofitable at 106.5% and 104.9%; E&S Lines worsened to 103.6% and 103.8%. Personal Lines premiums declined 3%; E&S premiums grew 20% in Q2 and 23% year to date.
- Underwriting expense ratios increased amid higher employee, pension, and commission costs. The 2014 comparison also included an $8 million nonrecurring benefit from selling renewal rights to a self-insured group book.
Outlook, risks, and unusual items
- Management revised full-year 2015 guidance to an ex-catastrophe combined ratio of 90%, excluding further prior-year casualty reserve development, from 91% previously. The full-year catastrophe-loss expectation remained four points.
- After-tax investment-income guidance was reduced to $95–$100 million from $100 million. Management maintained an approximate 58 million weighted-average share expectation and a longer-term operating ROE target of about 11.5%.
- Management cited competitive market conditions, low investment yields, uncertainty in alternative investments, and the possibility that favorable reserve development may not recur. First-half statutory catastrophe losses were 5.1 points, above the full-year expectation of four points; management also noted higher-than-expected non-catastrophe property losses.
- Liquidity depends in part on dividends from regulated insurance subsidiaries. The company expected $58 million of subsidiary dividends in 2015; $28.9 million had been paid in the first half. $60 million of FHLBI borrowings was outstanding, with $39 million of additional borrowing capacity before the relevant limit. No balance was outstanding on the parent’s $30 million credit line.
- Risks include uncertainty over the federally administered National Flood Insurance Program (NFIP), including future policy and rate changes; potential tax-law changes; and possible effects of disparate-impact regulation and litigation on homeowners underwriting. The company said no pending legal action was believed likely to materially affect consolidated financial condition, though adverse litigation outcomes could affect results or cash flows in particular periods.
- A.M. Best reaffirmed the company’s A (Excellent) rating with a stable outlook; Fitch reaffirmed A+ with stable outlook. Moody’s reaffirmed A2 and moved its outlook from negative to stable. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether reserve releases continue, and the adequacy of loss reserves—particularly given their material contribution to 2015 underwriting improvement.
- Progress toward the revised 90% ex-catastrophe combined-ratio target, including performance in Personal Lines, E&S, and commercial automobile.
- Investment-income delivery against the revised $95–$100 million outlook, portfolio yield trends, and exposure to energy-linked alternative investments and equity impairments.
- Availability of holding-company liquidity, regulatory approval of subsidiary dividends, debt obligations, and capacity under FHLBI arrangements.
- Developments in NFIP funding and rules, insurance regulation, and litigation that could affect flood operations or underwriting practices.