Selective Insurance Group, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing; quarterly information is also provided. Selective is a property-and-casualty insurer with Insurance Operations and Investments segments, principally distributed through independent agents.
Financial results and position
| Metric | 2011 | 2010 |
|---|---|---|
| Net premiums written | $1.485 billion | $1.391 billion |
| Net premiums earned | $1.439 billion | $1.417 billion |
| Total revenue | $1.597 billion | $1.565 billion |
| Net investment income, pretax | $147.4 million | $145.7 million |
| Net income | $19.9 million | $65.5 million |
| Diluted earnings per share | $0.36 | $1.20 |
| GAAP / statutory combined ratio | 107.4% / 106.7% | 101.6% / 101.6% |
| Operating cash flow | $123.0 million | $159.2 million |
| Total assets | $5.736 billion | $5.232 billion |
| Stockholders’ equity | $1.109 billion | $1.071 billion |
| Notes payable and debentures | $307.4 million | $262.3 million |
Insurance underwriting generated a $106.9 million loss. Catastrophe losses were $118.8 million, or 8.3 points of the statutory combined ratio. Prior-year reserve development was favorable by $38.7 million. The continuing-operations pretax income reported in the income statement was $8.1 million; the company reported a $12.5 million federal income tax benefit. Net realized investment gains were $2.2 million, including $13.2 million of OTTI charges recognized in earnings.
At year-end, investments totaled $4.112 billion, primarily fixed maturities (88%). Cash and short-term investments were approximately $218 million. The Parent’s $30 million credit line had no borrowings outstanding. Debt-to-capitalization was 21.7%; reported statutory surplus was approximately $1.1 billion. The quarterly common dividend remained $0.13 per share ($0.52 for the year).
Material changes versus 2010
- Net premiums written rose 7%, helped by commercial renewal price increases, improved audit and endorsement premiums, and $24.1 million of E&S premiums.
- Net income fell 70%, mainly as catastrophe losses more than doubled to a company-record $118.8 million. Hurricane Irene produced $40.2 million of net losses, including reinstatement premium, and pierced the first catastrophe reinsurance layer.
- The combined ratio worsened to 107.4% GAAP and 106.7% statutory. Loss and loss expense ratios rose, while the underwriting expense ratio increased modestly.
- Net investment income was nearly flat. Lower fixed-income reinvestment yields were partly offset by higher equity dividend income. Net unrealized investment gains increased to $149.6 million before tax from $82.9 million.
- The company acquired E&S renewal rights in August and purchased Montpelier U.S. Insurance Company (MUSIC) effective December 31 for $51.5 million net of cash acquired. The acquisition expanded its E&S platform nationally; most MUSIC unearned premiums remained with the seller.
Outlook, risks, and unusual items
- 2012 outlook: Management projected a statutory combined ratio of 101.5% and GAAP combined ratio of 102.5%, including a 2.5-point catastrophe assumption and excluding any reserve development. It expected investment income to be approximately flat with 2011 and year-end weighted-average shares of about 55.6 million.
- Management cited commercial renewal price increases of 2.8% for 2011, retention improvement, and growth opportunities from E&S. It also said personal-lines profitability remained inadequate and targeted rate and mix changes.
- The 2012 property catastrophe reinsurance renewal cost 19% more for the same coverage. Investment-income growth faces pressure as maturing bonds are reinvested at lower yields; 2011 new purchases averaged 2.7% pretax versus 3.8% on securities sold or matured.
- Key risks include catastrophe concentration in the Eastern and Midwestern U.S. (New Jersey was 25.3% of NPW), reserve-estimation uncertainty, workers’ compensation severity, reinsurance counterparty and availability risk, low interest rates, municipal credit exposure, and regulatory or rating changes. A.M. Best affirmed the group’s A+ rating with a negative outlook; other cited agency outlooks were stable.
- Net loss reserves were $2.595 billion after reinsurance, with a disclosed reasonable range of $2.395 billion to $2.716 billion; environmental reserves were excluded from that range. The filing highlights sensitivity of reserves to actuarial assumptions and claims trends.
- ASU 2010-26 was adopted retrospectively on January 1, 2012. The company estimated an after-tax reduction of about $51 million to stockholders’ equity; restated 2011 book value per share would be $19.45 versus $20.39 as reported.
- Ordinary-course litigation was not expected to materially affect consolidated financial condition, though the filing cautions that an adverse outcome in certain matters could materially affect results or cash flows in a particular period. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether pricing and underwriting actions improve combined ratios, especially in property, personal lines, and workers’ compensation.
- How actual catastrophe losses compare with the 2.5-point 2012 assumption and the available reinsurance limits and renewal costs.
- Whether reserve development remains favorable and how claims severity, particularly in workers’ compensation, evolves.
- Whether MUSIC and the E&S renewal-rights acquisition generate profitable earned premiums after acquisition-related and operating expenses.
- The impact of lower reinvestment yields, municipal-bond credit conditions, and alternative-investment valuations on investment income and capital.
- The effect of the accounting adoption on reported equity, book value per share, and comparability of future results.