Selective Insurance Group, Inc. — Q2 2013 Form 10-Q
Business context and reporting period. The company provides standard and excess-and-surplus property and casualty insurance, principally through independent agencies, and invests insurance premiums. This filing covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Amounts below are in U.S. dollars.
Financial results and key metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $468.9m | $428.9m | $928.9m | $848.3m |
| Net premiums earned | $426.3m | $392.2m | $847.2m | $771.0m |
| Pre-tax income from continuing operations | $36.2m | $(0.7)m | $65.1m | $22.5m |
| Net income | $27.1m | $0.3m | $48.4m | $18.4m |
| Diluted EPS | $0.48 | $0.01 | $0.86 | $0.33 |
| Operating income, non-GAAP | $23.8m | $0.2m | $43.9m | $15.4m |
| GAAP combined ratio | 98.9% | 106.9% | 98.0% | 103.7% |
- Q2 net premiums written rose 9% to $462.2m; six-month premiums written increased 8% to $912.3m. Management cited renewal pricing, strong retention and new business.
- Insurance underwriting improved: the overall GAAP combined ratio fell 8.0 points in Q2 and 5.7 points year to date. Standard operations reported ratios of 98.3% and 97.6%, respectively; E&S remained above break-even at 107.6% and 103.7%.
- Net investment income was essentially flat at $34.0m for Q2 and rose slightly to $66.9m for six months. Lower fixed-income yields were offset by higher alternative-investment and equity income.
- Six-month operating cash flow was $97.9m, compared with $52.2m a year earlier. Investing activities used $164.7m and financing activities provided $66.7m. Cash on the balance sheet was $0.2m; separately, cash and short-term investments totaled $187m ($40m at the parent and $147m at insurance subsidiaries), down from $215m at year-end.
- At June 30, total investments were $4.37bn, total assets $6.11bn, notes payable $392.4m and stockholders’ equity $1.10bn. Debt was up from $307.4m at year-end; the debt-to-capital ratio was approximately 26%. Book value per share was $19.72 versus $19.77 at year-end.
Material changes versus the prior comparable period
- Earnings improved substantially as underwriting results strengthened, catastrophe losses declined from the prior-year comparison, and premiums grew. Management said renewal price increases exceeded predicted loss trends by about four points; standard renewal pure price increases averaged 7.4% in Q2 and 7.5% year to date.
- Hurricane Sandy NFIP flood losses affected reported gross losses: estimated gross losses were $1.127bn at June 30, of which approximately $1.108bn had been paid. The company states that NFIP flood premiums and losses are 100% ceded to the program.
- Rising interest rates reduced investment valuations. The company reported a $100.1m pre-tax decline in unrealized investment gains during the first half, primarily in fixed maturities; net unrealized/unrecognized security losses increased to $46.3m from $2.9m at year-end. Management attributed the increase mainly to market interest-rate movements, not issuer-specific credit concerns.
- Other comprehensive income included a $44m pre-tax actuarial gain from amendments curtailing future pension accruals after March 31, 2016. The amendments reduced the reported pension liability; eligible employees began receiving an enhanced retirement-savings contribution.
- The company issued $185m of 5.875% senior notes due 2043 and redeemed $100m of 7.5% junior notes. The redemption resulted in a $3.3m pre-tax write-off of unamortized debt issuance costs.
- First-half net income included a $1.0m after-tax loss on disposal of discontinued operations related to settlement of the remaining Selective HR sale receivable.
Outlook, commentary and risks
- For 2013, management expects a 96% statutory combined ratio excluding catastrophe losses and favorable or unfavorable prior-year casualty reserve development, with an estimated three points of catastrophe losses. It expects E&S combined ratio of 100%–102% for 2013 and overall statutory combined ratio of 92% by year-end 2014 excluding three catastrophe points.
- Management expects E&S underwriting profitability to approach Standard operations in 2014. It anticipates 2014 standard renewal rate increases will be modestly below the 7.5% achieved in 2013 to date.
- Management expects 2013 after-tax investment income of approximately $95m, below $100m in 2012, citing low reinvestment yields. It cautioned that portfolio book yields could remain below 2012 levels through 2018 even if interest rates rise 50 basis points annually for several years.
- Ratings were mixed: A.M. Best affirmed A (Excellent), stable; Fitch affirmed A+ but revised its outlook to negative; Moody’s affirmed A2 and had a negative outlook. S&P lowered its financial strength rating to A- in July 2013, with a stable outlook. Management warned that significant downgrades could impair new business, increase funding costs or trigger credit-facility consequences.
- Key exposures include insurance loss-reserve estimation, reinsurance recoverability, catastrophe losses, investment-market and interest-rate movements, and litigation. The company said ordinary-course litigation is not expected to be material overall, but an adverse outcome could affect particular periods. It also had up to $61.5m of remaining alternative-investment commitments, potentially required through 2026.
Most important facts for investors to verify
- Whether premium growth and pricing continue to exceed loss-cost trends, and whether reported combined-ratio improvement persists after catastrophe and prior-year reserve-development effects.
- The size and collectability of reinsurance recoverables, including the accounting and cash-flow effects of Sandy NFIP claims and ceded losses.
- Investment portfolio sensitivity to further rate changes, the effect of unrealized losses on equity and book value, and whether any securities require credit impairment.
- Progress toward management’s 2013–2014 combined-ratio targets and its $95m after-tax investment-income expectation.
- Debt service and access to liquidity in light of higher debt, insurer dividend restrictions, and the negative rating outlooks or S&P downgrade.