Selective Insurance Group, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Selective writes standard and excess and surplus property and casualty insurance and invests insurance premiums. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial results and position
- Q2 revenue: $428.9 million, up 7% year over year; net premiums earned were $392.2 million, up 10%. Net investment income fell 14% to $34.0 million.
- Q2 earnings: Pre-tax loss of $0.7 million and net income of $0.3 million, versus net income of $1.5 million in Q2 2011; diluted EPS was $0.01 versus $0.03. Q2 operating income, a company-defined non-GAAP measure, was $0.2 million.
- First-half results: Revenue of $848.3 million, up 6%; net premiums earned of $771.0 million, up 9%. Net income was $18.4 million, down 16%, and diluted EPS was $0.33 versus $0.40. Operating income was $15.4 million, down 8%.
- Underwriting: The GAAP combined ratio improved to 106.9% in Q2 and 103.7% for the half, from 109.6% and 106.6%, respectively. Ratios above 100% indicate underwriting losses. Catastrophe losses were $30.2 million in Q2 and $37.1 million year to date, versus $38.1 million and $44.9 million in 2011.
- Cash flow: First-half operating cash flow was $52.2 million, compared with $59.8 million a year earlier. Investing activities used $39.3 million and financing activities used $13.4 million. Cash was $0.1 million at June 30; cash plus short-term investments was $136.0 million.
- Balance sheet and debt: Total assets were $5.69 billion, liabilities $4.60 billion, and stockholders’ equity $1.09 billion. Notes payable totaled $307.4 million; debt-to-capital was 22.1%. Statutory surplus was also reported at $1.1 billion. Book value per share rose to $19.75 from $19.45 at year-end 2011.
- Investments: Total investments were $4.18 billion. The fixed-maturity portfolio had a weighted-average credit rating of AA- and duration of 3.4 years. The filing reports $8.7 million of securities in unrealized or unrecognized loss positions, down from $10.6 million at year-end; management considered the impairments temporary.
Changes and management commentary
- Premium growth reflected the acquired E&S business, higher renewal pricing and retention, and increased standard-market new business. Net premiums written rose 14% in Q2 and 15% in the first half. Commercial Lines renewal price increases were 6.5% in Q2 and 5.8% year to date.
- Investment income declined, principally because alternative-investment income was lower, alongside pressure from lower fixed-income yields. First-half net investment income fell $16.2 million, or 20%.
- Underwriting ratios improved year over year, but remained above 100%; higher acquisition expenses, including E&S-related costs, partly offset better loss ratios. Management said MUSIC’s acquired unearned premiums had been fully ceded, keeping pressure on expense ratios until subsequently written premiums are earned.
- The company adopted new insurance acquisition-cost guidance retrospectively in 2012. The change reduced first-half 2011 net income by $1.9 million and diluted EPS by $0.03; prior-period figures in this filing were restated.
- A.M. Best lowered the financial-strength rating to A (Excellent), with a stable outlook, citing five-year operating performance relative to the commercial casualty sector. S&P, Moody’s, and Fitch ratings were A, A2, and A+, respectively, all with stable outlooks.
Outlook, risks and contingencies
- Management expected full-year 2012 GAAP and statutory combined ratios of 102%–103%, including an assumed 3.5 catastrophe-loss points and no assumed favorable or unfavorable reserve development. Expected after-tax investment income was $100–$105 million; expected year-end weighted-average shares were approximately 55.6 million.
- Management cited ongoing competitive conditions in new commercial business, catastrophe exposure, low interest rates and reinvestment-yield pressure. The company reported no direct investments in Italy, Greece, or Portugal and no credit-default-swap exposure; Eurozone investment exposure totaled $73.6 million.
- Insurance subsidiaries expected to pay approximately $196 million in dividends to the parent during 2012; $28.5 million had been paid by June 30. A roughly $139 million extraordinary cash and property dividend was paid after quarter-end to fund new subsidiary formation and a redomestication. Insurance-subsidiary dividends remain subject to regulatory requirements.
- The $30 million parent credit line had no borrowings outstanding and expires in 2014. FHLBI borrowings were $58 million and secured by investment securities. The company reported covenant compliance at June 30.
- Alternative-investment commitments could require up to an additional $62.2 million through 2022, though funding is not certain. Ordinary-course claims litigation was not expected to be material overall, but the filing notes that adverse outcomes in some unpredictable matters could materially affect particular periods.
- The NFIP was extended through September 30, 2017, with changes including higher permitted annual premium increases and phased movement toward actuarial rates for certain properties. The company noted uncertainty about future program rules and fees, and potential conflicts between federal program requirements and state regulation.
Important facts for investors to verify
- Whether premium growth and renewal pricing continue to improve underwriting profitability, particularly whether combined ratios move toward management’s 102%–103% full-year outlook.
- How catastrophe losses, reserve development and E&S acquisition-related expenses affect subsequent quarters.
- Whether investment income meets the $100–$105 million after-tax outlook amid low yields and volatile alternative-investment returns.
- Whether the A.M. Best rating remains stable and whether ratings or regulatory restrictions affect subsidiary dividends, parent liquidity or debt access.
- Future funding needs for alternative-investment commitments, and developments in NFIP rules and potentially material litigation.