Selective Insurance Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Selective is a property-and-casualty insurer operating through Standard Commercial, Standard Personal, E&S, and Investments segments. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $651.9 million | $614.5 million | $1,278.6 million | $1,215.0 million |
| Net premiums earned | $604.8 million | $568.0 million | $1,196.7 million | $1,128.9 million |
| Net income | $58.8 million | $41.4 million | $77.7 million | $91.9 million |
| Diluted EPS | $0.99 | $0.70 | $1.30 | $1.55 |
| Combined ratio | 93.7% | 94.7% | 96.4% | 93.0% |
| Net investment income, pretax | $45.6 million | $41.4 million | $88.8 million | $78.8 million |
| Operating cash flow | Not reported by quarter | Not reported by quarter | $92.3 million | $95.5 million |
- Q2 revenue grew 6%, net income rose 42%, and diluted EPS increased 41% year over year. For the first half, revenue grew 5%, while net income fell 15% and diluted EPS declined 16%.
- Net premiums written increased 7% in Q2 and 6% year to date. Net premiums earned increased 6% in both periods.
- Q2 underwriting income was $38.0 million, up 25%; first-half underwriting income was $42.8 million, down 46%. The first-half combined ratio worsened 3.4 points, primarily reflecting elevated property losses.
- Q2 after-tax net investment income increased 24% to $37.6 million; first-half after-tax net investment income increased 27% to $73.4 million. Higher fixed-income yields contributed to the gains.
Financial position, liquidity, and capital
- At June 30, 2018, total assets were $7.71 billion, total liabilities $6.01 billion, and stockholders’ equity $1.70 billion. Long-term debt was $439.3 million, approximately 20.6% of capitalization.
- Cash and short-term investments, excluding restricted cash, totaled $169 million: $36 million at the parent and $133 million at insurance subsidiaries. Parent cash and liquid investments totaled $126 million. The parent had no balance under its $30 million bank line of credit.
- Operating cash flow was $92.3 million for the first half, compared with $95.5 million in 2017. Investing activities used $96.4 million; financing activities used $24.1 million. Cash and restricted cash ended at $16.5 million.
- Book value per share declined to $28.86 from $29.28 at year-end 2017, reflecting investment unrealized losses and dividends, partly offset by earnings. The company reported $1.70 billion of GAAP stockholders’ equity and statutory surplus.
- The company anticipated $100 million of insurance-subsidiary dividends to the parent during 2018; $50 million had been paid in the first half. Such dividends remain subject to regulatory approval.
Material changes and operating drivers
- Commercial Lines combined ratio was 91.4% in Q2 and 94.9% year to date. Personal Lines improved to 93.7% in Q2 and 97.8% year to date. E&S deteriorated to 114.7% in Q2 and 107.9% year to date, producing underwriting losses in both periods.
- First-half non-catastrophe property losses rose to $188.7 million from $144.7 million, driven in part by the January deep freeze and numerous severe fires. First-half catastrophe losses were $44.8 million, versus $41.5 million.
- Favorable prior-year reserve development was $12.0 million for the first half, versus $28.7 million in 2017. Favorable workers’ compensation development was partly offset by adverse commercial-auto and E&S casualty development.
- Commercial auto remained unprofitable: combined ratios were 108.8% in Q2 and 110.0% year to date. Renewal pure price increases were 7.5% and 7.4%, respectively. Management described the line as a significant focus area.
- Investment unrealized losses reduced first-half other comprehensive income by $79.7 million after tax, and accumulated other comprehensive loss was $84.5 million at June 30. Rising interest rates contributed to lower fixed-income market values. Separately, a 2018 accounting change moved equity-security fair-value changes into earnings; the first-half unrealized equity loss recognized in income was $13.0 million.
Guidance, commentary, and risks
- Management confirmed full-year 2018 guidance: GAAP combined ratio excluding catastrophe losses of 92.0%, assuming no additional prior-year casualty reserve development; catastrophe losses of 3.5 points; after-tax net investment income of $150 million, including $8 million from alternative investments; effective tax rate of approximately 18%; and weighted-average shares of 59.6 million.
- Management cited ongoing pricing, underwriting, claims, distribution, geographic-expansion, and technology initiatives. It expects continued pressure on E&S premium growth while pricing and underwriting actions target improved profitability. It also noted industry competition, possible inflation and higher claims costs, and persistent commercial-auto profitability challenges.
- The company’s fixed-income portfolio was 97% investment grade, with a weighted-average rating of AA-. Risk assets were 7.6% of invested assets; management said it may gradually increase this allocation toward approximately 10%, depending on market conditions.
- The NFIP was extended through November 30, 2018. FEMA reduced the WYO expense allowance from 30.9% to 29.9% effective October 2018. Further program changes, lapse in authorization, or expansion of private flood insurance could affect the company’s flood business.
- Ordinary-course litigation and certain class-action or extra-contractual claims are described as not expected to materially affect financial condition, but the filing notes that an adverse outcome could materially affect results or cash flows in a particular period. Management reported no material changes to previously disclosed risk factors, apart from the NFIP discussion.
- The company adopted accounting guidance requiring equity-security fair-value changes in earnings and made other accounting adoptions affecting cash-flow presentation and equity balances. First-half 2017 cash-flow figures were retrospectively restated for certain changes.
Important facts for investors to verify
- Whether elevated property losses and adverse development in commercial auto and E&S persist, and whether pricing actions improve those lines’ combined ratios.
- Whether full-year guidance is achieved, particularly the 92.0% ex-catastrophe combined-ratio target and the assumption of no additional prior-year casualty reserve development.
- Whether the NFIP remains authorized and how its revised expense allowance and any further reforms affect flood-business economics.
- Changes in reserve estimates, investment valuations, interest rates, and realized or unrealized equity-security results, including their effects on earnings and book value.
- Regulatory approval and receipt of anticipated subsidiary dividends, and the company’s ability to maintain parent-level liquidity and service debt.