Selective Insurance Group, Inc. — Q1 2016 Form 10-Q
Business context and reporting period
For the quarter ended March 31, 2016, Selective Insurance Group reported results for its property-and-casualty insurance operations and investment portfolio. Its insurance segments are Standard Commercial Lines, Standard Personal Lines, and Excess and Surplus (E&S) Lines. Comparisons below are with Q1 2015 unless otherwise noted.
Financial results and key metrics
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Net premiums written | $565.4 million | $518.1 million; up 9% |
| Net premiums earned | $522.5 million | $476.1 million; up 10% |
| Total revenue | $551.5 million | $523.9 million; up 5% |
| Net investment income | $30.8 million | $26.9 million; up 14% |
| Income before tax | $51.9 million | $56.3 million |
| Net income / diluted EPS | $37.0 million / $0.63 | $39.7 million / $0.69 |
| Operating income / diluted operating EPS (non-GAAP) | $38.8 million / $0.66 | $27.4 million / $0.48 |
| GAAP combined ratio | 92.2% | 94.5% |
| Operating ROE / GAAP ROE | 10.8% / 10.3% | 8.5% / 12.3% |
| Operating cash flow | $13.8 million | $60.6 million |
The GAAP combined ratio improved 2.3 points, principally due to lower catastrophe and non-catastrophe property losses; lower favorable prior-year casualty reserve development partly offset the improvement. Q1 2016 included $17 million of favorable prior-year casualty reserve development, versus $20 million in Q1 2015. Investment results included $2.7 million of net realized losses, versus $18.9 million of gains a year earlier; Q1 2015 gains largely reflected a change in the equity investment strategy. Operating income excludes realized investment gains and losses and other specified items.
By insurance segment, Standard Commercial produced a $30.9 million underwriting gain and a 92.3% GAAP combined ratio (91.8% in Q1 2015). Standard Personal produced an $8.6 million gain, compared with a $2.5 million loss, and its ratio improved to 87.7% from 103.4%. E&S produced a $1.4 million gain versus a $1.5 million loss, with its ratio improving to 97.1% from 104.1%.
Financial condition, liquidity, and debt
At March 31, 2016, total assets were $7.02 billion, stockholders’ equity was $1.48 billion, and investments were $5.16 billion. Book value per share was $25.61, compared with $24.37 at year-end 2015. The company reported $104 million of cash and short-term investments across the parent and insurance subsidiaries. Balance-sheet cash alone was $0.7 million.
Debt totaled approximately $388 million: $60 million of short-term debt and $328.3 million of long-term debt, at carrying value. The company reported statutory surplus and GAAP equity of about $1.5 billion and a debt-to-capital ratio of approximately 21%. Q1 operating cash flow fell to $13.8 million from $60.6 million; investing activities used $3.7 million and financing activities used $10.4 million. The company expects $61 million in insurance-subsidiary dividends to the parent during 2016, subject to regulatory requirements. It expects approximately $30 million of pension contributions in 2016; $3.2 million had been contributed by March 31.
Outlook, commentary, and risks
- Management maintained its 2016 guidance: an ex-catastrophe statutory combined ratio of approximately 91%, assuming no additional prior-year casualty reserve development; catastrophe losses of 3.5 points; after-tax investment income of approximately $100 million; and weighted-average shares of approximately 58.5 million.
- Management’s stated goal is an operating ROE 300 basis points above its 8.1% weighted-average cost of capital. It estimated that a statutory combined ratio of approximately 93% would be needed to meet that goal, based on expected after-tax investment returns.
- Management cited lower market yields as a challenge because yields on new investments are below those of maturing bonds. Falling Treasury rates increased unrealized investment gains during the quarter; the fixed-income portfolio’s average credit rating was AA-.
- Key estimation sensitivities include loss and loss-expense reserves, pension assumptions, investment impairments, and reinsurance. The company stated that it did not intend to sell securities in unrealized-loss positions and did not believe it would be required to do so, but changed credit judgments could result in future losses.
- Ordinary-course litigation was not expected to materially affect consolidated financial condition; the filing cautions that adverse outcomes in certain unpredictable matters could materially affect results or cash flows in particular periods. No material changes to previously disclosed risk factors or market-risk disclosures were reported.
- The A.M. Best rating was A with a stable outlook. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether premium growth, especially in Commercial and E&S, continues without weakening underwriting discipline or increasing claims costs.
- How much of the combined-ratio improvement persists after catastrophe experience and favorable prior-year reserve development are considered.
- Progress against full-year guidance, particularly the 91% ex-catastrophe ratio and approximately $100 million after-tax investment income target.
- Drivers of the sharp year-over-year decline in operating cash flow and the timing and availability of subsidiary dividends and debt repayments.
- Investment portfolio sensitivity to interest rates, credit deterioration, and alternative-investment losses, including energy-related exposures.
- Future pension funding requirements and any material changes in reserve estimates, reinsurance recoverables, or litigation exposure.