Selective Insurance Group, Inc. — Q1 2015 Form 10-Q
Business and period. The company provides property and casualty insurance in standard commercial, standard personal, and excess and surplus (E&S) markets, and invests insurance premiums. This unaudited filing covers the quarter ended March 31, 2015, compared with Q1 2014; balance-sheet figures are compared with December 31, 2014. Amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $523.9 | $509.1 | +3% |
| Net premiums written | $518.1 | $476.8 | +9% |
| Net premiums earned | $476.1 | $456.5 | +4% |
| Net investment income | $26.9 | $35.5 | -24% |
| Net realized investment gains, including OTTI charges | $18.9 | $7.2 | Higher |
| Income before tax | $56.3 | $25.1 | +124% |
| Net income | $39.7 | $18.0 | +121% |
| Diluted EPS | $0.69 | $0.31 | +123% |
| Operating income (non-GAAP) | $27.4 | $13.3 | +107% |
| Diluted operating EPS (non-GAAP) | $0.48 | $0.23 | +109% |
Higher net income reflected improved underwriting and higher realized gains; it was partly offset by weaker investment income. Realized gains were primarily from equity sales associated with a change in the dividend-equity investment strategy. The company’s non-GAAP operating measure excludes realized investment gains and losses and OTTI charges. GAAP return on average equity was 12.3%, versus 6.1%; operating ROE was 8.5%, versus 4.5%.
Underwriting and margins. The all-lines GAAP combined ratio improved to 94.5% from 101.1%, and the statutory combined ratio to 93.0% from 100.8%. Underwriting gain was $26.0 million, compared with a $5.0 million loss. The loss ratio improved 10.3 points to 59.9%, while the expense ratio rose 3.7 points to 34.3%. Drivers of lower losses included milder catastrophe and non-catastrophe property losses, earned pricing above the company’s estimated claims inflation, and $20 million of favorable prior-year casualty reserve development (4.2 ratio points). The expense ratio faced higher commissions and employee costs; Q1 2014 also benefited from an $8 million renewal-rights sale.
- Standard Commercial: premiums written rose 9%; underwriting gain was $30.0 million and the GAAP combined ratio improved to 91.8% from 101.0%.
- Standard Personal: premiums written fell 3%; underwriting loss was $2.5 million and the combined ratio was 103.4%, little changed. Targeted non-renewals and lower new business weighed on premium volume.
- E&S: premiums written rose 26%; underwriting loss was $1.5 million and the combined ratio worsened to 104.1% from 97.0%, reflecting higher loss costs and unfavorable prior-year development.
Cash flow, balance sheet and liquidity
- Operating cash flow was $60.6 million, versus $35.8 million. Investing activities used $76.1 million, versus $27.7 million; financing provided $6.4 million, compared with $8.0 million used in Q1 2014.
- Cash was $14.8 million at quarter-end, down from $24.0 million at year-end. Cash plus short-term investments was approximately $139 million. Total investments were $4.90 billion, up from $4.81 billion.
- Total assets were $6.70 billion; stockholders’ equity was $1.316 billion. Loss and loss expense reserves were $3.516 billion, up from $3.478 billion.
- Notes payable totaled $394.3 million, up from $379.3 million, including $15 million of new FHLBI borrowing. Debt-to-capitalization was approximately 23%; the filing reports 23.4% for the credit-facility covenant calculation. No balance was outstanding on the parent’s $30 million revolving credit line.
- Book value per share rose to $23.11 from $22.54. The quarterly dividend was $0.14 per share, versus $0.13.
Outlook, risks and notable items
Management lowered its 2015 after-tax investment income expectation to $100 million from $105 million, citing alternative-investment losses related to energy. It otherwise maintained expectations for a 91% full-year ex-catastrophe combined ratio, four catastrophe-loss points, and approximately 58 million weighted-average shares. The ex-catastrophe ratio excluding prior-year reserve development was 87.7% in Q1, but favorable development contributed 4.2 points; Q1 catastrophe losses contributed 5.3 points, above the full-year four-point assumption. Management’s longer-term operating ROE objective is approximately 11.5%, which it associates with a 94% combined ratio.
Management cited competitive pricing and moderating renewal price increases, claims inflation and severity, catastrophe experience, reserve-estimate uncertainty, and low reinvestment yields as important considerations. New bonds purchased in Q1 yielded an average 1.8%, compared with a 2.6% average yield on bonds called, matured, or otherwise disposed of. Alternative investments were affected by lower oil prices, with some investment results reported on a one-quarter lag. The filing also identifies uncertainty around the NFIP and flood-policy reforms, potential changes to tax laws affecting tax-advantaged investments, and litigation risk. Management said it knew of no legal action expected to materially affect consolidated financial position, results, or cash flows as of March 31, while noting that adverse litigation outcomes could affect particular periods.
The insurer’s A.M. Best financial strength rating was A (stable); Fitch affirmed A+ (stable), S&P affirmed A- with a positive outlook, and Moody’s affirmed A2 with a negative outlook. The company expected $58 million of insurance-subsidiary dividends to the parent in 2015, subject to regulatory requirements and approvals.
Key facts for investors to verify
- How much of the underwriting improvement depends on favorable prior-year reserve development and unusually lower property losses, and whether current-year accident trends remain consistent with pricing assumptions.
- Whether renewal pricing, new-business growth, and retention can sustain premium growth while claims inflation is estimated at approximately 3%.
- Whether the reduced $100 million investment-income outlook adequately reflects low reinvestment yields and the volatility and lagged reporting of alternative investments.
- Whether Standard Personal and E&S underwriting results improve, given combined ratios above 100%, and whether Standard Commercial’s expense ratio pressure moderates.
- How NFIP program changes, insurer-subsidiary dividend restrictions, reserve estimates, and potential litigation outcomes could affect liquidity, capital, and earnings.