Selective Insurance Group, Inc. — Q1 2013 Form 10-Q
Business context and period. The company provides standard and excess-and-surplus property and casualty insurance and invests insurance premiums. This unaudited report covers the quarter ended March 31, 2013, compared with Q1 2012; balance-sheet comparisons are with December 31, 2012.
Financial performance
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $459.9 million | $419.3 million; up 10% |
| Net premiums earned | $420.9 million | $378.8 million; up 11% |
| Net income | $21.3 million; $0.38 diluted EPS | $18.1 million; $0.33 diluted EPS |
| Continuing-operations income before tax | $28.9 million | $23.2 million |
| Operating income (non-GAAP) | $20.1 million; $0.36 diluted EPS | $15.3 million; $0.28 diluted EPS |
| GAAP combined ratio | 97.1% | 100.4%; improved 3.3 points |
| Statutory combined ratio | 96.8% | 99.1%; improved 2.3 points |
| Net investment income | $32.9 million | $32.6 million |
| Operating cash flow | $28.1 million | $35.9 million |
| Cash and short-term investments | $163.7 million at March 31 | $214.7 million at December 31 |
| Total debt | $392.4 million at March 31 | $307.4 million at December 31 |
| Stockholders’ equity | $1.14 billion at March 31 | $1.09 billion at December 31 |
Underwriting and margins. Standard Insurance Operations generated a $12.1 million underwriting gain, versus $3.5 million in Q1 2012. E&S generated an $0.1 million gain, compared with a $4.9 million loss. Standard renewal price increases averaged 7.5% for commercial lines and 8.5% for personal lines; retention was 83% and 87%, respectively. Overall premium growth reflected pricing and strong standard-lines retention.
Cash, capital, and investments. Investing activities used $99.1 million, while financing activities provided $71.1 million. The company reported $1.2 billion of statutory surplus and a debt-to-capital ratio of approximately 25.7%. Invested assets were $4.42 billion. The fixed-maturity portfolio had a weighted-average credit rating of AA- and average duration of 3.6 years, compared with approximately 3.9 years for insurance liabilities.
Material changes and notable items
- Issued $185 million of 5.875% senior notes due 2043; used part of the proceeds to redeem $100 million of 7.5% junior notes. A $3.3 million pretax write-off of unamortized issuance costs was recorded in connection with the redemption. Debt rose by about $85 million net from year-end.
- Q1 included approximately $55 million of loss-reserve increases for Hurricane Sandy flood claims under the NFIP. The filing states NFIP flood losses are fully ceded; estimated gross Sandy flood losses were $1.094 billion at March 31, versus $1.039 billion at year-end.
- Amended retirement plans to curtail future benefit accruals after March 31, 2016. The change produced a $44 million pretax actuarial gain in other comprehensive income; it also affected statutory underwriting results. The reported funded-status liability declined to $50.7 million from $95.5 million at year-end.
- Recorded a $1.5 million impairment of the receivable from the 2009 sale of Selective HR, contributing to a $1.0 million after-tax loss on discontinued operations.
- Q1 net realized gains were $3.4 million, including $5.5 million of gains from equity-portfolio rebalancing, partly offset by impairment charges. The majority of 2013 OTTI charges related to an other-investment holding.
Outlook, risks, and contingencies
- Management expected a 2013 statutory combined ratio of 96%, excluding catastrophe losses and prior-year development, and estimated catastrophe losses at three points. It expected the E&S combined ratio to be 100%–102% for 2013, with profitability approaching Standard operations in 2014. The company targeted a three-year overall statutory combined ratio of 92% by year-end 2014, excluding three points of expected catastrophe losses.
- Management projected 2013 after-tax investment income of approximately $90 million–$95 million, below the $100 million earned in 2012, citing low reinvestment yields. Q1 after-tax investment income was approximately $25 million, flat year over year.
- Key exposures include claim-reserve estimation, catastrophe losses, reinsurance recoverability, investment valuation and credit risk, and persistently low interest rates. Management reported $4.2 million of securities in unrealized or unrecognized loss positions and said it did not intend, or expect to be required, to sell them; future changes in assessment could result in credit-loss charges.
- Insurance-subsidiary dividends to the parent are subject to regulatory approval. The company anticipated approximately $32 million of such dividends in 2013, including $12 million paid through Q1. Its $30 million parent credit line was undrawn at quarter-end; the filing reports compliance with its stated covenants.
- Routine and other insurance-related litigation was not expected to materially affect consolidated financial condition, though an adverse outcome in certain matters could materially affect results or cash flows in an individual period. The company reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether pricing increases continue to exceed loss-cost trends, and whether retention and combined-ratio performance hold up, particularly in workers’ compensation.
- Hurricane Sandy/NFIP reserve development and the timing and collectability of ceded recoveries.
- Investment income against management’s 2013 outlook, including effects of low rates, portfolio credit quality, and impairment assessments.
- Debt-service capacity, regulatory availability of subsidiary dividends, and financial-strength ratings; the filing cites negative outlooks from S&P and Moody’s.
- Effects of the pension-plan amendment and the Selective HR receivable impairment on subsequent reported results and equity.