Selective Insurance Group, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparison is Q1 2010 unless otherwise noted. Selective sells property and casualty insurance, primarily across 22 Eastern and Midwestern states, and reports Insurance Operations and Investments segments. Amounts below are in millions of dollars except per-share data and ratios.
Financial results and condition
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Total revenue | $403.5 | $393.1; up 3% |
| Net premiums earned | $351.3 | $356.2; down 1% |
| Net investment income | $43.5 | $34.7; up 25% |
| Pre-tax income from continuing operations | $27.8 | $7.6 |
| Net income | $21.5 | $5.8 |
| Diluted EPS | $0.39 | $0.11 |
| Operating income, a non-GAAP measure | $17.8; $0.32 diluted per share | $6.6; $0.12 diluted per share |
| Operating cash flow | $28.0 | $33.1 |
| GAAP / statutory combined ratio | 103.2% / 102.6% | 104.1% / 102.8% |
Insurance underwriting remained loss-making: the segment reported a $11.1 million pre-tax underwriting loss. Commercial Lines’ statutory combined ratio was 100.6%; Personal Lines’ was 111.5%. A combined ratio above 100% indicates underwriting losses before investment income.
At March 31, total assets were $5.28 billion, total investments $3.96 billion, liabilities $4.19 billion, and stockholders’ equity $1.08 billion. Notes payable totaled $262.3 million; debt-to-capitalization was 19.5%. Cash and short-term investments were approximately $157 million, including $496,000 of cash. Book value per share was $20.06, versus $19.95 at year-end 2010. The quarterly dividend was $0.13 per share.
Changes versus the prior period
- Net income rose to $21.5 million from $5.8 million, principally reflecting stronger investment income, lower investment impairment charges, and improved underwriting results.
- Alternative-investment income increased to $11.7 million from $3.9 million, accounting for most of the increase in net investment income. Most partnership results are reported with a one-quarter lag.
- Net realized investment results improved to a $5.8 million gain from a $0.1 million loss. OTTI charges recognized in earnings fell to $0.6 million from $8.2 million.
- Underwriting loss narrowed to $11.1 million from $14.6 million. Catastrophe losses declined $17.4 million, but non-catastrophe losses rose $10.0 million, largely due to non-weather-related fires. Favorable prior-year casualty development was about $4 million, partly offset by $1 million of unfavorable other-property development.
- Net premiums written declined 2% to $361.8 million. Commercial Lines net premiums written fell 4%, while Personal Lines grew 9%.
- Operating cash flow decreased to $28.0 million from $33.1 million. Total investments rose 1% from December 31, 2010, while the pre-tax unrealized gain position declined $7.7 million to $75.2 million.
Outlook, commentary, risks, and unusual items
- Company outlook: Management expected full-year 2011 statutory and GAAP combined ratios of 101%–102%, including a two-point catastrophe-loss assumption and excluding assumptions for further favorable or unfavorable reserve development. Year-end weighted-average shares were expected to be approximately 55 million.
- Pricing and competition: Commercial Lines renewal pure price increased 2.8%, with 80% retention; management cited competitive conditions, slow recovery, and reduced exposures, particularly in contractors, workers compensation, and commercial auto. Personal Lines renewal pure price increased 6.6%, with 86% retention. Rate actions were expected to add annual premium of $21.7 million in Personal Lines overall; the filing also cites $16.0 million expected from additional 2011 rate increases.
- Catastrophe reinsurance: A revised RMS hurricane model produced modeled losses 70%–100% higher than its prior version for the company’s portfolio. On April 22, 2011, after quarter-end, the company purchased an additional $75 million catastrophe layer, bringing coverage to $435 million excess of a $40 million retention. Model outputs differ materially across providers.
- Investment exposure: The $4.0 billion portfolio was rated AA on average for fixed maturities. Management noted low reinvestment yields, potential inflation and interest-rate effects, municipal-credit concerns, and risks in mortgage-related securities. It concluded loss-position securities were temporarily impaired and said it did not intend, or expect to be required, to sell them; changed judgments could produce future material losses. The number of securities in a loss position rose to 244 from 199, although aggregate unrealized/unrecognized losses declined by $0.9 million.
- Accounting change: An insurance-contract acquisition-cost standard effective for periods beginning after December 15, 2011 was expected to eliminate a significant portion of deferred policy acquisition costs and reduce GAAP equity. The balance was $210.2 million at quarter-end; the impact was still being evaluated.
- Liquidity and commitments: Management anticipated approximately $58 million of subsidiary dividends to the Parent during 2011, subject to regulatory approval; $14.5 million had been paid through Q1. A $30 million revolving credit facility had no borrowings and was due to expire August 11, 2011. Alternative-investment commitments could require up to an additional $61.9 million through 2022.
- Contingencies: The company described ordinary-course insurance litigation and other matters, including putative class actions and bad-faith claims. It expected no material consolidated financial-condition impact based on reserves and defenses, but said adverse outcomes could materially affect results or cash flows in particular periods.
- Other items: The 2010 comparison included a $0.8 million after-tax loss on disposal of discontinued operations; there was no such charge in Q1 2011. Q1 2011 included $6.2 million of realized gains on equity sales associated with a shift toward high-dividend-yield equities.
Investor facts to verify
- Whether Personal Lines’ 111.5% statutory combined ratio and workers compensation’s 122.8% ratio improve as pricing, selection, and retention measures take effect.
- Whether commercial premium and exposure trends stabilize despite competitive pricing and economic sensitivity.
- How much Q1 earnings growth is sustainable given the substantial increase in lagged alternative-investment income and the contribution from realized investment gains.
- Whether investment impairments, municipal and structured-security exposures, or the new hurricane model assumptions lead to additional losses or reinsurance costs.
- The eventual equity impact of the deferred-acquisition-cost accounting change, and the availability and regulatory approval of subsidiary dividends and liquidity sources.