Selective Insurance Group, Inc. — Q3 2017 Form 10-Q
Business context and reporting period
Property-and-casualty insurer operating through ten insurance subsidiaries. Its reportable segments are Standard Commercial Lines, Standard Personal Lines, Excess and Surplus (E&S) Lines, and Investments. This unaudited filing covers the quarter and nine months ended September 30, 2017; comparisons are to the corresponding 2016 periods.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $621.3 million | $581.7 million | $1,836.2 million | $1,701.9 million |
| Net income | $46.7 million | $38.5 million | $138.6 million | $119.1 million |
| Diluted earnings per share | $0.79 | $0.66 | $2.34 | $2.03 |
| Operating income, non-GAAP | $42.3 million | $36.1 million | $133.7 million | $117.3 million |
| Diluted operating EPS, non-GAAP | $0.72 | $0.62 | $2.26 | $2.00 |
| GAAP combined ratio | 94.3% | 94.1% | 93.4% | 92.7% |
Net premiums earned increased 5% in Q3 and 7% year to date; net premiums written increased 4% and 5%, respectively. Net investment income before tax was $40.4 million in Q3 and $119.3 million year to date, versus $33.4 million and $95.3 million in 2016. The nine-month after-tax yield on investments rose to 2.1% from 1.8%.
Insurance underwriting gain was $32.4 million in Q3 versus $32.0 million; for nine months it was $112.0 million versus $116.8 million. The Q3 loss ratio rose to 60.2% from 58.3%, while the underwriting expense ratio improved to 33.9% from 35.7%. Nine-month ratios were 59.0% and 34.2%, respectively, versus 57.1% and 35.4%.
Operating cash flow was $307.8 million for the first nine months, compared with $177.5 million in 2016. Investing cash outflow was $276.2 million and financing cash outflow was $31.4 million. Cash at period-end was $0.7 million; cash and short-term investments together were $217 million.
At September 30, 2017, total assets were $7.81 billion, total investments $5.71 billion, and stockholders’ equity $1.70 billion. Long-term debt was $439.0 million, unchanged from year-end 2016; debt-to-capital was approximately 20.5%. Book value per share was $29.10, up 10% from $26.42 at December 31, 2016.
Material changes and management commentary
- Net income and diluted EPS increased year over year, supported by higher investment income, premium growth, and lower corporate expenses. Nine-month operating income rose 14%; operating ROE improved to 11.0% from 10.5%.
- Catastrophe losses were $23.7 million in Q3 and $65.3 million year to date, compared with $10.4 million and $33.2 million in 2016. Hurricanes Harvey and Irma contributed to Q3 losses; management said the two U.S. landfalling hurricanes added 2.5 points to the Q3 combined ratio.
- Favorable prior-year casualty reserve development was $33.5 million year to date, chiefly in general liability and workers compensation, partly offset by adverse development in commercial auto, E&S, and personal auto. The comparable 2016 benefit was $43.5 million.
- Segment performance diverged: Q3 Standard Commercial Lines combined ratio was 92.1%; Standard Personal Lines, 88.7%; and E&S, 120.4%. E&S remained loss-making, with year-to-date combined ratio of 105.2%, amid competition and adverse reserve development. Commercial auto also remained unprofitable, with a year-to-date statutory combined ratio of 111.0%.
- Management attributed investment income growth to higher fixed-income yields and improved alternative-investment returns. Risk assets were 7.6% of invested assets, with management indicating they could rise to about 10% over time. Floating-rate securities increased to about 19% of fixed-income investments from 13% at year-end 2016.
Outlook, risks, and unusual items
Management raised full-year 2017 after-tax net investment income guidance by $2 million to $115 million. Other stated expectations: statutory combined ratio excluding catastrophe losses of approximately 89.5%, assuming no fourth-quarter prior-year casualty reserve development; catastrophe losses of 3.5 points; and weighted-average shares of approximately 59.2 million.
Management cited potential higher reinsurance costs following major industry catastrophe losses, which could also support higher primary property rates. The company is pursuing growth, rate increases, underwriting improvements, and geographic expansion; Arizona and New Hampshire began accepting Standard Commercial Lines business in 2017, with Colorado, Utah, and New Mexico planned for 2018.
NFIP reauthorization was uncertain: its authorization was scheduled to expire December 8, 2017, and the filing cited substantial storm losses and policy debate. The company’s flood business depends on the federal Write Your Own program. Other risks include catastrophe exposure, reserve-estimation uncertainty, competitive pricing, interest-rate and credit-market changes, and regulation. The filing reported no legal action believed likely to materially affect consolidated financial condition, results, or cash flows, but noted that unpredictable litigation could affect results or cash flows in particular periods.
Liquidity and capital indicators included $30 million of parent-company credit capacity, with no amount drawn; covenant measures were within stated limits. The company anticipated $80 million of insurance-subsidiary dividends to the parent in 2017, of which $60 million had been paid through September. On October 25, the board declared a $0.18-per-share dividend, payable December 1, a 13% increase from the prior declared dividend.
Important facts for investors to verify
- Whether the expected $115 million of full-year after-tax investment income and underwriting assumptions were achieved.
- Subsequent catastrophe losses, reinsurance pricing and availability, and their effects on combined ratios and renewal rates.
- Whether commercial auto and E&S underwriting results improve, and whether reserve development remains favorable or reverses.
- NFIP reauthorization and any changes affecting flood premiums, claims administration, or the company’s participation.
- Investment-portfolio risk, including alternative investments, floating-rate exposure, and the impact of market or interest-rate changes.
- Insurance-subsidiary dividend capacity, debt covenants, capital levels, and the sustainability of shareholder dividends.