Selective Insurance Group, Inc. — 2016 Q2 Form 10-Q
Business and period. Property-and-casualty insurer operating Standard Commercial Lines, Standard Personal Lines, and Excess and Surplus (E&S) Lines, alongside an investment segment. This unaudited filing covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Financial results and condition
| Metric | Q2 2016 | Six months 2016 |
|---|---|---|
| Net premiums earned | $531.9 million; up 8% | $1,054.4 million; up 9% |
| Total revenue | $568.7 million; up 9% | $1,120.2 million; up 7% |
| Net income | $43.6 million; up 29% | $80.6 million; up 10% |
| Diluted EPS | $0.74; versus $0.58 | $1.38; versus $1.27 |
| Operating income, non-GAAP | $42.5 million; up 18% | $81.2 million; up 28% |
| GAAP combined ratio | 91.8%; improved 2.3 points | 92.0%; improved 2.3 points |
| Statutory combined ratio | 90.1%; improved 3.4 points | 90.4%; improved 2.8 points |
| Net investment income | $31.2 million; down 3% | $62.0 million; up 5% |
All dollar amounts above are in U.S. dollars. The combined ratio improvement primarily reflected lower catastrophe and non-catastrophe property losses; lower favorable prior-year casualty reserve development partly offset the benefit. Catastrophe losses were $8.4 million in Q2 versus $24.0 million a year earlier, and $22.8 million for six months versus $49.3 million.
- Segments: Commercial Lines premiums earned rose 9% in Q2, with a 90.2% GAAP combined ratio. Personal Lines premiums earned fell 2%, but its combined ratio improved to 91.4% from 106.5%. E&S premiums earned increased 21%, while it reported a $2.5 million Q2 underwriting loss and a 105.1% combined ratio.
- Cash flow: Six-month operating cash flow was $59.1 million, versus $165.6 million in 2015. Investing activities used $41.0 million; financing activities used $17.5 million. Period-end cash was $1.5 million, and cash plus short-term investments was $207 million, including $30 million at the parent and $177 million at insurance subsidiaries.
- Balance sheet and capital: Total assets were $7.19 billion and stockholders’ equity $1.55 billion at June 30. Short-term debt was $60 million and long-term debt $328.4 million; total debt was approximately $388 million, with a debt-to-capital ratio of about 20%. Statutory surplus was $1.5 billion. Book value per share rose to $26.86 from $24.37 at year-end 2015.
- Investment portfolio: Invested assets totaled $5.27 billion, up 3% from year-end. Six-month after-tax investment yield was 1.8%, versus 1.9%. Unrealized investment gains increased substantially, contributing to $81.4 million of other comprehensive income for the half-year; this is distinct from net income.
Material changes, outlook, and risks
- Management revised full-year 2016 guidance to an approximately 89.5% ex-catastrophe combined ratio, assuming no additional prior-year casualty reserve development; 3.5 points of catastrophe losses; approximately $95 million of after-tax investment income; and approximately 58.5 million weighted-average shares.
- Six-month operating ROE was 11.0%. Management’s stated goal is operating ROE at least 300 basis points above weighted-average cost of capital, which was 7.8% at June 30.
- Commercial Lines growth reflected new business, renewal price increases, and 83% retention. Personal Lines premiums declined amid attrition. E&S growth reflected pricing and new business, but current-year loss costs and adverse prior-year development weighed on underwriting results.
- Low interest rates supported unrealized fixed-income gains but constrained reinvestment yields. Management cited technology and customer-service investments as strategic priorities. Pension benefits ceased accruing under the primary and excess plans after March 31, 2016; approximately $56 million of pension contributions were anticipated for 2016, of which $26.4 million had been funded by June 30.
- Insurance-subsidiary dividends to the parent are subject to regulatory approval; management anticipated $61 million of subsidiary dividends in 2016. The filing warns that restrictions could affect parent liquidity and debt or shareholder-dividend payments. Ratings changes, reserve-estimate uncertainty, reinsurance recoverability, investment impairments, and unpredictable litigation are also relevant risks. The company reported no legal action it believed would materially affect consolidated financial condition, though an adverse outcome could affect results or cash flow in a particular period.
- After quarter-end, an insurance subsidiary borrowed $25 million from the Federal Home Loan Bank of New York, due in 2021. The filing states that ratings were unchanged: A.M. Best A with stable outlook, S&P A- positive, Moody’s A2 stable, and Fitch A+ stable.
Most important facts for investors to verify
- Whether the improved combined ratio persists after unusually lower catastrophe losses and with less favorable prior-year reserve development.
- Progress against revised full-year guidance, particularly catastrophe claims, ex-catastrophe underwriting performance, and investment income.
- Cash generation, the difference between low reported cash and broader cash-plus-short-term-investment liquidity, and the availability of subsidiary dividends to the parent.
- Commercial auto adverse reserve development and E&S underwriting losses, alongside continued Personal Lines premium softness.
- Investment yield and credit performance, including the effect of low rates and any future impairment charges; six-month 2015 realized gains were unusually high and largely reflected an investment-strategy change.
- Funding and assumptions for pension obligations, and any material developments in litigation, reinsurance, or insurer financial-strength ratings.