Selective Insurance Group, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; comparisons are to the corresponding 2010 periods. Selective is a property-and-casualty insurer operating mainly in 22 Eastern and Midwestern states, with Insurance Operations and Investments segments. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $399.6 | $387.7 | $803.0 | $780.8 |
| Net premiums earned | $355.6 | $352.2 | $706.9 | $708.4 |
| Pre-tax income from continuing operations | $1.2 | $22.8 | $29.0 | $30.5 |
| Net income | $2.3 | $18.8 | $23.9 | $24.6 |
| Diluted earnings per share | $0.04 | $0.35 | $0.43 | $0.45 |
| Net investment income | $39.3 | $36.5 | $82.8 | $71.3 |
| Operating cash flow | — | $59.8 | $58.2 |
- Underwriting: Q2 underwriting loss was $32.7 million; the GAAP combined ratio was 109.2% (statutory: 109.5%), versus 100.9% and 101.0%, respectively, a year earlier. For the first half, the underwriting loss was $43.8 million and the GAAP combined ratio was 106.2% (statutory: 106.1%), compared with 102.5% and 101.9%.
- Cash, investments and capital: Total investments were $4.01 billion, total assets $5.37 billion, and stockholders’ equity $1.10 billion at June 30. Cash and short-term investments were reported as $143 million for liquidity purposes. Notes payable totaled $262.3 million; debt-to-capitalization was approximately 19.2%. The $30 million revolving credit facility had no outstanding balance.
- Dividends and book value: The company paid $0.13 per share in Q2. Book value per share was $20.33, up from $19.95 at year-end 2010.
Material changes versus the prior period
- Q2 revenue rose 3% and net premiums written rose 6%, but net income fell 88%. The primary driver was weaker underwriting: catastrophe losses increased $22.1 million to $38.1 million, and favorable prior-year casualty development declined to about $5 million from about $12 million.
- For the first half, net premiums written increased 2% while earned premiums were essentially flat. Underwriting losses widened to $43.8 million from $17.8 million, reflecting higher non-catastrophe property losses ($115.2 million versus $98.5 million), higher catastrophe losses ($44.9 million versus $40.2 million), and less favorable prior-year casualty development ($9 million versus $21 million).
- Investment income improved, primarily from alternative investments: $7.9 million in Q2 and $19.5 million for the first half. First-half realized investment gains were $7.9 million, versus a $3.3 million loss in 2010, partly because earnings-recognized impairment charges declined to $0.8 million from $14.4 million.
- Operating cash flow was $59.8 million for the first half, compared with $58.2 million. Net cash used in investing activities was $46.7 million; net cash used in financing activities was $13.6 million.
Outlook, risks and unusual items
- Management expected full-year statutory and GAAP combined ratios of 104%–105%, including a four-point catastrophe-loss assumption and excluding any assumption for additional reserve development. Year-end weighted-average shares were expected to be approximately 55 million.
- Management reported continued renewal pricing gains, including 2.6% commercial-lines renewal pricing in Q2 and 6.5% personal-lines renewal pricing; personal-lines retention was 86%. It also expected to close a commercial excess-and-surplus renewal-rights transaction in Q3. The acquired book produced $77 million of gross premiums written in 2010.
- Catastrophe exposure is a material uncertainty. The company purchased an additional $75 million of catastrophe cover, bringing its program to $435 million excess of $40 million. Updated catastrophe models produced substantially different loss estimates, which management cautioned should be treated as directional rather than precise.
- Management identified a sluggish recovery, low investment yields, inflation, housing weakness and Eurozone debt concerns as investment risks. The filing also added a risk concerning possible failure to raise the U.S. statutory debt limit and potential adverse effects on financial markets and the investment portfolio.
- A.M. Best reaffirmed the insurers’ A+ financial-strength rating but maintained a negative outlook. Other stated ratings included S&P A with stable outlook, Moody’s A2 with stable outlook, and Fitch A+ with stable outlook.
- Adoption of ASU 2010-26, effective for periods beginning after December 15, 2011, was expected to reduce stockholders’ equity after tax by approximately $55 million, or about $1 per share of book value; management did not expect a material impact on operating results.
- Ordinary-course litigation was not expected to be material overall, but the company cautioned that unpredictable outcomes in certain class actions or other cases could materially affect results or cash flows in an individual period. Alternative-investment commitments could require up to $61.6 million of additional investment through 2022.
Most important facts for investors to verify
- Whether catastrophe and other property losses remain elevated, and how actual full-year combined ratios compare with the 104%–105% outlook.
- Whether renewal pricing, retention and premium growth translate into improved underwriting profitability, particularly in commercial property and personal lines.
- The quality and sustainability of alternative-investment income and the exposure of investment values to credit, interest-rate and market movements.
- The adequacy of loss reserves and the effect of reduced favorable prior-year development; also monitor the disclosed litigation and contingent exposures.
- Whether the projected $55 million after-tax equity impact from ASU 2010-26 is confirmed when implemented, and whether subsidiary dividends and liquidity remain sufficient to support the parent’s obligations.