Selective Insurance Group, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The company provides standard and excess-and-surplus property and casualty insurance, and invests insurance premiums. Unless otherwise stated, dollar amounts below are in millions.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $436.9 | $394.1 | $1,285.1 | $1,197.1 |
| Net premiums earned | $406.2 | $359.0 | $1,177.3 | $1,065.9 |
| Net investment income, pre-tax | $30.7 | $35.8 | $97.3 | $118.6 |
| Pre-tax income (loss) from continuing operations | $20.3 | $(37.5) | $42.8 | $(11.4) |
| Net income (loss) | $18.3 | $(18.0) | $36.7 | $4.0 |
| Diluted EPS | $0.33 | $(0.33) | $0.66 | $0.07 |
| GAAP combined ratio | 99.8% | 118.0% | 102.3% | 110.5% |
- Premium growth reflected the acquired E&S business, higher renewal pricing and retention, and increased standard-market new business. Net premiums written rose 14% in both comparison periods; earned premiums rose 13% in Q3 and 10% year to date.
- Q3 and nine-month catastrophe losses were $9.6 and $46.7, respectively, versus $67.5 and $112.4 in 2011. Lower catastrophe losses—particularly compared with 2011 storms—were the primary driver of improved underwriting and earnings. Nine-month favorable prior-year casualty development was $16, versus $19 in 2011.
- Commercial Lines’ statutory combined ratio was 100.5% for Q3 and 101.8% year to date; Personal Lines’ was 88.8% and 98.4%, respectively. The overall statutory combined ratios were 98.4% and 101.2%.
- Investment income declined 14% in Q3 and 18% year to date, mainly because of weaker alternative-investment returns and lower reinvestment yields on fixed maturities. Nine-month net realized investment gains were $3.4, compared with $5.9 in 2011; Q3 reported a net realized loss of $1.1.
- Nine-month operating cash flow was $167.8, compared with $126.6 in 2011. Investing activities used $148.3; financing activities used $19.9. Cash at period-end was $0.3, while cash plus short-term investments was $185.2.
- At September 30, total assets were $5,879.9, total liabilities $4,755.6, and stockholders’ equity $1,124.4. Total investments were $4,333.2. Notes payable were $307.4; debt-to-capitalization was 21.5%. Book value per share was $20.44, up from $19.45 at year-end 2011.
Material changes versus the prior comparable period
- Net income turned positive in Q3, from a 2011 loss, and rose to $36.7 for the first nine months from $4.0. The comparison reflects substantially lower catastrophe losses and improved underwriting, partly offset by weaker investment income.
- Newly acquired E&S premiums were $29.8 in Q3 and $83.9 year to date, versus $8.4 for the 2011 comparison periods. Standard Commercial Lines renewal pure-price increases were 6.6% in Q3 and 6.0% year to date; retention improved to 83% and 82%, respectively.
- Available-for-sale investment values and unrealized gains increased; total investments rose 5% from December 31, 2011. The portfolio’s reported pre-tax unrealized gain increased to $211.0 from $149.6.
- The company adopted updated insurance acquisition-cost accounting retrospectively from January 1, 2012. This reduced December 2011 deferred acquisition costs by $78.3 and retained earnings by $50.9; prior-period results in the filing were restated.
Outlook, risks and notable items
- 2012 outlook: Management expected a full-year statutory combined ratio of approximately 101.5% and GAAP combined ratio of approximately 102.5%, each including an assumed 3.5 catastrophe-loss points and excluding any additional reserve development. Expected after-tax investment income was approximately $100, and year-end weighted-average shares approximately 55.6 million.
- Insurance and market risks: Management cited persistent low investment yields, a slow economic recovery, market volatility, catastrophe exposure, and uncertainty in commercial-lines pricing. A 25-basis-point decline in after-tax portfolio yield was estimated to reduce return on equity by roughly 100 basis points, all else equal.
- Investment and reserve uncertainty: The company reported $2.6 of securities in unrealized or unrecognized loss positions and said it did not intend, or expect to be required, to sell them. A change in its credit-loss assessment could affect future earnings and financial position. Loss reserves and other key estimates remain subject to uncertainty.
- Capital and liquidity: Insurance-subsidiary dividends are subject to regulatory restrictions and approval where applicable. The company received a $134.0 extraordinary dividend from SICA and used funds to capitalize subsidiaries. It anticipated approximately $196 of subsidiary dividends for 2012; $179.7 had been paid through Q3. Parent-company liquidity depends partly on regulated subsidiary distributions.
- Ratings and debt: A.M. Best rated the company A (stable), S&P A (negative outlook), Moody’s A2 (stable), and Fitch A+ (stable). A significant downgrade could impair new business, increase funding costs, or trigger debt consequences. The $30 line of credit had no borrowings at quarter-end.
- NFIP: The company participates in the federal flood-insurance program. The NFIP was extended through September 30, 2017, but changes to carrier compensation and program requirements could affect participation economics and create regulatory or reputational risks.
- Commitments and litigation: The company could be required to invest up to $64.8 in alternative and other investments through 2022. Ordinary-course litigation was not expected to be material overall, though the filing notes unpredictable adverse outcomes could materially affect particular periods.
- The company formed two New Jersey insurance subsidiaries expected to begin writing premiums in 2013. Its July 2012 property excess-of-loss treaty increased coverage limits; the casualty treaty was renewed on substantially similar terms.
Important facts for investors to verify
- Whether lower catastrophe losses persist and how actual full-year combined ratios compare with management’s 2012 outlook.
- Whether premium growth, renewal pricing, and retention—especially in the acquired E&S business—translate into sustainable underwriting profitability.
- Loss-reserve development and the sensitivity of earnings to catastrophe claims, reserve estimates, and reinsurance recoveries.
- The durability of investment income amid low yields and alternative-investment volatility, and any change in impaired-security assessments.
- Availability of regulated subsidiary dividends, the use of capital among subsidiaries, and the implications of rating-agency outlooks.
- Potential changes to NFIP compensation or requirements, and whether the $64.8 of remaining investment commitments are funded.