Business context and reporting period
Selective Insurance Group, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. The company is a property-and-casualty insurance holding company with Standard Commercial, Standard Personal, Excess and Surplus (E&S), and Investments segments. Commercial lines generated 77% of insurance-segment net premiums written (NPW), personal lines 14%, and E&S 9%. Its business is concentrated in the Eastern and Midwestern United States; New Jersey accounted for 21.2% of 2015 NPW.
Financial results and key metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $2.132 billion | $2.035 billion |
| Net premiums written | $2.070 billion | $1.885 billion |
| Net premiums earned | $1.990 billion | $1.853 billion |
| Net income | $165.9 million | $141.8 million |
| Diluted earnings per share | $2.85 | $2.47 |
| Operating income (non-GAAP) | $157.3 million | $124.5 million |
| Operating return on average equity (non-GAAP) | 11.8% | 10.3% |
| Operating cash flow | $381.6 million | $232.8 million |
- Insurance-segment underwriting income rose 91% to $149.0 million. The GAAP combined ratio improved to 92.5% from 95.8%; the statutory combined ratio was 92.4% versus 95.7%. Ratios below 100% indicate underwriting profit.
- Loss and loss expense ratio improved to 57.7% from 62.5%; underwriting expense ratio increased to 34.5% from 33.0%. Catastrophe losses were $59.1 million, or 3.0 combined-ratio points.
- Prior-year loss development was favorable by $69.0 million, including $51.0 million in general liability and $37.0 million in workers compensation, partly offset by $15.5 million of adverse E&S development.
- Pre-tax net investment income declined 13% to $121.3 million; after-tax investment income was $93.8 million. Total net realized investment gains were $13.2 million, including $18.4 million of other-than-temporary impairment charges.
- At year-end, total assets were $6.904 billion, stockholders’ equity $1.398 billion, and notes payable $388.2 million. The debt-to-capital ratio was 21.7%. The investment portfolio totaled $5.089 billion, 91% fixed income.
- Cash and short-term investments were approximately $196 million, including $30 million at the Parent and $166 million at insurance subsidiaries. The $30 million Parent credit facility was undrawn. Operating cash flow exceeded 2014, while investing activities used $391.5 million and financing activities used $13.1 million.
- Gross loss reserves were $3.518 billion and net reserves $2.967 billion. Management’s estimated reasonable range for net reserves was $2.694 billion to $3.136 billion.
Material changes versus the prior year
- NPW grew 10%, with strong commercial new business; Standard Commercial Lines NPW increased 11% and E&S increased 24%. Standard Personal Lines NPW declined 3%.
- Commercial underwriting improved substantially, supported by rate earned above expected claim inflation, favorable prior-year development, and improved workers compensation experience. Standard Commercial’s combined ratio fell to 89.2% from 95.7%.
- Personal Lines underwriting income fell to $1.3 million from $16.5 million, with its combined ratio worsening to 99.5% from 94.4%, reflecting higher losses and expenses.
- E&S reported a $16.8 million underwriting loss versus $0.4 million income; its combined ratio rose to 109.8% from 99.7%. Management cited adverse prior-year development, higher current-year loss costs, and property losses, and recorded a $10 million adverse reserve adjustment in the fourth quarter after reviewing complex claims.
- Net investment income was pressured by lower reinvestment yields and weak energy-related alternative investment returns. Net unrealized investment gains before tax fell to $69.2 million from $123.7 million; other comprehensive income was a $29.2 million loss.
- The Board raised the quarterly dividend 7% to $0.15 per share in the fourth quarter. Full-year dividends declared were $0.57 per share versus $0.53.
Outlook, commentary, risks, and contingencies
- For 2016, management guided to an approximately 91% ex-catastrophe combined ratio, assuming no prior-year casualty reserve development; 3.5 points of catastrophe losses; approximately $100 million of after-tax investment income; and approximately 58.5 million weighted-average shares. Management said an approximately 93% statutory combined ratio would be needed to meet its operating-ROE target, 300 basis points above its weighted-average cost of capital.
- Management described 2015 as its best statutory combined-ratio year since listing on Nasdaq. It plans to grow through existing and additional agents and continue technology investment and customer-service initiatives.
- Key risks include reserve-estimation uncertainty, catastrophe exposure and limits or cost of reinsurance, concentrated regional exposure, and adverse development in E&S. The company also flagged competition and pricing pressure, economic sensitivity of payroll- and sales-based premiums, investment-market and interest-rate risk, and dependence on independent agents and reinsurers.
- Other risks include the uncertain future of the federal flood program, regulatory changes, potential terrorism losses, cyber incidents, and reliance on models, key personnel, and third-party technology providers. TRIPRA’s 2016 insurer deductible was estimated at approximately $280 million; the federal program’s protection is subject to its terms and industry limit.
- Insurance-subsidiary dividends are regulated. The subsidiaries paid $57.8 million to the Parent in 2015; up to $178.3 million of ordinary dividends was indicated as available for 2016, subject to regulatory requirements. The Parent reported $15 million and $45 million of principal repayments due in 2016.
- The company reported no material off-balance-sheet arrangements. It did not believe pending legal actions at year-end would materially affect consolidated financial condition, though adverse litigation outcomes could affect particular periods. It had commitments to invest up to $74.4 million in alternative and other investments through 2028.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether favorable reserve development persists, particularly in general liability and workers compensation, and whether E&S claims actions limit further adverse development.
- Whether the 2016 combined-ratio and investment-income guidance is achieved, including catastrophe experience and the assumption of no prior-year casualty reserve development.
- How Standard Personal Lines’ declining premiums and weaker underwriting, and E&S’s 2015 underwriting loss, develop.
- Investment income and portfolio valuation trends, including reinvestment yields, equity impairment charges, and alternative investments exposed to energy-market weakness.
- Parent liquidity, debt maturities, covenant headroom, and the ability of regulated insurance subsidiaries to pay dividends supporting debt service and shareholder distributions.