Selective Insurance Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Quarter ended March 31, 2014; comparisons are primarily with Q1 2013. Selective writes standard and excess-and-surplus property and casualty insurance and invests the resulting premiums.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $509.1 million | $459.9 million | +11% |
| Net premiums earned | $456.5 million | $420.9 million | +8% |
| Net investment income | $35.5 million | $32.9 million | +8% |
| Pre-tax income from continuing operations | $25.1 million | $28.9 million | -13% |
| Net income | $18.0 million | $21.3 million | -16% |
| Diluted EPS | $0.31 | $0.38 | -18% |
| Operating income, non-GAAP | $13.3 million | $20.1 million | -34% |
| Operating return on average equity, non-GAAP | 4.5% | 7.2% | -2.7 points |
All-lines GAAP combined ratio was 101.1%, versus 97.1% a year earlier; the statutory ratio was 100.8%, versus 96.8%. A ratio above 100% indicates an underwriting loss. Net loss and loss expense incurred rose 19% to $320.5 million, while net underwriting expenses rose 1% to $139.7 million. Quarterly dividends were $0.13 per share.
Operating cash flow was $35.8 million, compared with $28.1 million. Investing activities used $27.7 million, versus $99.1 million; financing activities used $8.0 million, versus providing $71.1 million. Cash was $0.2 million at quarter-end; cash plus short-term investments was approximately $138 million.
At March 31, total assets were $6.37 billion, total liabilities $5.18 billion, and stockholders’ equity $1.19 billion. Invested assets totaled $4.64 billion. Notes payable were $392.4 million; debt-to-capitalization was approximately 25%. Statutory surplus was $1.3 billion. The $30 million parent credit line was undrawn. Book value per share was $21.09, up from $20.63 at year-end 2013.
Material changes and drivers
- Severe winter weather materially worsened underwriting results. Catastrophe losses were $34 million, or 7.5 combined-ratio points, versus $1.6 million, or 0.4 points. Non-catastrophe property losses were approximately $91 million, about five points above Q1 2013.
- Favorable prior-year casualty reserve development was $14 million, or 3.1 points, compared with $2 million, or 0.4 points. The filing attributes much of the 2014 benefit to improving general-liability claim trends for 2009–2012 accident years.
- Renewal rights to the small self-insured group book were sold for $8 million. The proceeds were included in other income and benefited reported underwriting results; the company will continue servicing policies in force at the sale date.
- Standard Insurance Operations recorded a $6.0 million underwriting loss, compared with a $12.1 million gain. Its GAAP combined ratio rose to 101.4% from 96.9%. E&S underwriting income improved to $1.0 million from $0.1 million, with a 97.0% GAAP combined ratio versus 99.7%.
- Investment portfolio unrealized gains increased as rates fell; the 10-year Treasury yield declined 31 basis points. Net unrealized/unrecognized investment losses improved to $31.4 million from $52.0 million at year-end.
Outlook, risks, and unusual items
- Management’s 2014 expectations: full-year combined ratio of 92% excluding catastrophe losses and assuming no additional prior-year casualty reserve development; four points of catastrophe losses; approximately $100 million of after-tax investment income; and approximately 57.4 million weighted-average shares.
- Management expected 2014 renewal pure price increases of 6%–7% overall and in each of Standard Commercial, Standard Personal, and E&S lines. Q1 increases were 6.4%, 6.8%, and 4.1%, respectively. Management said commercial earned rate increases exceeded its approximately 3% loss-cost trend.
- Low reinvestment yields remain a headwind as maturing and called bonds are replaced at lower rates. The fixed-income portfolio’s average credit rating was AA− and duration was 3.5 years, compared with approximately 3.8 years for insurance liabilities.
- The company expects $9.8 million of 2014 contributions to its retirement income plan; $2.7 million had been funded by quarter-end. Other-investment commitments remaining were $52.6 million.
- NFIP reforms remain uncertain following the March 2014 Flood Insurance Affordability Act’s modification of prior rate increases. The filing identifies potential program, regulatory-conflict, and reputational risks to the company’s flood business.
- Management said ordinary-course litigation was not expected to materially affect consolidated financial condition, but adverse outcomes in certain unpredictable cases could materially affect results or cash flows in a particular period. Investment impairment assessments and insurance reserves depend on estimates that may change.
- Rating context: A.M. Best affirmed A (stable) in 2013; Fitch affirmed A+ with a negative outlook in Q1 2014; S&P had lowered its rating to A− with a stable outlook in 2013; Moody’s A2 outlook was negative. A.M. Best downgrading below A− would trigger a credit-line default provision.
Important facts for investors to verify
- Whether elevated property losses normalize and whether management achieves the 92% ex-catastrophe combined-ratio target.
- Whether favorable casualty reserve development continues, and how sensitive results are to changes in reserve estimates.
- How much reported earnings and underwriting ratios benefited from the one-time $8 million renewal-rights sale.
- Whether premium increases and retention remain sufficient to outpace loss-cost trends, including in workers’ compensation and personal lines.
- How low interest rates affect reinvestment income, investment yields, and asset-liability matching.
- Developments in NFIP funding and implementation of the 2014 flood-law changes, as well as insurer dividend approvals and debt repayment capacity.