Business context and reporting period
Selective Insurance Group, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2020, compared with the first quarter of 2019. Its reportable segments are Standard Commercial Lines, Standard Personal Lines, E&S Lines, and Investments. Management described the period as materially affected by COVID-19, related government directives, and financial-market volatility.
Financial results and condition
| Metric | Q1 2020 | Q1 2019 or prior period |
|---|---|---|
| Net premiums earned | $651.7 million | $632.6 million; up 3% |
| Net premiums written | $647.3 million | $672.9 million; down 4% |
| Total revenue | $664.8 million | $699.0 million; down 5% |
| Net income | $15.2 million; diluted EPS $0.25 | $61.3 million; diluted EPS $1.02 |
| Non-GAAP operating income | $50.5 million; diluted EPS $0.84 | $54.0 million; diluted EPS $0.90 |
| Combined ratio | 96.7% | 94.7% in the all-lines comparison |
| Operating cash flow | $39.3 million | $46.6 million |
Net investment income rose 11% before tax to $56.0 million, while net realized and unrealized investment losses were $44.7 million, versus gains of $13.5 million a year earlier. The effective tax rate was 4.8%, compared with 16.8%; management attributed the lower rate chiefly to investment losses. Annualized ROE was 2.8%, versus 13.2%, and annualized non-GAAP operating ROE was 9.4%, versus 11.6%.
At March 31, total assets were $9.0 billion and stockholders’ equity was $2.1 billion. Book value per share was $35.11, down from $36.91 at year-end 2019. Cash and restricted cash totaled $14.6 million; cash plus short-term investments totaled $527.0 million. Total debt was $852.6 million, including $302.0 million of new short-term borrowings; long-term debt was $550.6 million. The debt-to-capital ratio was 28.9%. Gross unrealized losses on available-for-sale fixed income securities rose to $116.9 million from $7.7 million at year-end.
Material changes versus the prior comparable period
- Net income fell 75%, primarily reflecting investment losses and COVID-related underwriting impacts. Operating income declined less, by 6%.
- Insurance underwriting income declined 36% to $21.4 million. The all-lines combined ratio increased by 2.0 points to 96.7%, with a higher expense ratio contributing to the deterioration.
- Management recorded a $75 million increase in estimated return-audit and mid-term endorsement premiums, mainly reflecting expected lower sales and payroll exposures in workers’ compensation and general liability. It estimated a $15 million full-year pre-tax underwriting impact net of reduced losses and commissions.
- COVID-related items also included $10 million of estimated incurred-but-not-reported losses for limited property clean-up coverage and an additional $10.5 million allowance for uncollectible premiums.
- Investment impairments totaled $31.6 million: $15.6 million on securities the company intended to sell and $16.0 million of credit-related impairment. Unrealized losses on equity securities were $17.1 million.
- The company adopted the CECL credit-loss standard on January 1, 2020, recording a $1.4 million after-tax increase to opening retained earnings. It also began investing in commercial mortgage loans; the balance was less than 1% of invested assets.
Outlook, commentary, risks, and unusual items
Revised 2020 guidance was a GAAP combined ratio, excluding catastrophe losses, of 92%–93%; catastrophe losses of 4.5 points; after-tax net investment income of approximately $160 million; an effective tax rate of approximately 18.5%; and 60.5 million weighted-average diluted shares. The investment-income outlook was reduced from $185 million. Management targeted an 11% non-GAAP operating ROE for 2020; Q1 was 9.4%. It cautioned that pandemic duration, economic conditions, markets, and regulatory actions made full-year estimates uncertain.
- For April and May, the company obtained approval for customer credits equal to 15% of in-force personal and commercial auto premiums, with an estimated $20 million Q2 expense. Management expected reduced auto claims frequency to largely offset the expense, but said the ultimate effect was uncertain.
- Management estimated a $15 million–$20 million loss associated with alternative investments affected by Q1 market volatility, to be reflected in Q2 because those investments report on a one-quarter lag. The filing describes this estimate as pre-tax in one section and after-tax in another.
- The company expected approximately $35 million of pre-tax net losses from severe April storms.
- COVID-19 risks include weaker premium collections, return premiums, mandated credits or retroactive coverage, claims uncertainty, market and credit losses, and possible increases in workers’ compensation or liability claims. Litigation over business-interruption coverage was ongoing; the company said it could not predict outcomes. It reported no material pending legal proceeding at quarter-end.
- To bolster liquidity, the company borrowed $302 million short term and invested the proceeds in high-quality money-market funds. It said the borrowing was precautionary and intended to be repaid in the short to medium term. The company reported compliance with its credit-line covenants.
- Fitch reaffirmed the company’s A+ rating with a stable outlook on April 10, 2020. Other reported financial-strength ratings were AM Best A/Positive, Moody’s A2/Stable, and S&P A/Stable.
Important facts for investors to verify
- How premium deferrals, return audits, customer credits, and the increased premium-receivable allowance develop in subsequent quarters.
- Whether reported auto claims-frequency reductions offset the approximately $20 million Q2 premium-credit expense, and whether further credits or regulatory measures are required.
- Actual Q2 alternative-investment results and the applicable tax basis of the disclosed $15 million–$20 million estimate, which is described inconsistently in the filing.
- Changes in COVID-related claims, including business-interruption litigation, limited clean-up coverage, and any legislative or regulatory actions affecting coverage.
- Investment credit losses, unrealized losses, liquidity, and repayment of the $302 million short-term debt balance.
- Progress against revised full-year guidance, particularly catastrophe losses, underwriting expenses, and after-tax investment income.