Selective Insurance Group, Inc. — Q3 2013 Form 10-Q
Business and period. Selective provides standard and excess-and-surplus property and casualty insurance, primarily through independent agents, and invests insurance premiums. This unaudited filing covers the quarter and nine months ended September 30, 2013, with comparisons to 2012.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $486.8m | $436.9m | $1,415.7m | $1,285.1m |
| Net income | $32.7m | $18.3m | $81.1m | $36.7m |
| Diluted EPS | $0.57 | $0.33 | $1.43 | $0.66 |
| Operating income (non-GAAP) | $23.9m | $19.0m | $67.8m | $34.4m |
| GAAP combined ratio | 97.7% | 99.8% | 97.9% | 102.3% |
- Net premiums written rose 9% in Q3 and 8% year to date; earned premiums increased 8% and 9%, respectively. Management attributed growth mainly to renewal price increases, retention and new business.
- Insurance underwriting improved: the statutory combined ratio was 96.3% for Q3 and 96.9% year to date, versus 98.4% and 101.2%. The E&S segment’s Q3 ratio improved to 100.5% from 121.6%, but was 101.9% year to date.
- Investment income before tax was $32.5m in Q3 and $99.3m year to date. Higher alternative-investment income partly offset lower fixed-income income. Q3 realized investment gains were $13.4m, principally equity sales; these gains contributed to reported net income.
- Operating cash flow was $238.0m for nine months, versus $167.8m. Investing activities used $297.6m and financing provided $59.6m. Cash was $0.2m at period-end; cash plus short-term investments was $172m, down from $215m at year-end 2012 as Sandy-related claim payments continued.
- At September 30, total assets were $6.27bn, liabilities $5.14bn and stockholders’ equity $1.12bn. Total assets were down from $6.79bn at year-end, with reinsurance recoverables declining to $555.6m from $1.42bn. Notes payable increased to $392.4m from $307.4m; debt-to-capitalization was 26%.
Material changes and notable items
- Q3 and year-to-date earnings improved substantially alongside better underwriting. For nine months, the result also included $14.3m after-tax net realized gains and a $1.0m after-tax loss on discontinued operations; operating income excludes these items.
- In February, the company issued $185m of 5.875% senior notes due 2043 and redeemed $100m of 7.5% junior notes. The renewed $30m revolving credit facility was undrawn at September 30 and may be increased to $50m with lender approval.
- Rising interest rates reduced portfolio valuations: the 10-year Treasury yield rose 85 basis points during the first nine months. Investment securities’ net unrealized/unrecognized losses increased to $43.6m from $2.9m at year-end; management considered the positions temporary and said it did not intend, nor expect to be required, to sell them.
- The pension-plan amendment curtailing future benefit accruals after March 31, 2016 generated a $44m pre-tax actuarial gain in OCI. The year-to-date statutory combined ratio includes 0.4 points related to the amendment.
- NFIP flood losses from Hurricane Sandy are fully ceded to the NFIP. Estimated gross losses on the company’s WYO policies were $1.179bn at September 30, of which approximately $1.148bn had been paid. The filing reports higher direct and ceded losses associated with these claims.
Outlook, risks and contingencies
- Management forecast a 2013 statutory combined ratio of approximately 95.5%, excluding 2.5 catastrophe points, assuming no fourth-quarter prior-year casualty reserve development. It expected after-tax investment income of $95–$100m and approximately 57m weighted-average shares at year-end.
- Management expected a 2013 E&S combined ratio of 100%–102%, E&S profitability similar to Standard in 2014, and a 2014 overall statutory combined ratio of 92%, excluding three catastrophe points. Expected overall price increases in 2014 were 6%–7.5%.
- Management identified low reinvestment yields as a challenge; even with annual interest-rate increases of 50 basis points, portfolio book yields were expected to remain below 2012 levels until approximately 2017. Insurance results also depend on pricing relative to loss trends, catastrophe experience, reserve estimates and reinsurance recoveries.
- A.M. Best affirmed an A rating with stable outlook. S&P lowered the financial-strength rating to A- with stable outlook; Moody’s A2 and Fitch A+ had negative outlooks. The filing notes that significant rating downgrades could affect business, borrowing costs and liquidity; an A.M. Best downgrade below A- is a line-of-credit default event.
- Management expected ordinary-course litigation liabilities to be immaterial overall, but noted that an adverse outcome in certain unpredictable matters could materially affect results or cash flows in an individual period. The company had up to $58.9m of remaining alternative-investment commitments through 2026; actual funding is uncertain.
Key facts for investors to verify
- Whether underwriting gains and pricing increases persist, particularly in workers’ compensation, where the statutory combined ratio was 118.4% year to date and unfavorable reserve development was $14.0m.
- Whether the 2013 and 2014 combined-ratio and investment-income outlook assumptions are achieved, including catastrophe losses and any fourth-quarter reserve development.
- Changes in investment valuations, interest rates, realized gains, and the credit quality of securities in loss positions.
- Timing and collectibility of NFIP reinsurance recoveries for Sandy claims, and the effect of continued claims payments on liquidity.
- Rating-agency actions, access to subsidiary dividends and other funding sources, and compliance with debt-facility covenants.