Selective Insurance Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Quarter ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Selective is a property and casualty insurer operating Standard Commercial, Standard Personal, Excess and Surplus (E&S), and Investments segments.
Financial results and condition
| Metric | Q1 2019 | Q1 2018 / prior year-end |
|---|---|---|
| Total revenue | $699.0 million | $626.7 million; up 12% |
| Net premiums earned | $632.6 million | $591.8 million; up 7% |
| Net income / diluted EPS | $61.3 million / $1.02 | $18.9 million / $0.32 |
| Non-GAAP operating income / diluted EPS | $54.0 million / $0.90 | $27.3 million / $0.46 |
| Combined ratio | 94.7% | 99.2%; improved 4.5 points |
| Net investment income | $50.6 million pre-tax; $41.3 million after-tax | $43.2 million pre-tax; $35.8 million after-tax |
| Operating cash flow | $46.6 million | $(7.7) million |
| Total assets / stockholders’ equity | $8.28 billion / $1.93 billion | $7.95 billion / $1.79 billion at Dec. 31, 2018 |
| Long-term debt / debt-to-capital | $550.1 million / 22.2% | $439.5 million at Dec. 31, 2018 |
Underwriting income rose to $33.6 million from $4.7 million. The loss and loss expense ratio fell to 61.1% from 65.0%; the underwriting expense ratio improved to 33.3% from 33.8%. Q1 favorable prior-year casualty reserve development was $10.0 million, versus $8.0 million in Q1 2018. Catastrophe losses were $20.9 million, compared with $26.0 million.
Net income also reflected $10.1 million of unrealized equity-security gains, versus $14.1 million of unrealized losses in the prior-year quarter. A $4.2 million pre-tax debt-retirement charge was recorded in connection with refinancing; it is excluded from non-GAAP operating income. Comprehensive income was $142.3 million, including $81.0 million of other comprehensive income, mainly investment-security gains.
Cash, excluding restricted cash, and short-term investments totaled $291 million across the Parent and insurance subsidiaries. The Parent reported $257 million of cash and liquid investments, against a stated target of $160 million. Book value per share was $32.51, up from $30.40 at year-end.
Material changes and segment performance
- Net premiums written increased 8% to $672.9 million. Standard Commercial Lines grew 7%, Standard Personal Lines 2%, and E&S Lines 19%.
- Segment combined ratios improved to 94.8% for Standard Commercial (98.5% prior year), 95.9% for Standard Personal (102.0%), and 92.1% for E&S (101.1%).
- Commercial automobile remained a weak area despite improvement: its combined ratio was 106.6%, versus 111.3%. Management cited current-year loss-cost pressure and continued pricing and underwriting actions.
- Investment income benefited from higher fixed-income income, portfolio management, and proceeds from the debt offering. The after-tax portfolio yield increased to 2.8% from 2.5%.
- The company issued $300 million of 5.375% senior notes due 2049 and redeemed $185 million of 5.875% notes due 2043. Net proceeds were approximately $290.7 million; approximately $106 million remained for general corporate purposes after redemption.
Outlook, risks, and unusual items
- Management’s 2019 non-GAAP operating ROE target is 12%; Q1 annualized non-GAAP operating ROE was 11.6%.
- Full-year guidance: GAAP combined ratio excluding catastrophe losses of 92.0%, assuming no additional prior-year casualty reserve development; catastrophe losses of 3.5 points; after-tax net investment income of $180 million, including $8 million from alternative investments; effective tax rate of approximately 19%; and diluted weighted-average shares of 60 million. Net investment income guidance was raised by $5 million.
- Management reported 3.7% overall renewal pure price increases in Q1 and emphasized disciplined growth, pricing aligned with expected loss trends, underwriting actions, and customer-service technology.
- Risks include uncertainty in loss reserves and reinsurance recoverables, catastrophe and other claim severity, commercial-auto profitability, and investment-market and interest-rate changes. Management said it was monitoring workers’ compensation reserve trends and noted current accident-year margins did not support continued negative pricing in that line.
- Insurance-subsidiary dividends to the Parent are subject to regulatory approval. The company expected $110 million in subsidiary dividends during 2019. Alternative-investment commitments could require up to $217.3 million, though funding is not certain.
- Ordinary-course litigation was not expected to materially affect consolidated financial condition; the filing cautions that adverse outcomes in some matters could materially affect results or cash flows in particular periods. No material change in disclosed risk factors was reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether underwriting improvement persists after considering favorable reserve development and lower catastrophe and property losses.
- Whether commercial-auto pricing and underwriting actions improve the line’s combined ratio and loss trends.
- How much of reported earnings and equity growth reflects investment-market gains, and how investment yields respond to changing rates and markets.
- Whether the $180 million after-tax investment-income guidance and 12% non-GAAP operating ROE target remain achievable.
- Debt-service capacity, regulatory approval and availability of subsidiary dividends, and the scale and timing of investment commitments.