Selective Insurance Group, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing; fourth-quarter figures are identified separately where relevant. Selective is a property-and-casualty insurer operating Standard Commercial, Standard Personal, E&S, and Investments segments.
Financial results and key metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $2.035 billion | $1.904 billion |
| Net premiums written | $1.885 billion | $1.810 billion |
| Net premiums earned | $1.853 billion | $1.736 billion |
| Net income | $141.8 million | $106.4 million |
| Diluted EPS | $2.47 | $1.87 |
| Operating income (non-GAAP) | $124.5 million | $93.9 million |
| GAAP combined ratio | 95.8% | 97.8% |
| Operating return on average equity (non-GAAP) | 10.3% | 8.4% |
| Net investment income | $138.7 million | $134.6 million |
| Operating cash flow | $232.8 million | $336.1 million |
- Underwriting income increased to $78.1 million from $38.8 million. The statutory combined ratio improved to 95.7% from 97.5%.
- Fourth-quarter net income was $41.4 million versus $25.3 million in Q4 2013; underwriting income was $38.6 million versus $12.0 million.
- At year-end, total assets were $6.582 billion, stockholders’ equity $1.276 billion, and notes payable $379.3 million. Debt-to-capitalization was 22.9%, down from 25.4%.
- Cash and short-term investments were approximately $156 million. The $30 million revolving credit facility had no borrowings during 2014. Insurance subsidiaries had $1.308 billion in statutory surplus; their combined total adjusted capital was 4.5 times authorized control-level capital.
- Invested assets totaled $4.807 billion, 91% fixed income. The fixed-income portfolio’s weighted-average credit rating was AA-; its duration was 3.8 years, compared with 4.2 years for insurance liabilities.
Material changes and drivers
- Revenue rose 7% and net income rose 33% year over year. Underwriting improvement, higher premiums, and investment gains contributed to results.
- Net premiums written grew 4% overall. Standard Commercial grew 4%; Standard Personal declined 2%; E&S grew 16%. Commercial growth would have been 7% excluding the sale of renewal rights to a $37 million book.
- Favorable prior-year reserve development was $59.3 million, versus $25.5 million in each of 2013 and 2012. General liability was the largest contributor. This benefit is not necessarily recurring.
- Catastrophe losses increased to $60.0 million from $47.4 million, and non-catastrophe property losses also rose. Management cited extreme cold and Midwest storms in 2014.
- Investment income increased 3%, but reinvestment yields remained pressured: new bond purchases averaged a 2.0% after-tax yield versus 2.3% on bonds sold, called, or matured.
- Book value per share increased to $22.54 from $20.63. The board raised the quarterly dividend 8%, to $0.14 per share in Q4; full-year dividends were $0.53 per share.
Outlook, risks, and unusual items
- 2015 targets: ex-catastrophe combined ratio of 91%, including no prior-year casualty reserve development; catastrophe losses of four points; after-tax investment income of approximately $105 million; and weighted-average shares of approximately 58 million. Longer-term, management targets a 90% ex-catastrophe combined ratio to support a 12% operating ROE goal.
- Management identified competitive conditions, lower expected rate increases, catastrophe exposure, low fixed-income yields, reserve uncertainty, and the need to develop underwriting talent and analytics as important industry challenges.
- Loss reserves are a significant estimate: gross reserves were $3.478 billion and net reserves $2.906 billion at year-end. Management’s estimated reasonable range for net reserves was $2.645 billion to $3.061 billion. Reserve outcomes may differ materially from estimates.
- Concentrated exposure in the Eastern and Midwestern U.S. is notable; New Jersey generated 22.6% of 2014 net premiums written. Reinsurance mitigates catastrophe exposure but may be insufficient or unavailable on acceptable terms. The 2015 terrorism-program deductible was approximately $254 million.
- Investment, interest-rate, credit, and alternative-investment valuation risks remain relevant. A 200-basis-point rise in rates was estimated to reduce the fair value of available-for-sale fixed-income securities by approximately $308 million.
- Other risks include regulatory changes, NFIP uncertainty, reinsurer credit exposure, cyber incidents, and litigation. The company reported no material cyberattack. Ordinary-course litigation was not expected to be material overall, though adverse outcomes could affect particular periods.
- Unusual items include an $8 million gain from the sale of renewal rights, $59.3 million of favorable prior-year reserve development, and $11.1 million of investment impairment charges. Pension and post-retirement obligations increased to $337.4 million, reflecting lower discount rates and updated mortality assumptions.
- Insurance financial-strength ratings included A from A.M. Best (stable), A- from S&P (positive), A2 from Moody’s (negative), and A+ from Fitch (stable). A.M. Best rating deterioration could affect business and credit access.
Important facts for investors to verify
- How much of 2014 underwriting improvement came from durable pricing and claims performance versus favorable reserve development and the renewal-rights gain.
- Whether workers’ compensation results and general-liability reserve emergence remain stable as claims mature.
- Actual 2015 performance against the stated ex-catastrophe combined-ratio, catastrophe-loss, and investment-income targets.
- Effects of catastrophe activity, reinsurance renewal terms, and New Jersey and other regional exposure on earnings and capital.
- Investment income and portfolio values under changing rates, spreads, and credit conditions, including alternative-investment valuations.
- Availability of holding-company liquidity and regulatory approval of subsidiary dividends; 2015 ordinary dividend capacity was reported as $162 million.