Business context and reporting period
Selective Insurance Group, Inc. is a property and casualty insurer operating through Standard Commercial Lines, Standard Personal Lines, Excess and Surplus (E&S) Lines, and Investments. This Form 10-Q covers the quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $710.4 million | $664.5 million | $2,117.6 million | $1,943.1 million |
| Net premiums earned | $653.6 million | $614.3 million | $1,928.8 million | $1,810.9 million |
| Net investment income | $55.8 million | $52.4 million | $164.9 million | $141.2 million |
| Net income | $56.2 million | $55.4 million | $189.8 million | $133.2 million |
| Diluted EPS | $0.93 | $0.93 | $3.16 | $2.23 |
| Combined ratio | 95.2% | 94.6% | 94.3% | 95.8% |
| Non-GAAP operating income | $58.8 million | $59.2 million | $181.9 million | $146.6 million |
Q3 underwriting income was $31.3 million, down 5% year over year; nine-month underwriting income was $109.5 million, up 45%. The Q3 combined ratio worsened by 0.6 points, while the nine-month ratio improved by 1.5 points. Net investment income after tax increased 6% in Q3 and 16% year to date. The nine-month effective tax rate was 19.3%, compared with 16.5% in 2018.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $316.2 million, versus $292.5 million in 2018. Investing activities used $391.0 million; financing activities provided $68.0 million. Cash and restricted cash ended at $10.2 million.
- Total investments were $6.55 billion at September 30, up from $5.96 billion at year-end 2018. Cash excluding restricted cash plus short-term investments totaled $327 million.
- Stockholders’ equity was $2.14 billion; book value per share was $35.98, up from $30.40 at year-end 2018. Unrealized investment gains and net income contributed to the increase.
- Long-term debt was $550.7 million, compared with $439.5 million at year-end. Debt-to-capital was 20.5%. The company issued $300 million of 5.375% senior notes due 2049, redeemed $185 million of 5.875% notes due 2043, and reported $4.2 million of pretax debt retirement costs.
- Parent cash and liquid investments were $267 million; management’s stated target is to maintain roughly twice expected annual Parent needs, currently estimated at $160 million. There was no balance outstanding on the Parent’s $30 million bank line of credit.
Material changes versus prior periods
- Nine-month net income rose 42%, reflecting stronger underwriting results and improved investment results. Q3 net income rose only 1%, and diluted EPS was unchanged.
- Premium growth continued: net premiums written increased 4% in Q3 and 6% year to date. Standard Commercial Lines drove much of the growth; Standard Personal Lines premiums written declined 4% in Q3, and E&S premiums written declined 3%.
- Favorable prior-year casualty reserve development was $34.6 million for the nine months, versus $17.6 million in 2018. The 2019 benefit included $41 million favorable casualty development, partly offset by $6.4 million unfavorable property development.
- Q3 Standard Personal Lines reported an underwriting loss of $0.6 million and a 100.8% combined ratio, compared with a $3.2 million gain and 95.9% ratio a year earlier. Commercial automobile remained unprofitable, with a 108.1% Q3 combined ratio, although improved from 118.2%.
- Net unrealized gains on investments improved substantially as interest rates fell and credit spreads tightened. Nine-month other comprehensive income was $176.4 million, compared with an $87.7 million loss in 2018; this materially supported equity and book value.
Outlook, management commentary and risks
- Management reported a 12.3% annualized non-GAAP operating ROE through nine months, above its 12% 2019 target. Full-year expectations were: GAAP combined ratio excluding catastrophe losses of 91.0%, catastrophe losses of 3.5 points, after-tax net investment income of $180 million (including $14 million from alternative investments), effective tax rate of approximately 19%, and diluted weighted-average shares of 60 million. The combined-ratio expectation assumes no fourth-quarter prior-year casualty reserve development.
- Management said low interest rates could pressure ROE and non-GAAP operating ROE in 2020. Its priorities include renewal pricing aligned with expected loss trends, disciplined growth, underwriting and claims initiatives, and active investment portfolio management.
- Q3 results included approximately $5 million after tax ($0.09 per diluted share) of higher-than-expected non-catastrophe property losses and $3 million after tax ($0.05 per diluted share) of employee severance costs. Year-to-date results also included $3.3 million after-tax debt retirement costs.
- Insurance results remain exposed to catastrophe and non-catastrophe property losses, reserve-estimation uncertainty, and line-specific profitability. Management noted workers compensation results depend on continued favorable claim frequency and severity trends; commercial auto continues to face profitability challenges.
- The company participates in the federal National Flood Insurance Program (NFIP). Its authorization was extended only through November 21, 2019 at the filing date; a lapse, changes to carrier compensation, or market changes could affect the flood business. The company also noted that adverse litigation outcomes, though not expected to be material to financial condition, could affect results or cash flows in particular periods.
- On October 31, 2019, A.M. Best reaffirmed the company’s “A” rating and upgraded its outlook to positive. The Board declared a $0.23 per-share dividend payable December 2, 2019, a 15% increase from the prior declared dividend.
Important facts for investors to verify
- Whether full-year underwriting guidance is achieved, particularly the 91.0% ex-catastrophe combined-ratio expectation and the no-fourth-quarter-reserve-development assumption.
- How much of earnings and book-value growth reflects recurring underwriting and investment income versus favorable reserve development and unrealized market gains.
- Whether commercial auto and personal lines improve profitability amid pricing, competition, retention, and expense pressures.
- Investment portfolio credit quality, duration and liquidity, and the effect of lower interest rates on future investment income and ROE.
- Debt service and Parent liquidity, including dependence on regulated insurance-subsidiary dividends, as well as the status and terms of the NFIP authorization and compensation.
- Potential reserve revisions, catastrophe losses, litigation developments, and the timing or funding of up to $229.9 million in remaining alternative-investment commitments.