Selective Insurance Group, Inc. — 2018 Third-Quarter Form 10-Q
Business context and reporting period
Selective is a property and casualty insurer operating through ten insurance subsidiaries. Its reportable segments are Standard Commercial Lines, Standard Personal Lines, Excess and Surplus (E&S) Lines, and Investments. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods.
Key financial metrics
| Metric | Quarter ended September 30, 2018 | Nine months ended September 30, 2018 |
|---|---|---|
| Net premiums earned | $614.3 million, up 7% | $1,810.9 million, up 6% |
| Total revenues | $664.5 million, up 7% | $1,943.1 million, up 6% |
| Net investment income, before tax | $52.4 million, up 30% | $141.2 million, up 18% |
| Net income | $55.4 million, up 19% | $133.2 million, down 4% |
| Diluted earnings per share | $0.93, versus $0.79 | $2.23, versus $2.34 |
| Combined ratio | 94.6%, versus 94.3% | 95.8%, versus 93.4% |
| Operating cash flow | Not presented separately for the quarter | $292.5 million, versus $290.3 million |
For the quarter, underwriting income was $33.0 million, compared with $32.4 million. Nine-month underwriting income fell to $75.8 million from $112.0 million. The nine-month loss and loss expense ratio rose to 62.5% from 59.0%; the underwriting expense ratio improved to 33.0% from 34.2%.
At September 30, 2018, total assets were $8.0 billion, stockholders’ equity was $1.7 billion, and long-term debt was $439.4 million. Debt-to-capitalization was 20.2%. Total investments were $5.9 billion. Cash and restricted cash totaled $12.8 million; short-term investments were $304.6 million. The Parent reported $141 million of cash and liquid investments and no borrowings under its $30 million revolving line of credit.
Material changes versus the prior comparable period
- Quarterly earnings improved, helped by lower income taxes and higher investment income. Nine-month earnings declined despite premium growth, primarily reflecting weaker underwriting results and investment losses.
- Nine-month catastrophe losses were $72.9 million, versus $65.3 million; non-catastrophe property losses rose to $278.5 million from $216.5 million. The filing attributes some losses to the January deep freeze and increased fire losses.
- Favorable prior-year casualty reserve development was $24.0 million for the first nine months, versus $38.6 million. Commercial automobile and E&S had unfavorable development, partly offset by favorable workers’ compensation and general liability development.
- Net investment income increased, supported by higher reinvestment yields, active security selection, higher floating-rate income and improved alternative-investment results. However, nine-month net realized and unrealized investment losses were $17.0 million, versus gains of $7.5 million.
- Investment-market movements reduced nine-month other comprehensive income by $87.7 million; accumulated other comprehensive loss was $92.6 million at September 30. Management cited rising interest rates as a driver of fixed-income unrealized losses.
- The 2018 statutory corporate tax rate fell to 21% from 35% following Tax Reform, lowering the effective tax rate and supporting after-tax earnings. Adoption of new equity-security accounting also moved unrealized equity gains and losses into earnings rather than accumulated other comprehensive income.
Outlook, management commentary, risks and unusual items
- Management raised full-year 2018 after-tax net investment income guidance by $6 million to $156 million and raised its catastrophe-loss assumption by 0.5 points to 4.0 points. Other stated assumptions: a 92.0% GAAP combined ratio excluding catastrophe losses, no fourth-quarter prior-year casualty reserve development, an approximately 18% effective tax rate, and 59.6 million weighted-average shares.
- Management cited intense competition, low industry premium growth, and potential inflation—including from trade policies and tariffs—as factors that could increase claims costs. Commercial automobile profitability remains a significant concern; management reported a 112.8% nine-month combined ratio for that line. E&S remains below the company’s target profitability.
- The company renewed its July 1 excess-of-loss reinsurance treaties with the same structure as the expiring treaties. It reported a 3.9-year fixed-income portfolio duration and a 3.8-year insurance-liability duration (the latter measured at December 31, 2017).
- Hurricane Michael made landfall on October 10, after quarter-end. The company’s preliminary loss estimate was approximately $10 million.
- The National Flood Insurance Program was authorized only through November 30, 2018 at the filing date. Effective October 1, FEMA reduced the Write Your Own expense allowance from 30.9% to 30.0%; management identified program authorization and potential market changes as risks to its flood business.
- The company reported no legal action it believed would materially affect its consolidated financial condition, results of operations, or cash flows, while noting that unpredictable litigation could affect results or cash flows in particular periods. It also reported $218.2 million of possible future alternative-investment commitments, plus other investment commitments.
- On October 25, the Board declared a $0.20-per-share dividend payable December 3, an 11% increase from the August declaration. Management expected insurance subsidiaries to pay $100 million in total dividends to the Parent in 2018, subject to regulatory approval.
Important facts for investors to verify
- Whether the higher property-loss trend, catastrophe experience and weaker reserve development continue to pressure combined ratios, particularly in commercial automobile and E&S.
- Whether pricing, underwriting actions and business mix changes improve commercial automobile profitability without materially weakening retention or growth.
- Whether the $156 million investment-income target and the 92.0% ex-catastrophe combined-ratio assumption remain achievable, and how actual catastrophe losses compare with the 4.0-point forecast.
- The ultimate Hurricane Michael losses and any subsequent catastrophe claims, as the filing’s estimate was preliminary.
- How interest rates and equity markets affect investment values, earnings, accumulated other comprehensive income and book value; and whether the portfolio’s credit quality and liquidity remain consistent with management’s stated objectives.
- Whether the NFIP is extended and how further program changes affect flood-business economics and operations.
- Availability of subsidiary dividends and other funding sources to support Parent liquidity, debt service and shareholder distributions.