Selective Insurance Group, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Amounts are in millions except per-share data and ratios.
Business context
Selective writes property and casualty insurance through standard commercial, standard personal, and excess and surplus (E&S) businesses, alongside an investment segment. Standard commercial generated 78% of combined insurance-segment net premiums written, personal 14%, and E&S 8%.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $540.5 | $515.4 | $1,586.3 | $1,531.3 |
| Net premiums earned | $507.4 | $462.6 | $1,473.8 | $1,382.8 |
| Income before tax | $65.8 | $75.3 | $168.9 | $139.9 |
| Net income | $47.0 | $53.2 | $120.5 | $100.5 |
| Diluted EPS | $0.81 | $0.93 | $2.08 | $1.75 |
| GAAP combined ratio | 91.2% | 92.6% | 93.2% | 97.1% |
| Operating income (non-GAAP) | $46.8 | $43.3 | $110.2 | $82.9 |
| Diluted operating EPS (non-GAAP) | $0.81 | $0.76 | $1.90 | $1.44 |
Q3 revenue rose 5%, but net income declined 12% as lower investment gains and investment income more than offset improved underwriting. Nine-month net income increased 20%, supported by stronger underwriting, despite lower investment income and realized gains. The combined ratio improved in both periods; below 100% indicates an underwriting profit.
- Underwriting: Insurance-segment net premiums written rose 10% in Q3 and 10% year to date. Q3 underwriting gain was $44.8; nine-month gain was $100.0.
- Cash flow: Nine-month operating cash flow was $259.0, versus $158.1 in 2014; investing cash use was $260.1 versus $134.7. Cash at period end was $15.1, down from $24.0 at year-end 2014. Management reported cash and short-term investments of $141 million, including $32 million at the parent and $109 million at insurance subsidiaries.
- Balance sheet and debt: Total assets were $6.90 billion and stockholders’ equity $1.36 billion. Notes payable were $394.3, up from $379.3 at year-end 2014. Debt-to-capital was approximately 22.9%. Book value per share was $23.77, versus $22.54 at year-end.
- Investments: Invested assets totaled $5.01 billion, up 4% from year-end. Nine-month net investment income was $91.2, down 14%; after-tax portfolio yield was 1.9%, versus 2.3%. The portfolio’s weighted-average fixed-income credit rating was AA-.
Material changes and segment performance
- Standard Commercial: Nine-month revenue increased 6%; underwriting gain rose to $109.3 from $39.8, and the combined ratio improved to 90.3% from 96.2%. Results benefited from favorable prior-year casualty reserve development and lower property losses. Commercial auto remained a pressure point, with statutory combined ratios of 104.5% for Q3 and 101.5% year to date.
- Standard Personal: Net premiums written declined 3% year to date. The nine-month underwriting loss was $4.3, and the combined ratio worsened to 102.0% from 100.0%, reflecting competition, targeted non-renewals, and higher Q3 catastrophe losses.
- E&S: Net premiums written increased 28% year to date, but underwriting remained loss-making: $5.0 for nine months, with a 104.0% combined ratio. Management cited loss inflation and unfavorable prior-year casualty development.
- Reserves and catastrophes: Favorable prior-year casualty reserve development was approximately $15 million in Q3 and $55 million year to date, mainly in general liability and workers compensation. Nine-month catastrophe losses were $56.1, versus $66.9 in 2014.
- Investment marks: Accumulated other comprehensive income moved from a $19.8 gain at year-end to a $6.0 loss at September 30, primarily reflecting lower unrealized investment gains. The company recorded $7.8 of other-than-temporary impairment charges in the first nine months, versus $1.4 in 2014.
Outlook, risks, and unusual items
- Management refined 2015 guidance to a statutory combined ratio of 89%, excluding catastrophe losses and further prior-year casualty reserve development; four points of catastrophe losses; overall renewal pure price increases of 3%–3.5%; after-tax investment income of approximately $95 million; and weighted-average shares of approximately 58 million.
- Workers compensation full-year combined-ratio guidance was revised to 91%, assuming no additional reserve development; prior guidance was below 103%.
- Management attributed investment-income pressure to low fixed-income reinvestment yields and weaker alternative-investment income, particularly energy-related partnerships affected by declining oil prices. Fixed-income securities purchased year to date had a 1.6% average after-tax yield, compared with 2.5% for securities called, matured, or otherwise disposed of.
- July 2015 excess-of-loss reinsurance renewals extended coverage to E&S operations and retained stated property and casualty treaty structures. Treaty exclusions include nuclear, biological, chemical, and radiological terrorism losses.
- Insurance subsidiaries expected to pay $58 million in dividends to the parent in 2015; $43 million had been paid through nine months. Such transfers are subject to regulatory approval. The company also had $76.5 million of remaining investment commitments.
- The board declared a subsequent $0.15-per-share dividend, payable December 1, 2015, a 7% increase from the prior declared dividend. The company reported A.M. Best “A” with stable outlook; S&P “A-” with positive outlook; Fitch “A+” with stable outlook; and Moody’s “A2” with stable outlook.
- Risks include uncertainty around the federally administered NFIP flood program, potential changes to tax advantages and insurance regulation, and litigation that could adversely affect results or cash flows in particular periods. Management reported no legal action it believed would materially affect consolidated financial condition, results, or cash flows as of September 30.
Important facts for investors to verify
- How much of underwriting improvement depends on favorable prior-year reserve releases, and whether current-year loss trends support the 89% statutory combined-ratio guidance.
- Whether personal lines and E&S underwriting improve, and whether commercial auto losses remain elevated.
- Whether the approximately $95 million after-tax investment-income outlook is achievable given reinvestment yields and alternative-investment exposure to energy markets.
- The liquidity available to the parent after considering restrictions on insurance-subsidiary dividends, debt maturities, and the $76.5 million of remaining investment commitments.
- Developments in NFIP funding and rules, material litigation, and rating-agency outlooks that could affect operations, capital access, or dividend capacity.