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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
As used herein, the "Company," "we," "us," or "our" refers to Selective Insurance Group, Inc. (the "Parent"), and its subsidiaries, except as expressly indicated or unless the context otherwise requires. In this Quarterly Report on Form 10-Q, we discuss and make statements regarding our intentions, beliefs, current expectations, and projections regarding our company’s future operations and performance. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by words such as “anticipates,” “believes,” “expects,” “will,” “should,” and “intends” and their negatives. We caution prospective investors that such forward-looking statements are not guarantees of future performance. Risks and uncertainties are inherent in our future performance. Factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, those discussed under Item 1A. “Risk Factors” below in Part II. “Other Information.” These risk factors may not be exhaustive. We operate in a continually changing business environment and new risk factors emerge from time to time. We can neither predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied in any forward-looking statements in this report. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this report might not occur. We make forward-looking statements based on currently available information and assume no obligation to update these statements due to changes in underlying factors, new information, future developments, or otherwise.
Introduction
The Parent, through its
ten
insurance subsidiaries, collectively referred to as the "Insurance Subsidiaries," offers property and casualty insurance products in the standard and excess and surplus ("E&S") marketplaces. We classify our business into
four
reportable segments, which are as follows:
|
|
•
|
Standard Commercial Lines;
|
|
|
•
|
Standard Personal Lines;
|
For further details regarding these segments, refer to Note 9. "Segment Information" in Item 1. "Financial Statements." of this Form 10-Q and Note 11. "Segment Information" in Item 8. "Financial Statements and Supplementary Data." of our Annual Report on Form 10-K for the year ended
December 31, 2018
("
2018
Annual Report").
Our Standard Commercial and Standard Personal Lines products and services are written through nine of our Insurance Subsidiaries, some of which write flood business through the Write Your Own ("WYO") program of the National Flood Insurance Program ("NFIP"). Our E&S products and services are written through one subsidiary, Mesa Underwriters Specialty Insurance Company. This subsidiary provides us with a nationally-authorized non-admitted platform to offer insurance products and services to customers who have not obtained coverage in the standard marketplace.
The following is Management’s Discussion and Analysis (“MD&A”) of the consolidated results of operations and financial condition, as well as known trends and uncertainties, that may have a material impact in future periods. Consequently, investors should read the MD&A in conjunction with Item 1. "Financial Statements." of this Form 10-Q and the consolidated financial statements in our
2018
Annual Report filed with the U.S. Securities and Exchange Commission. Within this MD&A, all prior year amounts for non-catastrophe property losses, and the related ratios, have been adjusted to include the related loss expenses, which is consistent with the current year presentation.
In the MD&A, we will discuss and analyze the following:
|
|
•
|
Critical Accounting Policies and Estimates;
|
|
|
•
|
Financial Highlights of Results for the
second
quarters ended
June 30, 2019
(“
Second Quarter 2019
”) and
June 30, 2018
(“
Second Quarter 2018
”) and the six-month periods ended
June 30, 2019
(“Six Months 2019”) and
June 30, 2018
(“Six Months 2018”);
|
|
|
•
|
Results of Operations and Related Information by Segment;
|
|
|
•
|
Financial Condition, Liquidity, and Capital Resources;
|
|
|
•
|
Off-Balance Sheet Arrangements; and
|
|
|
•
|
Contractual Obligations, Contingent Liabilities, and Commitments.
|
Critical Accounting Policies and Estimates
Our unaudited interim consolidated financial statements include amounts based on our informed estimates and judgments for those transactions that are not yet complete. Such estimates and judgments affect the reported amounts in the consolidated financial statements. Those estimates and judgments that were most critical to the preparation of the consolidated financial statements involved the following: (i) reserves for loss and loss expense; (ii) pension and post-retirement benefit plan actuarial assumptions; (iii) investment valuation and other-than-temporary-impairments ("OTTI"); and (iv) reinsurance. These estimates and judgments require the use of assumptions about matters that are highly uncertain and, therefore, are subject to change as facts and circumstances develop. If different estimates and judgments had been applied, materially different amounts might have been reported in the financial statements. For additional information regarding our critical accounting policies, refer to pages 37 through 46 of our
2018
Annual Report.
Financial Highlights of Results for
Second Quarter
and
Six Months
2019
and
Second Quarter
and
Six Months
2018
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ and shares in thousands, except per share amounts)
|
|
Quarter ended June 30,
|
|
Change
% or Points
|
|
|
Six Months ended June 30,
|
|
Change
% or Points
|
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
|
|
Revenues
|
|
$
|
708,204
|
|
|
651,916
|
|
|
9
|
|
%
|
|
$
|
1,407,166
|
|
|
1,278,605
|
|
|
10
|
|
%
|
After-tax net investment income
|
|
47,622
|
|
|
37,589
|
|
|
27
|
|
|
|
88,945
|
|
|
73,379
|
|
|
21
|
|
|
After-tax underwriting income
|
|
35,254
|
|
|
30,045
|
|
|
17
|
|
|
|
61,767
|
|
|
33,784
|
|
|
83
|
|
|
Net income before federal income tax
|
|
90,225
|
|
|
72,525
|
|
|
24
|
|
|
|
163,919
|
|
|
92,456
|
|
|
77
|
|
|
Net income
|
|
72,266
|
|
|
58,819
|
|
|
23
|
|
|
|
133,614
|
|
|
77,744
|
|
|
72
|
|
|
Diluted net income per share
|
|
1.21
|
|
|
0.99
|
|
|
22
|
|
|
|
2.23
|
|
|
1.30
|
|
|
72
|
|
|
Diluted weighted-average outstanding shares
|
|
59,936
|
|
|
59,597
|
|
|
1
|
|
|
|
59,906
|
|
|
59,579
|
|
|
1
|
|
|
Combined ratio
|
|
93.1
|
%
|
|
93.7
|
|
|
(0.6
|
)
|
pts
|
|
93.9
|
%
|
|
96.4
|
|
|
(2.5
|
)
|
pts
|
Invested assets per dollar of stockholders' equity
|
|
$
|
3.12
|
|
|
3.34
|
|
|
(7
|
)
|
%
|
|
$
|
3.12
|
|
|
3.34
|
|
|
(7
|
)
|
%
|
After-tax yield on investments
|
|
3.0
|
%
|
|
2.7
|
|
|
0.3
|
|
pts
|
|
2.9
|
%
|
|
2.6
|
|
|
0.3
|
|
pts
|
Annualized return on equity ("ROE")
|
|
14.5
|
|
|
14.0
|
|
|
0.5
|
|
|
|
13.9
|
|
|
9.1
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Generally Accepted Accounting Principles ("GAAP") operating income
2
|
|
$
|
69,085
|
|
|
60,124
|
|
|
15
|
|
%
|
|
$
|
123,105
|
|
|
87,383
|
|
|
41
|
|
%
|
Diluted non-GAAP operating income per share
2
|
|
1.16
|
|
|
1.01
|
|
|
15
|
|
|
|
2.06
|
|
|
1.46
|
|
|
41
|
|
|
Annualized non-GAAP operating ROE
2
|
|
13.9
|
%
|
|
14.3
|
|
|
(0.4
|
)
|
pts
|
|
12.8
|
%
|
|
10.2
|
|
|
2.6
|
|
pts
|
|
|
1
|
Refer to the Glossary of Terms attached to our
2018
Annual Report as Exhibit 99.1 for definitions of terms used in this Form 10-Q.
|
|
|
2
|
Non-GAAP operating income is used as an important financial measure by us, analysts, and investors, because the realization of net investment gains and losses on sales of securities in any given period is largely discretionary as to timing. In addition, these net realized investment gains and losses, OTTI that are charged to earnings, unrealized gains and losses on equity securities, and the debt retirement costs could distort the analysis of trends.
|
Reconciliations of net income, net income per diluted share, and annualized ROE to non-GAAP operating income, non-GAAP operating income per diluted share, and annualized non-GAAP operating ROE, respectively, are provided in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net income to non-GAAP operating income
|
|
Quarter ended June 30,
|
|
Six Months ended June 30,
|
($ in thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income
|
|
$
|
72,266
|
|
|
58,819
|
|
|
133,614
|
|
|
77,744
|
|
Net realized and unrealized (gains) losses, before tax
|
|
(4,027
|
)
|
|
1,652
|
|
|
(17,478
|
)
|
|
12,201
|
|
Debt retirement costs, before tax
|
|
—
|
|
|
—
|
|
|
4,175
|
|
|
—
|
|
Tax on reconciling items, at 21%
|
|
846
|
|
|
(347
|
)
|
|
2,794
|
|
|
(2,562
|
)
|
Non-GAAP operating income
|
|
$
|
69,085
|
|
|
60,124
|
|
|
123,105
|
|
|
87,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net income per diluted share to non-GAAP operating income per diluted share
|
|
Quarter ended June 30,
|
|
Six Months ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income per diluted share
|
|
$
|
1.21
|
|
|
0.99
|
|
|
2.23
|
|
|
1.30
|
|
Net realized and unrealized (gains) losses, before tax
|
|
(0.06
|
)
|
|
0.03
|
|
|
(0.29
|
)
|
|
0.20
|
|
Debt retirement costs, before tax
|
|
—
|
|
|
—
|
|
|
0.07
|
|
|
—
|
|
Tax on reconciling items, at 21%
|
|
0.01
|
|
|
(0.01
|
)
|
|
0.05
|
|
|
(0.04
|
)
|
Non-GAAP operating income per diluted share
|
|
$
|
1.16
|
|
|
1.01
|
|
|
2.06
|
|
|
1.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of annualized ROE to annualized non-GAAP operating ROE
|
|
Quarter ended June 30,
|
|
Six Months ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Annualized ROE
|
|
14.5
|
%
|
|
14.0
|
|
|
13.9
|
|
|
9.1
|
|
Net realized and unrealized (gains) losses, before tax
|
|
(0.8
|
)
|
|
0.4
|
|
|
(1.8
|
)
|
|
1.4
|
|
Debt retirement costs, before tax
|
|
—
|
|
|
—
|
|
|
0.4
|
|
|
—
|
|
Tax on reconciling items, at 21%
|
|
0.2
|
|
|
(0.1
|
)
|
|
0.3
|
|
|
(0.3
|
)
|
Annualized non-GAAP operating ROE
|
|
13.9
|
%
|
|
14.3
|
|
|
12.8
|
|
|
10.2
|
|
The components of our annualized ROE are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized ROE Components
|
|
Quarter ended June 30,
|
|
Change Points
|
|
Six Months ended June 30,
|
|
Change Points
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
Standard Commercial Lines Segment
|
|
5.9
|
%
|
|
7.8
|
|
|
(1.9
|
)
|
|
5.2
|
|
|
4.5
|
|
|
0.7
|
|
Standard Personal Lines Segment
|
|
0.7
|
|
|
0.9
|
|
|
(0.2
|
)
|
|
0.6
|
|
|
0.3
|
|
|
0.3
|
|
E&S Lines Segment
|
|
0.5
|
|
|
(1.5
|
)
|
|
2.0
|
|
|
0.6
|
|
|
(0.8
|
)
|
|
1.4
|
|
Total insurance operations
|
|
7.1
|
|
|
7.2
|
|
|
(0.1
|
)
|
|
6.4
|
|
|
4.0
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
9.6
|
|
|
9.0
|
|
|
0.6
|
|
|
9.2
|
|
|
8.6
|
|
|
0.6
|
|
Net realized and unrealized gains (losses)
|
|
0.6
|
|
|
(0.3
|
)
|
|
0.9
|
|
|
1.4
|
|
|
(1.1
|
)
|
|
2.5
|
|
Total investments segment
|
|
10.2
|
|
|
8.7
|
|
|
1.5
|
|
|
10.6
|
|
|
7.5
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
(2.8
|
)
|
|
(1.9
|
)
|
|
(0.9
|
)
|
|
(3.1
|
)
|
|
(2.4
|
)
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized ROE
|
|
14.5
|
%
|
|
14.0
|
|
|
0.5
|
|
|
13.9
|
|
|
9.1
|
|
|
4.8
|
|
The financial results this year continue to build on our five-year track record of consistently generating double-digit non-GAAP operating ROEs on an annual basis. At 12.8%, our Six Months 2019 non-GAAP operating ROEs is above our 2019 target of 12%.
Our stockholders' equity increased 15% in Six Months 2019, to $2.1 billion as of June 30, 2019. This was driven, in part, by appreciation in the value of our fixed income securities portfolio, which experienced unrealized after-tax gains of approximately $145 million over the first half of 2019.
Insurance Operations
Each of our insurance segments delivered profitable results in Second Quarter and Six Months 2019, contributing to a combined annualized ROE of 7.1% and 6.4% in the quarter and year-to-date periods, respectively. The Six Month 2019 annualized ROE increased 2.4 points compared to Six Months 2018, reflecting a decrease in our combined ratio of 2.5 points. This decrease was principally driven by lower levels of non-catastrophe property losses and higher levels of favorable prior year casualty reserve development, partially offset by higher catastrophe losses.
The following table provides quantitative information for analyzing the combined ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Lines
|
|
Quarter ended June 30,
|
|
Change % or Points
|
|
|
Six Months ended June 30,
|
|
Change % or Points
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
|
|
Insurance Operations Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written ("NPW")
|
|
$
|
701,397
|
|
|
655,248
|
|
|
7
|
|
%
|
|
$
|
1,374,344
|
|
|
1,279,808
|
|
|
7
|
|
%
|
Net premiums earned (“NPE”)
|
|
642,619
|
|
|
604,836
|
|
|
6
|
|
|
|
1,275,192
|
|
|
1,196,664
|
|
|
7
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred
|
|
380,984
|
|
|
366,328
|
|
|
4
|
|
|
|
767,563
|
|
|
751,269
|
|
|
2
|
|
|
Net underwriting expenses incurred
|
|
215,441
|
|
|
198,899
|
|
|
8
|
|
|
|
426,094
|
|
|
398,646
|
|
|
7
|
|
|
Dividends to policyholders
|
|
1,569
|
|
|
1,577
|
|
|
(1
|
)
|
|
|
3,349
|
|
|
3,984
|
|
|
(16
|
)
|
|
Underwriting income
|
|
$
|
44,625
|
|
|
38,032
|
|
|
17
|
|
%
|
|
$
|
78,186
|
|
|
42,765
|
|
|
83
|
|
%
|
Combined Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
59.4
|
|
%
|
60.5
|
|
|
(1.1
|
)
|
pts
|
|
60.2
|
|
%
|
62.8
|
|
|
(2.6
|
)
|
pts
|
Underwriting expense ratio
|
|
33.5
|
|
|
32.9
|
|
|
0.6
|
|
|
|
33.4
|
|
|
33.3
|
|
|
0.1
|
|
|
Dividends to policyholders ratio
|
|
0.2
|
|
|
0.3
|
|
|
(0.1
|
)
|
|
|
0.3
|
|
|
0.3
|
|
|
—
|
|
|
Combined ratio
|
|
93.1
|
|
|
93.7
|
|
|
(0.6
|
)
|
|
|
93.9
|
|
|
96.4
|
|
|
(2.5
|
)
|
|
Our Second Quarter and Six Months 2019 results continue to reflect our efforts to: (i) achieve overall renewal pure price increases at levels that are in line with expected loss trend; (ii) generate new business; and (iii) improve the underlying profitability of our business through various underwriting and claims initiatives. We continue to execute on our strategy for disciplined NPW growth, with 7% growth in both Second Quarter and Six Months 2019 compared to the same prior year periods, primarily driven by our Standard Commercial Lines and E&S Lines segments. This growth was primarily due to increased new business, coupled with renewal pure price increases and strong retention. The Standard Commercial Lines growth was aided by the net appointment of 52 retail agents, excluding agency consolidations.
Loss and Loss Expenses
The loss and loss expense ratio decreased 1.1 points in
Second Quarter 2019
compared to Second Quarter 2018, and 2.6 points in Six Months 2019 compared to Six Months 2018, driven by the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2019
|
|
Second Quarter 2018
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
|
Loss and Loss
Expense
Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
Change in Ratio
|
|
Catastrophe losses
|
$
|
29.5
|
|
4.6
|
|
pts
|
|
$
|
18.7
|
|
3.1
|
|
pts
|
1.5
|
|
pts
|
(Favorable) prior year casualty reserve development
|
(17.0
|
)
|
(2.6
|
)
|
|
|
(4.0
|
)
|
(0.7
|
)
|
|
(1.9
|
)
|
|
Non-catastrophe property loss and loss expenses
|
92.8
|
|
14.4
|
|
|
|
93.8
|
|
15.5
|
|
|
(1.1
|
)
|
|
Total
|
105.3
|
|
16.4
|
|
|
|
108.5
|
|
17.9
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months 2019
|
|
Six Months 2018
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
|
Loss and Loss
Expense
Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
Change in Ratio
|
|
Catastrophe losses
|
$
|
50.3
|
|
3.9
|
|
pts
|
|
$
|
44.8
|
|
3.7
|
|
pts
|
0.2
|
|
pts
|
(Favorable) prior year casualty reserve development
|
(27.0
|
)
|
(2.1
|
)
|
|
|
(12.0
|
)
|
(1.0
|
)
|
|
(1.1
|
)
|
|
Non-catastrophe property loss and loss expenses
|
200.8
|
|
15.7
|
|
|
|
210.1
|
|
17.6
|
|
|
(1.9
|
)
|
|
Total
|
224.1
|
|
17.5
|
|
|
|
242.9
|
|
20.3
|
|
|
(2.8
|
)
|
|
Details of the prior year casualty reserve development were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Favorable)/Unfavorable Prior Year Casualty Reserve Development
|
Quarter ended June 30,
|
|
Six Months ended June 30,
|
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
General liability
|
$
|
(5.0
|
)
|
|
—
|
|
|
(7.0
|
)
|
|
—
|
|
|
Commercial automobile
|
—
|
|
|
7.0
|
|
|
—
|
|
|
15.0
|
|
|
Workers compensation
|
(12.0
|
)
|
|
(17.0
|
)
|
|
(20.0
|
)
|
|
(33.0
|
)
|
|
Total Standard Commercial Lines
|
(17.0
|
)
|
|
(10.0
|
)
|
|
(27.0
|
)
|
|
(18.0
|
)
|
|
|
|
|
|
|
|
|
|
|
Homeowners
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Personal automobile
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total Standard Personal Lines
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
E&S
|
—
|
|
|
6.0
|
|
|
—
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
Total (favorable) prior year casualty reserve development
|
$
|
(17.0
|
)
|
|
(4.0
|
)
|
|
(27.0
|
)
|
|
(12.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(Favorable) impact on loss ratio
|
(2.6
|
)
|
pts
|
(0.7
|
)
|
|
(2.1
|
)
|
|
(1.0
|
)
|
|
Offsetting favorable prior year casualty reserve development in both periods was unfavorable property development of $11.3 million and $10.6 million in Second Quarter and Six Months 2019, respectively, compared to unfavorable property development of $2.3 million and $6.4 million in Second Quarter and Six Months 2018. For additional qualitative discussions regarding reserve development, please refer to the insurance segment sections below in "Results of Operations and Related Information by Segment."
Underwriting Expenses
The underwriting expense ratio increased 0.6 points in
Second Quarter
2019 compared to Second Quarter 2018, primarily due to a 0.7-point increase in profit-based compensation to our employees. The underwriting expense ratio remained relatively unchanged in Six Months 2019 compared to Six Months 2018.
Investments Segment
Net investment income, after tax, contributed 9.6 percentage points to ROE in Second Quarter 2019 and 9.2 points in Six Months 2019, compared to 9.0 points in Second Quarter 2018 and 8.6 points in Six Months 2018. The improvement in the current year periods reflect after-tax net investment income growth of 27% in Second Quarter 2019 and 21% in Six Months
2019, compared to the same prior year periods, principally driven by: (i) cash flow from operations that was 17% of NPW in Second Quarter 2019 and 12% of NPW in Six Months 2019; (ii) higher yields on our core fixed income securities portfolio; and (iii) improved alternative investment returns in both the quarter and year-to-date periods. Also benefiting after-tax net investment income growth in Six Months 2019 was the $106 million of net proceeds from our 5.375% Senior Notes issuance in the first quarter of 2019. The after-tax earned income yield on the portfolio averaged 3.0% and 2.9% during Second Quarter and Six Months 2019, respectively, compared to 2.7% and 2.6% during Second Quarter and Six Months 2018, respectively.
Net realized and unrealized gains and losses contributed 0.6 points and 1.4 points to ROE in Second Quarter and Six Months 2019, respectively, an improvement of 0.9 points and 2.5 points over the comparable prior year periods. The significant driver of the improvement in Second Quarter 2019 compared to the prior year period was realized gains on our fixed income securities portfolio. These gains contributed $1.0 million to net income, or 0.2 points of ROE contribution, in Second Quarter 2019 compared to an after-tax loss of $2.3 million, or a reduction in ROE of 0.5 points, in Second Quarter 2018. The significant driver of the improvement in Six Months 2019 compared to the prior year period was unrealized gains on our equity portfolio. These gains contributed $9.7 million in Six Months 2019, with an ROE contribution of 1.0 points, while Six Months 2018 included an after-tax loss of $10.2 million, or 1.2 points of ROE reduction.
Other
Our interest and corporate expenses, which are primarily comprised of stock compensation expense at the holding company
level, reduced ROE by 2.8 points and 3.1 points in Second Quarter and Six Months 2019, respectively, compared to 1.9 points and 2.4 points in Second Quarter and Six Months 2018, respectively. The quarter-to-date and year-to-date variances were driven primarily by 0.9-point and 0.4-point increases, respectively, in stock compensation expense as a result of appreciation in the price of our common stock that has impacted the fair value of our liability awards. In addition, on March 1, 2019, Selective issued 5.375% Senior Notes with an aggregate principal amount of $300 million, the proceeds of which were used, in part, to redeem our 5.875% Senior Notes with an aggregate principal balance of $185 million that became callable last year. As a result of this redemption, we incurred after-tax debt retirement costs of $3.3 million, which reduced our ROE by 0.3 points in Six Months 2019. These costs have been excluded from non-GAAP operating income.
Outlook
We ended 2018 with record levels of capital and liquidity, and our strong
Six Months 2019
results continued to improve our financial position. Additionally, during the first quarter of 2019 we executed our first institutional public debt offering with the issuance of $300 million aggregate principal amount of 5.375% Senior Notes. We used the net proceeds from this offering to redeem our then-outstanding $185 million aggregate principal amount of 5.875% Senior Notes, with the remaining $106 million of net proceeds being used for general corporate purposes.
For 2019, we have established a non-GAAP operating ROE target of 12%, which is an appropriate return for our shareholders based on our current estimated weighted average cost of capital, the current interest rate environment, and property and casualty insurance market conditions.
Our focus in 2019 will be on the following areas:
|
|
•
|
Achieving written renewal pure price increases that are in line with expected loss trend. We achieved renewal pure price increases on our overall insurance operations of
3.5%
in
Six Months 2019
.
|
|
|
•
|
Delivering on our strategy for continued disciplined growth, which will be driven by the addition of new agents,
|
greater "share of wallet" in our agents’ offices, and geographic expansion. Our longer-term Standard Commercial Lines target is to attain a 3% market share in the states in which we operate, by appointing distribution partner relationships approximating 25% of their markets and seeking an average "share of wallet" of 12% across the relationships. This goal represents an additional premium opportunity in excess of $2.7 billion in our 27 state footprint. In
Six Months 2019
, we achieved NPW growth of 7%. Our current agency market share stands at over 20%, and our share of wallet is approximately 8% in our legacy states.
|
|
•
|
Continuing to enhance the customer experience strategy that we have been highlighting over the past few years, including value-added technologies and services such as: (i) our “Selective
®
Drive” program, which was first introduced to certain commercial automobile policyholders through our distribution partners in the fourth quarter of 2018; (ii) proactive communications in relation to product recalls, possible loss activity, policy changes, and risk management activities; (iii) technology usage to reduce claim cycle time, such as SWIFT claim-fast tracking and EZ Write; and (iv) fully digital self-service capabilities for our customers.
|
|
|
•
|
Improving profitability in our lines of business by: (i) generating overall renewal pure price increases that are in line with expected loss trend; (ii) actively managing the new and renewal books in targeted industry segments, which we expect will have a positive impact on profitability through business mix; (iii) deploying sophisticated claims tools, including enhanced modeling and segmentation strategies, which we expect will improve loss experience; and (iv) within our E&S segment, exiting some underperforming classes, while entering into new distribution relationships.
|
|
|
•
|
Actively managing the investment portfolio to enhance after-tax yields while managing credit, duration, and liquidity
|
risk. There was a significant decline in interest rates in Six Months 2019, which demonstrates the need to maintain a strong focus on underwriting discipline to generate adequate returns on invested capital.
Our agile approach to driving underwriting, pricing and claims improvements is best demonstrated by our combined ratio that averaged 93.9% for the past five and a half year period. Our strong technical and underwriting capabilities, underwriting leverage of 1.4x, and proven track record of effectively managing renewal pricing and retention, position us well for continued success in this low interest rate environment. As we look to the remainder of 2019, we remain extremely pleased with our financial and strategic position. We are steadfastly focused on underwriting discipline as we execute on our various strategies to generate profitable growth. The investments we are making today in our franchise distribution model, sophisticated underwriting tools and technology, and overall customer experience in an omni-channel environment, will position us for continued long-term success. For 2019, A.M. Best Company's ("A.M. Best") "US Property/Casualty: 2019 Review & Preview" is currently forecasting a property and casualty industry statutory combined ratio of 101.2%, including 5 points of catastrophe losses, with a return on equity of 4.8%.
After two quarters of results, our full-year expectations are as follows:
|
|
•
|
An improved GAAP combined ratio, excluding catastrophe losses, of
91.0%
, down from our existing guidance of 92.0%. This assumes no additional prior-year casualty reserve development;
|
|
|
•
|
Catastrophe losses of
3.5
points;
|
|
|
•
|
After-tax net investment income of
$180 million
, which includes $13 million after-tax net investment income from our alternative investments. Overall after-tax net investment income expectation remains unchanged due to lower after-tax new money yields on our core fixed income securities portfolio;
|
|
|
•
|
An overall effective tax rate of approximately
19%
, which includes an effective tax rate of
18%
for net investment income, reflecting a tax rate of
5.25%
for tax-advantaged municipal bonds and a tax rate of
21%
for all other items; and
|
|
|
•
|
Weighted average shares of
60 million
on a diluted basis.
|
Results of Operations and Related Information by Segment
Standard Commercial Lines Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
Change
% or
Points
|
|
|
Six Months ended June 30,
|
|
Change
% or
Points
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
|
|
Insurance Segments Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPW
|
|
$
|
557,379
|
|
|
514,930
|
|
|
8
|
|
%
|
|
$
|
1,104,062
|
|
|
1,024,006
|
|
|
8
|
|
%
|
NPE
|
|
506,649
|
|
|
476,012
|
|
|
6
|
|
|
|
1,003,833
|
|
|
941,376
|
|
|
7
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred
|
|
293,152
|
|
|
273,934
|
|
|
7
|
|
|
|
591,961
|
|
|
567,440
|
|
|
4
|
|
|
Net underwriting expenses incurred
|
|
174,785
|
|
|
159,485
|
|
|
10
|
|
|
|
345,565
|
|
|
322,132
|
|
|
7
|
|
|
Dividends to policyholders
|
|
1,569
|
|
|
1,577
|
|
|
(1
|
)
|
|
|
3,349
|
|
|
3,984
|
|
|
(16
|
)
|
|
Underwriting income
|
|
$
|
37,143
|
|
|
41,016
|
|
|
(9
|
)
|
%
|
|
$
|
62,958
|
|
|
47,820
|
|
|
32
|
|
%
|
Combined Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
57.9
|
|
%
|
57.6
|
|
|
0.3
|
|
pts
|
|
59.0
|
|
%
|
60.3
|
|
|
(1.3
|
)
|
pts
|
Underwriting expense ratio
|
|
34.5
|
|
|
33.5
|
|
|
1.0
|
|
|
|
34.4
|
|
|
34.2
|
|
|
0.2
|
|
|
Dividends to policyholders ratio
|
|
0.3
|
|
|
0.3
|
|
|
—
|
|
|
|
0.3
|
|
|
0.4
|
|
|
(0.1
|
)
|
|
Combined ratio
|
|
92.7
|
|
|
91.4
|
|
|
1.3
|
|
|
|
93.7
|
|
|
94.9
|
|
|
(1.2
|
)
|
|
The increases in NPW in the quarter and year-to-date periods reflected in the table above were driven by: (i) direct new business; and (ii) renewal pure price increases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
Change
% or
Points
|
|
|
Six Months ended June 30,
|
Change
% or
Points
|
|
($ in millions)
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
Direct new business
|
|
$
|
110.7
|
|
|
101.1
|
|
|
9
|
|
%
|
|
219.7
|
|
|
199.0
|
|
10
|
|
%
|
Renewal pure price increases
|
|
3.1
|
|
|
3.5
|
|
|
(0.4
|
)
|
|
|
3.2
|
|
|
3.4
|
|
(0.2
|
)
|
|
Retention
|
|
83
|
|
%
|
84
|
|
|
(1
|
)
|
pts
|
|
83
|
%
|
|
84
|
|
(1
|
)
|
pts
|
The loss and loss expense ratio remained relatively flat in
Second Quarter 2019
compared to
Second Quarter 2018
, and decreased 1.3 points in Six Months 2019 compared to Six Months 2018, and included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2019
|
|
Second Quarter 2018
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
|
Loss and Loss
Expense
Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
Change in Ratio
|
|
Catastrophe losses
|
$
|
21.3
|
|
4.2
|
|
pts
|
|
$
|
10.1
|
|
2.1
|
|
pts
|
2.1
|
|
pts
|
Non-catastrophe property loss and loss expenses
|
62.8
|
|
12.4
|
|
|
|
63.8
|
|
13.4
|
|
|
(1.0
|
)
|
|
(Favorable) prior year casualty reserve development
|
(17.0
|
)
|
(3.4
|
)
|
|
|
(10.0
|
)
|
(2.1
|
)
|
|
(1.3
|
)
|
|
Total
|
67.1
|
|
13.2
|
|
|
|
63.9
|
|
13.4
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months 2019
|
|
Six Months 2018
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
|
Loss and Loss
Expense
Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
Change in Ratio
|
|
Catastrophe losses
|
$
|
37.3
|
|
3.7
|
|
pts
|
|
$
|
29.9
|
|
3.2
|
|
pts
|
0.5
|
|
pts
|
Non-catastrophe property loss and loss expenses
|
137.1
|
|
13.7
|
|
|
|
141.2
|
|
15.0
|
|
|
(1.3
|
)
|
|
(Favorable) prior year casualty reserve development
|
(27.0
|
)
|
(2.7
|
)
|
|
|
(18.0
|
)
|
(1.9
|
)
|
|
(0.8
|
)
|
|
Total
|
147.4
|
|
14.7
|
|
|
|
153.1
|
|
16.3
|
|
|
(1.6
|
)
|
|
For additional information regarding favorable prior year casualty reserve development by line of business, see the "Financial Highlights of Results for
Second Quarter
and Six Months
2019
and
Second Quarter
and Six Months
2018
" section above and the line of business discussions below.
There was a 1.0-point increase in the underwriting expense ratio in
Second Quarter
2019
compared to
Second Quarter
2018
, and a 0.2-point increase in the underwriting expense ratio in Six Months 2019 compared to Six Months 2018. The primary driver was increased profit-based compensation to our employees of 0.7 points in the quarter and 0.3 points in the year-to-date period.
The following is a discussion of our most significant Standard Commercial Lines of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Liability
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
Change
% or
Points
|
|
|
Six Months ended June 30,
|
|
Change
% or
Points
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
|
|
NPW
|
|
$
|
185,278
|
|
|
170,370
|
|
|
9
|
|
%
|
|
$
|
363,977
|
|
|
334,879
|
|
|
9
|
|
%
|
Direct new business
|
|
32,314
|
|
|
29,725
|
|
|
9
|
|
|
|
64,499
|
|
|
59,442
|
|
|
9
|
|
|
Retention
|
|
84
|
|
%
|
84
|
|
|
—
|
|
pts
|
|
83
|
|
%
|
84
|
|
|
(1
|
)
|
pts
|
Renewal pure price increases
|
|
2.3
|
|
|
2.4
|
|
|
(0.1
|
)
|
|
|
2.4
|
|
|
2.5
|
|
|
(0.1
|
)
|
|
NPE
|
|
$
|
164,793
|
|
|
153,002
|
|
|
8
|
|
%
|
|
$
|
326,318
|
|
|
302,831
|
|
|
8
|
|
%
|
Underwriting income
|
|
20,784
|
|
|
15,758
|
|
|
32
|
|
|
|
39,833
|
|
|
29,700
|
|
|
34
|
|
|
Combined ratio
|
|
87.4
|
|
%
|
89.7
|
|
|
(2.3
|
)
|
pts
|
|
87.8
|
|
%
|
90.2
|
%
|
|
(2.4
|
)
|
pts
|
% of total Standard Commercial Lines NPW
|
|
33
|
|
|
33
|
|
|
|
|
|
|
33
|
|
|
33
|
|
|
|
|
|
The improvement in the combined ratio in both
Second Quarter
2019
compared to
Second Quarter
2018
and Six Months 2019 compared to Six Months 2018 was driven by the impact of favorable prior year casualty reserve development, as illustrated in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2019
|
Second Quarter 2018
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
Change
Points
|
|
(Favorable) prior year casualty reserve development
|
$
|
(5.0
|
)
|
(3.0
|
)
|
pts
|
$
|
—
|
|
—
|
pts
|
(3.0
|
)
|
pts
|
|
|
|
|
|
|
|
|
|
|
Six Months 2019
|
Six Months 2018
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
Change
Points
|
|
(Favorable) prior year casualty reserve development
|
$
|
(7.0
|
)
|
(2.1
|
)
|
pts
|
$
|
—
|
|
—
|
pts
|
(2.1
|
)
|
pts
|
The
Second Quarter
and Six Months 2019 reserve development was primarily attributable to favorable reserve development on loss severities in accident years 2015 and 2016.
Partially offsetting the favorable reserve development in Second Quarter 2019 compared to Second Quarter 2018 was a 0.6-point increase in the underwriting expense ratio, driven by higher employee-related costs as mentioned in the overall Standard Commercial Lines Segment discussion above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Automobile
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
Change
% or
Points
|
|
|
Six Months ended June 30,
|
|
Change
% or
Points
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
|
|
NPW
|
|
$
|
155,191
|
|
|
134,082
|
|
|
16
|
|
%
|
|
$
|
302,436
|
|
|
263,927
|
|
|
15
|
|
%
|
Direct new business
|
|
28,554
|
|
|
25,016
|
|
|
14
|
|
|
|
56,744
|
|
|
47,305
|
|
|
20
|
|
|
Retention
|
|
82
|
|
%
|
84
|
|
|
(2
|
)
|
pts
|
|
81
|
|
%
|
84
|
|
|
(3
|
)
|
pts
|
Renewal pure price increases
|
|
7.4
|
|
|
7.5
|
|
|
(0.1
|
)
|
|
|
7.3
|
|
|
7.4
|
|
|
(0.1
|
)
|
|
NPE
|
|
$
|
136,338
|
|
|
122,104
|
|
|
12
|
|
%
|
|
$
|
267,524
|
|
|
240,335
|
|
|
11
|
|
%
|
Underwriting loss
|
|
(8,800
|
)
|
|
(10,773
|
)
|
|
18
|
|
|
|
(17,521
|
)
|
|
(24,137
|
)
|
|
27
|
|
|
Combined ratio
|
|
106.5
|
|
%
|
108.8
|
|
|
(2.3
|
)
|
pts
|
|
106.5
|
|
%
|
110.0
|
|
|
(3.5
|
)
|
pts
|
% of total Standard Commercial Lines NPW
|
|
28
|
|
|
26
|
|
|
|
|
|
|
27
|
|
|
26
|
|
|
|
|
|
The increases in NPW shown in the table above reflect renewal pure price increases on this line, coupled with an increase in new business as we continue to write commercial automobile policies as part of our overall customer accounts.
The combined ratio improved
2.3
points in
Second Quarter
2019
compared to
Second Quarter
2018
, and 3.5 points in Six Months 2019 compared to Six Months 2018, driven by the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2019
|
|
Second Quarter 2018
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
Change in Ratio
|
|
Non-catastrophe property loss and loss expenses
|
$
|
23.9
|
|
17.5
|
|
pts
|
|
$
|
21.1
|
|
17.3
|
|
pts
|
0.2
|
|
pts
|
Unfavorable prior year casualty reserve development
|
—
|
|
—
|
|
|
|
7.0
|
|
5.7
|
|
|
(5.7
|
)
|
|
Catastrophe losses
|
0.9
|
|
0.7
|
|
|
|
0.7
|
|
0.5
|
|
|
0.2
|
|
|
Total
|
24.8
|
|
18.2
|
|
|
|
28.8
|
|
23.5
|
|
|
(5.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months 2019
|
|
Six Months 2018
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
Change in Ratio
|
|
Non-catastrophe property loss and loss expenses
|
$
|
48.9
|
|
18.3
|
|
pts
|
|
$
|
43.7
|
|
18.2
|
|
pts
|
0.1
|
|
pts
|
Unfavorable prior year casualty reserve development
|
—
|
|
—
|
|
|
|
15.0
|
|
6.2
|
|
|
(6.2
|
)
|
|
Catastrophe losses
|
1.1
|
|
0.4
|
|
|
|
1.5
|
|
0.6
|
|
|
(0.2
|
)
|
|
Total
|
50.0
|
|
18.7
|
|
|
|
60.2
|
|
25.0
|
|
|
(6.3
|
)
|
|
Partially offsetting the items above are current year loss costs that increased by 1.8 points in the quarter, and 3.1 points in the year-to-date period, compared to the respective prior year periods. These increases reflect the elevated frequencies and severities we experienced during 2018 that are reflected in our 2019 accident year loss expectations. This line of business did not experience any prior year casualty reserve development this year. The unfavorable development in
Second Quarter
2018
and Six Months 2018 was primarily due to higher claim frequencies, and to some extent severities, in accident years 2015 through 2017.
Partially offsetting the improvements in the table above for Second Quarter 2019 compared to Second Quarter 2018 was a 1.1-point increase in the underwriting expense ratio, driven by higher employee-related costs as mentioned in the overall Standard Commercial Lines Segment discussion above.
This line of business remains an area of focus for both us and the industry, as profitability challenges continue to generate combined ratios that are higher than target levels. To address profitability in this line, we have been actively implementing price increases, which averaged 7.4% in Second Quarter 2019 and 7.3% in Six Months 2019. In addition to price increases, we have also been actively managing our new and renewal business in targeted industry segments, which we expect will have a positive impact on profitability through business mix improvement. Over the longer term, we expect accounts that adopt our recently introduced Selective
®
Drive program will have greater insight to their commercial auto risks and have the potential to reduce their loss experience.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers Compensation
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
Change
% or
Points
|
|
|
Six Months ended June 30,
|
|
Change
% or
Points
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
|
|
NPW
|
|
$
|
81,438
|
|
|
81,995
|
|
|
(1
|
)
|
%
|
|
$
|
166,503
|
|
|
170,901
|
|
|
(3
|
)
|
%
|
Direct new business
|
|
17,791
|
|
|
16,070
|
|
|
11
|
|
|
|
34,739
|
|
|
33,418
|
|
|
4
|
|
|
Retention
|
|
83
|
|
%
|
84
|
|
|
(1
|
)
|
pts
|
|
83
|
|
%
|
84
|
|
|
(1
|
)
|
pts
|
Renewal pure price (decreases) increases
|
|
(3.9
|
)
|
|
0.3
|
|
|
(4.2
|
)
|
|
|
(2.8
|
)
|
|
0.1
|
|
|
(2.9
|
)
|
|
NPE
|
|
$
|
78,464
|
|
|
80,021
|
|
|
(2
|
)
|
%
|
|
$
|
157,179
|
|
|
158,844
|
|
|
(1
|
)
|
%
|
Underwriting income
|
|
14,514
|
|
|
21,795
|
|
|
(33
|
)
|
|
|
25,233
|
|
|
38,221
|
|
|
(34
|
)
|
|
Combined ratio
|
|
81.5
|
|
%
|
72.8
|
|
|
8.7
|
|
pts
|
|
83.9
|
|
%
|
75.9
|
|
|
8.0
|
|
pts
|
% of total Standard Commercial Lines NPW
|
|
15
|
|
|
16
|
|
|
|
|
|
|
15
|
|
|
17
|
|
|
|
|
The increases in the combined ratio in
Second Quarter
and Six Months
2019
compared to the same prior year periods were driven by less favorable prior year casualty reserve development, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2019
|
Second Quarter 2018
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
Change
Points
|
|
(Favorable) prior year casualty reserve development
|
$
|
(12.0
|
)
|
(15.3
|
)
|
pts
|
$
|
(17.0
|
)
|
(21.2
|
)
|
pts
|
5.9
|
pts
|
|
|
|
|
|
|
|
|
|
|
Six Months 2019
|
Six Months 2018
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
Change
Points
|
|
(Favorable) prior year casualty reserve development
|
$
|
(20.0
|
)
|
(12.7
|
)
|
pts
|
$
|
(33.0
|
)
|
(20.8
|
)
|
pts
|
8.1
|
pts
|
The development in both Second Quarter and Six Months 2019 was primarily due to lower severities in accident years 2017 and prior, and the development in both Second Quarter and Six Months 2018 was primarily due to lower severities in accident years 2016 and prior.
Additionally, there was an increase in the underwriting expense ratio of 2.6 points in Second Quarter 2019, compared to Second Quarter 2018, reflecting: (i) higher employee-related costs, as mentioned in the overall Standard Commercial Lines Segment discussion above; and (ii) an increase in insurance-related assessments specific to this line of business.
While reported profitability on this line remains strong due to favorable emergence on prior year reserves, current accident year margins do not support the continued negative pricing levels that are being set by the National Council on Compensation Insurance and independent state rating bureaus. A reduction or reversal in the trend of favorable frequencies and severities has the potential to significantly increase this line's combined ratio, which we are monitoring closely.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
Change
% or
Points
|
|
|
Six Months ended June 30,
|
|
Change
% or
Points
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
|
|
NPW
|
|
$
|
94,439
|
|
|
88,376
|
|
|
7
|
|
%
|
|
$
|
187,468
|
|
|
173,581
|
|
|
8
|
|
%
|
Direct new business
|
|
21,391
|
|
|
19,928
|
|
|
7
|
|
|
|
42,433
|
|
|
39,412
|
|
|
8
|
|
|
Retention
|
|
83
|
|
%
|
82
|
|
|
1
|
|
pts
|
|
82
|
|
%
|
82
|
|
|
—
|
|
pts
|
Renewal pure price increases
|
|
3.6
|
|
|
3.2
|
|
|
0.4
|
|
|
|
3.6
|
|
|
2.8
|
|
|
0.8
|
|
|
NPE
|
|
$
|
87,136
|
|
|
82,162
|
|
|
6
|
|
%
|
|
$
|
173,203
|
|
|
162,488
|
|
|
7
|
|
%
|
Underwriting (loss) income
|
|
1,372
|
|
|
9,944
|
|
|
(86
|
)
|
|
|
3,275
|
|
|
(2,497
|
)
|
|
231
|
|
|
Combined ratio
|
|
98.4
|
|
%
|
87.9
|
|
|
10.5
|
|
pts
|
|
98.1
|
|
%
|
101.5
|
|
|
(3.4
|
)
|
pts
|
% of total Standard Commercial Lines NPW
|
|
17
|
|
|
17
|
|
|
|
|
|
|
17
|
|
|
17
|
|
|
|
|
The increase in the combined ratio in
Second Quarter
2019
compared to
Second Quarter
2018
, and the decrease in the combined ratio in Six Months 2019 compared to Six Months 2018, were driven by the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2019
|
|
Second Quarter 2018
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
Change
% or
Points
|
|
Catastrophe losses
|
$
|
18.7
|
|
21.5
|
pts
|
|
$
|
7.8
|
|
9.4
|
pts
|
12.1
|
|
pts
|
Non-catastrophe property loss and loss expenses
|
34.0
|
|
39.0
|
|
|
33.4
|
|
40.7
|
|
(1.7
|
)
|
|
Total
|
52.7
|
|
60.5
|
|
|
41.2
|
|
50.1
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months 2019
|
|
Six Months 2018
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
|
Loss and Loss Expense Incurred
|
Impact on
Combined Ratio
|
|
Change
% or
Points
|
|
Catastrophe losses
|
$
|
31.2
|
|
18.0
|
pts
|
|
$
|
22.5
|
|
13.9
|
pts
|
4.1
|
|
pts
|
Non-catastrophe property loss and loss expenses
|
73.1
|
|
42.2
|
|
|
80.6
|
|
49.6
|
|
(7.4
|
)
|
|
Total
|
104.3
|
|
60.2
|
|
|
103.1
|
|
63.5
|
|
(3.3
|
)
|
|
Higher catastrophe losses in Second Quarter 2019 compared to Second Quarter 2018 included one storm that impacted the Midwestern states in our footprint, adding 9.5 points to the loss and loss expense ratio in the current quarter. On a year-to-date basis, non-catastrophe property losses were lower in Six Month 2019 compared to Six Months 2018, as non-catastrophe property losses in the first quarter of 2018 were elevated by a January deep freeze in our footprint states and a relatively large number of severe fire losses.
Standard Personal Lines Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
Change
% or
Points
|
|
|
|
Six Months ended June 30,
|
|
Change
% or
Points
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
|
|
|
2019
|
|
2018
|
|
|
Insurance Segments Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPW
|
|
$
|
82,709
|
|
|
83,934
|
|
|
(1
|
)
|
|
%
|
|
$
|
152,078
|
|
|
151,795
|
|
|
—
|
|
%
|
NPE
|
|
77,113
|
|
|
75,677
|
|
|
2
|
|
|
|
|
154,420
|
|
|
149,933
|
|
|
3
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred
|
|
50,554
|
|
|
49,260
|
|
|
3
|
|
|
|
|
103,624
|
|
|
104,699
|
|
|
(1
|
)
|
|
Net underwriting expenses incurred
|
|
22,021
|
|
|
21,612
|
|
|
2
|
|
|
|
|
43,091
|
|
|
41,935
|
|
|
3
|
|
|
Underwriting income
|
|
$
|
4,538
|
|
|
4,805
|
|
|
(6
|
)
|
|
%
|
|
$
|
7,705
|
|
|
3,299
|
|
|
134
|
|
%
|
Combined Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
65.5
|
|
%
|
65.1
|
|
|
0.4
|
|
|
pts
|
|
67.1
|
|
%
|
69.8
|
|
|
(2.7
|
)
|
pts
|
Underwriting expense ratio
|
|
28.6
|
|
|
28.6
|
|
|
—
|
|
|
|
|
27.9
|
|
|
28.0
|
|
|
(0.1
|
)
|
|
Combined ratio
|
|
94.1
|
|
|
93.7
|
|
|
0.4
|
|
|
|
|
95.0
|
|
|
97.8
|
|
|
(2.8
|
)
|
|
NPW was down slightly in Second Quarter 2019 compared to Second Quarter 2018, and was relatively flat in the year-to-date comparative periods, reflecting the impact of a decrease in direct new business as a result of a competitive marketplace. Retention has decreased in both Second Quarter and Six Months 2019 compared to the same periods last year, as we continue to achieve renewal pure price increases on our personal automobile line of business in excess of loss trends, while the industry has seen a softening in rate activity. Additionally, the deteriorating competitive position on our automobile business has led to lower new homeowners business, as we typically write policies at the account level, which include both automobile and homeowners coverage.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
Change
% or
Points
|
|
|
Six Months ended June 30,
|
Change
% or
Points
|
|
($ in millions)
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
Direct new business
|
|
$
|
10.5
|
|
|
15.9
|
|
(34
|
)
|
%
|
|
$
|
20.9
|
|
|
27.7
|
|
(25
|
)
|
%
|
Retention
|
|
84
|
|
%
|
85
|
|
(1
|
)
|
pts
|
|
83
|
|
%
|
85
|
|
(2
|
)
|
pts
|
Renewal pure price increases
|
|
5.6
|
|
|
3.4
|
|
2.2
|
|
|
|
5.4
|
|
|
3.6
|
|
1.8
|
|
|
The loss and loss expense ratio increased
0.4
points in
Second Quarter 2019
compared to
Second Quarter 2018
, and decreased 2.7 points in Six Months 2019 compared to Six Months 2018. The drivers of these fluctuations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2019
|
|
Second Quarter 2018
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
|
Loss and Loss
Expense
Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
Change in Ratio
|
|
Non-catastrophe property loss and loss expenses
|
$
|
24.5
|
|
31.7
|
|
pts
|
|
$
|
23.3
|
|
30.8
|
|
pts
|
0.9
|
|
pts
|
Catastrophe losses
|
6.1
|
|
7.9
|
|
|
|
5.8
|
|
7.7
|
|
|
0.2
|
|
|
Flood claims handling fees
|
(0.9
|
)
|
(1.2
|
)
|
|
|
(0.7
|
)
|
(1.1
|
)
|
|
(0.1
|
)
|
|
Total
|
29.7
|
|
38.4
|
|
|
|
28.4
|
|
37.4
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months 2019
|
|
Six Months 2018
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
|
Loss and Loss
Expense
Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
Change in Ratio
|
|
Non-catastrophe property loss and loss expenses
|
$
|
53.6
|
|
34.7
|
|
|
|
$
|
52.3
|
|
34.9
|
|
|
(0.2
|
)
|
|
Catastrophe losses
|
10.2
|
|
6.6
|
|
pts
|
|
12.7
|
|
8.4
|
|
pts
|
(1.8
|
)
|
pts
|
Flood claims handling fees
|
(1.7
|
)
|
(1.1
|
)
|
|
|
(1.5
|
)
|
(1.0
|
)
|
|
(0.1
|
)
|
|
Total
|
8.5
|
|
5.5
|
|
|
|
11.2
|
|
7.4
|
|
|
(1.9
|
)
|
|
In addition, current year loss costs were 0.7 points lower in both Second Quarter and Six Months 2019 compared to the prior year periods, reflecting rate increases in excess of expected loss trend.
E&S Lines Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
Change
% or
Points
|
|
|
Six Months ended June 30,
|
|
Change
% or
Points
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
|
|
Insurance Segments Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPW
|
|
$
|
61,309
|
|
|
56,384
|
|
|
9
|
|
%
|
|
$
|
118,204
|
|
|
104,007
|
|
|
14
|
|
%
|
NPE
|
|
58,857
|
|
|
53,147
|
|
|
11
|
|
|
|
116,939
|
|
|
105,355
|
|
|
11
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred
|
|
37,278
|
|
|
43,134
|
|
|
(14
|
)
|
|
|
71,978
|
|
|
79,130
|
|
|
(9
|
)
|
|
Net underwriting expenses incurred
|
|
18,635
|
|
|
17,802
|
|
|
5
|
|
|
|
37,438
|
|
|
34,579
|
|
|
8
|
|
|
Underwriting (loss) income
|
|
$
|
2,944
|
|
|
(7,789
|
)
|
|
138
|
|
%
|
|
$
|
7,523
|
|
|
(8,354
|
)
|
|
190
|
|
%
|
Combined Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
63.3
|
|
%
|
81.2
|
|
|
(17.9
|
)
|
pts
|
|
61.6
|
|
%
|
75.1
|
|
|
(13.5
|
)
|
pts
|
Underwriting expense ratio
|
|
31.7
|
|
|
33.5
|
|
|
(1.8
|
)
|
|
|
32.0
|
|
|
32.8
|
|
|
(0.8
|
)
|
|
Combined ratio
|
|
95.0
|
|
|
114.7
|
|
|
(19.7
|
)
|
|
|
93.6
|
|
|
107.9
|
|
|
(14.3
|
)
|
|
NPW increased 9% in the quarter and 14% year-to-date compared to the respective prior year periods, driven by increases in new business, as outlined in the table below. Over the past two-year period, we have taken steps to exit certain underperforming classes of E&S business, while entering into new distribution relationships. The premium growth this year continues to reflect the impact of one particularly large relationship that we reestablished in Second Quarter 2018. We do not anticipate the same level of year-over-year growth going forward from this relationship, as it has now been in place for a full year.
Quantitative information on the premium in this segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
Change
% or
Points
|
|
|
Six Months ended June 30,
|
Change
% or
Points
|
|
($ in millions)
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
Direct new business
|
|
$
|
25.1
|
|
|
20.3
|
|
24
|
|
%
|
|
$
|
50.7
|
|
|
38.5
|
|
32
|
|
%
|
Renewal pure price increases
1
|
|
2.8
|
|
%
|
5.3
|
|
(2.5
|
)
|
pts
|
|
4.5
|
|
%
|
5.1
|
|
(0.6
|
)
|
pts
|
1
E&S casualty renewal price increases were
2.3%
for Second Quarter 2019, compared to
6.0%
for Second Quarter 2018, and
4.3%
for Six Months 2019, compared to
6.2%
for Six Months 2018.
While the relatively small size of this segment can lead to some volatility in results, improved underwriting, pricing, and claims outcomes have us on track to achieve our risk-adjusted profitability target for this segment by the end of 2020. The combined ratio improved 19.7 points in Second Quarter 2019 compared to Second Quarter 2018, and 14.3 points in Six Months 2019 compared to Six Months 2018, primarily due to the items outlined in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2019
|
|
|
Second Quarter 2018
|
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
|
Loss and Loss
Expense
Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
Change in Ratio
|
|
Unfavorable prior year casualty reserve development
|
—
|
|
—
|
|
|
6.0
|
|
11.3
|
|
(11.3
|
)
|
|
Non-catastrophe property loss and loss expenses
|
5.5
|
|
9.4
|
|
|
6.7
|
|
12.6
|
|
(3.2
|
)
|
|
Catastrophe losses
|
2.0
|
|
3.4
|
|
|
2.8
|
|
5.3
|
|
(1.9
|
)
|
|
Total
|
7.5
|
|
12.8
|
|
|
15.5
|
|
29.2
|
|
(16.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months 2019
|
|
|
Six Months 2018
|
|
|
|
($ in millions)
|
Loss and Loss Expense Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
|
Loss and Loss
Expense
Incurred
|
Impact on
Loss and Loss Expense Ratio
|
|
Change in Ratio
|
|
Unfavorable prior year casualty reserve development
|
$
|
—
|
|
—
|
pts
|
|
$
|
6.0
|
|
5.7
|
pts
|
(5.7
|
)
|
pts
|
Non-catastrophe property loss and loss expenses
|
10.0
|
|
8.6
|
|
|
16.6
|
|
15.7
|
|
(7.1
|
)
|
|
Catastrophe losses
|
2.8
|
|
2.4
|
|
|
2.2
|
|
2.1
|
|
0.3
|
|
|
Total
|
12.8
|
|
11.0
|
|
|
24.8
|
|
23.5
|
|
(12.5
|
)
|
|
Additionally, current year loss costs were 2.2 points lower in both Second Quarter and Six Months 2019 compared to the prior year periods.
Reinsurance
We have successfully completed negotiations of our July 1, 2019 excess of loss treaties, which provide coverage for our Standard Commercial Lines, Standard Personal Lines, and E&S Lines. These treaties were renewed with the same structure as the expiring treaties, with an underwriting year ceded premium increase estimated at $10 million, or 14%, which reflects an increase in our estimated subject matter premium and a risk-adjusted price increase for our property treaty, driven by heavy loss activity from the 2018 underwriting year.
Details of the treaties are as follows:
Property Excess of Loss
Our property excess of loss treaty ("Property Treaty") provides protection against large individual property losses with $58.0 million of coverage in excess of a $2.0 million retention:
|
|
•
|
The per occurrence cap on the first and second layers is $84.0 million.
|
|
|
•
|
The first layer has unlimited reinstatements and a limit of $8.0 million in excess of $2.0 million.
|
|
|
•
|
The annual aggregate limit, for the $30.0 million in excess of $10.0 million second layer, is $120.0 million.
|
|
|
•
|
A third layer has a limit of $20.0 million in excess of $40.0 million, with an annual aggregate limit of approximately $75.0 million.
|
|
|
•
|
The Property Treaty excludes nuclear, biological, chemical, and radiological ("NBCR") terrorism losses.
|
Casualty Excess of Loss
Our casualty excess of loss treaty (“Casualty Treaty”) provides protection against large individual casualty losses with $88.0 million of coverage in excess of a $2.0 million retention:
|
|
•
|
The first through sixth layers provide coverage for 100% of up to $88.0 million in excess of a $2.0 million retention.
|
|
|
•
|
The Casualty Treaty includes a $25.0 million limit, per life, on our workers compensation business, which remains unchanged from the prior treaty.
|
|
|
•
|
The Casualty Treaty excludes NBCR terrorism losses and has annual aggregate non-NBCR terrorism limits of $208.0 million.
|
Investments
The primary objective of the investment portfolio is to maximize after-tax net investment income and the overall total return of the portfolio, while maintaining a high credit quality core fixed income securities portfolio and managing our duration risk profile. The effective duration of the fixed income securities portfolio as of
June 30, 2019
was
3.5
years, compared to the Insurance Subsidiaries’ liability duration as of December 31, 2018 of approximately
3.6
years. The effective duration of the fixed income securities portfolio is monitored and managed to maximize yield, while managing interest rate risk at an acceptable level. We maintain a well-diversified portfolio across sectors, credit quality, and maturities that affords us ample liquidity. Purchases and sales are made with the intent of maximizing investment returns in the current market environment while balancing capital preservation. Over time, we may seek to increase or decrease the duration and overall credit quality of the portfolio based on market conditions.
Our investment philosophy includes certain return and risk objectives for the fixed income, equity, and other investment portfolios. After-tax yield and net investment income generation are key drivers to our investment strategy, which we believe will be obtained through active management of the portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Invested Assets
|
|
|
|
|
|
|
|
($ in thousands)
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Change
|
|
Total invested assets
|
|
$
|
6,421,255
|
|
|
5,960,651
|
|
|
8
|
|
%
|
Invested assets per dollar of stockholders' equity
|
|
3.12
|
|
|
3.33
|
|
|
(6
|
)
|
|
Unrealized gain – before tax
1
|
|
208,208
|
|
|
11,916
|
|
|
1,647
|
|
|
Unrealized gain – after tax
1
|
|
164,484
|
|
|
9,414
|
|
|
1,647
|
|
|
1
Includes unrealized gains on fixed income and equity securities.
The increase in invested assets at
June 30, 2019
, compared to
December 31, 2018
, was driven by: (i) operating cash flow generated in Six Months 2019 of $165 million; (ii) pre-tax net unrealized gains in our fixed income and equity securities portfolios of $196 million, due to a reduction in interest rates and tightening corporate credit spreads, as well as strong performance in U.S. equities during Six Months 2019; and (iii) net proceeds of $106 million from the issuance of our 5.375% Senior Notes and the redemption of our 5.875% Senior Notes in March 2019. For additional information regarding these debt transactions, see Note 5. "Indebtedness" in Item 1. "Financial Statements" of this Form 10-Q.
At
June 30, 2019
, our fixed income securities and short-term investment portfolios represented 95% of our invested assets, consistent with
December 31, 2018
. These portfolios had a weighted average credit rating of “
AA-
,” as of both
June 30, 2019
and
December 31, 2018
, with
97%
and 98% of the securities in the portfolio being investment grade quality, respectively. The sector composition and credit quality of our major asset categories within our fixed income securities portfolio did not significantly change from
December 31, 2018
.
For details regarding the credit quality of our portfolio, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” of our
2018
Annual Report.
Net Investment Income
The components of net investment income earned for the indicated periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
Change
% or Points
|
|
|
Six Months ended June 30,
|
Change
% or Points
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
Fixed income securities
|
|
$
|
50,907
|
|
|
43,774
|
|
|
16
|
%
|
|
|
99,940
|
|
|
85,815
|
|
16
|
%
|
|
Equity securities
|
|
1,740
|
|
|
1,820
|
|
|
(4
|
)
|
|
|
3,380
|
|
|
3,797
|
|
(11
|
)
|
|
Short-term investments
|
|
1,759
|
|
|
611
|
|
|
188
|
|
|
|
3,803
|
|
|
1,134
|
|
235
|
|
|
Other investments
|
|
7,494
|
|
|
2,094
|
|
|
258
|
|
|
|
8,154
|
|
|
3,657
|
|
123
|
|
|
Investment expenses
|
|
(3,395
|
)
|
|
(2,746
|
)
|
|
(24
|
)
|
|
|
(6,154
|
)
|
|
(5,619
|
)
|
(10
|
)
|
|
Net investment income earned – before tax
|
|
58,505
|
|
|
45,553
|
|
|
28
|
|
|
|
109,123
|
|
|
88,784
|
|
23
|
|
|
Net investment income tax expense
|
|
(10,883
|
)
|
|
(7,964
|
)
|
|
(37
|
)
|
|
|
(20,178
|
)
|
|
(15,405
|
)
|
(31
|
)
|
|
Net investment income earned – after tax
|
|
$
|
47,622
|
|
|
37,589
|
|
|
27
|
|
|
|
88,945
|
|
|
73,379
|
|
21
|
|
|
Effective tax rate
|
|
18.6
|
%
|
|
17.5
|
|
|
1.1
|
|
pts
|
|
18.5
|
|
|
17.4
|
|
1.1
|
|
pts
|
Annualized after-tax yield on fixed income securities
|
|
2.9
|
|
|
2.8
|
|
|
0.1
|
|
|
|
2.9
|
|
|
2.7
|
|
0.2
|
|
|
Annualized after-tax yield on investment portfolio
|
|
3.0
|
|
|
2.7
|
|
|
0.3
|
|
|
|
2.9
|
|
|
2.6
|
|
0.3
|
|
|
The increase in pre-tax net investment income in
Second Quarter
and Six Months
2019
, compared to
Second Quarter
and Six Months
2018
, was driven primarily by: (i) cash flow from operations that was 17% of NPW in the current quarter and 12% in the current year-to-date period; (ii) higher yields on our core fixed income securities portfolio; (iii) strong alternative investment returns; and (iv) $106 million of net proceeds from our 5.375% Senior Notes issuance.
Realized and Unrealized Gains and Losses
Our general philosophy for sales of securities is to reduce our exposure to securities and sectors based on economic evaluations and when the fundamentals for that security or sector have deteriorated, or to opportunistically trade out of securities to other securities with better economic return characteristics. Net realized and unrealized gains and losses for the indicated periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
Six Months ended June 30,
|
($ in thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net realized gains on disposals, excluding OTTI
|
|
$
|
2,883
|
|
|
54
|
|
|
6,327
|
|
|
4,785
|
|
OTTI charges
|
|
(971
|
)
|
|
(2,821
|
)
|
|
(1,075
|
)
|
|
(4,033
|
)
|
Unrealized gains (losses) recognized in income on equity securities
|
|
2,115
|
|
|
1,115
|
|
|
12,226
|
|
|
(12,953
|
)
|
Total net realized and unrealized gains (losses)
|
|
$
|
4,027
|
|
|
(1,652
|
)
|
|
17,478
|
|
|
(12,201
|
)
|
The increase in net realized and unrealized gains in Six Months
2019
compared to the same period last year was primarily driven by market value fluctuations on our equity portfolio.
Federal Income Taxes
The following table provides information regarding federal income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30,
|
|
Six Months ended June 30,
|
($ in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Federal income tax expense
|
$
|
18.0
|
|
|
13.7
|
|
|
30.3
|
|
|
14.7
|
|
Effective tax rate
|
19.9
|
%
|
|
18.9
|
|
|
18.5
|
|
|
15.9
|
|
The effective tax rate in the table above differs from the statutory rate of 21% principally due to: (i) the benefit of tax-advantaged interest and dividend income; and (ii) the impact of excess tax benefits on our stock-based compensation awards, partially offset by the disallowance of certain executive compensation. The increase in the effective tax rate in Second Quarter and Six Months 2019, compared to Second Quarter and Six Months 2018, reflects a greater pre-tax income contribution from our insurance operations compared to the relative contribution of tax-advantaged income this year compared to last.
Financial Condition, Liquidity, and Capital Resources
Capital resources and liquidity reflect our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet operating and growth needs.
Liquidity
We manage liquidity with a focus on generating sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. Our cash, excluding restricted cash, and short-term investment position of
$292 million
at
June 30, 2019
was comprised of
$42 million
at the Parent and
$250 million
at the Insurance Subsidiaries. Short-term investments are generally maintained in "AAA" rated money market funds approved by the National Association of Insurance Commissioners. The Parent maintains a fixed income security investment portfolio containing high-quality, highly-liquid government and corporate fixed income securities. This portfolio amounted to
$204 million
at
June 30, 2019
and $110 million at
December 31, 2018
. The Parent had a total of $257 million of cash and liquid investments at
June 30,
2019
, compared to $146 million at December 31, 2018, with the increase driven by our capital market activities discussed below. The level of cash and invested assets may fluctuate based on various factors, including the amount and availability of dividends from our Insurance Subsidiaries, investment income, expenses, and other liquidity needs of the Parent. Our target is to maintain the cash and liquidity at the Parent to two times its expected annual needs, which is currently estimated at $160 million.
Sources of Liquidity
Sources of cash for the Parent have historically consisted of dividends from the Insurance Subsidiaries, the investment portfolio discussed above, borrowings under lines of credit and loan agreements with certain Insurance Subsidiaries, and the issuance of stock and debt securities. We continue to monitor these sources, giving consideration to our long-term liquidity and capital preservation strategies.
Insurance Subsidiary Dividends
We currently anticipate that the Insurance Subsidiaries may pay
$110 million
in total dividends to the Parent in
2019
, a $10 million increase from $100 million paid in 2018, of which
$55 million
was paid during Six Months
2019
. As of
December 31, 2018
, our allowable ordinary maximum dividend was
$210 million
for
2019
.
Any dividends to the Parent are subject to the approval and/or review of the insurance regulators in the respective Insurance Subsidiaries' domiciliary states and are generally payable only from earned surplus as reported in the statutory annual statements of those subsidiaries as of the preceding December 31. Although past dividends have historically been met with regulatory approval, there is no assurance that future dividends that may be declared will be approved. For additional information regarding dividend restrictions, refer to Note 19. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” in Item 8. “Financial Statements and Supplementary Data.” of our
2018
Annual Report.
The Insurance Subsidiaries generate liquidity through insurance float, which is created by collecting premiums and earning investment income before losses are paid. The period of the float can extend over many years. Our investment portfolio consists of maturity dates that continually provide a source of cash flows for claims payments in the ordinary course of business. The effective duration of the fixed income securities portfolio was
3.5
years as of
June 30, 2019
, while the liabilities of the Insurance Subsidiaries had a duration as of December 31, 2018 of
3.6
years. As protection for the capital resources of the Insurance Subsidiaries, we purchase reinsurance coverage for significantly large claims or catastrophes that may occur during the year.
Line of Credit
The Parent's line of credit with Wells Fargo Bank, National Association, as administrative agent, and Branch Banking and Trust Company (BB&T) (referred to as our "Line of Credit"), was renewed effective
December 1, 2015
with a borrowing capacity of
$30 million
, which can be increased to
$50 million
with the approval of both lending partners. This Line of Credit expires on
December 1, 2020
and has an interest rate that varies and is based on, among other factors, the Parent's debt ratings. There were no balances outstanding under the Line of Credit at
June 30, 2019
or at any time during
2019
.
For additional information regarding the Line of Credit agreement and corresponding representations, warranties, and covenants, refer to Note 10. "Indebtedness" in Item 8. "Financial Statements." of our 2018 Annual Report. We continue to meet all covenants under our Line of Credit agreement as of June 30, 2019.
Several of our Insurance Subsidiaries are members of certain branches of the Federal Home Loan Bank, which provides those subsidiaries with additional access to liquidity. Membership is as follows:
|
|
|
Branch
|
Insurance Subsidiary Member
|
Federal Home Loan Bank of Indianapolis ("FHLBI")
|
Selective Insurance Company of South Carolina ("SICSC")
1
Selective Insurance Company of the Southeast ("SICSE")
1
|
Federal Home Loan Bank of New York ("FHLBNY")
|
Selective Insurance Company of America ("SICA")
Selective Insurance Company of New York ("SICNY")
|
1
These subsidiaries are jointly referred to as the "Indiana Subsidiaries" as they are domiciled in Indiana.
The Line of Credit permits aggregate borrowings from the FHLBI and the FHLBNY up to
10%
of the respective member company’s admitted assets for the previous year end. Additionally, as SICNY is domiciled in New York, this company's borrowings from the FHLBNY are limited to the lower of
5%
of admitted assets for the most recently completed fiscal quarter or
10%
of admitted assets for the previous year end. We have a remaining capacity of $288.9 million for Federal Home Loan Bank borrowings, with a $12.9 million additional stock purchase requirement to allow the member companies to borrow their full remaining capacity amounts.
All borrowings from both the FHLBI and the FHLBNY are required to be secured by investments pledged as collateral. For additional information regarding collateral outstanding, refer to Note 4. "Investments" in Item 1. "Financial Statements." of this Form 10-Q.
Short-term Borrowings
In the first quarter of
2019
, SICA borrowed
$50 million
from the FHLBNY, which was repaid on March 28, 2019. For further information regarding this borrowing, see Note 5. "Indebtedness" in Item 1. "Financial Statements." of this Form 10-Q.
Intercompany Loan Agreements
The Parent has lending agreements with the Indiana Subsidiaries that have been approved by the Indiana Department of Insurance, which provide additional liquidity to the Parent. Similar to the Line of Credit agreement, these lending agreements limit borrowings by the Parent from the Indiana Subsidiaries to 10% of the admitted assets of the respective Indiana Subsidiary. The outstanding balance on these intercompany loans was $42.5 million as of June 30, 2019, compared to $45.0 million as of December 31, 2018. The remaining capacity under these intercompany loan agreements was $78.8 million as of June 30, 2019, compared to $76.2 million as of December 31, 2018. Despite not being contractually obligated to do so, the Parent currently plans to repay the remaining outstanding balance by the end of 2021.
Capital Market Activities
In the first quarter of 2019, the Parent issued $300 million of 5.375% Senior Notes at a discount of $5.9 million which, when coupled with debt issuance costs of approximately $3.3 million, resulted in net proceeds from the offering of $290.8 million. The Parent used a portion of the proceeds to fully redeem the then outstanding $185 million aggregate principal amount of its 5.875% Senior Notes, with the remaining $106 million being used for general corporate purposes. For additional information on these transactions, refer to Note 5. "Indebtedness" in Item 1. "Financial Statements." of this Form 10-Q. The Parent had no private or public issuances of stock during Six Months
2019
.
Uses of Liquidity
The liquidity generated from the sources discussed above is used, among other things, to pay dividends to our shareholders. Dividends on shares of the Parent's common stock are declared and paid at the discretion of the Board of Directors based on our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors.
Our ability to meet our interest and principal repayment obligations on our debt, as well as our ability to continue to pay dividends to our stockholders, is dependent on liquidity at the Parent coupled with the ability of the Insurance Subsidiaries to pay dividends, if necessary, and/or the availability of other sources of liquidity to the Parent. Our next two principal
repayments, each in the amount of $25 million, are due in 2021, and the next principal payment is due in 2026.
Restrictions on the ability of the Insurance Subsidiaries to declare and pay dividends, without alternative liquidity options, could materially affect our ability to service debt and pay dividends on common stock.
Capital Resources
Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks, and facilitate continued business growth. At
June 30, 2019
, we had GAAP stockholders' equity of
$2.1 billion
and statutory surplus of $1.9 billion. With total debt of
$550.8 million
, our debt-to-capital ratio was
21.1%
at
June 30, 2019
.
Our cash requirements include, but are not limited to, principal and interest payments on various notes payable, dividends to stockholders, payment of claims, payment of commitments under limited partnership agreements and capital expenditures, as well as other operating expenses, which include commissions to our distribution partners, labor costs, premium taxes, general and administrative expenses, and income taxes. For further details regarding our cash requirements, refer to the section below entitled, “Contractual Obligations, Contingent Liabilities, and Commitments.”
We continually monitor our cash requirements and the amount of capital resources that we maintain at the holding company and operating subsidiary levels. As part of our long-term capital strategy, we strive to maintain capital metrics, relative to the macroeconomic environment, that support our targeted financial strength. Based on our analysis and market conditions, we may take a variety of actions, including, but not limited to, contributing capital to the Insurance Subsidiaries in our insurance operations, issuing additional debt and/or equity securities, repurchasing existing debt, repurchasing shares of the Parent’s common stock, and increasing stockholders’ dividends.
Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our stockholders, while enhancing our financial strength and underwriting capacity.
Book value per share increased to
$34.71
as of
June 30, 2019
, from
$30.40
as of
December 31, 2018
, driven by
$2.23
in net income per share and
$2.45
in unrealized gains on our fixed income securities portfolio, partially offset by
$0.40
in dividends to our shareholders.
Ratings
We are rated by major rating agencies that issue opinions on our financial strength, operating performance, strategic position, and ability to meet policyholder obligations. We believe that our ability to write insurance business is most influenced by our rating from A.M. Best. We have been rated “
A
” or higher by A.M. Best for the past
89
years. A downgrade from A.M. Best to a rating below “
A-
” is an event of default under our Line of Credit and could affect our ability to write new business with customers and/or distribution partners, some of whom are required (under various third-party agreements) to maintain insurance with a carrier that maintains a specified A.M. Best minimum rating.
Our ratings have not changed from those reported in our "Ratings" section of Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." in our
2018
Annual Report and continue to be as follows:
|
|
|
|
|
|
NRSRO
|
|
Financial Strength Rating
|
|
Outlook
|
A.M. Best
|
|
A
|
|
Stable
|
Moody's Investor Services ("Moody's")
|
|
A2
|
|
Stable
|
Fitch Ratings ("Fitch")
|
|
A+
|
|
Stable
|
Standard & Poor's Global Ratings ("S&P")
|
|
A
|
|
Stable
|
In Second Quarter 2019, Fitch reaffirmed our "A+" rating with a "stable" outlook. In taking this action, Fitch cited our strong capitalization and financial performance, with stable underwriting results and return metrics that have remained favorable compared to our peers.
Our S&P, Moody's, and Fitch financial strength and associated credit ratings affect our ability to access capital markets. The interest rate on our Line of Credit varies and is based on, among other factors, the Parent's debt ratings. There can be no assurance that our ratings will continue for any given period of time or that they will not be changed. It is possible that positive or negative ratings actions by one or more of the rating agencies may occur in the future.
Off-Balance Sheet Arrangements
At
June 30, 2019
and
December 31, 2018
, we did not have any material relationships with unconsolidated entities or financial partnerships, such entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, we are not exposed to any material financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.
Contractual Obligations, Contingent Liabilities, and Commitments
Our future cash payments associated with: (i) loss and loss expense reserves; and (ii) contractual obligations pursuant to operating and financing leases for office space and equipment have not materially changed since
December 31, 2018
. The following table provides future cash payments on our notes payable as of
June 30, 2019
, giving consideration to the $300 million 5.375% Senior Notes issuance and the redemption of our $185 million 5.875% Senior Notes in the first quarter of 2019, the details of which are contained in Note 5. "Indebtedness" in Item 1. "Financial Statements." in this Form 10-Q:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
Payment Due by Period
|
|
|
|
|
Less than
1 year
|
|
1-3
years
|
|
3-5
years
|
|
More than
5 years
|
($ in millions)
|
|
Total
|
|
|
|
|
Notes payable
|
|
$
|
560.0
|
|
|
—
|
|
|
50.0
|
|
|
—
|
|
|
510.0
|
|
Interest on debt obligations
|
|
666.1
|
|
|
29.1
|
|
|
57.5
|
|
|
56.6
|
|
|
522.9
|
|
Total
|
|
$
|
1,226.1
|
|
|
29.1
|
|
|
107.5
|
|
|
56.6
|
|
|
1,032.9
|
|
As of
June 30, 2019
, we had contractual obligations that expire at various dates through
2036
that may require us to invest up to
$231.8 million
in alternative investments. There is no certainty that any such additional investment will be required. Additionally, as of
June 30, 2019
, we had the following contractual obligations: (i)
$9.4 million
to further invest in non-publicly traded common stock within our equity portfolio that expire through 2023; and (ii)
$34.4 million
to further invest in non-publicly traded collateralized loan obligations in our fixed income securities portfolio that expire through 2030. We expect to have the capacity to repay and/or refinance these obligations as they come due.
We have issued no material guarantees on behalf of others and have no trading activities involving non-exchange traded contracts accounted for at fair value. For additional details on transactions with related parties, see Note 16. "Related Party Transactions" in Item 8. "Financial Statements and Supplementary Data." in our
2018
Annual Report.