Reserve releases and lower cats push Selective to record Q4 EPS

Reserve releases and lower catastrophe costs combined to help Selective Insurance Group report record operating income for the fourth quarter of 2019, comfortably surpassing analysts’ expectations in the process.

Record non-GAAP operating income per diluted share amounted to $1.37 for the fourth quarter of 2019 was a notable increase on the $1.20 posted in the prior year period, and a significant beat on the $1.11 a share consensus predicted by 11 analysts compiled by MarketWatch.

Favourable prior reserve development on casualty lines removed three points of Selective’s combined ratio for 2019’s fourth quarter. In the prior year period, Selective benefited from 2.8 points of prior year development.

Catastrophe losses contributed just one point to Selective’s fourth quarter 2019 combined ratio of 91.8 percent. For the same period in 2018, catastrophe losses were responsible for 2.4 points of Selective’s 92.7 percent combined ratio.

Branchville, New Jersey-based Selective’s non-GAAP operating profit was $82.5mn for the three months to 31 December 2019, up $10.5mn year on year.

Net premiums written (NPW) across the company totalled $628.2mn in the fourth quarter of 2019, up 8 percent compared with the prior year period.

As Gregory Murphy, Selective’s chief executive explained, this increase is “about twice the expected annual industry growth rate”.

Murphy said the increase was driven by strong retention and new business in Selective’s standard commercial lines segment, although that was partially offset by lower standard personal lines and excess and surplus lines premiums.

“Overall renewal pure price increases were 3.8 percent, in line with expected loss trend, which positions us well for the future,” said Murphy.

Standard commercial lines NPW hit $550.1mn 2019’s fourth quarter, up 11 percent year on year. A combined ratio of 90 percent was a 2.9 point improvement over the prior year period.

The company explained that its “excellent” fourth quarter 2019 standard commercial lines combined ratio reflected a lower level of catastrophe losses and favourable prior year casualty reserve development, primarily in the workers’ compensation line. That was somewhat offset by unfavourable development in the general liability and commercial auto segments however.

In the standard personal lines segment, NPW totalled $70.9mn, a slight reduction of $1.8mn compared with the same three months in 2018. The fourth quarter 2019 combined ratio of 98.5 percent represented an increase of 6.7 points on the prior year period.

The reduction in NPW was driven by a 9 percent reduction in new business, reflecting what it said was “an increasingly competitive marketplace”.

In Selective’s excess and surplus lines unit, NPW decreased by 6 percent year on year to $57.2mn. A combined ratio of 99.5 percent was an increase of 6.6 points on 2018’s fourth quarter.

The NPW reduction reflected a 16 percent decrease in new business, primarily related to the exit of specific classes, partially offset by overall renewal pure price increases of 3.7 percent.

Selective’s after-tax net investment income amounted to $47mn for the final quarter of 2019, up 6 percent year on year.