Bank of America Merrill Lynch 2013 Insurance Conference February 13, - - PowerPoint PPT Presentation

bank of america merrill lynch 2013 insurance conference
SMART_READER_LITE
LIVE PREVIEW

Bank of America Merrill Lynch 2013 Insurance Conference February 13, - - PowerPoint PPT Presentation

Bank of America Merrill Lynch 2013 Insurance Conference February 13, 2013 Forward Looking Statement Certain statements in this report, including information incorporated by reference, are forward looking statements as that term is defined


slide-1
SLIDE 1

Bank of America Merrill Lynch 2013 Insurance Conference

February 13, 2013

slide-2
SLIDE 2

Forward Looking Statement

Certain statements in this report, including information incorporated by reference, are “forward‐looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The PSLRA provides a safe harbor under the Securities Act of 1933 and the Securities Exchange Act of 1934 for forward‐looking statements. These statements relate to our intentions, beliefs, projections, estimations or forecasts of future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, or performance to be materially different from those expressed or implied by the forward‐looking statements. In some cases, you can identify forward‐looking statements by use of words such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "target," "project," "intend," "believe," "estimate," "predict," "potential," "pro forma," "seek," "likely" or "continue" or other comparable terminology. These statements are only predictions, and we can give no assurance that such expectations will prove to be correct. We undertake no

  • bligation, other than as may be required under the federal securities laws, to publicly update or revise any forward‐

looking statements, whether as a result of new information, future events or otherwise. Factors, that could cause our actual results to differ materially from those projected, forecasted or estimated by us in forward‐looking statements are discussed in further detail in Selective’s public filings with the United States Securities and Exchange Commission. 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.

slide-3
SLIDE 3

Foundation for Success

Dale Thatcher EVP, Chief Financial Officer

slide-4
SLIDE 4

Who We Are

  • $1.7B 2012 NPW
  • Super‐regional carrier
  • Standard lines distributed

through independent agents

  • Excess & Surplus (E&S) lines

distributed through wholesale agents

  • 76% standard commercial

lines

  • History of financial strength
slide-5
SLIDE 5

Business Diversification

  • 22 state footprint
  • 1,100 independent agency relationships
  • Average account size of $9,000

Standard Commercial Lines

  • 13 state footprint
  • 620 independent agents
  • Agents want joint C/L & P/L markets
  • Flood 2012 net income of $19M

Personal Lines

  • Right time to enter business
  • Wholesale agents have controlled binding

authority and no claims authority

  • Within E&S, lower hazard and dollar limits
  • Average policy size of $2,600

E&S Contract Binding Authority

slide-6
SLIDE 6

Diversification Leads to Profit Opportunities

76% 17% 7% 65‐70% 15‐20% 10‐15%

Net Premiums Written %

Standard Commercial Personal Excess & Surplus

2012 Projected 5‐Year View

slide-7
SLIDE 7

Financial Strength is our Foundation for Success

  • Access to capital markets

– February 8, 2013 issued $175 million 5.875% senior notes due 2043 – Use of proceeds:

  • Call $100 million 7.5% junior

subordinated notes due 2066

  • Balance to fund growth
slide-8
SLIDE 8

85 90 95 100 105 110 115

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Statutory Combined Ratio – SIGI vs. Industry SIGI Industry

(STD. DEV 3.7) (STD. DEV 4.1)

*2012 AM Best Industry Estimate Source: A.M. Best and Insurance Information Institute Note: Industry excluding Mortgage and Financial Guaranty Segments since 2007

Underwriting Stability

%

slide-9
SLIDE 9

2 4 6 8 10 12

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Impact of CATs on Combined Ratio

SIGI Avg = 2.6 pts

  • Ind. Avg. = 4.9 pts

*2012 AM Best Industry Estimate Source: AM Best

pts

slide-10
SLIDE 10

Managing Increased Catastrophes

  • Hurricane Sandy
  • Pre‐tax gross losses estimated to be $136 million
  • Pre‐tax net catastrophe losses of $47 million
  • Reinsurance reinstatement premium of $9 million
  • Flood claims handling fees offset of $16 million
  • Pre‐tax net loss of $40 million, or $0.46 per diluted

share after tax

  • Added 9.8 points to the 4th quarter combined ratio and

2.5 points to the year

slide-11
SLIDE 11

3% 11% 0% 2% 4% 6% 8% 10% 12% 1% Probability 0.4% Probability

Conservative Reinsurance Program

Percentages are after tax and include applicable reinstatement premium. Data as of 7/12; Equity data as of December 31, 2012.

% of Equity at Risk

Blended Model Results (RMS v11 & AIR v13)

CAT Cover: $585M in excess of $40M

slide-12
SLIDE 12

‐4% ‐3% ‐2% ‐1% 0% 1% 2% 3% 4% 5%

2003 2004 2005 2006 2007 2008 2009 2010* 2011 2012**

*2010 Industry development includes $4B charge from AIG **2012 AM Best Industry Estimate Source: AM Best and Insurance Information Institute Note: Industry excluding Mortgage and Financial Guaranty Segments

Calendar Year Development

(Favorable)/Adverse Points

SIGI Industry

slide-13
SLIDE 13

$4.3B Invested Assets December 31, 2012

“AA‐” Avg Rating

Conservative Investment Portfolio

  • Well diversified, laddered

portfolio

  • Only 1.7% of bond portfolio

rated “BB” & below

  • 3.6 year average duration,

excluding short‐term

  • Investment leverage of

3.97 x 2.4% yield = ~ 9.5% ROE

Bonds 89% Equities 3% Alternatives 3% Short‐ Term 5%

slide-14
SLIDE 14

1.8 1.7 1.6 1.5 1.5 1.7 1.5 1.3 1.4 1.6 1.2 1.1 1.0 0.9 0.9 0.9 0.8 0.7 0.8 0.8 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Selective’s Use of Underwriting Leverage

*2012 AM Best Industry Estimate Sources: ISO, AM Best and Insurance Information Institute Note: Industry excluding Mortgage and Financial Guaranty Segments since 2007

Premium to Surplus Ratio

SIGI Industry

slide-15
SLIDE 15

Impact of Leverage

Combined Ratio Required for 12% ROE

~95%

70 80 90 100

2012

SIGI Industry

Industry Source: AM Best

Investment Leverage 4.0x U/W Leverage 1.6x Investment Leverage 2.3x U/W Leverage 0.8x

~87% %

slide-16
SLIDE 16

100.9 ~92.0 85 90 95 100 105 110 115

6.5 (2.0) 1.0 (12.5) (1.5)

Combined Ratio Improvement Plan

*Excluding CATS and reserve development

%

Company expectation for 3 points of CAT losses in 2013 & 2014

slide-17
SLIDE 17

Strategic Overview

Greg Murphy Chairman, President & CEO

slide-18
SLIDE 18

What Makes Us Unique

  • Empowered decision makers
  • Superior agency relationships
  • Sophisticated tools
  • Focus on customer experience
  • Excellent risk management

Culture of Continuous Improvement

slide-19
SLIDE 19
  • Franchise value
  • Greater share of wallet
  • Strong feedback loop

Relationships with the Highest Caliber Agents

2012

  • $1.4M NPW per agency
  • 8.3/10 on agency survey
slide-20
SLIDE 20

A Regional with National Capabilities

Capabilities of a National

  • Sophisticated pricing
  • Fraud and recovery models
  • Advanced data and technology

Nimbleness of a Regional

  • Relationships
  • Local decision making

Selective: A Unique Super‐Regional

slide-21
SLIDE 21
  • ~20 factors driven through DPM generate individual policy

guidance and portfolio level impact

  • Line of business and segment strategy
  • CAT modeling
  • Predictive modeling
  • Agency profitability
  • Risk characteristics
  • “What‐if” profitability analysis of an underwriter’s

book

Pricing Sophistication – Dynamic Portfolio Manager

slide-22
SLIDE 22

60% 70% 80% 90% 0% 2% 4% 6% 8% 10% 12% 14% Above Average Average Below Average Low

Price 2012 Pricing by Retention Group – Standard Commercial Lines Retention

Pricing Sophistication – Dynamic Portfolio Manager

2012 Price = 6.2%

slide-23
SLIDE 23

60% 65% 70% 75% 80% 85% 90% 0% 1% 2% 3% 4% 5% 6% 7% 8%

Standard Commercial Lines Price

Relationships Drive Pricing Through the Cycle

Anticipate commercial lines pricing between 7.5% and 8% for 2013

Quarterly Retention

slide-24
SLIDE 24

Homeowners

  • Increasing rate
  • By‐peril rating
  • Encourage whole account customers

Personal Lines Sophistication

Auto

  • Increasing rate
  • Continued mix improvements
  • Underwriting restrictions
  • Claims initiatives
  • Age of book

Anticipate personal lines pricing of approximately 7% in 2013

slide-25
SLIDE 25

65% 75% 85% 95% 0% 1% 2% 3% 4% 5% 6% 7% 8% 2008 2009 2010 2011 2012

Renewal Pure Price Retention

Homeowners Pricing

Targeting upper‐80’s combined ratio in normal CAT year Anticipate pricing of approximately 8.5% in 2013

slide-26
SLIDE 26

65% 75% 85% 95% 0% 1% 2% 3% 4% 5% 6% 7% 2008 2009 2010 2011 2012

Renewal Pure Price

Personal Auto Pricing

Retention

Anticipate pricing of approximately 5.5% in 2013

slide-27
SLIDE 27

Achieving Better Outcomes in Claims

  • Medical cost containment
  • Complex claims
  • Fraud detection model
  • Recovery model
  • Litigation management
  • Comprehensive data

management tools

Projected 3 Point Loss & Expense Savings

slide-28
SLIDE 28

Why Invest in Selective?

  • Proven ability to manage

the market cycle

  • Growth at the right time
  • Grew faster and longer

in last hard market

  • Strong balance sheet limits

downside

  • Attractive valuation with

~2.5% dividend yield

slide-29
SLIDE 29

2013 Guidance*

  • Statutory combined ratio of 96%, excluding catastrophes

and any prior year development either favorable or unfavorable

  • A 3 point estimate for catastrophe losses
  • After‐tax investment income of approximately $90‐95

million

  • Weighted average shares of approximately 56 million at

year end 2013

*As of February 1, 2013

slide-30
SLIDE 30

Additional Information

slide-31
SLIDE 31

Financial Highlights 2008 – 2012

2008 2009 2010 2011 2012 Statutory NPW Growth (4.5)% (4.7)% (2.3)% 6.8% 12.2% Operating EPS* $1.43 $1.39 $1.38 $0.38 $0.58 Net Income per Share* $0.82 $0.68 $1.23 $0.40 $0.68 Dividend per Share $0.52 $0.52 $0.52 $0.52 $0.52 Book Value per Share* $15.81 $17.80 $18.97 $19.45 $19.77 Return on Equity* 4.7% 4.1% 6.8% 2.1% 3.5% Operating Return on Equity* 8.2% 8.3% 7.7% 2.0% 3.0% Statutory Combined Ratio ‐ Total 99.2% 100.5% 101.6% 106.7% 103.5% ‐ Standard Commercial Lines 98.5% 99.8% 100.8% 103.9% 103.0% ‐ Standard Personal Lines 103.7% 104.4% 106.4% 117.3% 100.7% ‐ Excess and Surplus Lines NA NA NA 131.3% 118.8% GAAP Combined Ratio – Total* 100.0% 99.9% 101.4% 107.2% 104.0% ‐ Standard Commercial Lines* 99.2% 98.8% 100.0% 104.3% 103.3% ‐ Standard Personal Lines* 105.1% 105.6% 108.3% 117.8% 101.3% ‐ Excess and Surplus Lines* NA NA NA 270.2% 124.7%

*Historical values have been restated to reflect impact of deferred policy acquisition cost accounting change

slide-32
SLIDE 32

Net Operating Cash Flow

241 228 159 123 227 40 90 140 190 240 290 2008 2009 2010 2011 2012

($ in millions)

16% 16% 11% 8% Cash Flow as % of NPW 14%

slide-33
SLIDE 33

Investment Income – After‐tax

105 96 111 111 100 40 50 60 70 80 90 100 110 120 2008 2009 2010 2011 2012

($ in millions)

slide-34
SLIDE 34

26 27 28 29 30 31 32 33 34 35 36 2007 2008 2009 2010 2011 9/30/12 YTD

Focused Expense Management

Peers include CINF, CNA, HIG, STFC , THG, TRV, UFCS, and WRB Source: SNL Financial; includes policyholder dividends

GAAP Expense Ratio

SIGI Peer Median

slide-35
SLIDE 35

Insurance Operations Productivity

( $ in 0 0 0 s) %

*Excludes Excess & Surplus Lines

797 797 766 761 791 822

29 29.5 30 30.5 31 31.5 32 32.5 33 300 500 700 900 2007 2008 2009 2010 2011* 2012* NPW per Employee Statutory Expense Ratio

slide-36
SLIDE 36

101.1 98.5 93.9 93.3 93.8 95.0 96.4 99.3 97.5 97.5 98.0 1.1 2.4 1.5 0.3 1.2 0.9 2.1 0.5 3.3 6.4 5.0

85 90 95 100 105 110 115 %

103.9 102.2 100.9

Impact of Catastrophe Losses Combined Ratio excluding CATS

95.4

Statutory Combined Ratios

93.6 95.0 95.9 98.5 99.8 100.8

Standard Commercial Lines Profitability

103.0

*Includes impact of reinstatement premium on catastrophe reinsurance program as a result of Hurricane Sandy

slide-37
SLIDE 37

Contractors 34% Manufacturing & Mercantile 42% Community and Public Services 23% Bonds 1%

Premium by Strategic Business Unit

2012 Standard Commercial Lines Direct Premium Written

slide-38
SLIDE 38

General Liability 31% Auto 23% BOP 6% Bonds 1% Other 1% Commercial Property 17% Workers Compensation 21%

Premium by Line of Business

2012 Standard Commercial Lines Net Premium Written

slide-39
SLIDE 39

Long‐Term Shareholder Value Creation

12.96 14.96 16.44 17.87 18.82 15.81 17.80 18.97 19.45 19.77 0.31 0.35 0.40 0.44 0.49 0.52 0.52 0.52 0.52 0.52

$0 $5 $10 $15 $20 $25 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Book Value Dividend

Per Share

Note: Book value restated for change in deferred policy acquisition costs (2002‐2006 Estimated)