Selective Insurance Group 10-Q 2012
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2012
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________________________to_____________________________
Commission File Number: 001-33067
SELECTIVE INSURANCE GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx No ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of March 31, 2012, there were 54,805,134 shares of common stock, par value $2.00 per share, outstanding.
SELECTIVE INSURANCE GROUP, INC.
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
Selective Insurance Group, Inc. also has authorized, but not issued, 5,000,000 shares of preferred stock, without par value, of which 300,000 shares have been designated Series A junior preferred stock, without par value.
We classify our business into two operating segments:
NOTE 2. Basis of Presentation
These Financial Statements reflect all adjustments that, in our opinion, are normal, recurring, and necessary for a fair presentation of our results of operations and financial condition. The Financial Statements cover the first quarters ended March 31, 2012 (“First Quarter 2012”) and March 31, 2011 (“First Quarter 2011”). The Financial Statements do not include all of the information and disclosures required by GAAP and the SEC for audited financial statements. Results of operations for any interim period are not necessarily indicative of results for a full year. Consequently, the Financial Statements should be read in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Annual Report”).
NOTE 3. Reclassification
Certain prior year amounts in these Financial Statements and related footnotes have been reclassified to conform to the current year presentation. Such reclassifications had no effect on our net income, stockholders’ equity, or cash flows.
NOTE 4. Adoption of Accounting Pronouncements
In October 2010, the FASB issued ASU 2010-26, Financial Services-Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (“ASU 2010-26”). ASU 2010-26 requires that only costs that are incremental or directly related to the successful acquisition of new or renewal insurance contracts are to be capitalized as a deferred acquisition cost. This includes, among other items, sales commissions paid to agents, premium taxes, and the portion of employee salaries and benefits directly related to time spent on acquired contracts. We adopted this guidance on January 1, 2012, with retrospective application and, as such, all historical data in this Form 10-Q has been restated to reflect the revised guidance.
The following tables provide select restated financial information:
Income Statement Information
First Quarter 2011
Cash Flow Information
First Quarter 2011
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). This guidance changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and disclosing information about fair value measurements to improve consistency in the application and description of fair value between GAAP and International Financial Reporting Standards. ASU 2011-04 clarifies that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets, and are not relevant when measuring the fair value of financial assets or liabilities. In addition, ASU 2011-04 expands the disclosures for unobservable inputs for Level 3 fair value measurements, requiring quantitative information to be disclosed related to: (i) the valuation processes used; (ii) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs; and (iii) the use of a nonfinancial asset in a way that differs from the asset’s highest and best use. ASU 2011-04 was effective prospectively for interim and annual periods beginning after December 15, 2011. We have included the disclosures required by this guidance in our notes to the consolidated financial statements, where appropriate.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The standard eliminates the option to report other comprehensive income and its components in the statement of stockholders’ equity. Based on an amendment issued in December 2011, companies are not required to present separate line items on the income statement for reclassification adjustments out of accumulated other comprehensive income into net income, as would have been required under the initial ASU. This guidance, which is ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, is effective concurrently with ASU 2011-05. We have retroactively restated our financial statements in this Form 10-Q to comply with the presentation required under this accounting guidance.
In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which simplifies the requirements to test goodwill for impairment. This guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing events and circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than the carrying amount, then performing the two-step impairment test is unnecessary. However, if the entity concludes otherwise, then it is required to perform the quantitative impairment test. This guidance was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, and early adoption was permitted. The adoption of this guidance did not impact our financial condition or results of operation.
NOTE 5. Statements of Cash Flow
Cash paid during the period for interest and federal income taxes was as follows:
NOTE 6. Investments
(a) The amortized cost, carrying value, unrecognized holding gains and losses, and fair values of held-to-maturity (“HTM”) fixed maturity securities were as follows:
Unrecognized holding gains/losses of HTM securities are not reflected in the consolidated financial statements, as they represent fair value fluctuations from the later of: (i) the date a security is designated as HTM; or (ii) the date that an other-than-temporary impairment (“OTTI”) charge is recognized on an HTM security, through the date of the balance sheet. Our HTM securities had an average duration of 2.9 years as of March 31, 2012.
During First Quarter 2012, two securities with a carrying value of $4.4 million and a net unrecognized gain position of $0.1 million were reclassified from HTM designations to available-for-sale (“AFS”) designation due to credit rating downgrades by Moody’s Investors Service. These unexpected rating downgrades raised significant concerns about the issuers’ credit worthiness, which changed our intention to hold these securities to maturity. There were no downgrades on securities in our HTM portfolio from Standard and Poor’s Financial Services, or Fitch Ratings in First Quarter 2012.
(b) The cost/amortized cost, unrealized gains (losses), and fair value of AFS securities were as follows:
1 U.S. government includes corporate securities fully guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) with a fair value of $61.5 million at March 31, 2012 and $76.5 million at December 31, 2011.
2 CMBS includes government guaranteed agency securities with a fair value of $68.4 million at March 31, 2012 and $72.9 million at December 31, 2011.
3 RMBS includes government guaranteed agency securities with a fair value of $102.8 million at March 31, 2012 and $98.2 million at December 31, 2011.
Unrealized gains/losses of AFS securities represent fair value fluctuations from the later of: (i) the date a security is designated as AFS; or (ii) the date that an OTTI charge is recognized on an AFS security, through the date of the balance sheet. These unrealized gains and losses are recorded in accumulated other comprehensive income (“AOCI”) on the Consolidated Balance Sheets.
c) The following tables summarize, for all securities in a net unrealized/unrecognized loss position at March 31, 2012 and December 31, 2011, the fair value and gross pre-tax net unrealized/unrecognized loss by asset class and by length of time those securities have been in a net loss position:
As evidenced by the table below, our unrealized/unrecognized loss positions improved by $2.6 million as of March 31, 2012 compared to December 31, 2011 as follows:
We have reviewed the securities in the tables above in accordance with our OTTI policy, as described in Note 2. “Summary of Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data.” of our 2011 Annual Report.
At March 31, 2012, we had 155 securities in an aggregate unrealized/unrecognized loss position of $8.0 million, $4.4 million of which have been in a loss position for more than 12 months. Securities with non-credit OTTI impairments comprised $2.6 million of the $4.4 million balance, with the remainder related to securities that were, on average, 4% impaired compared to their amortized cost.
At December 31, 2011, we had 141 securities in an aggregate unrealized/unrecognized loss position of $10.6 million, $4.9 million of which had been in a loss position for more than 12 months. Non-credit OTTI impairments comprised $2.1 million of the $4.9 million balance, with the remainder related to securities that were, on average, 6% impaired compared to their amortized cost.
We do not have the intent to sell any securities in an unrealized/unrecognized loss position nor do we believe we will be required to sell these securities, and therefore we have concluded that they are temporarily impaired as of March 31, 2012. This conclusion reflects our current judgment as to the financial position and future prospects of the entity that issued the investment security and underlying collateral. If our judgment about an individual security changes in the future, we may ultimately record a credit loss after having originally concluded that one did not exist, which could have a material impact on our net income and financial position in future periods.
(d) Fixed maturity securities at March 31, 2012, by contractual maturity, are shown below. Mortgage-backed securities are included in the maturity tables using the estimated average life of each security. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Listed below are HTM fixed maturity securities at March 31, 2012:
Listed below are AFS fixed maturity securities at March 31, 2012:
(e) The following table outlines a summary of our other investment portfolio by strategy and the remaining commitment amount associated with each strategy:
The carrying value of our other investments decreased by $3.2 million compared to year end 2011. The carrying value was impacted in First Quarter 2012 by distributions of $8.1 million, partially offset by income of $2.0 million and additional contributions of $3.0 million under our existing commitments.
For a description of our seven alternative investment strategies outlined above, as well as redemption, restrictions, and fund liquidations, refer to Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of our 2011 Annual Report.
The following table sets forth aggregated summarized financial information for the partnerships in our alternative investment portfolio. The last line of the table below reflects our share of the aggregate income, which is the portion included in our consolidated Financial Statements. As the majority of these investments report results to us on a quarter lag, the summarized financial statement information for the three-month periods ended December 31 is as follows:
(f) At March 31, 2012, we had 27 fixed maturity securities, with a carrying value of $63.4 million, pledged as collateral for our outstanding borrowing with the Federal Home Loan Bank of Indianapolis (“FHLBI”). This borrowing, which has an outstanding principal balance of $58.0 million, is included in “Notes payable” on our Consolidated Balance Sheets. In accordance with the terms of our agreement with the FHLBI, we retain all rights regarding the collateral securities, which are included in the “U.S. government and government agencies,” “RMBS,” and “CMBS” classifications of our AFS fixed maturity securities portfolio.
(g) The components of net investment income earned were as follows:
Net investment income earned, before tax, decreased by $10.8 million for First Quarter 2012 compared to First Quarter 2011, primarily driven by a decrease of $9.3 million in income from our alternative investments within our other investment portfolio. Our alternative investments, which are accounted for under the equity method, primarily consist of investments in limited partnerships, the majority of which report results to us on a one quarter lag.
h) The following tables summarize OTTI by asset type for the periods indicated:
The following table set forth, for the periods indicated, credit loss impairments on fixed maturity securities for which a portion of the OTTI charge was recognized in OCI, and the corresponding changes in such amounts:
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold. Proceeds from the sale of AFS securities were $71.8 million in First Quarter 2012 and $71.7 million in First Quarter 2011. In addition to calls and maturities, the realized gain, excluding OTTI charges, in First Quarter 2012 was driven primarily by the sale of AFS equity securities for proceeds of $57.5 million with realized gains of $4.3 million due to a rebalancing of securities within the equity securities portfolio.
Net realized gains, excluding OTTI charges, in First Quarter 2011 was driven by the sale of AFS equity securities for proceeds of $56.8 million with realized gains of $6.2 million due to a reallocation of the equity securities portfolio into a high dividend yield equities strategy.
NOTE 7. Fair Value Measurements
The following table presents the carrying amounts and estimated fair values of our financial instruments as of March 31, 2012 and December 31, 2011:
The techniques used to value our financial assets are as follows:
The techniques used to value our financial liabilities are as follows:
The following tables provide quantitative disclosures of our financial assets that were measured at fair value at March 31, 2012 and December 31, 2011:
1 There were no transfers of securities between Level 1 and Level 2 in First Quarter 2012.
2 U.S. government includes corporate securities fully guaranteed by the FDIC.
The following tables provide a summary of the changes in the fair value of securities measured using Level 3 inputs and related quantitative information as of March 31, 2012:
As discussed above, the fair value of our Level 3 fixed maturity securities are typically obtained through non-binding broker quotes, which we review for reasonableness. The receivable related to the sale of Selective HR is also a Level 3 fair value measurement using unobservable inputs, the most significant of which is our assumption regarding the retention of business. If this assumption were to change by +/-10%, the value of this receivable would increase/decrease by approximately $0.1 million.
The following table provides a summary of the changes in the fair value of securities measured using Level 3 inputs in 2011:
The transfers of the government and corporate securities into level 3 classification at December 31, 2011 were primarily the result of broker-priced securities being transferred from an HTM to an AFS designation in 2011.
The following tables provide quantitative information regarding our financial assets and liabilities that were disclosed at fair value at March 31, 2012:
NOTE 8. Reinsurance
The following table contains a listing of direct, assumed, and ceded reinsurance amounts for premiums written, premiums earned, and losses and loss expenses incurred. For more information concerning reinsurance, refer to Note 8. “Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” in our 2011 Annual Report.
Direct premium written (“DPW”) for First Quarter 2012 was $52.6 million higher than First Quarter 2011 due to the following: (i) our E&S operations that generated DPW of $13.2 million; (ii) Commercial Lines renewal pure price increases of 5.1% coupled with a three-point increase in retention to 83%; (iii) Personal Lines filed rate increases that were effective for the quarter that averaged 5.9% while retention improved one point from a year ago to 87%; (iv) an increase in direct new business premiums of $21.8 million; and (v) audit and endorsement additional premium of $5.7 million compared to return premium of $4.0 million. Direct premium earned increases in First Quarter 2012 were consistent with the fluctuation in DPW for the twelve-month period ended March 31, 2012 as compared to the twelve-month period ended March 31, 2011.
Assumed premiums written and earned for First Quarter 2012 was $16.3 million and $9.2 million higher, respectively, than First Quarter 2011 primarily due to the August 2011 E&S renewal rights acquisition.
The ceded premiums and losses related to our involvement with the National Flood Insurance Program (“NFIP”), in which all of our Flood premiums, losses, and loss expenses are ceded to the NFIP, are as follows:
NFIP ceded losses and loss expenses incurred in First Quarter 2012 were $29.5 million lower than First Quarter 2011. This decrease was a direct result of Hurricane Irene and Lee claims from August and September 2011 being settled in First Quarter 2012 for roughly $15 million less than their original estimates. On an overall company basis, this decrease was partially offset by ceded loss activity related to our E&S business.
9. Segment Information
Our Insurance Operations segment has historically reflected the results of our standard market insurance products. In 2011, through our acquisition activities, we began writing E&S business. This business has not met the quantitative thresholds for individual segment reporting, as our E&S operations share various economic, regulatory, and production-related characteristics with our standard market insurance products, we have aggregated their results into our Insurance Operations segment.
In computing the results of each segment, we do not make adjustments for interest expense, net general corporate expenses, or federal income taxes. We do not maintain separate investment portfolios for the segments, and therefore, do not allocate assets to the segments.
The following summaries present revenue (net investment income and net realized gain (loss) on investments in the case of the Investments segment) and pre-tax income for the individual segments:
NOTE 10. Retirement Plans
The following tables show the costs of the Retirement Income Plan for Selective Insurance Company of America (“Retirement Income Plan”) and the retirement life insurance component (“Retirement Life Plan”) of the Selective Insurance Company of America Welfare Benefits Plan. For more information concerning these plans, refer to Note 16. “Retirement Plans” in Item 8. “Financial Statements and Supplementary Data.” of our 2011 Annual Report.
We presently anticipate contributing $8.4 million to the Retirement Income Plan in 2012, $2.4 million of which has been funded as of March 31, 2012.
NOTE 11. Comprehensive Income
The balances of, and changes in, each component of AOCI (net of taxes) as of March 31, 2012 are as follows:
Note 12. Commitments and Contingencies
At March 31, 2012, we had contractual obligations that expire at various dates through 2022 to invest up to an additional $54.3 million in alternative and other investments. There is no certainty that any such additional investment will be required.
Note 13. Litigation
In the ordinary course of conducting business, we are named as defendants in various legal proceedings. Most of these proceedings are claims litigation involving our eight insurance subsidiaries (the “Insurance Subsidiaries”) as either: (a) liability insurers defending or providing indemnity for third-party claims brought against insureds; or (b) insurers defending first-party coverage claims brought against them. We account for such activity through the establishment of unpaid loss and loss adjustment expense reserves. We expect that the ultimate liability, if any, with respect to such ordinary course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to our consolidated financial condition, results of operations, or cash flows.
Our Insurance Subsidiaries are also from time-to-time involved in other legal actions, some of which assert claims for substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, improper reimbursement of medical providers paid under workers compensation and personal and commercial automobile insurance policies. Our Insurance Subsidiaries also are involved from time-to-time in individual actions in which extra-contractual damages, punitive damages, or penalties are sought, such as claims alleging bad faith in the handling of insurance claims. We believe that we have valid defenses to these cases. We expect that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to our consolidated financial condition. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, an adverse outcome in certain matters could, from time-to-time, have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
We classify our business into two operating segments:
Our Insurance Operations offers standard market insurance products and services through seven insurance subsidiaries and, in 2011, we began offering excess and surplus lines (“E&S”) insurance products through one insurance subsidiary as the result of the following acquisition activity:
Our eight insurance subsidiaries are collectively referred to as the “Insurance Subsidiaries”.
For additional information regarding our recent acquisitions, refer to Note 13. “Business Combinations” in Item 8. “Financial Statements and Supplementary Data.” of our Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Annual Report”).
The purpose of the Management’s Discussion and Analysis (“MD&A”) is to provide an understanding of the consolidated results of operations and financial condition and known trends and uncertainties that may have a material impact in future periods. Consequently, investors should read the MD&A in conjunction with the consolidated financial statements in our 2011 Annual Report.
In the MD&A, we will discuss and analyze the following:
These 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 most critical to the preparation of the consolidated financial statements involve the following: (i) reserves for losses and loss expenses; (ii) deferred policy acquisition costs; (iii) premium audit; (iv) pension and post-retirement benefit plan actuarial assumptions; (v) other-than-temporary investment impairments; and (vi) 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 our 2011 Annual Report, pages 47 through 56.
1 Refer to the Glossary of Terms attached to our 2011 Annual Report as Exhibit 99.1 for definitions of terms used in this Form 10-Q.
2 Operating income is used as an important financial measure by us, analysts, and investors, because the realization of investment gains and losses on sales in any given period is largely discretionary as to timing. In addition, these realized investment gains and losses, as well as other-than-temporary impairments (“OTTI”) that are charged to earnings could distort the analysis of trends. See below for a reconciliation of operating income to net income in accordance with U.S. generally accepted accounting principles (“GAAP”). Operating return on average equity is calculated by dividing annualized operating income by average stockholders’ equity.
Our pre-tax net income decreased by $3.0 million in the first quarter of 2012 (“First Quarter 2012”) as compared to the first quarter of 2011 (“First Quarter 2011”), primarily due to a reduction in net investment income of $10.8 million partially offset by improved underwriting operations. The net income fluctuation between 2012 and 2011 is consistent with these pre-tax income changes.
The following table reconciles operating income and net income for the periods presented above:
The variances in operating income are reflective of the results discussed above.
Our standard market insurance products and services are sold primarily in 22 states in the Eastern and Midwestern U.S. through approximately 1,000 independent insurance agencies. Our recent E&S acquisitions provide us the opportunity to write contract binding authority E&S business in all 50 states and the District of Columbia through approximately 100 wholesale agents across the entire country.
Our Insurance Operations segment consists of two components: (i) Commercial Lines, which markets primarily to businesses and represents approximately 82% of net premiums written (“NPW”); and (ii) Personal Lines, which markets primarily to individuals and represents approximately 18% of NPW. Our E&S operations write exclusively commercial lines of business, and for purposes of this MD&A, this business is included within Commercial Lines. The underwriting performance of these lines is generally measured by four different statutory ratios: (i) the loss and loss expense ratio; (ii) the underwriting expense ratio; (iii) the dividend ratio; and (iv) the combined ratio.
Summary of Insurance Operations
Overall NPW increased by 16% in First Quarter 2012 compared to First Quarter 2011, 7.1 points of which were attributable to our E&S operations that generated NPW of $25.8 million. The remainder of the increase was attributable to our standard market business due to the following: (i) Commercial Lines renewal pure price increases of 5.1% coupled with a three-point increase in retention to 83%; (ii) Personal Lines filed rate increases that were effective for the quarter that averaged 5.9% while retention improved one point from a year ago to 87%; (iii) an overall increase in direct new business premiums of $21.8 million; and (iv) audit and endorsement additional premium of $5.7 million compared to return premium of $4.0 million in First Quarter 2011.
Insurance Operations Outlook
The insurance industry continues to demonstrate higher levels for pricing and underwriting discipline, in part due to the extreme levels of catastrophe losses in 2011. However, until a sustained hard market has been established, the industry is expected to remain unprofitable as evidenced by A.M. Best’s industry combined ratio projection of 102.0% for 2012, including approximately 2 points of favorable prior year reserve development. Our Insurance Operations segment reported a statutory combined ratio of 99.1% for First Quarter 2012 as compared to 102.6% in First Quarter 2011. Our full year 2012 expectation remains at a statutory combined ratio of 101.5%.
A.M Best continues to maintain its negative outlook on the commercial lines sector as widespread pricing improvements have not yet materialized. A recent report from the Commercial Lines Insurance Pricing Survey showed that industry pricing increased by 3.3% during the fourth quarter of 2011. While industry pricing continues to improve, we are on our twelfth consecutive quarter of Commercial Lines renewal pure price increases with 5.1% in First Quarter 2012 while retention continues to be strong at 83%, an increase of three points as compared to the prior year. The price increases that we have obtained demonstrate the overall strength of the relationships that we have with our independent agents, even in difficult economic times.
The personal lines market continues to be more receptive to price increases, and A.M. Best has continued to maintain a stable outlook for the sector, citing that capitalization will continue to be strong and rating actions will generally be affirmations. Our Personal Lines operations continue to experience NPW growth driven by ongoing rate increases that went into effect over the past several years. Personal Lines filed rate increases that were effective for the quarter that averaged 5.9% while retention improved one point from a year ago to 87%. As we achieve rate increases in excess of loss trends, we expect profitability in this line to improve
In First Quarter 2012, some positive variances in underwriting results and some negative variances in investments led to overall earnings within expectations. We are maintaining the 2012 guidance as follows:
Review of Underwriting Results by Line of Business
The following is a discussion of our most significant standard market commercial lines of business:
We continue to see improvements in pricing in this line as our renewal pure price increase was 5.8% in First Quarter 2012. Along with our ability to achieve price increases, we are seeing premium improvement in this line compared to First Quarter 2011 as evidenced by the following:
The statutory combined ratio for First Quarter 2012 was flat compared to the same period last year. While there was no prior year development in First Quarter 2012, First Quarter 2011 was impacted by favorable prior year development of approximately $3 million, or 3.5 points. The prior year development was driven by 2008 and prior accident years partially offset by adverse development in the 2010 accident year.
In First Quarter 2012, we achieved renewal pure price increases of 6.9%. In addition, improvements in NPW include the following:
The decrease in the statutory combined ratio of this line reflects no net prior year development in First Quarter 2012, compared to $6 million, or 9.6 points, of unfavorable development related to the 2010 accident year for First Quarter 2011.
NPW increased 6% on this line of business in First Quarter 2012 compared to the same period last year driven by: (i) new business growth of 48%, or $4.8 million, to $14.6 million; (ii) renewal pure price increases of 4.0%; and (iii) a three-point improvement in retention to 83%.
The increase in the statutory combined ratio was primarily driven by lower favorable casualty prior year development in First Quarter 2012 compared to First Quarter 2011. Prior year casualty development was as follows:
NPW for this line of business increased in First Quarter 2012 compared to First Quarter 2011 primarily due to:
The improvement in the statutory combined ratio was driven by a decrease in catastrophe losses of $2.3 million, or 4.9 points, compared to First Quarter 2011. Partially offsetting the catastrophe losses were non-catastrophe property losses that increased by 1.2 points for First Quarter 2012 compared to First Quarter 2011.
Our investment philosophy includes certain return and risk objectives for the fixed maturity, equity, and other investment portfolios. The primary fixed maturity portfolio return objective is to maximize after-tax investment yield and income while balancing risk. A secondary objective is to meet or exceed a weighted-average benchmark of public fixed income indices. Within the equity portfolio, the high dividend yield equities strategy is designed to generate consistent dividend income while maintaining a minimal tracking error to the Standard & Poor’s (“S&P”) 500 Index. Additional equity security strategies are focused on meeting or exceeding strategy specific benchmarks of public equity indices. Although yield and income generation remain the key drivers to our investment strategy, our overall philosophy is to invest with a long-term horizon along with predominately a “buy-and-hold” approach. The return objective of the other investment portfolio, which includes alternative investments, is to meet or exceed the S&P 500 Index.
Total Invested Assets
The increase in our investment portfolio compared to year-end 2011 was driven primarily by: (i) operating cash flows generated from Insurance Operations; and (ii) valuation improvements on securities in our available-for-sale (“AFS”) portfolio. The cash generated from our Insurance Operations in First Quarter 2012 was used to invest primarily in corporate securities within our fixed income portfolio.
We structure our portfolio conservatively with a focus on: (i) asset diversification; (ii) investment quality; (iii) liquidity, particularly to meet the cash obligations of our Insurance Operations segment; (iv) consideration of taxes; and (v) preservation of capital. We believe that we have a high quality and liquid investment portfolio. The breakdown of our investment portfolio is as follows:
Fixed Maturity Securities
The average duration of the fixed maturity securities portfolio as of March 31, 2012 was 3.3 years compared to the Insurance Subsidiaries’ liability duration of approximately 3.8 years, which was relatively consistent with the prior year. The current duration of the fixed maturity securities portfolio is within our historical range, and is monitored and managed to maximize yield and limit interest rate risk. We are currently experiencing pressure on our yields within our fixed maturity securities portfolio, as higher yielding bonds that are either maturing or have been sold are being replaced with the lower yielding bonds that are currently available in the marketplace. We manage liquidity with a laddered maturity structure and an appropriate level of short-term investments to avoid liquidation of AFS fixed maturities in the ordinary course of business. We typically have a long investment time horizon, and every purchase or sale is made with the intent of maximizing risk adjusted investment returns in the current market environment while balancing capital preservation. In First Quarter 2012, we continued to migrate to investment-grade corporate bonds as part of our overall investment strategy, due to the more attractive risk/return characteristics of the corporate sector. We also invested in high credit quality municipal bonds and MBS.
Our fixed maturity securities portfolio maintains a weighted average credit rating of “AA-” as of March 31, 2012. The following table presents the credit ratings of our fixed maturity securities portfolio:
The following table summarizes the fair value, unrealized gain (loss) balances, and the weighted average credit qualities of our AFS fixed maturity securities at March 31, 2012 and December 31, 2011: