Business context and reporting period
Select a Insurance Group, Inc. is a property-and-casualty insurer with Standard Commercial Lines, Standard Personal Lines, Excess and Surplus (E&S) Lines, and Investments segments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023, with comparisons to 2022.
Financial results and condition
- Revenue: Second-quarter revenue was $1.041 billion, up 20%; net premiums earned rose 13% to $942.2 million and net investment income rose 39% to $97.7 million. Six-month revenue was $2.040 billion, up 19%.
- Earnings: Q2 net income was $58.6 million, up 48%, and diluted EPS was $0.92 versus $0.61. Six-month net income was $151.2 million, up 58%, and diluted EPS was $2.41 versus $1.50. Non-GAAP operating income, which excludes after-tax realized and unrealized investment gains and losses, fell 15% in Q2 to $60.6 million and 6% in the first half to $148.2 million.
- Underwriting and margins: The combined ratio was 100.2% in Q2 versus 95.5% and 98.0% for the first half versus 94.3%. Underwriting results were a $1.5 million loss in Q2 and $37.7 million income for six months, down 60% year over year. Q2 catastrophe losses were $100.0 million, or 10.6 combined-ratio points; the six-month amount was $155.3 million, or 8.4 points.
- Cash flow: Six-month operating cash flow was $293.6 million versus $243.5 million. Investing activities used $253.6 million and financing activities used $44.0 million. Cash and restricted cash totaled $21.3 million at June 30; restricted cash is principally NFIP funds for flood claims.
- Investments: Net investment income increased as new cash was invested at higher yields; the annualized after-tax portfolio yield was 3.9% in Q2 versus 3.0%. Net realized and unrealized investment losses narrowed to $5.4 million in Q2 and $2.1 million for six months. The fixed-income portfolio still had $501.2 million of pretax net unrealized losses at June 30; management said it did not intend to sell the securities and did not believe it would be required to do so.
- Debt and capital: Long-term debt was $503.6 million; the debt-to-capital ratio was 15.9%. GAAP equity was $2.67 billion and statutory surplus was $2.5 billion. Book value per common share was $40.81 at June 30, up from $38.57 at year-end 2022.
- Liquidity: Parent cash and investments were $480 million, against a stated target of at least $180 million in highly liquid investments. The $50 million revolving credit facility was undrawn, and the company reported compliance with its covenants. Insurance subsidiaries paid $80 million in dividends to the parent during the first half.
Material changes versus the prior comparable period
- Premium growth was strong: net premiums written increased 17% in Q2 and 15% for six months, supported by pricing, new business, retention, and exposure growth.
- Higher catastrophe losses and less favorable prior-year casualty reserve development weakened underwriting results. First-half favorable prior-year reserve development was $8.1 million, compared with $22.7 million a year earlier.
- Standard Personal Lines deteriorated materially: its combined ratio reached 126.5% in Q2 and 121.4% for six months, with higher auto and homeowners claim costs, catastrophe losses, and unfavorable reserve development.
- Investment income growth and substantially smaller investment losses supported GAAP earnings, while non-GAAP operating income declined, reflecting weaker underwriting results.
Outlook, management commentary, and risks
- Management maintained its 2023 expectations for a 96.5% GAAP combined ratio, including catastrophe losses of 6.0 points (increased from prior guidance of 4.5 points) and assuming no additional prior-year casualty reserve development; $300 million of after-tax net investment income, including $30 million from alternative investments; an approximately 21% effective tax rate; and 61 million fully diluted weighted-average shares, assuming no additional repurchases.
- Management said first-half non-GAAP operating ROE of 12.2% was in line with its full-year 12% target. Growth priorities include disciplined pricing and underwriting, commercial-lines expansion, new-state entry, and a mass-affluent focus in personal lines. West Virginia and Maine commercial-lines launches were expected in early 2024.
- Personal-lines profitability faces pressure from elevated claim frequency and severity, inflation in repair and construction costs, and renewal price increases that may lag loss trends. The company said it was filing state-level rate increases and expected filings and approved impacts to increase through 2023.
- Reinsurance treaties effective July 1, 2023 were renewed. The property treaty raised the first-layer retention from $3 million to $5 million; casualty treaty deposit premium rose 33%, while property treaty deposit premium fell 11%.
- Key exposures include catastrophe frequency and severity, inflation and claims trends, reserve-estimation uncertainty, investment-market and interest-rate movements, and reinsurer collectability. Ordinary-course litigation is not expected to be material overall, but adverse outcomes could affect results or cash flows in particular periods; COVID-19 coverage disputes remain unresolved.
Important facts for investors to verify
- Whether catastrophe activity, personal-lines claim trends, and rate actions support delivery of the 96.5% full-year combined-ratio outlook.
- Whether higher investment yields can continue to offset underwriting weakness, and how alternative-investment income develops.
- Whether reserve development and the remaining unrealized fixed-income losses change materially, including any need to sell securities or increase credit-loss allowances.
- Whether reinsurance changes provide adequate protection at the revised retentions and treaty costs, and whether subsidiary dividend capacity and liquidity remain sufficient.
- How reported GAAP earnings compare with non-GAAP operating results; the filing shows materially different trends between the two measures.