Safety Insurance Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparative periods ended June 30, 2022. Safety is a property-and-casualty insurer focused mainly on Massachusetts, with business in New Hampshire and Maine. Private passenger auto is its largest product line.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net earned premiums | $202.2m | $188.3m | $394.0m | $375.4m |
| Total revenue | $229.4m | $183.6m | $443.2m | $378.6m |
| Net income (loss) | $17.0m | $7.9m | $4.7m | $15.7m |
| Diluted EPS | $1.15 | $0.53 | $0.31 | $1.06 |
| Net investment income | $13.8m | $11.6m | $27.5m | $22.2m |
| Non-GAAP operating income (loss) | $12.0m | $28.2m | ($0.8m) | $43.0m |
Direct written premiums were $260.2m in Q2, up 21.2%; net written premiums were $245.0m, up 20.8%. For the six months, direct and net written premiums rose 18.3% and 17.6%, respectively. Management attributed growth to new business, improved retention, and rate increases. Six-month policy counts grew in private passenger auto (13.5%), commercial auto (4.0%), and homeowners (9.1%); average written premium per policy also increased in each line.
Underwriting results weakened: the combined ratio was 101.9% in Q2 versus 92.1% a year earlier, and 110.0% for the first half versus 95.4%. The six-month loss ratio rose to 78.9% from 62.8%; the expense ratio improved to 31.1% from 32.6%. A combined ratio above 100% indicates an underwriting loss before investment and other income.
At June 30, total assets were $2.016bn, investments $1.374bn, cash and cash equivalents $25.4m, total liabilities $1.222bn, and shareholders’ equity $793.8m. Debt was $35.0m, principally a $30m FHLB borrowing; the company reported covenant compliance. Operating cash flow was negative $13.4m for the first half, compared with negative $0.3m in 2022. Investing activities provided $45.7m and financing activities used $32.2m. The quarterly dividend remained $0.90 per share.
Changes, drivers, and management commentary
- Q2 net income increased year over year, while first-half net income declined. Q2 included a $6.3m increase in unrealized equity-security gains, compared with a $28.9m unrealized loss in Q2 2022; these fair-value changes contribute to GAAP earnings volatility. First-half non-GAAP operating results also fell sharply, reflecting higher claims costs.
- Loss and loss-adjustment expenses rose 27.3% in Q2 and 31.7% for the first half. Management cited inflation, particularly in private passenger auto, and the February 2023 winter freeze, which generated about 800 claims and $32.1m of losses and expenses through June 30.
- Prior-year reserve releases were $10.0m in Q2 and $21.5m for the first half, compared with $16.9m and $29.3m in the comparable 2022 periods. Management said favorable development reflected fewer claims than estimated and better-than-expected severity in certain auto reserves, among other lines.
- Net investment income increased 18.9% in Q2 and 23.7% for the first half, primarily as higher interest rates lifted fixed-income returns. Annualized portfolio yield was 3.9% for both periods in 2023, versus 3.2% and 3.0% in 2022. Partnership investment earnings and realized gains were lower year over year.
- Management expects sufficient operating cash to meet needs over the next 12 months and expects the insurance subsidiaries to generate cash for longer-term needs, while cautioning that future conditions could affect liquidity. The company expects to continue quarterly dividends in 2023, subject to its financial position and cash flows; it did not provide earnings or revenue guidance.
Risks, contingencies, and unusual items
- Management’s selected net loss and LAE reserve estimate was $468.2m, within an actuarial range of $437.5m–$495.7m. A one-percentage-point change in the six-month loss and LAE ratio would change reserves by about $3.9m and net income by about $3.1m, or $0.21 per diluted share.
- Fixed maturities had $95.5m of gross unrealized losses at June 30; management attributed most losses to interest rates and temporary market conditions and said it did not expect to need to sell securities before recovery. The company reported $1.6m of credit-loss allowance on fixed maturities.
- Reinsurance recoverables are concentrated: 94% of recoverables on paid and unpaid losses related to the Massachusetts CAR commercial auto program. Management monitors reinsurer credit risk; it reported no expected credit losses on reinsurance recoverables. Catastrophe protection for 2023 included $590m of excess coverage above a $75m retention, subject to stated layers and participation terms.
- A Massachusetts court denied class certification on June 20, 2023 in litigation concerning inherent diminished value claims. The company said it did not expect such claims to be material and had not accrued a specific loss contingency. Other ordinary-course claims were not expected to have a material adverse effect. The COVID-19 business-interruption lawsuit was closed in 2022 and a prior $6.5m defense-cost accrual was reversed.
- Investments committed to limited partnerships totaled $160m; the filing reports $127.0m contributed and $40.2m of remaining callable capital, including potential recallable contributions. The debt facility’s stated maturity was August 10, 2023; verify any extension or replacement after the reporting date.
- Approved rate increases include Massachusetts private passenger auto rates effective July 1, 2023 (4.3%) and homeowners rates effective August 1, 2023 (3.9%), along with increases in other states and lines. These are prospective and do not guarantee improved underwriting results.
Most important facts for investors to verify
- Whether subsequent quarters show that premium growth and rate actions are keeping pace with auto inflation, freeze-related claims, and other loss severity.
- How loss reserves develop against the disclosed actuarial range, including the effect of continued favorable prior-year reserve development.
- Whether operating cash flow returns to positive levels and the company maintains liquidity without selling investments at a loss.
- The status and terms of the revolving credit facility after its stated August 2023 maturity, and any changes in debt or FHLB borrowing.
- Subsequent updates on CAR-related recoverables, catastrophe exposure, the remaining investment commitments, and the Massachusetts diminished-value litigation.