Safety Insurance Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Dollar amounts below are in millions unless stated otherwise. Safety is a property-and-casualty insurer focused primarily on Massachusetts, with operations in New Hampshire and Maine; private passenger auto is its largest product line.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net earned premiums | $189.9 | $194.4 | $565.4 | $581.5 |
| Total revenue | $192.3 | $213.7 | $571.0 | $658.5 |
| Losses and loss adjustment expenses | $124.1 | $119.1 | $360.0 | $340.8 |
| Net income | $6.2 | $24.8 | $21.9 | $98.7 |
| Diluted EPS | $0.42 | $1.64 | $1.48 | $6.58 |
| Operating cash flow | Not reported by quarter | $23.4 | $110.6 |
- Direct written premiums increased 3.2% to $217.9 million in Q3; nine-month direct written premiums were up 0.2% to $621.9 million. Net earned premiums fell 2.3% in Q3 and 2.8% year to date.
- GAAP combined ratio was 97.1% in Q3 versus 93.9%; nine-month ratio was 96.0% versus 91.9%. Loss ratios rose to 65.3% and 63.7%, respectively, while expense ratios improved to 31.8% and 32.3%.
- Non-GAAP operating income was $16.7 million in Q3 and $59.8 million year to date, down from $25.8 million and $82.7 million. The filing defines this measure as net income adjusted for investment gains/losses, equity-security unrealized changes, credit losses and related taxes.
- Net investment income was $11.1 million in Q3 and $33.3 million year to date. Nine-month partnership investment earnings declined to $9.7 million from $12.6 million. Net unrealized losses on equity securities were $56.3 million year to date, versus gains of $11.4 million in 2021.
Financial position, debt and capital
- At September 30, total assets were $1.934 billion, total investments $1.372 billion, cash and cash equivalents $33.6 million, and shareholders’ equity $784.4 million. At December 31, 2021, these were $2.117 billion, $1.571 billion, $63.6 million and $927.2 million, respectively.
- Accumulated other comprehensive loss was $90.5 million, compared with income of $24.6 million at year-end 2021. Fixed-maturity fair value declined to $1.039 billion from $1.218 billion; the company attributed most unrealized fixed-income losses to interest-rate and other temporary market conditions, not credit deterioration.
- Debt was $30.0 million, consisting of a 1.42% FHLB-Boston loan due in 2025. There were no borrowings under the $30 million revolving facility, which matures in August 2023. The company reported compliance with its debt covenants and potential FHLB borrowing capacity of approximately $190.7 million, subject to collateral.
- Nine-month financing cash outflow was $54.5 million, including $39.9 million of dividends and $14.6 million of share repurchases. Dividends were $0.90 per share each quarter; the board declared another $0.90 dividend for payment in December 2022.
Changes, outlook and notable items
- Management attributed higher claims costs to a return toward pre-pandemic private-auto claim frequency, inflation and supply-chain delays. Nine-month incurred losses rose 5.6%, faster than earned premiums.
- Prior-year reserves developed favorably by $43.2 million in the first nine months, versus $41.2 million in 2021. This included reversal in Q2 of a $6.5 million legal-defense accrual after a COVID-19 business-interruption claim was closed. The reserve release supported results; it is not recurring underwriting premium revenue.
- Management reported sufficient liquidity for operating needs over the next 12 months and expects internally generated funds to meet needs thereafter, while noting uncertainty from market, regulatory and economic conditions. It expects operating cash flows to fund the proposed acquisition described below.
- On October 6, 2022, the company signed a non-binding letter of intent to acquire the assets and operations of Northeast Metrowest Insurance Agency, which has more than $40 million in policy premiums. Completion was expected in Q4 2022, subject to customary conditions; the filing does not report a completed transaction.
- Approved rate actions effective in 2022 included increases in several commercial-auto and homeowners lines, a 2.3% decrease in Massachusetts private passenger auto effective April 1, and a 3.5% increase in that line effective December 1.
- Catastrophe, inflation, supply-chain, competition, regulatory, interest-rate and equity-market risks remain relevant. The company reported $145.3 million of gross unrealized investment losses at September 30, but stated it believed it would not need to sell securities before recovery. It maintained catastrophe reinsurance intended to protect against a modeled 135-year storm.
- Other contingencies include third-party claims for inherent diminished vehicle value following a Massachusetts court decision; the company did not accrue a specific loss, judging potential claims immaterial at the time. Management said ordinary-course claims and expected insolvency-fund assessments were not expected to materially affect the company.
- Management stated that no conditions raised substantial doubt about the company’s ability to continue as a going concern. No specific earnings or revenue guidance was provided.
Important facts for investors to verify
- Whether claim frequency and severity, including inflation and repair-cost pressures, continue to worsen and how that affects loss and combined ratios.
- Whether favorable reserve development persists; the filing notes that reserves are estimates and that a one-percentage-point change in the loss and LAE ratio would change reserves by $5.7 million and net income by about $4.5 million, or $0.30 per diluted share.
- Investment portfolio performance and capital impact: unrealized losses drove a substantial decline in accumulated other comprehensive income and shareholders’ equity.
- Status, purchase price, funding and expected contribution of the Northeast Metrowest agency acquisition.
- Dividend sustainability, future repurchases, and the availability of subsidiary dividends subject to Massachusetts regulatory limits.