Safety Insurance Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Amounts are in thousands of dollars unless stated otherwise. Safety is a property-and-casualty insurer focused primarily on Massachusetts, with operations in New Hampshire and Maine. Private passenger automobile is its principal product line.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Direct written premiums | $189.5 million | $192.2 million |
| Net earned premiums | $187.1 million | $192.9 million |
| Total revenue | $195.0 million | $221.9 million |
| Losses and loss adjustment expenses | $123.2 million | $111.5 million |
| Net income | $7.8 million | $36.2 million |
| Diluted EPS | $0.53 | $2.42 |
| Operating cash flow | $(15.3) million | $12.5 million |
Revenue declined 12.1% and net income declined 78.3% year over year. The GAAP combined ratio was 98.7%, versus 91.5%; the loss ratio rose to 65.8% from 57.8%, while the expense ratio improved to 32.9% from 33.7%. Non-GAAP operating income, as defined by the company, was $14.8 million, or $0.99 per diluted share, compared with $28.9 million, or $1.93 per diluted share. The company cautions that this non-GAAP measure is not a substitute for GAAP results.
Balance sheet, investments and capital
- At March 31, total assets were $1.991 billion, total liabilities $1.129 billion, and shareholders’ equity $861.9 million. Equity declined from $927.2 million at year-end 2021, including a $47.4 million after-tax other comprehensive loss, largely from unrealized investment losses.
- Cash and cash equivalents were $35.2 million, down from $63.6 million at December 31, 2021. Total investments were $1.486 billion, down from $1.571 billion; fixed-maturity fair value fell to $1.136 billion from $1.218 billion.
- The company reported $41.9 million of gross unrealized investment losses at quarter-end, compared with $7.6 million at year-end. Management attributed most fixed-maturity losses to interest-rate and other temporary market movements, stated it did not expect to need to sell securities before recovery, and maintained an expected-credit-loss allowance of $691,000.
- Debt was $30.0 million, consisting of a 1.42% FHLB-Boston borrowing due March 2025. No amounts were drawn on the $30.0 million revolving credit facility, which matures August 2023. The company also reported capacity to borrow $197.3 million from FHLB-Boston against eligible collateral and said it was in compliance with credit-facility covenants.
- Cash used in financing was $28.2 million, including $13.6 million in dividends paid and $14.6 million for repurchases of 170,904 shares. The quarterly dividend was $0.90 per share.
Material changes and management commentary
- Direct written premiums decreased 1.4%; management attributed the decline primarily to fewer private passenger auto policies. Net earned premiums decreased 3.0%.
- Loss and LAE increased 10.5%. Management cited a return to pre-pandemic private-passenger auto claim frequency, inflation and supply-chain delays. Prior-year reserve releases were $12.4 million, broadly similar to $12.5 million in Q1 2021.
- Net investment income fell 8.2% to $10.6 million; management cited lower fixed-income portfolio yields, 2.9% versus 3.2%. Net realized investment gains increased to $4.2 million, but equity securities generated a $13.0 million decline in net unrealized gains, compared with a $6.2 million increase in Q1 2021.
- Operating cash flow was negative, which management attributed to the timing of expense payments; it said positive operating cash flows were expected in the future and that current liquidity was sufficient for operating needs. Investing activities provided $15.1 million, while cash declined by $28.4 million overall.
- No formal earnings or premium guidance was provided. Management said it planned to continue quarterly dividends in 2022 subject to financial position and cash-flow regularity. A May 4, 2022 dividend of $0.90 per share was declared for payment June 15.
- Approved 2022 rate changes included Massachusetts commercial auto +3.3%, homeowners +2.6%, private passenger auto -2.3%, and New Hampshire commercial auto +2.8%, with effective dates from March through September. The Massachusetts auto reduction reflected policyholder discounts.
Risks, contingencies and unusual items
- The company had accrued $6.5 million for legal defense costs in a lawsuit alleging improper denial of COVID-19 business-interruption claims. The Massachusetts Supreme Judicial Court’s April 21, 2022 decision in a separate case affirmed dismissal of similar claims based on the absence of direct physical loss or damage; the company’s case remained open.
- Management did not expect Massachusetts inherent-diminished-value auto claims to be material and had not accrued a specific loss contingency. Future assessments by the Massachusetts Insurers Insolvency Fund are possible but were not expected by management to materially affect financial position.
- Loss reserves involve significant estimation uncertainty. Net reserves were $469.4 million, within the company’s actuarial range of $433.3 million to $496.1 million. Management estimated that a one-percentage-point change in the loss and LAE ratio would change reserves by $1.9 million and net income by $1.5 million, or $0.10 per diluted share.
- Other stated risks include severe weather and catastrophe losses, competition, regulation and residual-market obligations, changes in claim frequency or severity, interest-rate and equity-price movements, investment liquidity, and potential effects of COVID-19-related legal or regulatory actions. The filing reported no subsequent events requiring recognition or disclosure and no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether auto claim frequency, inflation and repair-cost pressures continue to elevate losses and the combined ratio.
- How reserve estimates develop, including continued favorable prior-year development and the substantial IBNR component in certain residual-market reserves.
- Whether unrealized investment losses recover or create liquidity or earnings pressure, particularly if securities must be sold before recovery.
- The outcome and potential cost of the COVID-19 business-interruption litigation and any related coverage or regulatory developments.
- The sustainability of the $0.90 quarterly dividend and the pace of repurchases, given Q1 negative operating cash flow and the company’s capital and regulatory constraints.