Safety Insurance Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. The company is a property and casualty insurer focused primarily on Massachusetts, with business in New Hampshire and Maine. Private passenger auto is its largest product line. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Total revenue | $221.9 | $181.0 | Higher, substantially reflecting investment-related items |
| Net earned premiums | $192.9 | $197.9 | Down 2.5% |
| Net investment income | $11.5 | $10.7 | Up 7.7% |
| Net income (loss) | $36.2 | $(2.0) | Turned profitable |
| Diluted EPS | $2.42 | $(0.13) | Improved |
| Non-GAAP operating income | $28.9 | $24.2 | Up; management attributes increase mainly to lower losses |
| GAAP loss / expense / combined ratios | 57.8% / 33.7% / 91.5% | 61.0% / 31.9% / 92.9% | Combined ratio improved 1.4 percentage points |
| Operating cash flow | $12.5 | $(28.5) | Improved |
Investment items included $4.3 million of partnership earnings, $2.9 million of realized investment gains, a $6.2 million increase in unrealized equity gains, and a $0.2 million credit-loss benefit. In Q1 2020, the company recorded a $30.0 million decline in unrealized equity gains and a $2.5 million credit-loss expense. Non-GAAP operating income excludes specified investment gains and losses and related taxes; it is not a GAAP measure.
Direct written premiums were $192.2 million, down 2.6%, primarily due to fewer private passenger auto policies. Net losses and loss adjustment expenses fell 7.7% to $111.5 million. The company reported $12.5 million of favorable prior-year reserve development, versus $9.6 million a year earlier. Underwriting and related expenses rose 3.1% to $65.0 million, reflecting system modernization costs and higher contingent commissions.
Balance sheet, debt and liquidity
- At March 31, total assets were $2,045.7 million, shareholders’ equity was $890.3 million, and cash and cash equivalents were $51.6 million. Total investments were $1,506.0 million.
- Loss and loss adjustment expense reserves were $577.3 million gross, including $108.2 million recoverable from reinsurers for unpaid losses; unearned premium reserves were $412.4 million.
- Debt was $30.0 million, consisting of a five-year FHLB-Boston borrowing at 1.42%, due March 2025. No borrowings were outstanding under the $30.0 million revolving credit facility, which matures in August 2023. The company reported compliance with its credit covenants.
- Investing cash flow was a use of $0.8 million; financing cash flow was a use of $13.9 million, mainly shareholder dividends. Cash declined $2.2 million during the quarter.
Material changes, outlook and risks
- Management linked lower claims costs mainly to reduced claim frequency, particularly in private passenger auto, as fewer cars were on the road during the pandemic. It cautioned that claim patterns and COVID-19 effects remain uncertain.
- The company accrued $6.5 million for legal defense costs related to a lawsuit alleging improper denial of COVID-19 business-interruption coverage. It maintains that coverage generally requires direct physical damage or loss to property. Litigation outcomes or legislative or regulatory action could alter coverage obligations.
- Management said operating cash flow should be sufficient for operating needs over the next 12 months and expects internally generated funds to meet needs beyond that period, while noting longer-term uncertainty. It planned to continue quarterly dividends in 2021 subject to financial position and cash flows; the board declared a $0.90-per-share dividend payable June 15, 2021.
- Catastrophe, reserve-estimation, market, regulatory and competitive risks remain significant. The company’s 2021 catastrophe reinsurance provides $615 million of coverage for property losses above $50 million, up to $665 million. Management reported no conditions raising substantial doubt about going concern and no subsequent events requiring disclosure. No formal earnings guidance was provided in the filing.
Most important facts for investors to verify
- Whether the reduced auto claim frequency persists and whether premium and policy-count declines continue.
- Whether favorable prior-year reserve development is sustainable: management’s net reserve estimate was $469.1 million, within an actuarial range of $438.0 million to $488.6 million. A one-percentage-point change in the loss and LAE ratio would change reserves by about $1.9 million and net income by about $1.5 million, or $0.10 per diluted share.
- How much reported earnings depend on investment valuations: Q1 included a $6.2 million unrealized equity gain, while accumulated other comprehensive income fell by $19.0 million during the quarter.
- The outcome and potential cost of the COVID-19 business-interruption lawsuit, in addition to the $6.5 million defense-cost reserve.
- Dividend capacity and access to subsidiary cash: insurance-subsidiary dividends are subject to regulatory limits, and the filing identifies $121.4 million as available in 2021 without prior approval based on statutory measures.