Safety Insurance Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. Dollar amounts are in millions unless stated otherwise. Safety is a property-and-casualty insurer concentrated in Massachusetts, with operations also in New Hampshire and Maine. Private passenger auto is its largest product line.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net earned premiums | $194.3 | $181.9 | $387.1 | $379.8 |
| Total revenue | $222.9 | $207.8 | $444.8 | $388.8 |
| Net income | $37.7 | $42.5 | $73.8 | $40.5 |
| Diluted EPS | $2.49 | $2.78 | $4.93 | $2.64 |
| Combined ratio | 90.2% | 84.9% | 90.9% | 89.0% |
| Operating cash flow | — | $62.6 | $25.2 |
- Q2 total revenue rose 7.3%, while net income fell 11.4%. Loss and loss-adjustment expenses rose 21.1% to $110.2 million; the loss ratio increased to 56.7% from 50.0%. Management attributed much of the comparison to unusually lower auto claim frequency in Q2 2020 during the pandemic.
- First-half total revenue increased 14.4% and net income increased 82.3%. Investment-related items contributed to the change: first-half 2021 included $6.9 million of partnership investment earnings and $6.3 million of realized investment gains, versus losses of $2.1 million and $1.4 million, respectively, in 2020. Unrealized equity gains were $14.9 million versus a $13.2 million loss.
- First-half direct written premiums increased 1.7% to $409.5 million. The prior-year comparison includes a 15% personal-auto policyholder credit for April–June 2020. The company reported non-GAAP operating income of $28.0 million for Q2 and $56.8 million for the first half, versus $29.7 million and $53.9 million, respectively; these measures exclude specified investment and credit-loss items.
- Net investment income was $9.8 million in Q2, down 1.4%, and $21.3 million in the first half, up 3.3%. The annualized portfolio yield was 2.7% for Q2 and 2.9% for the first half, below the corresponding 2020 yields of 2.9% and 3.0%.
Financial position and liquidity
- At June 30, total assets were $2.108 billion, shareholders’ equity was $920.3 million, and cash and cash equivalents were $82.4 million, up from $53.8 million at year-end 2020. Total investments were $1.521 billion.
- Loss and LAE reserves were $577.0 million; unearned premiums were $427.1 million. Net reserves, after related reinsurance recoverables, were $475.8 million.
- Debt was $30.0 million, consisting of a five-year FHLB-Boston borrowing at 1.42%, due March 2025 and secured by mortgage-backed securities. The $30 million revolving credit facility had no balance outstanding; the company said it could borrow up to $225.6 million from the FHLB against eligible collateral. It was in compliance with credit-facility covenants.
- First-half operating cash flow was $62.6 million; investing activities used $6.7 million and financing activities used $27.3 million, principally for shareholder dividends. The quarterly dividend remained $0.90 per share. The board declared another $0.90 dividend in August, payable in September, and management said it planned to continue quarterly dividends subject to financial position and cash flows.
Changes, outlook and material risks
- Prior-year loss reserves were released by $25.8 million in the first half, compared with $19.3 million in the prior-year period. Management cited fewer IBNR claims than previously estimated and better-than-expected severity in established auto claims, among other factors. The company’s estimated reasonable range for net loss reserves was $437.8 million to $492.0 million, against a recorded $475.8 million.
- The company maintained catastrophe reinsurance intended to protect against a “135-year storm,” with $615 million of coverage for aggregate property losses above $50 million, subject to stated program terms. It also participates in residual-market programs, including CAR; $114.2 million was recoverable from CAR at quarter-end across specified balances.
- A lawsuit alleges improper denial of COVID-19 business-interruption coverage. The company maintains that its policies require direct physical damage or loss and generally do not cover the claims at issue. It retained a $6.5 million reserve for legal defense costs recorded in 2020. Litigation, legislation or regulatory action that expands coverage beyond policy terms could increase losses; potential additional premium relief is also cited as a risk.
- The filing provides no quantified earnings or premium guidance. Management said it expected internally generated cash and operating flows to meet near-term needs and stated there was no substantial doubt about the company’s ability to continue as a going concern. Outlook remains subject to claims trends, severe weather, interest rates and investment markets, regulation, competition, and COVID-related developments.
- Other notable commitments include $70.8 million of remaining callable limited-partnership capital, including potential recallable distributions. Management said ordinary claims and insolvency-fund assessments were not expected to have a material effect, while noting estimates and timing could change.
Important facts for investors to verify
- Whether the higher 2021 loss frequency and severity persist as pandemic-related comparisons normalize, and how this affects the combined ratio.
- Whether favorable prior-year reserve development continues and how actual claims emerge relative to the disclosed reserve range and sensitivity analysis.
- The outcome and potential exposure from the COVID-19 business-interruption lawsuit and any regulatory or legislative premium-relief requirements.
- The contribution and volatility of realized, unrealized, and partnership investment results relative to underlying underwriting performance.
- Catastrophe exposure, reinsurance recoverability and terms, CAR/residual-market obligations, and the company’s capacity to fund callable investment commitments while sustaining dividends.