Safety Insurance Group, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. The company is a property-and-casualty insurer focused primarily on Massachusetts, with automobile insurance its largest product line; it also writes business in New Hampshire and Maine. This unaudited filing covers the three and six months ended June 30, 2019, compared with the same periods in 2018. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $216.0 | $208.0 | $438.6 | $417.7 |
| Net earned premiums | $196.4 | $194.1 | $390.9 | $386.2 |
| Net investment income | $10.6 | $10.2 | $22.3 | $20.7 |
| Net income | $25.9 | $26.8 | $55.9 | $35.9 |
| Diluted EPS | $1.68 | $1.75 | $3.63 | $2.35 |
| Non-GAAP operating income | $22.6 | $27.7 | $43.6 | $38.5 |
Underwriting: The GAAP combined ratio was 93.3% in Q2 2019 versus 90.0% a year earlier; for the six months it improved to 94.5% from 96.7%. The Q2 loss ratio rose to 62.3% from 58.3%, while the six-month loss ratio improved to 63.5% from 65.0%. Expense ratio was 31.0% in both 2019 periods, versus 31.7% in 2018.
Cash flow and balance sheet: Six-month operating cash flow was $13.4, down from $24.2; investing activities provided $12.2 versus using $22.7, and financing activities used $25.2, primarily for shareholder dividends. Cash and cash equivalents were $38.0 at June 30, 2019. Total assets were $1.973 billion, total liabilities $1.190 billion, and shareholders’ equity $783.0 million. Investments totaled $1.374 billion. Loss and LAE reserves were $589.1 million, including $112.2 million recoverable from reinsurers.
Debt and liquidity: No borrowings were outstanding under the $30 million revolving credit facility or from the Federal Home Loan Bank of Boston. The company reported potential FHLB borrowing capacity of $279.5 million against eligible collateral. It stated that operating cash flows and liquid investments were expected to meet requirements, while noting that unforeseen needs could require asset sales or financing. The revolving facility matures in August 2023.
Changes versus the prior comparable period
- Premium growth was modest: direct written premiums increased 0.2% in Q2 and less than 0.1% for the first half; net earned premiums rose 1.2% in both periods.
- Q2 net income declined 3.3%, as higher incurred losses outweighed premium and investment-income growth. Six-month net income increased 55.5%, but included a $15.6 million gain from changes in unrealized equity investment values, compared with a $6.2 million loss in 2018. Non-GAAP operating income, which excludes specified investment effects, declined in Q2 but rose for the first half.
- Q2 incurred losses and LAE increased 8.1% year over year; six-month incurred losses decreased 1.0%. Favorable prior-year reserve development was $22.3 million for the first half, versus $26.3 million in 2018.
- Net investment income increased 3.8% in Q2 and 7.8% for the first half. Management attributed the increase to a higher average invested-asset balance and improved yields. The six-month investment yield was 3.3% versus 3.2%.
- Unrealized investment gains increased accumulated other comprehensive income to $22.1 million from a $10.7 million loss at year-end 2018. Total shareholders’ equity increased to $783.0 million from $718.6 million.
Outlook, commentary, risks and unusual items
- No specific full-year earnings or premium guidance is provided. Management said it expected positive operating cash flows to continue and to support liquidity, but cautioned that longer-term needs depend on market, regulatory and economic conditions.
- On July 31, 2019, the board declared an increase in the quarterly dividend from $0.80 to $0.90 per share, payable September 13, 2019. The company said future dividends depend on its financial position and cash flows.
- The company recorded $0.3 million of investment impairment losses in the first half, all identified as credit losses on fixed-maturity securities. It said most other unrealized losses reflected interest-rate and temporary market movements, and management did not expect to need to sell securities before recovery.
- Insurance results remain exposed to claim frequency and severity, severe weather, competition, interest-rate and equity-market movements, regulation, and residual-market assessments. Management estimated net loss and LAE reserves at $476.9 million, within an actuarial range of $441.6 million to $498.2 million; a one-percentage-point change in the loss and LAE ratio would affect first-half net income by approximately $3.1 million, or $0.20 per diluted share.
- The company maintained catastrophe reinsurance described as protecting against a “139-year storm.” For 2019, it purchased four layers providing $615 million of coverage for property losses above $50 million, subject to stated participation and limits. On July 1, the Massachusetts FAIR Plan separately purchased $2.0 billion of catastrophe reinsurance with a $100 million retention.
- Adoption of lease accounting on January 1, 2019 added a $36.0 million right-of-use asset and matching lease liability; operating lease liabilities were $36.1 million at June 30. Adoption of accounting guidance for callable debt securities reduced retained earnings by $3.0 million. Neither adoption was described as a material operating event.
- Various routine claims and potential Massachusetts Insurers Insolvency Fund assessments were disclosed; management did not expect them to materially affect the financial statements. The filing reported no subsequent events requiring recognition or disclosure and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the deterioration in Q2 loss ratio and underwriting results persists, and how favorable reserve development affects future reported results.
- Whether first-half earnings growth is repeatable after separating investment-market gains from underwriting and recurring operating performance.
- Reserve adequacy, including the sensitivity of estimates to claim severity, frequency and residual-market reporting delays.
- Investment portfolio credit quality, market valuation exposure, and the company’s ability to avoid forced sales during adverse conditions.
- Catastrophe reinsurance terms, recoverability from reinsurers, and regulatory limits on dividends from insurance subsidiaries.