Safety Insurance Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. The company is a property-and-casualty insurer focused mainly on Massachusetts, with operations in New Hampshire and Maine; private passenger auto is its largest product line. Unless stated otherwise, dollar figures below are in millions.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $229.4 | $192.3 | $672.6 | $571.0 |
| Net earned premiums | $214.4 | $189.9 | $608.4 | $565.4 |
| Net income | $1.9 | $6.2 | $6.6 | $21.9 |
| Diluted EPS | $0.13 | $0.42 | $0.45 | $1.48 |
| Net investment income | $14.0 | $11.1 | $41.5 | $33.3 |
| Operating cash flow | Not reported separately | Not reported separately | $17.1 | $23.4 |
- Direct written premiums rose 22.6% in Q3 and 19.8% for the nine-month period; net written premiums grew 22.2% and 19.2%, respectively. Management attributed growth to new business, improved retention and rate increases.
- GAAP combined ratio was 104.8% in Q3 versus 97.1% a year earlier, and 108.2% for nine months versus 96.0%. The ratios above 100% indicate underwriting losses. The Q3 loss ratio rose to 74.4% from 65.3%; the expense ratio improved to 30.4% from 31.8%.
- Non-GAAP operating income was $8.7 million for Q3 and $7.9 million for nine months, versus $16.7 million and $59.8 million, respectively, in 2022. This company-defined measure excludes specified investment-related items and taxes; it is not a substitute for GAAP net income.
Balance sheet, liquidity and capital
- At September 30, 2023, total assets were $2.052 billion, shareholders’ equity $769.7 million, cash and cash equivalents $30.9 million, and investments $1.358 billion. Equity was down from $812.0 million at year-end 2022.
- Debt was $30.0 million, consisting of an FHLB-Boston borrowing. The company had no borrowings under its $30 million Citizens Bank revolving credit facility, extended to August 2028. It reported compliance with debt covenants and access to potential FHLB borrowing capacity of $177.1 million, subject to eligible collateral.
- Nine-month investing cash flow was $38.9 million; financing cash outflow was $50.4 million, including $40.1 million of dividends and $5.2 million of share repurchases. Cash increased $5.6 million from year-end.
- Dividends were $0.90 per share each quarter, or $2.70 per share in the first nine months, compared with diluted nine-month EPS of $0.45. The board declared another $0.90 dividend on November 1, payable December 15, subject to the company’s financial position and cash flows.
- Fixed-maturity investments had $1.005 billion fair value against $1.117 billion amortized cost. The company reported $128.4 million of gross unrealized investment losses and $87.6 million of accumulated other comprehensive loss at quarter-end, largely attributed to interest-rate and other temporary market conditions. Management said it did not expect to need to sell securities before recovery.
Material changes, outlook and risks
- Loss and loss adjustment expenses increased 28.6% in Q3 and 30.6% for nine months year over year. Management cited auto inflation, flood events and a high-wind event in Q3, with approximately $3.0 million of losses from those weather events. The February 2023 winter freeze generated approximately 800 claims and $32.1 million of losses and adjustment expenses through September.
- Prior-year reserve development remained favorable: $35.0 million for the first nine months, compared with $43.2 million in 2022. Recorded net loss reserves of $477.5 million were within the actuarial range of $445.4 million to $507.0 million. Management cautions that reserve estimates are uncertain; a one-percentage-point change in the loss and LAE ratio would change reserves by about $6.1 million.
- Net investment income increased as fixed-income yields rose; the nine-month annualized portfolio yield was 3.9%, versus 3.1% in 2022. Partnership investment earnings fell to $5.1 million from $9.7 million over nine months, reflecting lower appreciation and timing of proceeds.
- Management expects positive operating cash flows and believes current cash flow is sufficient for operating needs over the next 12 months. It gave no numerical earnings or premium guidance. Approved rate changes include Massachusetts private passenger auto increases effective July 2023 and January 2024, among other state and product changes.
- Key risks include inflation and claim severity, severe weather, competition, regulatory changes and investment-market, interest-rate and liquidity risks. Reinsurance reduces catastrophe exposure but does not relieve the company of obligations to policyholders; the company reported $123.8 million recoverable from CAR.
- A Massachusetts inherent-diminished-value class action remains unresolved. A motion to amend the complaint is pending after class certification was denied; the company has opposed the motion and has not recorded a specific loss contingency, stating it does not currently expect claims to be material. Other routine claims are not expected by management to have a material adverse effect.
- The company had $48.9 million of remaining committed capital for limited-partnership investments, including potential recallable contributions. Management reported no subsequent events requiring disclosure and no material changes to previously reported risk factors.
Investor verification points
- Track whether premium growth and approved rate increases keep pace with auto and property claim inflation, and whether combined ratios return below 100%.
- Review subsequent reserve development, particularly the assumptions for frequency, severity and residual-market claims.
- Monitor catastrophe losses, reinsurance recoveries and the status and potential financial effect of the diminished-value litigation.
- Assess dividend sustainability against earnings, operating cash generation, insurer subsidiary dividend restrictions and capital requirements.
- Monitor unrealized investment losses, portfolio liquidity and the company’s capacity to avoid selling investments before recovery.