Safety Insurance Group, Inc. — Q1 2023 Form 10-Q
Business and period: Property and casualty insurer focused primarily on Massachusetts, with operations in New Hampshire and Maine. Main lines include personal and commercial auto and homeowners insurance. This unaudited filing covers the three months ended March 31, 2023; amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Total revenue | $213.8 | $195.0 | Up 9.6% |
| Net earned premiums | $191.7 | $187.1 | Up 2.5% |
| Direct written premiums | $217.9 | $189.5 | Up 15.0% |
| Net written premiums | $202.9 | $178.1 | Up 13.9% |
| Net investment income | $13.7 | $10.6 | Up 28.9%; reported portfolio yield rose to 3.8% from 2.9% |
| Losses and loss adjustment expenses | $167.2 | $123.2 | Up 35.7% |
| Net income (loss) | $(12.3) | $7.8 | Basic and diluted EPS: $(0.84), versus $0.53 |
| Non-GAAP operating income (loss) | $(12.8) | $14.8 | Non-GAAP diluted EPS: $(0.87), versus $0.99 |
| Cash dividends per share | $0.90 | $0.90 | Quarterly dividend maintained despite the net loss |
Underwriting: The GAAP loss ratio was 87.2%, expense ratio 31.3%, and combined ratio 118.5%, compared with 65.8%, 32.9%, and 98.7%, respectively, a year earlier. A combined ratio above 100% indicates an underwriting loss. Prior-year reserve development was favorable by $11.5 million, versus $12.4 million favorable in Q1 2022.
Cash, liquidity, and capital: Operating cash flow was negative $12.9 million, compared with negative $15.3 million; investing activities provided $6.7 million and financing activities used $3.7 million. Cash and cash equivalents were $15.3 million at quarter-end, down from $25.3 million at year-end 2022. Total investments were $1.416 billion. Total debt was $45.0 million, including a $30 million FHLB-Boston term loan and a $15 million short-term FHLB borrowing that was repaid April 5, 2023. The company reported $193.5 million of potential FHLB borrowing capacity against eligible collateral and compliance with debt covenants. Shareholders’ equity was $802.9 million, versus $812.0 million at year-end.
Material changes and management commentary
- Premium growth reflected new business production, particularly personal auto, improved retention, and rate increases. Massachusetts contributed $208.0 million of Q1 direct written premiums; New Hampshire $8.6 million and Maine $1.3 million.
- The February 2–5 winter freeze generated 783 claims and an estimated $32.1 million of losses and LAE as of quarter-end. Management also cited inflation and current market conditions as drivers of higher claims costs.
- Underwriting and related expenses declined 2.5% to $60.0 million, primarily due to lower contingent commissions.
- Management said the quarter’s operating cash use reflected the timing of expenses and winter-freeze payments. It expects positive operating cash flows in the future and believes liquidity is sufficient for operating needs over the next 12 months, while noting that unforeseen needs could require securities sales or additional funding.
- Approved rate changes include Massachusetts commercial auto +4.0% effective May 1, 2023; Massachusetts personal auto +4.3% effective July 1, 2023; and Massachusetts homeowners +3.9% effective August 1, 2023. The filing provides no earnings or full-year financial guidance.
Risks, contingencies, and unusual items
- Net loss and underwriting deterioration were driven in part by the winter freeze and inflation. Claim frequency, severity, reserve estimates, severe weather, and residual-market assessments remain important uncertainties.
- Net loss and LAE reserves were $474.2 million net of reinsurance, with an actuarial range of $443.1 million to $497.0 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.
- Fixed-maturity securities had $85.5 million of gross unrealized losses at quarter-end; total unrealized investment losses across fixed maturities and equity securities were $103.7 million. Management attributed most fixed-maturity losses to interest rates and temporary market conditions and said it did not expect to need to sell securities before recovery. The credit-loss allowance on fixed maturities increased to $1.6 million from $0.7 million at year-end.
- Reinsurance does not release the company from obligations to policyholders. The majority of recoverables on paid and unpaid losses relates to the CAR Commercial Automobile Program; the filing reports no expected credit losses on reinsurance recoverables.
- Claims and lawsuits arise in the ordinary course; management does not expect their resolution to materially affect the consolidated financial statements. A COVID-19 business-interruption lawsuit was closed in 2022 and its $6.5 million defense-cost accrual was reversed. Management did not accrue for Massachusetts inherent diminished value claims, which it did not expect to be material.
- Committed limited-partnership investment capital remaining callable was reported as $44.4 million, including potential recallable contributions. Insurance-subsidiary dividends are subject to regulatory limits; $78.2 million was available for payment by Safety Insurance in 2023 without prior approval, based on the disclosed statutory calculation.
Important facts for investors to verify
- Whether premium growth and approved rate increases are keeping pace with inflation, claims severity, and the elevated loss ratio.
- How winter-freeze claims develop and whether reserve releases from prior accident years continue to offset current-year losses.
- Whether operating cash flow returns to positive territory and how the company manages liquidity, FHLB borrowings, and the April 2023 repayment.
- Whether the $0.90 quarterly dividend remains supported by earnings, cash generation, and regulatory capacity.
- Changes in investment fair values, credit-loss allowances, and the company’s ability to avoid realizing unrealized losses through forced sales.