Safety Insurance Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods unless noted. Dollars are in millions except per-share data. Safety is a property-and-casualty insurer focused primarily on Massachusetts, with operations in New Hampshire and Maine and a business mix led by automobile insurance.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $222.4 | $215.3 | $611.2 | $653.9 |
| Net earned premiums | $194.8 | $198.4 | $574.6 | $589.3 |
| Net income | $44.7 | $15.6 | $85.2 | $71.5 |
| Diluted EPS | $2.96 | $1.01 | $5.58 | $4.64 |
| Net cash from operations | Not presented by quarter | $76.1 | $69.7 |
- Underwriting: Q3 loss and LAE expense was $97.1 million, down 28.1%; nine-month expense was $308.8 million, down 19.5%. Management attributed the declines principally to lower claim frequency, especially in private passenger auto, during the pandemic.
- Insurance ratios: Q3 loss ratio was 49.8% versus 68.0%, expense ratio 35.2% versus 30.7%, and combined ratio 85.0% versus 98.7%. For nine months, the ratios were 53.7%, 34.0%, and 87.7%, respectively, versus 65.1%, 30.9%, and 96.0%.
- Investment results: Net investment income declined to $9.7 million in Q3 and $30.3 million for nine months, down 18.7% and 11.5%, respectively. The nine-month period also included $5.6 million of net unrealized losses on equity investments and $2.3 million of credit-loss expense; Q3 included $7.5 million of equity unrealized gains and a $0.2 million credit-loss benefit. Q3 partnership investment earnings were $4.7 million.
- Cash, capital and debt: At September 30, cash and equivalents were $59.7 million; investments totaled $1.46 billion; total assets were $2.05 billion and shareholders’ equity was $837.9 million. Nine-month operating cash flow was $76.1 million. Financing cash outflow was $51.3 million, including $41.3 million of dividends and $40.0 million of share repurchases, partly offset by $30.0 million borrowed from FHLB-Boston. The five-year loan bears 1.42% interest and matures in March 2025. The separate $30 million revolving facility had no balance drawn at quarter-end; the company reported compliance with its covenants.
- Shareholder returns: Cash dividends were $0.90 per share in Q3 and $2.70 per share year-to-date. The board declared a further $0.90 quarterly dividend on November 4, 2020. The company repurchased 551,598 shares for $40.0 million during the first nine months.
Material changes and management commentary
- Direct written premiums fell 5.5% in Q3 and 7.0% year-to-date. Management cited changes to Commonwealth Automobile Reinsurers eligibility that reduced servicing-carrier commercial auto policies, as well as a 15% personal-auto relief credit applied for April through June, totaling $17.7 million in premium.
- Net earned premiums declined 1.8% in Q3 and 2.5% year-to-date. Lower investment income also weighed on results, while reduced claims drove the improvement in earnings and underwriting ratios.
- Underwriting, operating and related expenses rose 12.7% in Q3 and 7.1% year-to-date. Management cited higher contingent commissions, system modernization costs, and lower expense allowances linked to reduced servicing-carrier premium. The Q3 expense also includes a $6.5 million accrual for legal defense costs related to COVID-19 business-interruption litigation.
- Prior-year reserves developed favorably by $15.3 million in Q3 and $34.6 million year-to-date, principally reflecting lower-than-estimated claims and better-than-estimated severity in automobile reserves, with reductions also in homeowners and other lines. The company’s recorded net loss and LAE reserves were $478.7 million, within its actuarial range of $439.8 million to $494.9 million.
- Management said it expects operating cash flows to meet near-term needs and does not anticipate needing to sell investments to fund insurer cash requirements. It gave no specific earnings, premium, or combined-ratio guidance. The company reported no conditions raising substantial doubt about its ability to continue as a going concern.
Risks, contingencies and unusual items
- COVID-19 could affect premium volumes, claims, agent operations, investments and liquidity. The company faces potential litigation or legislative and regulatory actions that could extend business-interruption coverage beyond policy terms, as well as possible additional premium-relief requirements.
- The company has been sued over alleged denial of COVID-19 business-income coverage. It maintains that coverage requires direct physical loss or damage to property; most relevant policies do not specifically exclude viruses. The $6.5 million defense-cost accrual is not a stated estimate of ultimate claim liability.
- Insurance reserves rely on actuarial estimates and may change as claim frequency, severity, legal outcomes, inflation, and residual-market information develop. A one-percentage-point change in the loss and LAE ratio would change reserves by approximately $5.7 million, according to the filing.
- Investment values are exposed to interest-rate, equity-price, credit and liquidity risks. A 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by $40.6 million; a 100-basis-point decrease was estimated to increase it by $37.2 million. Management said it believed it would not need to sell securities before recovery, but noted unforeseen needs could require sales and additional impairment charges.
- Reinsurance recoverables depend on reinsurer performance and residual-market programs. The company reported $118.7 million recoverable from CAR across loss adjustment reserves, unearned premiums and reinsurance recoverables. It also maintains catastrophe reinsurance intended to cover a modeled 137-year storm.
Important facts for investors to verify
- Whether lower auto claim frequency persists as driving patterns and pandemic conditions change, and how much Q3 and year-to-date profit benefited from favorable prior-year reserve development.
- Developments in the COVID-19 business-interruption lawsuit, defense costs, and any legislative or regulatory action that could alter coverage obligations or require premium relief.
- The causes and durability of premium declines, including CAR eligibility changes and the personal-auto relief credit, and whether expense growth moderates.
- Investment portfolio performance, credit-loss allowances, equity-market exposure and the sensitivity of fair values to interest rates and liquidity conditions.
- Capital and dividend capacity at the regulated insurance subsidiaries, the FHLB loan and collateral terms, and continued compliance with credit-facility covenants.