Safety Insurance Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Dollar amounts below are in millions unless otherwise stated. Safety is a property and casualty insurer focused primarily on Massachusetts, with operations in New Hampshire and Maine; private passenger auto is its largest business line.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net earned premiums | $181.9 | $196.4 | $379.8 | $390.9 |
| Total revenue | $207.8 | $216.0 | $388.8 | $438.6 |
| Net income | $42.5 | $25.9 | $40.5 | $55.9 |
| Diluted EPS | $2.78 | $1.68 | $2.64 | $3.63 |
| Net cash from operating activities | Not presented by quarter | $25.2 | $13.4 |
- Underwriting: The GAAP combined ratio improved to 84.9% from 93.3% in Q2 and to 89.0% from 94.5% for the first half. Loss ratios fell to 50.0% from 62.3% and to 55.7% from 63.5%, respectively; expense ratios rose to 34.9% from 31.0% and to 33.3% from 31.0%.
- Premiums: Direct written premiums decreased 12.1% in Q2 and 7.9% for the first half. Net earned premiums fell 7.4% and 2.8%, respectively. The company recorded a $17.651 million personal-auto premium credit in Q2, and also cited changes to CAR servicing-carrier eligibility affecting commercial auto premiums.
- Cash and investments: Cash and cash equivalents were $44.8 million at June 30, versus $44.4 million at year-end 2019. Total investments were $1.434 billion, down from $1.443 billion. First-half operating cash flow was $25.2 million; investing activities used $4.9 million and financing activities used $20.0 million.
- Debt and capital: Debt was $30.0 million, consisting of a five-year FHLB-Boston loan at 1.42%, borrowed in March and secured by U.S. government mortgage-backed securities. The $30 million revolving credit facility had no balance outstanding; the company reported covenant compliance. Shareholders’ equity was $817.0 million.
- Dividends and repurchases: First-half dividends paid were $27.8 million, or $1.80 per share. The company repurchased 301,844 shares for $22.1 million in the first half. After quarter-end, the board declared another $0.90-per-share quarterly dividend.
Changes versus the prior period
- Q2 net income rose to $42.5 million from $25.9 million, primarily as lower auto claim frequency reduced losses. First-half net income declined to $40.5 million from $55.9 million, despite lower claims, reflecting investment-related volatility, including a change in unrealized equity gains from a $15.6 million gain in first-half 2019 to a $13.2 million loss in first-half 2020.
- Q2 losses and loss adjustment expenses declined 25.7%; first-half amounts declined 14.8%. The company attributed this mainly to fewer claims, particularly in personal auto, during pandemic-related reductions in driving. Prior-year favorable reserve development was $19.3 million for the first half, versus $22.3 million a year earlier.
- First-half net investment income fell 7.6% to $20.6 million; portfolio annualized yield decreased to 3.0% from 3.3%. Partnership investments recorded a $2.1 million loss versus $1.6 million earnings in the prior-year period, and net realized investment losses were $1.4 million versus $0.3 million gains.
- Underwriting and related expenses increased 4.3% in both periods, with management citing system modernization costs, higher contingent commissions, lower servicing-carrier allowances, and the smaller earned-premium base.
Outlook, risks, and unusual items
- Management said operating cash flows should meet near-term operating needs and expects positive operating cash flow to continue; it gave no numerical earnings or revenue guidance. Future dividends remain dependent on financial position and cash-flow regularity.
- COVID-19 created uncertainty around premium levels, policyholder behavior, agent operations, claim frequency and severity, and investment values. The company warned of potential litigation or legislation requiring business-interruption coverage beyond policy terms; it stated its business-owner policies generally require direct physical damage or loss for such coverage, while noting that most do not specifically exclude viruses.
- Insurance reserves are estimates subject to development. At June 30, net loss and LAE reserves were $483.4 million, with an actuarial range of $443.7 million to $503.9 million. A one-percentage-point change in the six-month loss ratio would change reserves by $3.8 million and net income by approximately $3.0 million, or $0.20 per diluted share.
- Investment risks include market-value declines, interest-rate sensitivity, credit losses, and possible liquidity needs. The company recorded a $2.471 million allowance for expected credit losses on available-for-sale debt securities under the new CECL accounting standard; management said other unrealized fixed-maturity losses were principally due to market conditions and it expected not to need to sell securities before recovery.
- Catastrophe exposure is partly reinsured: 2020 property catastrophe coverage provides $615 million above a $50 million retention, subject to stated layers and participation. Reinsurance does not release the company from its obligations to policyholders; most reported reinsurance recoverables on paid and unpaid losses related to CAR programs.
- Management reported no material adverse effect expected from pending ordinary-course claims or future Massachusetts insolvency-fund assessments. It also stated that no conditions raised substantial doubt about the company’s ability to continue as a going concern.
Most important facts to verify
- Whether reduced auto claim frequency and the improved combined ratio persist as driving patterns normalize, and how the $17.651 million premium credit affects subsequent periods.
- Whether the $483.4 million net reserve estimate develops within the disclosed actuarial range, including assumptions for CAR and FAIR Plan liabilities.
- How COVID-19-related business-interruption claims, legal or regulatory action, and any further premium-relief requirements affect losses and premiums.
- Whether investment marks, partnership results, credit allowances, and portfolio yield stabilize; distinguish GAAP earnings from management’s non-GAAP operating income.
- Capital and liquidity after dividends and repurchases, including the use and terms of the FHLB borrowing and capacity under the revolving facility.