Safety Insurance Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Dollar amounts below are in millions unless noted. Safety primarily writes property and casualty insurance, especially auto, in Massachusetts, New Hampshire and Maine.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net earned premiums | $197.9 | $194.5; up 1.8% |
| Total revenue | $181.0 | $222.6 |
| Net investment income | $10.7 | $11.8; down 8.9% |
| Losses and loss adjustment expenses | $120.7 | $126.0; down 4.2% |
| Underwriting, operating and related expenses | $63.1 | $60.4 |
| Net income (loss) | $(2.0) | $29.9 |
| Diluted earnings per share | $(0.13) | $1.95 |
| Non-GAAP operating income | $24.2; $1.57 per diluted share | $20.9; $1.36 per diluted share |
| Combined ratio | 92.9% | 95.9% |
| Operating cash flow | $(28.5) | $(8.0) |
The GAAP loss ratio improved to 61.0% from 64.8%, while the expense ratio rose to 31.9% from 31.1%. Management attributed lower claims costs mainly to favorable winter weather and favorable prior-year reserve development of $9.6 million (versus $12.0 million a year earlier). Management said higher expenses reflected system-modernization costs and lower expense allowances tied to reduced servicing-carrier premiums.
The GAAP loss was driven substantially by investment-market effects: the change in unrealized gains on equity investments was a $30.0 million loss, compared with an $11.8 million gain in Q1 2019. The company also recorded a $2.5 million expected-credit-loss charge on available-for-sale debt securities under newly adopted CECL guidance. Comprehensive loss was $23.8 million, including $21.8 million of after-tax unrealized investment losses in other comprehensive income.
Balance sheet, debt and liquidity
- At March 31, total assets were $1.931 billion, total investments $1.357 billion, cash and cash equivalents $41.6 million, and shareholders’ equity $762.1 million. Equity was $808.4 million at December 31, 2019.
- Loss and loss adjustment reserves were $608.7 million; unearned premiums were $428.3 million.
- The company borrowed $30.0 million from FHLB-Boston on March 17 for five years at 1.42%, secured by U.S. government mortgage-backed securities; principal is due March 17, 2025. This borrowing is reported as debt. Separately, the $30.0 million revolving credit facility was undrawn at quarter-end. The company also reported approximately $284.0 million of potential FHLB borrowing capacity against eligible collateral.
- Operating cash outflow reflected payment timing and changes in liabilities, including reclassification of cash associated with outstanding claim checks. Investing activities provided $20.3 million; financing activities provided $5.4 million, including the FHLB borrowing, partly offset by $14.2 million of dividends paid and $10.4 million of share repurchases.
- Cash dividends paid were $0.90 per share, versus $0.80 a year earlier. The board declared another $0.90 quarterly dividend on May 6, payable June 15, subject to the company’s financial position and cash flows. Management stated it expected sufficient liquidity for operating needs, while noting long-term cash availability depends on market, regulatory and economic conditions.
Changes, outlook, risks and unusual items
- Direct written premiums declined 3.0% to $197.3 million; net written premiums declined 0.5% to $189.0 million. Management attributed the direct-premium decline mainly to changes in Massachusetts CAR eligibility that reduced commercial-auto servicing-carrier business. Net earned premiums nevertheless increased 1.8%.
- COVID-19 market volatility materially affected investment results. Management said the pandemic had not materially affected Q1 premium revenue or incurred auto losses. On April 14, the company announced a 15% personal-auto premium credit for April and May, estimated at approximately $12 million and expected to be recognized in Q2.
- The company warned that COVID-19 could affect premiums, claims, investment values and liquidity. It highlighted possible legislation or court decisions extending business-interruption coverage beyond policy terms, including litigation risk. Management’s stated position is that its business-owner policies require direct physical loss or damage for business-interruption coverage; it will assess claims individually.
- Management reported no material adverse effect from pending ordinary-course claims or expected Massachusetts Insurers Insolvency Fund assessments. It stated the company was in compliance with debt covenants and that there was no substantial doubt about its ability to continue as a going concern.
- No specific full-year earnings guidance is provided. Management expects positive operating cash flows in the future and plans to continue quarterly dividends in 2020 depending on financial position and cash-flow regularity. The filing identifies competition, severe weather, regulation, reserve-estimation uncertainty, market risk and COVID-19 as risks.
Important facts for investors to verify
- Whether subsequent market movements change the large Q1 equity-investment loss and unrealized fixed-income losses, and whether any securities must be sold before recovery.
- Whether the approximately $12 million personal-auto credit, lower driving activity and pandemic-related policyholder or regulatory actions affect Q2 premiums, claims and margins.
- Whether favorable reserve development continues; management’s recorded net loss and LAE reserves of $487.4 million were within an actuarial range of approximately $453.7 million to $504.5 million.
- Whether the company maintains liquidity, statutory capital and dividend capacity while carrying the new $30 million FHLB borrowing and continuing dividends and share repurchases.
- How the new expected-credit-loss allowance and any further deterioration in investment credit quality affect earnings and capital.