SAFETY INSURANCE GROUP INC quarterly report, Q1 FY2024

Safety Insurance Group, Inc. — Q1 2024 Form 10-Q

Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise noted. Amounts are in millions of dollars except per-share data. Safety is a property and casualty insurer focused primarily on Massachusetts, with business in New Hampshire and Maine; private passenger auto is its largest line.

Key financial results

Metric	Q1 2024	Q1 2023
Total revenue	$268.2	$213.8
Net earned premiums	$236.1	$191.7
Net investment income	$15.2	$13.7
Net income (loss)	$20.1	$(12.3)
Diluted EPS	$1.36	$(0.84)
Non-GAAP operating income (loss)	$13.7	$(12.8)
Operating cash flow	$(21.1)	$(12.9)

Direct written premiums rose 22.7% to $267.3 million and net written premiums rose 23.4% to $250.3 million. Management attributed growth to new business and rate increases. Policy counts and average written premiums increased across private passenger auto, commercial auto, and homeowners.

The GAAP loss ratio improved to 71.3% from 87.2%; the expense ratio was 30.6% versus 31.3%, and the combined ratio improved to 101.9% from 118.5%. The combined ratio remained above 100%, indicating an underwriting loss before investment and other income. Q1 2023 results included $32.1 million of losses and LAE from a severe weather event. Q1 2024 included $11.0 million of favorable prior-year reserve development, compared with $11.5 million in Q1 2023.

Total revenue and net income benefited in part from a $7.7 million increase in unrealized gains on equity securities, which is excluded from the company’s non-GAAP operating income measure. Net investment income increased 11.5%; the portfolio’s annualized effective yield was 4.3%, up from 3.8%.

Balance sheet, liquidity, and capital

At March 31, 2024, total assets were $2.09 billion and shareholders’ equity was $807.1 million. Cash and cash equivalents were $30.8 million, down from $38.2 million at year-end 2023.
Investments totaled $1.40 billion, including $1.04 billion of available-for-sale fixed maturities. Fixed maturities had $78.5 million of gross unrealized losses; management attributed most declines to interest rates and temporary market conditions and said it did not expect to need to sell securities before recovery.
Loss and LAE reserves were $603.8 million gross, including $121.5 million recoverable from reinsurers; net reserves were $482.3 million. Management’s estimated reasonable range for net reserves was $443.6 million to $502.7 million.
Debt was $30.0 million, the outstanding FHLB-Boston borrowing at a 1.42% rate, due March 2025 and collateralized by securities. No amounts were drawn under the $30 million revolving credit facility; the facility matures in August 2028. The company reported compliance with its covenants.
Operating cash flow was negative $21.1 million. Investing activities provided $27.4 million and financing activities used $13.6 million, principally for dividends. Management expects internally generated funds to meet operating needs, but notes that longer-term liquidity depends on market, regulatory, and economic conditions.
The quarterly dividend was $0.90 per share. After quarter-end, the board declared another $0.90 dividend, payable June 14, 2024, and management said it planned to continue quarterly dividends subject to financial position and cash flows. No shares were repurchased during the quarter.

Changes, outlook, and risks

Results improved substantially from the prior-year loss, supported by premium growth and a much lower loss ratio after the prior-year severe weather impact. Underwriting and related expenses increased 20.4%, primarily due to higher contingent commission expenses.
Approved rate changes included Massachusetts private passenger auto increases of 3.5% effective January 2024, New Hampshire private passenger auto increases of 3.4% effective April 2024, and Massachusetts commercial auto increases of 6.3% effective May 2024. The filing provides no full-year earnings or revenue guidance.
For 2024, catastrophe reinsurance provides $615 million of coverage for property losses above $75 million, up to $690 million. Reinsurance reduces exposure but does not release the company from obligations to policyholders; reinsurer creditworthiness and catastrophe severity remain risks.
Reserving estimates are sensitive to claim frequency, severity, inflation, legal developments, and residual-market reporting lags. Management estimated that a one-percentage-point change in the loss and LAE ratio would change reserves by $2.4 million and net income by $1.9 million, or $0.13 per diluted share.
A Massachusetts case concerning inherent diminished value claims remains pending, including a plaintiff motion to amend the complaint. The company said it did not expect such claims to be material and recorded no specific contingency accrual. Other routine claims and potential state insolvency-fund assessments were not expected by management to have a material effect.
Management cited competition, restrictive Massachusetts regulation, severe weather, inflation and supply-chain effects on claim severity, residual-market changes, and financing availability as risks. No material changes to previously disclosed risk factors were reported.

Important facts for investors to verify

Whether premium growth and approved rate increases continue to keep pace with claims inflation and maintain underwriting profitability, given the 101.9% combined ratio.
How loss reserves develop, especially the $11.0 million favorable prior-year development and the estimated $443.6 million–$502.7 million net reserve range.
Cash flow and liquidity trends: operating cash flow was negative in the quarter despite management’s expectation of positive future operating cash flows.
Exposure to severe weather, residual markets, reinsurance recoverables, and potential inherent diminished value litigation or insolvency-fund assessments.
Investment portfolio valuations and unrealized losses, and the ability to sustain dividends while meeting insurance-subsidiary capital and regulatory requirements.