Safety Insurance Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparative periods ended September 30, 2020. Dollar amounts below are in millions unless stated otherwise. The company is a property-and-casualty insurer operating primarily in Massachusetts, with business in New Hampshire and Maine; private passenger auto is its largest product line. Interim figures are unaudited.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net earned premiums | $194.4 | $194.8 | $581.5 | $574.6 |
| Total revenue | $213.7 | $222.4 | $658.5 | $611.2 |
| Net income | $24.8 | $44.7 | $98.7 | $85.2 |
| Diluted EPS | $1.64 | $2.96 | $6.58 | $5.58 |
| Non-GAAP operating income | $25.8 | $38.1 | $82.7 | $92.0 |
| Non-GAAP operating income per diluted share | $1.70 | $2.53 | $5.51 | $6.02 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $110.6 | $76.1 |
Underwriting ratios: Q3 loss ratio was 61.3% (49.8% prior year), expense ratio 32.6% (35.2%), and combined ratio 93.9% (85.0%). Nine-month loss ratio was 58.6% (53.7%), expense ratio 33.3% (34.0%), and combined ratio 91.9% (87.7%).
Balance sheet and liquidity at September 30, 2021: Total assets were $2,144.7 million and shareholders’ equity was $928.1 million. Investments totaled $1,596.3 million and cash and cash equivalents were $44.7 million. Loss and loss adjustment expense reserves were $578.5 million; unearned premium reserves were $434.2 million. Debt was $30.0 million, consisting of a five-year FHLB-Boston loan at 1.42%; the $30 million revolving credit facility was undrawn. The company reported covenant compliance and access to up to $228.6 million of FHLB borrowing capacity against eligible collateral.
Material changes versus comparable periods
- Q3 net income fell 44.5% year over year as losses and loss adjustment expenses rose 22.7% to $119.1 million. Management attributed the comparison in part to unusually low auto claim frequency in 2020 during the pandemic.
- Nine-month net income rose 15.7%, despite higher claims costs, as investment results and earned premiums supported results. The 2020 premium comparison included a 15% personal-auto policyholder relief credit applied in April–June 2020.
- Net realized investment gains were $8.5 million for the first nine months, versus a $0.7 million loss in 2020. Equity-security unrealized changes were also volatile: a $3.4 million Q3 loss in 2021 versus a $7.5 million gain in Q3 2020; the nine-month 2021 change was an $11.4 million gain.
- Direct written premiums decreased 1.1% in Q3 to $211.1 million and increased 0.7% for the nine months to $620.6 million. Nine-month net earned premiums increased 1.2%.
- Prior-year reserve development was favorable by $41.2 million for the first nine months, compared with $34.6 million in 2020. Management cited fewer incurred-but-not-reported claims and better-than-estimated severity, mainly in auto and homeowners lines.
- Net cash increased from operating activities, while investing outflows rose to $79.0 million from $9.5 million, reflecting substantially higher purchases of investments. Cash declined $9.1 million during the nine months.
Outlook, risks, and unusual items
- No specific earnings or premium guidance was provided. Management said operating cash flows should meet liquidity needs over the next 12 months and expects internally generated funds to support operations thereafter; future results remain subject to market, regulatory, and economic conditions. The company declared a $0.90-per-share quarterly dividend for payment in December 2021, subject to its financial position and cash flows.
- COVID-19 remains a risk to premium volumes, claims, investment markets, and possible regulatory or judicial changes to coverage. The company continued to carry a $6.5 million reserve for legal defense costs in a business-interruption coverage lawsuit; it maintains that coverage requires direct physical loss or damage.
- On October 19, 2021, the Massachusetts Supreme Judicial Court ruled that auto property-damage coverage can include third-party inherent diminished value. The company said it did not expect resulting claims to be material and recorded no specific loss contingency.
- Catastrophe exposure, claim frequency and severity, reserve estimation, and reinsurance recoverability are significant insurance risks. The company reported 2021 catastrophe reinsurance coverage of $615 million above a $50 million retention for aggregate property losses. Reinsurance does not release the company from obligations to policyholders.
- Net loss and LAE reserves were estimated at $479.3 million, within an actuarial range of $445.6 million to $501.1 million. Management estimated that a one-percentage-point change in the loss and LAE ratio would change reserves by $5.8 million and net income by $4.6 million, or $0.31 per diluted share, for the nine-month period.
- The company had $62.8 million of remaining committed capital to limited partnerships, including potential recallable distributions. It also disclosed market risk: a 100-basis-point rate decrease/increase was estimated to raise/reduce fixed-maturity fair value by $42.2 million/$43.9 million.
Important facts for investors to verify
- Whether claim frequency and severity normalize from pandemic-affected comparison periods, and how that affects the combined ratio.
- Whether favorable prior-year reserve development continues and whether recorded reserves remain adequate as claims mature.
- Investment income, partnership returns, realized gains, equity-market movements, and interest-rate effects on portfolio value.
- Developments in the COVID-19 business-interruption lawsuit and the financial impact, if any, of the Massachusetts diminished-value ruling.
- Catastrophe losses, reinsurance recoverables and capacity, and the timing or amount of limited-partnership capital calls.
- Dividend sustainability and the effect of insurance-subsidiary dividend restrictions on parent-company liquidity.