Safety Insurance Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company is a property and casualty insurer focused primarily on Massachusetts, with operations in New Hampshire and Maine; private passenger auto is its largest product. Dollar amounts below are in millions unless otherwise stated. Interim financial statements are unaudited.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net earned premiums | $188.3 | $194.3 | $375.4 | $387.1 |
| Total revenue | $183.6 | $222.9 | $378.6 | $444.8 |
| Net income | $7.9 | $37.7 | $15.7 | $73.8 |
| Diluted EPS | $0.53 | $2.49 | $1.06 | $4.93 |
| GAAP combined ratio | 92.1% | 90.2% | 95.4% | 90.9% |
| Non-GAAP operating income | $28.2 | $28.0 | $43.0 | $56.8 |
- Q2 direct written premiums were $214.6 million, down 1.2%; six-month direct written premiums were $404.1 million, down 1.3%. Management attributed the declines primarily to fewer private passenger auto policies.
- Losses and loss adjustment expenses rose 2.3% in Q2 and 6.4% year to date. The loss ratio increased to 59.8% for Q2 and 62.8% for the six months; expense ratios improved to 32.3% and 32.6%, respectively.
- Investment income increased to $11.6 million in Q2 and $22.2 million year to date. Partnership investment earnings were $6.0 million and $8.8 million, respectively. Equity securities’ unrealized losses were $28.9 million for Q2 and $41.9 million year to date, substantially affecting GAAP results.
- Six-month operating cash flow was negative $0.3 million, versus positive $62.6 million in 2021. Cash and cash equivalents were $39.1 million at June 30. Investing activities provided $17.1 million; financing activities used $41.4 million, including $26.8 million of dividends and $14.6 million of share repurchases.
- Total investments were $1,410.6 million, down from $1,571.1 million at year-end 2021. Total assets were $1,947.4 million and shareholders’ equity was $818.6 million, compared with $2,117.4 million and $927.2 million, respectively, at year-end. Accumulated other comprehensive income moved from positive $24.6 million to a loss of $62.0 million, largely reflecting investment-market declines.
- Debt was $30.0 million, consisting of a 1.42% FHLB-Boston borrowing due in 2025. The company had no balance outstanding on its $30 million revolving credit facility, which matures in August 2023, and reported covenant compliance. It said it expects internal cash generation to meet operating needs, while noting future cash needs remain subject to market, regulatory, and economic conditions.
- Quarterly dividends were $0.90 per share ($1.80 per share for the six months). The board declared another $0.90 quarterly dividend on August 3, 2022. The company repurchased 170,904 shares for $14.6 million during the first half.
Material changes, outlook, and risks
- Lower GAAP net income primarily reflects unrealized equity-security losses, while underwriting results also weakened: the combined ratio increased 1.9 percentage points in Q2 and 4.5 points for the first half. Non-GAAP operating income was broadly flat in Q2 but declined 24% for the first half.
- Management cited a return to pre-pandemic private auto claim frequency, inflation, and supply-chain delays as drivers of higher losses. Lower policy counts affected premiums. It reported approved rate changes for several Massachusetts and New Hampshire lines, effective during 2022; no quantified earnings guidance was provided.
- Prior-year reserves developed favorably by $29.3 million in the first half, versus $25.8 million a year earlier. The filing cautions that reserves depend on actuarial estimates; a one-percentage-point change in the loss and LAE ratio would change reserves by $3.8 million and net income by approximately $3.0 million, or $0.20 per diluted share.
- A $6.5 million reserve for legal defense costs in a COVID-19 business-interruption coverage lawsuit was reversed in Q2 after the claim closed following a favorable Massachusetts Supreme Judicial Court decision in a separate case. The company said it did not expect potential inherent diminished value auto claims to be material and had not accrued a specific contingency.
- Investment-market risk is notable: fixed-maturity fair value was $1,072.2 million versus amortized cost of $1,151.4 million, and total investment unrealized losses were $101.6 million. Management attributed fixed-maturity losses mainly to interest rates and other temporary market conditions and said it did not expect to need forced sales. A 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by $41.7 million.
- Catastrophe exposure, inflation, claim severity and frequency, competition, residual-market assessments, reinsurance counterparty performance, and regulatory constraints on subsidiary dividends remain relevant risks. The company reported no substantial doubt about its ability to continue as a going concern and no material changes to the risk factors in its 2021 Form 10-K.
Most important facts for investors to verify
- Whether policy counts and premium trends stabilize, and whether approved rate actions offset claims inflation and returning auto frequency.
- How favorable reserve development compares with subsequent claim emergence, and whether reported combined ratios remain below 100% without unusually large reserve releases.
- Whether investment marks recover or cause realized losses, and the resulting effect on earnings, accumulated other comprehensive loss, and capital.
- Whether operating cash flow improves and remains sufficient to support dividends and repurchases; note that the quarterly dividend exceeded Q2 diluted EPS.
- Current statutory surplus, dividend capacity, and catastrophe/reinsurance exposure, including the effect of residual-market obligations.