Safety Insurance Group, Inc. — Q3 2017 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2017; financial statements are unaudited. Safety is a property-and-casualty insurer focused primarily on Massachusetts, with operations in New Hampshire and Maine. Automobile insurance is its principal business.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $212.5m | $210.1m | $625.5m | $612.9m |
| Net earned premiums | $195.5m | $190.7m | $578.1m | $563.8m |
| Net income | $18.0m | $18.6m | $51.1m | $52.6m |
| Diluted EPS | $1.18 | $1.23 | $3.36 | $3.48 |
| Combined ratio | 95.5% | 96.1% | 95.7% | 95.4% |
Amounts are in U.S. dollars; financial statement amounts are converted from thousands. Q3 loss ratio improved to 63.3% from 65.5%, while the expense ratio rose to 32.2% from 30.6%. For the first nine months, the loss ratio improved to 63.9% from 64.9%, but the expense ratio increased to 31.8% from 30.5%. Net investment income was $9.5m for Q3 and $28.3m year to date. Cash dividends were $0.80 per share in Q3.
At September 30, total assets were $1.855bn, liabilities $1.152bn, and shareholders’ equity $702.8m. Cash and cash equivalents were $31.9m; investments totaled $1.312bn. Operating cash flow was $50.1m for the nine months, compared with $75.8m in 2016. The company had no borrowings under its $30m revolving credit facility or from FHLB-Boston; the facility matures August 2018.
Material changes versus prior comparable periods
- Q3 net earned premiums increased 2.5%; year-to-date net earned premiums also rose 2.5%. Year-to-date direct written premiums increased 1.9% to $642.6m.
- Net income declined 3.5% in Q3 and 3.0% year to date. Higher underwriting and operating expenses—up 7.9% in Q3 and 6.8% year to date—more than offset premium growth and lower Q3 losses. The company attributed expense increases to nonrecurring reinsurance-arbitration legal fees, contingent commissions, and restricted-stock compensation.
- Prior-year favorable reserve development was $10.8m in Q3 and $31.2m year to date, versus $11.7m and $33.6m, respectively, in 2016. Management cited fewer-than-estimated incurred-but-not-reported claims and better-than-estimated severity on established auto case reserves.
- Year-to-date operating cash flow fell, while net cash used in investing activities narrowed to $4.8m from $39.6m. Cash dividends paid were $33.4m, versus $31.7m in 2016.
Outlook, risks, contingencies, and unusual items
- Management expects internally generated cash flows to meet operating needs over the next 12 months and beyond, but gives no earnings or premium guidance. It stated quarterly dividends are planned for 2018 subject to financial position and cash-flow regularity. The board declared a further $0.80-per-share dividend for payment December 15, 2017.
- Management’s selected net loss and LAE reserve estimate was $484.7m, within an actuarial range of $433.6m to $500.5m. A one-percentage-point change in the loss and LAE ratio would change reserves by $5.8m and net income by $3.8m, or $0.25 per diluted share.
- A reinsurer dispute related to 2015 winter-storm losses involves $22.8m; the company has recorded no collectability provision and believes the amount is recoverable. Expected total reinsurance recovery for that event was $67.9m; the reported recoverable on paid and unpaid losses was $30.0m.
- The 2017 catastrophe reinsurance program provides $615m of coverage for property losses above a $50m retention, intended to protect against a modeled “130-year storm.” Severe weather, reserve uncertainty, residual-market assessments and reporting delays, competition, and insurance regulation remain risks.
- The company recorded $0.3m of investment impairment losses in Q3 and year to date, entirely credit losses on fixed maturities. It viewed the remaining unrealized investment losses as temporary and reported no subprime mortgage securities.
- Insurance subsidiary dividends to the parent are regulatorily restricted. Based on year-end 2016 statutory measures, up to $60.5m was available in 2017 without prior regulatory approval; Safety Insurance had paid $30.6m to the parent through September.
Most important facts for investors to verify
- Whether favorable prior-year reserve development continues, and how actual claims compare with the recorded reserve estimate and its range.
- Resolution and collectability of the $22.8m reinsurance arbitration claim, and timing of broader 2015 storm recoveries.
- Whether premium growth can offset rising expense ratios and sustain underwriting profitability.
- Investment portfolio credit quality, interest-rate sensitivity, and the effect of impairment losses or any need to sell securities.
- Subsidiary dividend capacity, liquidity, and the company’s ability to maintain shareholder dividends while meeting insurance and catastrophe obligations.