Safety Insurance Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; financial statements are unaudited. Unless stated otherwise, dollar amounts are in thousands. Safety is a property and casualty insurer focused primarily on Massachusetts, with business in New Hampshire and new business in Maine during 2016. Automobile insurance is its principal product.
Financial results and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $202,950 | $197,602 | $402,779 | $395,641 |
| Net earned premiums | $187,393 | $182,447 | $373,047 | $365,011 |
| Losses and loss adjustment expenses | $115,144 | $147,026 | $241,123 | $355,350 |
| Income (loss) before taxes | $30,270 | $(1,645) | $48,141 | $(64,049) |
| Net income (loss) | $21,365 | $(1,053) | $34,035 | $(36,124) |
| Diluted EPS | $1.41 | $(0.07) | $2.25 | $(2.43) |
| GAAP combined ratio | 92.1% | 109.2% | 95.0% | 126.0% |
- Premiums: Q2 direct written premiums rose 3.8% to $221,359; six-month premiums rose 2.3% to $417,311. Net earned premiums increased 2.7% in Q2 and 2.2% for the first half.
- Underwriting: The Q2 loss ratio improved to 61.4% from 80.6%; the six-month ratio improved to 64.6% from 97.4%. Expense ratios increased to 30.7% and 30.4%, respectively, from 28.6% in both prior-year periods. Management attributed higher expenses primarily to contingent commissions and bonus compensation.
- Investments: Net investment income fell 6.6% in Q2 to $9,641 and 7.7% for six months to $19,268, reflecting a lower average invested asset balance after claim payments related to 2015 winter events. The portfolio’s annualized effective yield was 3.2%; duration was 4.0 years at June 30.
- Cash flow: Six-month operating cash flow was $29,913, versus cash used of $35,439 in 2015. Investing activities used $12,418; financing activities used $20,936, mainly for dividends. Cash and cash equivalents were $44,053 at June 30.
- Balance sheet and liquidity: Total assets were $1,764,499 and shareholders’ equity was $680,035, compared with $1,703,869 and $644,499 at December 31, 2015. Loss and LAE reserves were $544,082; unearned premiums were $428,135.
- Debt: No borrowings were outstanding on June 30 under the $30,000 revolving credit facility, which matures August 14, 2018. The company reported compliance with covenants. It also had no FHLB-Boston borrowings and stated borrowing capacity of $197,337 against eligible collateral.
- Shareholder returns: Dividends were $0.70 per share each quarter, or $1.40 for the first half. The board declared another $0.70 dividend on August 3, payable September 15. No shares were repurchased during the first half.
Material changes versus the prior comparable period
- Profitability rebounded from a prior-year loss: six-month net income improved by $70,159. Management attributed the change primarily to the 2015 record snowfall catastrophe losses, which did not recur at the same level in 2016.
- Six-month incurred losses and LAE fell 32.1%, while net earned premiums rose 2.2%. Prior-year favorable reserve development was $21,867 in the first half of 2016, compared with $12,011 in 2015.
- Shareholders’ equity increased by $35,536 from year-end, including $20,282 of after-tax unrealized investment gains in other comprehensive income.
- Six-month net investment income declined, while partnership investment earnings increased to $2,287 from $577.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no earnings or premium-growth guidance. Management expected operating cash flow to meet operating needs over the next 12 months and anticipated internally generated funds thereafter, while noting that longer-term sufficiency depends on market, regulatory and economic conditions. Management said it planned to continue quarterly dividends in 2016, subject to financial position and cash-flow regularity.
- Catastrophe protection and recovery: The 2016 catastrophe reinsurance program provides $615,000 of coverage for property losses above $50,000, up to $665,000, and was described as protecting against a “133-year storm.” Expected recovery related to the 2015 snow event was $67,934; $33,353 of paid and unpaid loss recoverables was reported at June 30. A $22,838 recovery is disputed in arbitration with a reinsurer; the company recorded no collectability provision and believes it will recover the amount.
- Reserving judgment: Net loss and LAE reserves were estimated at $466,039, within an actuarial range of $421,019–$476,460. Management cited fewer IBNR claims and better-than-expected severity in certain prior-year automobile and homeowners reserves as drivers of favorable development. A one-percentage-point change in the six-month loss and LAE ratio would change reserves by about $3,730 and net income by about $2,424, or $0.16 per diluted share.
- Investment impairment: The company recognized credit-related impairment losses of $137 in Q2 and $429 in the first half. It considered other portfolio unrealized losses temporary, but warned that unforeseen cash needs could force securities sales before recovery and lead to further impairment charges.
- Other risks: Exposure includes severe weather, competition, Massachusetts insurance regulation and residual-market mechanisms, reserve uncertainty, investment and interest-rate risk, and reliance on reinsurance recoveries. Management reported no material change to the 2015 Form 10-K risk factors. It reported no material off-balance-sheet arrangements and no subsequent events requiring recognition or disclosure.
- Controls: Management concluded disclosure controls were adequate and effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether favorable prior-year reserve development continues and whether ultimate claims experience supports the $466,039 net reserve estimate.
- Resolution and collectability of the $22,838 reinsurance dispute, alongside recovery of the broader 2015 winter-storm claims.
- Whether premium growth and approved rate increases offset rising underwriting expenses and lower investment income.
- Catastrophe exposure, reinsurance terms and counterparty strength, including the adequacy of protection under more severe events.
- Dividend sustainability, considering insurer dividend restrictions, operating cash flows and holding-company reliance on subsidiary distributions.
- The MD&A table appears to show six-month 2015 diluted EPS as positive $2.43, whereas the statements report a loss of $2.43; verify against the filed financial statements.