Safety Insurance Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. Safety is a property-and-casualty insurer concentrated in Massachusetts, with automobile insurance its principal business. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $197.6 | $192.9 | $395.6 | $384.0 |
| Net earned premiums | $182.4 | $178.2 | $365.0 | $354.1 |
| Losses and loss adjustment expenses | $147.0 | $108.6 | $355.4 | $229.4 |
| Underwriting, operating and related expenses | $52.2 | $54.4 | $104.3 | $107.8 |
| Net income (loss) | $(1.1) | $21.4 | $(36.1) | $33.5 |
| Diluted EPS | $(0.07) | $1.40 | $(2.43) | $2.18 |
| Combined ratio | 109.2% | 91.4% | 126.0% | 95.2% |
- Premium growth was modest: first-half direct written premiums rose 2.0% to $408.0 million, net written premiums rose 0.8% to $389.5 million, and net earned premiums rose 3.1% to $365.0 million.
- First-half net investment income increased 1.9% to $20.9 million. The annualized portfolio yield was 3.4%; duration was 4.0 years at June 30, versus 3.8 years at year-end 2014.
- First-half cash used in operating activities was $35.4 million, compared with $24.6 million provided in the prior-year period. Investing activities provided $35.1 million; financing activities used $20.8 million, mainly for dividends. Cash and cash equivalents ended the period at $21.3 million.
- At June 30, total assets were $1.725 billion, total liabilities $1.078 billion, and shareholders’ equity $646.3 million. Equity was down from $708.3 million at December 31, 2014, reflecting the net loss, dividends and lower accumulated other comprehensive income. Investments totaled $1.207 billion.
- The company reported no borrowings under its $30 million revolving credit facility or from FHLB-Boston. The facility matures in August 2018; the company reported compliance with its covenants.
- Cash dividends paid per share increased to $0.70 in Q2 and $1.40 for the first half, versus $0.60 and $1.20 in the comparable 2014 periods.
Material changes and unusual items
- Winter catastrophe losses drove the deterioration. Q2 included an additional $45.0 million of catastrophe losses and LAE associated with first-quarter 2015 winter weather, as claim severity increased from supplemental payments. For the first half, direct snowfall catastrophe losses totaled $156.7 million, with expected reinsurance recovery of $65.0 million. Management said the event was the first in company history to pierce its catastrophe reinsurance program.
- First-half incurred losses and LAE increased 54.9% year over year. The loss ratio rose to 97.4% from 64.8%; the expense ratio improved to 28.6% from 30.4%, but was not enough to offset claims, leaving a 126.0% combined ratio.
- Prior-year reserve development remained favorable, reducing first-half incurred losses by $12.0 million, compared with $19.9 million of favorable development in 2014. Management attributed the releases mainly to auto and homeowners reserves.
- Net realized investment results were a $0.2 million loss in Q2 2015 versus a $0.4 million gain in Q2 2014; first-half results were a $0.2 million gain versus $0.4 million. Unrealized investment losses reduced first-half other comprehensive income by $6.9 million, net of tax. Management attributed unrealized losses to interest-rate and other temporary market movements; no OTTI charges were recorded.
Outlook, risks and contingencies
- Management expects positive operating cash flows to continue and believes current cash flow is sufficient for operating needs over the next 12 months, while cautioning that longer-term liquidity depends on market, regulatory and economic conditions. It does not expect to need to sell investments to meet insurance-subsidiary cash requirements.
- Management planned to begin writing business in Maine later in 2015. Approved rate actions included Massachusetts private passenger auto +3.8% effective June 1, 2015, commercial auto +3.5% effective February 1, 2015, and homeowners +9.1% effective December 1, 2015. No earnings guidance was provided.
- The board approved a $0.70-per-share dividend on August 5, payable September 15, 2015, and said it planned to continue quarterly dividends depending on financial position and cash-flow regularity.
- Catastrophe exposure, claim frequency and severity, reserve estimation, reinsurance recoverability, competition, and Massachusetts insurance regulation are principal risks. A one-percentage-point change in the loss and LAE ratio would change reserves by approximately $3.6 million and net income by approximately $2.4 million, or $0.16 per diluted share, according to the filing.
- Net loss and LAE reserves were $473.0 million net of reinsurance, with an actuarial estimate range of $437.8 million to $481.6 million. Management noted that actual development may differ from estimates. The filing also describes ordinary-course legal claims and possible Massachusetts insolvency-fund assessments; management did not expect these to have a material effect.
- Insurance-subsidiary dividends are subject to statutory and regulatory limits. The filing states that $63.0 million was available from Safety Insurance in 2015 without prior regulatory approval, based on year-end 2014 statutory measures; the subsidiaries paid $20.2 million to the parent in the first half.
Important facts for investors to verify
- Subsequent catastrophe claims, supplemental payments and actual collections of the expected $65.0 million reinsurance recovery.
- Whether reserve assumptions and favorable prior-year development remain supported as claims mature, particularly in auto, homeowners and residual-market business.
- Premium retention, rate adequacy and underwriting results after the approved rate changes and planned Maine expansion.
- Cash generation, statutory capital, dividend capacity and the sustainability of the quarterly dividend following the first-half loss.
- Investment portfolio sensitivity to interest rates and credit markets, including the effect of unrealized losses and any future need to sell securities.