Business context and reporting period
Safety Insurance Group, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods. The company is a property and casualty insurer focused primarily on Massachusetts, with business in New Hampshire and Maine; private passenger and commercial automobile insurance are key lines.
Financial results and position
Dollar amounts below are in millions unless stated otherwise.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $208.0 | $208.2 | $417.7 | $413.0 |
| Net earned premiums | $194.1 | $192.8 | $386.2 | $382.5 |
| Net income | $26.8 | $21.1 | $35.9 | $33.1 |
| Diluted EPS | $1.75 | $1.39 | $2.35 | $2.18 |
| Combined ratio | 90.0% | 92.3% | 96.7% | 95.7% |
- For the six months, non-GAAP operating income was $38.5 million, versus $31.8 million. This measure excludes realized investment gains and changes in unrealized equity gains, among other adjustments; it is not a substitute for GAAP net income.
- Six-month net investment income rose 10.1% to $20.7 million. Partnership investment earnings were $5.4 million versus $0.9 million, reflecting investment appreciation and returns of capital. Six-month net realized investment gains were $2.9 million versus $2.1 million.
- Six-month loss and loss adjustment expenses increased 2.2% to $250.9 million. The loss ratio rose to 65.0% from 64.2%; the expense ratio rose to 31.7% from 31.5%. Q2 loss ratio improved to 58.3% from 60.7%, while the expense ratio was 31.7% versus 31.6%.
- Operating cash flow was $24.2 million for the first half, compared with $17.2 million. Investing activities used $22.7 million, financing activities used $24.5 million, and cash and equivalents ended at $18.7 million, down from $41.7 million at year-end 2017.
- At June 30, total assets were $1.83 billion, investments $1.30 billion, liabilities $1.13 billion, and shareholders’ equity $696.5 million. Accumulated other comprehensive income/loss moved from positive $24.3 million at year-end to a loss of $6.5 million, principally reflecting investment valuation movements.
- No borrowings were outstanding on the $30 million revolving credit facility or FHLB-Boston borrowing capacity. The revolving facility matured August 14, 2018; management expected renewal. The company reported compliance with its covenants at June 30.
Material changes, outlook, and risks
- Q2 net income increased 27% year over year despite nearly flat total revenue. First-half GAAP net income rose about 8.5%, while pretax income declined; lower income tax expense, including the lower federal corporate tax rate, supported the after-tax result. The 2018 six-month results also include a $6.2 million reduction in net income from unrealized equity investment losses under newly adopted accounting guidance.
- Direct written premiums increased 2.6% in Q2 and 2.4% for the first half. Management attributed growth primarily to commercial automobile and homeowners lines. Approved rate changes included Massachusetts commercial automobile rates up 3.7% effective June 1, 2018, and Massachusetts private passenger automobile rates up 2.3% effective September 1, 2018.
- Prior-year reserves developed favorably by $26.3 million in the first half, compared with $20.4 million in 2017, mainly from automobile and homeowners reserve reductions. Management cited fewer incurred-but-not-reported claims than previously estimated and better-than-estimated severity in certain automobile case reserves. The company’s selected net loss and LAE reserve estimate was $483.2 million, within an actuarial range of $429.9 million to $504.5 million; reserve estimation remains inherently uncertain.
- Management said operating cash flows should meet liquidity needs over the next 12 months and expected internally generated funds to support needs thereafter, while noting longer-term sufficiency depends on market, regulatory, and economic conditions. It expected to continue quarterly dividends subject to financial position and cash flows; the board declared a $0.80-per-share dividend payable September 14, 2018.
- Catastrophe, weather, competition, Massachusetts regulation and residual-market assessments, reserve uncertainty, interest-rate and equity-market movements, and reinsurer collectability are notable risks. Reinsurance coverage was described as protecting against a modeled “137-year storm.” The filing reports no material change to previously disclosed risk factors.
- The company reported a non-material revision to its March 2018 comprehensive-income presentation related to accounting-standard adoption; the correction did not affect financial position, net income, or cash flow. No material subsequent event was reported.
Most important facts for investors to verify
- Whether the revolving credit facility was renewed before its August 14, 2018 maturity.
- Whether favorable reserve development persists and how actual claims experience compares with the disclosed reserve range and assumptions.
- How investment valuation changes, interest rates, and partnership returns affect GAAP earnings and shareholders’ equity.
- Whether premium growth and approved rate increases support underwriting results amid rising first-half loss and combined ratios.
- The insurer subsidiaries’ statutory capital, dividend capacity, catastrophe exposure, and ability to sustain shareholder dividends.