Safety Insurance Group, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Amounts are in thousands of dollars except per-share data and ratios.
Business context
Safety is a property-and-casualty insurer focused primarily on Massachusetts, with automobile insurance as its principal business. It also writes homeowners and other lines in Massachusetts, New Hampshire, and Maine. Maine business began in 2016.
Financial results and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Direct written premiums | $199.7 million | $196.0 million | +1.9% |
| Net earned premiums | $189.7 million | $185.7 million | +2.2% |
| Total revenue | $204.8 million | $199.8 million | +2.5% |
| Net investment income | $9.1 million | $9.6 million | -5.5% |
| Income before taxes | $16.6 million | $17.9 million | -6.8% |
| Net income | $12.0 million | $12.7 million | -5.1% |
| Diluted EPS | $0.79 | $0.84 | Down $0.05 |
| Operating cash flow | $0.9 million | $2.2 million | Lower |
- The GAAP loss ratio improved to 67.7% from 67.9%; the expense ratio rose to 31.5% from 30.1%. The combined ratio increased to 99.2% from 98.0%, indicating narrower underwriting profitability.
- Loss and loss adjustment expenses were $128.4 million, up 1.9%; underwriting, operating, and related expenses were $59.7 million, up 6.6%. Management attributed the expense increase primarily to higher contingent commissions and restricted-stock compensation.
- Net realized investment gains were $1.5 million, versus losses of $0.3 million in Q1 2016. Partnership investment earnings fell to $0.1 million from $0.9 million. No investment impairment losses were recorded in Q1 2017; Q1 2016 included $0.3 million.
- Net effective annualized portfolio yield was 2.9%, compared with 3.2%; portfolio duration was 4.1 years at quarter-end, versus 4.3 years at December 31, 2016.
- At March 31, total assets were $1.76 billion, liabilities $1.08 billion, and shareholders’ equity $677.8 million. Cash and cash equivalents were $32.2 million, up from $20.1 million at year-end.
- Investments totaled $1.27 billion. The company reported no outstanding borrowings under its $30 million revolving facility or its FHLB-Boston borrowing capacity; it was in compliance with credit-facility covenants.
- Cash dividends were $0.70 per share, unchanged year over year. The company said it planned to continue quarterly dividends in 2017, subject to its financial position and cash flows.
Material changes and management commentary
- Premium growth was driven mainly by homeowners and private-passenger automobile business; average written premium per exposure increased 4.3% and 4.1%, respectively. Net written premiums rose 2.8% to $190.9 million.
- Prior-year reserve development reduced incurred losses by $10.4 million in Q1 2017, compared with $10.0 million in Q1 2016. Management cited fewer incurred-but-not-reported claims than previously estimated and better-than-expected severity in established automobile bodily-injury and property-damage case reserves.
- Recorded net loss and LAE reserves were $482.3 million, within management’s actuarial range of approximately $439.4 million to $504.1 million. Management cautioned that reserve estimates are inherently uncertain; a one-percentage-point change in the loss and LAE ratio would change reserves by approximately $1.9 million.
- Operating cash flow remained positive but declined year over year. Management expects positive operating cash flows to continue and considers current liquidity sufficient for operating needs over the next 12 months; longer-term liquidity depends on market, regulatory, and economic conditions.
Outlook, risks, and contingencies
- The filing provides no earnings or premium guidance. Management expects to meet operating needs from internally generated funds, but gives no assurance that future cash flows will suffice under changed conditions.
- Key stated risks include intense competition, severe-weather and catastrophe claims, Massachusetts insurance regulation and residual-market changes, interest-rate and investment-market movements, liquidity needs, and uncertainty in loss-reserve estimates.
- For 2017, catastrophe reinsurance provides $615 million of coverage for property losses above a $50 million retention, with stated protection against a “130-year storm.” Reinsurance does not eliminate the company’s exposure to losses or reinsurer credit risk.
- The company had $67.9 million of expected recoveries related to the 2015 snow event. A $22.8 million reinsurance recoverable is in arbitration; no collectability provision was recorded because management believes it will be recovered.
- Management said ordinary-course claims and anticipated Massachusetts Insurers Insolvency Fund assessments were not expected to materially affect the financial statements. It also reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether premium growth continues and whether the 99.2% combined ratio improves as expense growth and claims trends develop.
- Whether favorable prior-year reserve development persists, and how actual loss emergence compares with the disclosed reserve range and assumptions.
- Collection and timing of the disputed $22.8 million reinsurance recovery, along with recoveries for the 2015 snow event and residual-market exposures.
- Investment yield, portfolio valuation and credit quality, and the effect of interest-rate changes on investment values and income.
- Cash generation, regulatory limits on subsidiary dividends, and the sustainability of shareholder dividends under future conditions.