Safety Insurance Group, Inc. — Q2 2017 Form 10-Q
Business and period: Unaudited results for the three and six months ended June 30, 2017, compared with the same 2016 periods. The company is a property and casualty insurer focused primarily on Massachusetts, especially automobile insurance, and also writes business in New Hampshire and Maine. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Total revenue | $208.249 | $202.950 | $413.019 | $402.779 |
| Net earned premiums | $192.824 | $187.393 | $382.535 | $373.047 |
| Net income | $21.105 | $21.365 | $33.124 | $34.035 |
| Diluted EPS | $1.39 | $1.41 | $2.18 | $2.25 |
| Combined ratio | 92.3% | 92.1% | 95.7% | 95.0% |
- H1 direct written premiums increased 2.3% to $426.714 million; net written premiums rose 2.8% to $404.686 million. Management attributed direct premium growth to higher average written premiums per exposure in private passenger auto, commercial auto, and homeowners.
- H1 losses and loss adjustment expenses rose 1.8% to $245.479 million. The loss ratio improved to 64.2% from 64.6%, while the expense ratio increased to 31.5% from 30.4%. Higher legal fees related to reinsurance arbitration, contingent commissions, and restricted-stock compensation contributed to expense growth.
- H1 net investment income fell 2.4% to $18.810 million, primarily due to fixed-maturity amortization from prepayments. Net realized investment gains increased to $2.109 million from $0.037 million; no investment impairment losses were recorded in H1 2017, versus $0.429 million in H1 2016.
Financial position, cash flow, and capital
- At June 30, 2017, total assets were $1.815 billion, investments $1.288 billion, cash and cash equivalents $34.297 million, total liabilities $1.121 billion, and shareholders’ equity $693.834 million. Total assets were $1.758 billion at December 31, 2016.
- H1 operating cash flow was $17.181 million, down from $29.913 million. Investing activities provided $18.339 million, compared with $12.418 million used in H1 2016; financing activities used $21.275 million, primarily for dividends. Ending cash was $34.297 million.
- No amounts were outstanding on the $30 million revolving credit facility or the company’s FHLB-Boston borrowing capacity at June 30. The revolver matures August 2018; the company reported covenant compliance. Management said operating cash flow should meet operating needs over the next 12 months, while noting longer-term funding depends on market, regulatory, and economic conditions.
- Quarterly dividends were $0.70 per share during H1. On August 2, 2017, the board declared an increase to $0.80 per share, payable September 15, subject to the stated record date.
Material developments, outlook, and risks
- Prior-year loss reserves developed favorably by $20.407 million in H1 2017, compared with $21.867 million in H1 2016. Management cited lower-than-estimated incurred-but-not-reported claims and better-than-expected severity on certain automobile reserves. Net reserves for losses and LAE were $474.072 million; management’s actuarial range was $424.783 million to $489.690 million. Reserve estimates are inherently uncertain.
- A $22.838 million reinsurance recovery relating to 2015 winter-storm losses is in arbitration. The company recorded no collectability provision, stating it believes the claim is valid and will be recovered. Total expected recovery under the catastrophe program for the event was $67.934 million; $30.246 million of paid and unpaid loss recoverables was reported at June 30.
- The company maintained catastrophe reinsurance intended to cover a “130-year storm,” with $615 million of coverage for property losses above a $50 million retention, subject to the disclosed layers and participation. Catastrophe losses, reinsurance collectability, reserve judgments, competition, and Massachusetts regulation are important risks.
- A 3.6% Massachusetts private passenger automobile rate change was approved effective July 15, 2017. The filing provides no formal earnings or revenue guidance. Management expected positive operating cash flows and sufficient liquidity, but cautioned that actual results may differ from forward-looking expectations.
- Management reported no material adverse effect expected from ordinary legal claims or future Massachusetts insolvency-fund assessments. It also reported no material change to previously disclosed risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and outcome of arbitration over the $22.838 million disputed winter-storm reinsurance recovery, and actual collections on all catastrophe recoverables.
- Whether favorable prior-year reserve development continues, and how actual claims experience compares with the disclosed reserve range and sensitivity estimates.
- Whether premium growth and approved rate changes offset claims costs and rising underwriting expenses, including the effect on the combined ratio.
- Liquidity, statutory capital and dividend capacity at the insurance subsidiaries, and the sustainability of the increased quarterly dividend.