Safety Insurance Group, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015, compared with Q1 2014; balance-sheet figures are compared with December 31, 2014. Safety is a property-and-casualty insurer focused primarily on Massachusetts, with automobile insurance its principal product. It received licenses to write insurance in Maine and anticipated beginning new business there later in 2015.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total revenue | $198.0 million | $191.1 million |
| Net earned premiums | $182.6 million | $176.0 million |
| Net investment income | $10.6 million | $10.6 million |
| Losses and loss adjustment expenses | $208.3 million | $120.9 million |
| Net income (loss) | $(35.1) million | $12.1 million |
| Diluted EPS | $(2.37) | $0.79 |
| GAAP loss / expense / combined ratios | 114.1% / 28.5% / 142.6% | 68.7% / 30.4% / 99.1% |
| Operating cash flow | $(10.1) million | $(8.1) million |
Direct written premiums grew 1.1% to $194.7 million; net written premiums declined 0.4% to $185.3 million, largely due to catastrophe-reinsurance reinstatement premiums. Net earned premiums increased 3.7%. Cash dividends paid were $0.70 per share, versus $0.60 a year earlier.
At March 31, total assets were $1.742 billion, total liabilities $1.075 billion, and shareholders’ equity $667.0 million. Cash and cash equivalents were $25.3 million, down from $42.5 million at year-end. Investments totaled $1.254 billion. The company had no borrowings under its $30 million revolving credit facility (expandable to $50 million); it reported compliance with covenants. Loss and LAE reserves were $570.0 million, including $111.5 million recoverable from reinsurers for unpaid losses.
Material changes versus the prior comparable period
- Record Massachusetts snowfall drove a sharp rise in claims and turned a $12.1 million profit into a $35.1 million net loss. Management reported $111.7 million of direct catastrophe losses from the snow event and expected $49.9 million of reinsurance recovery; it was the first time the company’s catastrophe reinsurance program was pierced.
- The combined ratio increased to 142.6% from 99.1%. Direct written premiums rose modestly, while net written premiums fell slightly as ceded premiums increased.
- Underwriting, operating and related expenses declined 2.5% to $52.1 million, and the expense ratio improved to 28.5% from 30.4%, reflecting lower contingent commissions and bonus compensation.
- Net cash used in operations was $10.1 million, which management attributed principally to claims payments associated with the snowfall. Cash fell $17.2 million during the quarter.
- Shareholders’ equity declined from $708.3 million at year-end to $667.0 million, reflecting the quarterly loss and dividends, partly offset by other comprehensive income.
Outlook, commentary, risks and unusual items
- Management said it expects positive operating cash flows to meet liquidity needs and does not anticipate needing to sell investments to fund insurer cash requirements, while cautioning that unforeseen needs could require sales before recovery in value.
- The company said it planned to continue quarterly cash dividends in 2015 subject to financial position and cash-flow regularity. On May 5, the Board declared a $0.70-per-share dividend payable June 15, 2015.
- Approved rate changes included Massachusetts private passenger auto +3.8% effective June 1, 2015; Massachusetts commercial auto +3.5% effective February 1, 2015; and earlier approved homeowner and New Hampshire auto/homeowner increases.
- Prior-year reserve development reduced losses by $4.1 million in Q1 2015, compared with $11.0 million in Q1 2014. Management’s recorded net loss-reserve estimate of $458.5 million was within an actuarial range of $415.0 million to $467.5 million. A one-percentage-point change in the loss and LAE ratio was estimated to change reserves by $1.8 million and net income by $1.2 million, or $0.08 per diluted share.
- Key risks include severe weather and catastrophe exposure, uncertainty in loss-reserve estimates, competition, Massachusetts insurance regulation and residual-market assessments, and interest-rate and investment-market changes. The filing reported no material change to previously disclosed risk factors and no material legal contingency expected by management to adversely affect the financial statements.
Important facts for investors to verify
- Actual snow-event losses, collections and timing of the $49.9 million expected reinsurance recovery, and the impact of catastrophe-reinsurance reinstatement costs.
- Whether catastrophe and automobile claim frequency and severity normalize, and how subsequent reserve development compares with management’s estimates.
- Cash generation, liquidity and statutory limits on insurer dividends to the holding company; the filing cited $63.0 million available for Safety Insurance dividends in 2015 without prior regulatory approval, subject to other constraints.
- Premium and retention trends after rate changes, and the timing and economics of expansion into Maine.
- Investment portfolio valuation and credit exposure, including unrealized losses; management reported no other-than-temporary impairment charges in the quarter.