Safety Insurance Group, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company is a property-and-casualty insurer focused primarily on Massachusetts, with automobile insurance its principal product. It also writes business in New Hampshire and expected to begin writing in Maine in early 2016.
Financial results and key metrics
Unless otherwise indicated, amounts are in millions of dollars. Comparisons are with the corresponding 2014 period.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $201.3 | $196.1 | $596.9 | $580.2 |
| Net earned premiums | $186.6 | $180.3 | $551.6 | $534.4 |
| Losses and loss adjustment expenses | $128.9 | $119.7 | $484.3 | $349.2 |
| Net income (loss) | $12.0 | $15.4 | $(24.1) | $49.0 |
| Diluted earnings (loss) per share | $0.80 | $1.03 | $(1.62) | $3.21 |
| Combined ratio | 97.8% | 96.6% | 116.4% | 95.7% |
- Direct written premiums rose 3.5% to $204.4 million in Q3 and 2.5% to $612.4 million for the nine months. Net written premiums increased 2.9% and 1.5%, respectively.
- Q3 loss ratio was 69.1% versus 66.4%; nine-month loss ratio was 87.8% versus 65.3%. Expense ratios improved to 28.7% from 30.2% in Q3 and to 28.6% from 30.4% year to date.
- Net investment income declined 7.9% to $10.0 million in Q3 and 1.5% to $30.8 million year to date. The nine-month period also included $1.4 million of partnership investment earnings and $0.4 million of investment impairment losses.
- At September 30, total assets were $1.720 billion, including $1.190 billion of investments and $43.2 million of cash. Total liabilities were $1.075 billion and shareholders’ equity was $644.4 million. Loss and LAE reserves were $553.3 million gross, with $74.1 million recoverable from reinsurers.
- Operating cash flow was negative $10.8 million for the nine months, versus positive $65.6 million in 2014; investing cash flow was positive $42.9 million. Cash ended the period at $43.2 million, up from $42.5 million at year-end 2014.
- No borrowings were outstanding under the $30 million revolving credit facility or the FHLB-Boston facility. The company reported covenant compliance and approximately $174.7 million of potential FHLB borrowing capacity against eligible collateral.
Material changes and unusual items
- Severe winter snowfall drove the principal year-to-date deterioration: direct catastrophe losses were $156.7 million, with expected reinsurance recovery of $64.9 million. The company said this was the first event in its history to pierce its catastrophe reinsurance program. At September 30, $46.6 million of snow-event reinsurance recoveries were receivable; the company also reported $55.4 million recoverable from CAR.
- Q3 incurred losses increased 7.7%, primarily because of $12.5 million of hailstorm claims. For the nine months, incurred losses increased 38.7%, primarily due to the snowfall catastrophe losses.
- Prior-year reserves developed favorably by $19.8 million in the first nine months, compared with $29.3 million of favorable development in 2014. Management attributed the releases mainly to lower-than-estimated IBNR claims and better-than-estimated severity on established auto claims.
- Net investment portfolio fair value was $1.190 billion, down from $1.256 billion at December 31, 2014. Accumulated other comprehensive income declined to $17.4 million from $28.7 million.
Outlook, commentary, risks and contingencies
- Management said it expects positive operating cash flows to continue and believes current cash flows are sufficient for operating needs over the next 12 months. It also noted longer-term funding depends on market, regulatory and economic conditions. No numerical earnings or premium guidance was provided.
- Management cited approved rate changes across Massachusetts and New Hampshire lines, including Massachusetts private passenger auto rates effective June 2015 and additional New Hampshire and Massachusetts rates effective later in 2015. It expected to start writing business in Maine in early 2016.
- Catastrophe exposure, reserve-estimation uncertainty, competition, Massachusetts regulation and residual-market obligations are key risks. A one-percentage-point change in the loss and LAE ratio would change reserves by approximately $5.5 million and net income by approximately $3.6 million, or $0.24 per diluted share, according to the filing.
- Net reserve estimates ranged from $441.4 million to $494.8 million; the recorded point estimate was $479.3 million. Management cautioned actual ultimate claims could differ materially from estimates.
- Management did not expect pending ordinary-course claims or future Massachusetts Insurers Insolvency Fund assessments to materially affect the financial statements. It reported no material off-balance-sheet arrangements and no subsequent events requiring recognition or disclosure.
- The company declared a $0.70-per-share dividend payable December 15, 2015. It said future dividends would depend on financial position and cash-flow regularity. No shares were repurchased in the first nine months of 2015.
Most important facts for investors to verify
- Actual catastrophe reinsurance collections and the ultimate net cost of the 2015 snowfall losses.
- Whether claims experience and reserve development support the recorded $479.3 million net reserve estimate, especially after substantial favorable prior-year releases.
- Whether premium growth and rate increases can offset claims inflation and catastrophe volatility, and whether the nine-month combined ratio returns below 100%.
- Operating cash generation, statutory capital and dividend capacity, including regulatory limits on subsidiary distributions.
- Investment portfolio credit quality, unrealized losses and sensitivity to interest-rate changes.