Safety Insurance Group, Inc. — Q3 2012 Form 10-Q
Unaudited results for the quarter and nine months ended September 30, 2012. Safety is a property and casualty insurer focused mainly on Massachusetts, with automobile insurance as its principal business; it also operates in New Hampshire.
Financial performance
Amounts are in thousands of dollars except per-share data and ratios.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $177,531 | $168,035 | $522,645 | $490,769 |
| Net earned premiums | $162,493 | $151,254 | $477,099 | $444,620 |
| Net investment income | $10,142 | $10,081 | $30,551 | $29,716 |
| Net realized investment gains | $153 | $1,844 | $1,226 | $2,702 |
| Net income | $14,334 | $8,810 | $48,499 | $8,942 |
| Diluted EPS | $0.94 | $0.58 | $3.17 | $0.59 |
| Combined ratio | 96.3% | 103.8% | 95.1% | 107.8% |
- Net earned premiums rose 7.4% in Q3 and 7.3% year to date. Direct written premiums increased 7.1% and 7.3%, respectively, primarily on higher average premiums in personal auto and homeowners; homeowners exposures also grew.
- Lower catastrophe losses were a major earnings driver: $2.355 million in Q3 and year to date 2012, versus $12.375 million in Q3 2011 and $53.043 million for the first nine months of 2011. Prior-year favorable reserve development was $4.263 million in Q3 and $11.872 million year to date, compared with $6.275 million and $25.122 million, respectively, in 2011.
- The nine-month GAAP loss ratio improved to 64.4% from 78.1%; the expense ratio increased to 30.7% from 29.7%. Underwriting, operating and related expenses rose 10.9% year to date, primarily due to higher agent commissions.
- Annualized investment portfolio yield was 3.6% in Q3 2012 versus 3.7% a year earlier; the year-to-date yield was 3.7% in both periods. The decline in realized gains partly offset premium growth and improved underwriting results.
Financial position, cash flow and capital
- At September 30, 2012, total assets were $1.593 billion, including $1.194 billion of investments and $33.7 million of cash and cash equivalents. Shareholders’ equity was $696.4 million. Total assets were $1.472 billion and equity $656.3 million at December 31, 2011.
- Operating cash flow for the first nine months was $76.4 million, versus $20.5 million in 2011. Investing activities used $57.1 million, mainly as purchases of fixed maturities exceeded portfolio proceeds; financing activities used $23.5 million, chiefly for dividends. Cash ended the period at $33.7 million.
- No amounts were outstanding under the $30 million revolving credit facility. It matures August 14, 2013; the company reported compliance with its covenants. Interest expense was $66,000 for the first nine months.
- Cash dividends paid were $0.60 per share in Q3 and $1.60 year to date. The board declared a further $0.60-per-share dividend for payment in December 2012. Management said expected operating cash flows should meet liquidity needs over the next 12 months and beyond, while noting that long-term sufficiency cannot be assured.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expected internally generated funds to support operating needs and stated that future dividends depend on financial position and cash flow.
- Approved rate increases effective in 2012 included Massachusetts homeowners (6.9%) and personal umbrella (2.1%), and New Hampshire auto (6.1%) and homeowners (5.1%).
- The company reported $485 million of catastrophe reinsurance coverage for property losses above $50 million, up to a maximum of $535 million, and characterized the program as covering a “140-year storm.” Reinsurance does not eliminate exposure to severe weather or residual-market losses.
- Management was assessing Hurricane Sandy’s October 2012 impact and did not then expect a material effect on consolidated financial position. The filing does not provide a final loss estimate.
- Net loss and LAE reserves were estimated at $361.5 million, within an actuarial range of $335.7 million to $366.9 million. Management emphasized uncertainty in reserve estimates; a one-percentage-point change in the loss and LAE ratio would change reserves by $4.771 million and net income by $3.101 million, or $0.20 per diluted share.
- The investment portfolio had $72.9 million of gross unrealized gains and $444,000 of gross unrealized losses. No OTTI charges were recorded in the first nine months; management considered the unrealized losses temporary. The filing reports no subprime mortgage debt or European sovereign debt exposure.
- Routine claims and potential Massachusetts insolvency-fund assessments were not expected by management to have a material adverse effect, though amounts and timing of future assessments are uncertain. Management reported no material off-balance-sheet arrangements.
- Key risks include claims severity and reserve adequacy, catastrophe events, competition, Massachusetts insurance regulation and residual-market changes, investment-market and interest-rate risk, and access to financing. The company said there were no subsequent material changes to the risk factors in its 2011 Form 10-K.
Important facts for investors to verify
- Whether favorable reserve development and unusually low catastrophe losses persist, and how claims experience compares with the company’s reserve assumptions.
- The ultimate impact of Hurricane Sandy and the company’s net exposure after reinsurance and residual-market participation.
- Whether premium growth and approved rate increases offset rising commissions and other operating expenses.
- Investment income and portfolio values under changing interest rates, including the company’s ability to hold securities through any market recovery.
- Subsidiary dividend capacity, credit-facility renewal before its August 2013 maturity, and the sustainability of shareholder dividends.