Safety Insurance Group, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Safety is a property-and-casualty insurer focused primarily on Massachusetts, with operations in New Hampshire and new business launched in Maine in 2016. Automobile insurance is its principal business.
Financial results and key metrics
Amounts below are in millions of dollars, except per-share data and ratios.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $199.8 | $198.0 |
| Net earned premiums | $185.7 | $182.6 |
| Net income (loss) | $12.7 | $(35.1) |
| Diluted EPS | $0.84 | $(2.37) |
| Loss ratio | 67.9% | 114.1% |
| Expense ratio | 30.1% | 28.5% |
| Combined ratio | 98.0% | 142.6% |
| Operating cash flow | $2.2 | $(10.1) |
- Direct written premiums increased 0.6% to $196.0 million; net written premiums increased 0.2% to $185.7 million.
- Loss and loss-adjustment expenses fell 39.5% to $126.0 million, primarily because Q1 2015 included losses from record Massachusetts snowfall. Underwriting expenses rose 7.4% to $56.0 million, mainly from higher contingent commissions and bonus compensation.
- Net investment income declined 8.8% to $9.6 million; portfolio yield was 3.2%, versus 3.4%. The quarter included $0.9 million of partnership investment earnings, $0.3 million of net realized investment losses, and $0.3 million of investment impairment losses.
- Prior-year reserve development reduced incurred losses by $10.0 million, compared with a $4.1 million reduction in Q1 2015. Net loss and LAE reserves were $472.8 million; management’s actuarial range was $425.4 million to $482.9 million.
- At March 31, total assets were $1.694 billion, total liabilities $1.036 billion, and shareholders’ equity $658.3 million. Cash and equivalents were $35.9 million, down from $47.5 million at year-end 2015. Investments totaled $1.220 billion.
- There was no borrowing outstanding under the $30 million revolving credit facility or the FHLB-Boston facility. The company reported $201.9 million of potential FHLB borrowing capacity, subject to eligible collateral. Interest expense was $22,000.
- Financing cash outflow was $10.4 million, primarily reflecting shareholder dividends. Cash dividends were $0.70 per share; $10.6 million was paid during the quarter.
Material changes and management commentary
- The shift from a Q1 2015 net loss to Q1 2016 net income was principally attributable to the unusually severe winter-weather losses in the prior-year quarter, not a comparable increase in premium revenue.
- Management attributed lower investment income partly to a reduced average invested-asset balance after investment proceeds were used to pay 2015 winter-event claims.
- Management said operating cash flow is expected to remain positive and believes current cash flows are sufficient for operating needs over the next 12 months; it also noted longer-term liquidity depends on market, regulatory, and economic conditions.
- The company said it plans to continue quarterly cash dividends in 2016, subject to its financial position and cash-flow regularity. The board declared a further $0.70-per-share dividend payable June 15, 2016.
- No formal earnings or full-year financial guidance was provided. Management reported no material changes to previously disclosed risk factors.
Risks, contingencies, and unusual items
- A $22.8 million reinsurance recovery related to 2015 winter-storm losses is disputed in arbitration. The company recorded no collectability provision, stating it believes the recovery is valid and collectible. Total expected recovery under the catastrophe program for the event was $67.9 million; $34.9 million was recoverable for paid and unpaid losses at quarter-end.
- The 2016 quarter included $0.3 million of recognized credit-related impairment on fixed-maturity securities. Management considered other portfolio unrealized losses temporary and said it did not expect to be required to sell securities before recovery, while acknowledging forced sales could result in further impairment charges.
- Catastrophe exposure, especially severe weather, competition, Massachusetts insurance regulation, residual-market assessments, and the estimation of loss reserves are key risks. Management estimated that a one-percentage-point change in the loss and LAE ratio would change reserves by approximately $1.9 million and net income by approximately $1.2 million, or $0.08 per diluted share.
- Massachusetts dividend rules restrict distributions from insurance subsidiaries. The filing reported up to $57.1 million available for dividends from Safety Insurance in 2016 without prior regulatory approval, based on year-end 2015 statutory measures; actual distributions may be constrained by business and regulatory considerations.
- The company reported no material off-balance-sheet arrangements, no outstanding facility borrowings, and compliance with credit-facility covenants at March 31, 2016. Management stated disclosure controls were effective and there were no material changes in internal control over financial reporting.
Investor verification priorities
- Assess how much of the earnings rebound reflects the prior-year snow-loss comparison and the $10.0 million favorable prior-year reserve development.
- Track the $22.8 million disputed winter-storm reinsurance recovery, related arbitration, and subsequent collections.
- Review reserve development and actuarial assumptions against actual claim frequency and severity, particularly for automobile and homeowners lines.
- Monitor premium growth, underwriting expenses, investment income and portfolio credit exposure, including the recognized impairment.
- Confirm catastrophe reinsurance protection, regulatory limits on subsidiary dividends, and the sustainability of the $0.70 quarterly dividend.