Safety Insurance Group, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; interim financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise. The company is a property-and-casualty insurer focused mainly on Massachusetts, with automobile insurance its principal business.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $187.7 | $177.5 | $553.5 | $522.6 |
| Net earned premiums | $172.2 | $162.5 | $508.2 | $477.1 |
| Net income | $17.7 | $14.3 | $49.7 | $48.5 |
| Diluted EPS | $1.14 | $0.94 | $3.23 | $3.17 |
| Combined ratio | 94.1% | 96.3% | 95.0% | 95.1% |
- Q3 revenue grew 5.7% and net income rose 23.2% year over year. Nine-month revenue increased 5.9%, while net income rose 2.5%.
- Direct written premiums increased 4.3% in Q3 and 5.5% for nine months. Management attributed growth chiefly to homeowners and commercial auto, including higher premiums per exposure and more written exposures.
- Q3 loss ratio improved to 63.4% from 65.5%; the nine-month ratio edged up to 64.6% from 64.4%. Expense ratios improved slightly in both comparisons. Investment income declined 1.2% in Q3 and 1.4% for nine months, reflecting lower portfolio yields.
- Operating cash flow was $65.1 million for nine months, down from $76.4 million. Investing used $32.2 million and financing used $29.9 million; cash and equivalents ended the period at $38.3 million.
- At September 30, total assets were $1.614 billion, total liabilities $920.6 million, and shareholders’ equity $693.4 million. Investments totaled $1.182 billion. Accumulated other comprehensive income fell to $19.1 million from $43.4 million at year-end 2012, largely reflecting unrealized investment losses.
- No borrowings were outstanding under the $30 million revolving facility; it was extended to August 2018. The company reported compliance with facility covenants. Interest expense was immaterial.
Changes, outlook and risks
- Prior-year loss reserves were released by $21.8 million in the first nine months of 2013, versus $11.9 million in the prior-year period. Management cited favorable auto and homeowners experience, including fewer claims than previously estimated and lower-than-estimated severity. Reserve releases increased reported earnings.
- Unrealized investment losses were attributed by management to interest-rate and other temporary market movements. No other-than-temporary impairment charges were recorded during the nine-month period. The portfolio’s effective annualized yield was 3.4% for Q3 and 3.5% for nine months, below the comparable 2012 yields.
- The company increased its estimated Massachusetts Insurers Insolvency Fund assessment to $1.25 million for 2013; the estimate added $1.0 million to Q3 underwriting expense. Further assessments may occur, though management did not expect them to materially affect financial position.
- Management said operating cash flows should meet liquidity needs over the next 12 months and expected internally generated funds to support longer-term operating needs. No specific earnings or revenue guidance was provided. These expectations remain subject to claims, investment markets, regulation and economic conditions.
- Catastrophe exposure, reserve-estimation uncertainty, competition and Massachusetts insurance regulation are key risks. Catastrophe reinsurance provided $515 million of coverage for property losses above $50 million, subject to stated layers and participation terms. Reinsurance recoverables and residual-market assessments also present exposure.
- After quarter-end, the board authorized increasing the share repurchase program to as much as $150 million; this is authorization, not a commitment to repurchase. The board also declared a $0.60-per-share dividend payable in December 2013.
Important facts for investors to verify
- How much reported earnings depended on favorable prior-year reserve development, and whether current-year loss trends support reserve adequacy.
- Whether premium growth and underwriting profitability persist by business line, particularly in Massachusetts auto and homeowners insurance.
- The sensitivity of investment values and future investment income to interest rates, and the company’s ability to avoid selling securities at a loss.
- Actual future insolvency-fund assessments, catastrophe and residual-market exposures, and the collectability and timing of reinsurance recoveries.
- Whether the expanded repurchase authorization is used, and how dividends, repurchases and insurance-subsidiary dividend restrictions affect capital and liquidity.