Safety Insurance Group, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Unless noted otherwise, dollar amounts are in thousands. Safety is a property and casualty insurer focused primarily on Massachusetts, with automobile insurance its principal business.
Financial results and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Direct written premiums | $185,554 | $176,253 | +5.3% |
| Net written premiums | $178,688 | $169,298 | +5.5% |
| Net earned premiums | $166,439 | $155,536 | +7.0% |
| Total revenue | $181,796 | $170,406 | +6.7% |
| Losses and loss adjustment expenses | $112,145 | $98,044 | +14.4% |
| Income before taxes | $19,531 | $23,802 | −17.9% |
| Net income | $13,984 | $17,209 | −18.7% |
| Diluted earnings per share | $0.91 | $1.13 | −19.5% |
| Operating cash flow | $4,858 | $11,444 | −57.5% |
Underwriting: The GAAP loss ratio rose to 67.4% from 63.0%; the expense ratio improved to 30.1% from 31.2%. The combined ratio increased to 97.5% from 94.2%, remaining below 100%. Prior-year reserve releases contributed $7,400 to Q1 2013 pretax results, compared with $3,987 in Q1 2012.
Investment income and cash flows: Net investment income was $10,387, up 4.8%; portfolio annualized yield remained 3.6%. Net realized investment gains were $402 versus $456. Cash and cash equivalents were $39,704 at quarter-end, versus $35,383 at December 31, 2012. Investing activities provided $8,127; financing activities used $8,664, chiefly for $9,200 of dividends.
Balance sheet and debt: Total assets were $1,585,248 and shareholders’ equity was $696,481 at March 31, 2013. Loss and LAE reserves were $431,796 and unearned premium reserves were $365,796. The company had no borrowings under its $30,000 revolving credit facility. The facility matures August 14, 2013; the company reported compliance with its covenants.
Material changes and management commentary
- Premium growth reflected higher average written premiums in personal auto, commercial auto, and homeowners, along with increased exposures in commercial auto and homeowners. Personal auto exposures declined 1.2%.
- Management attributed higher claims costs largely to a more typical level of catastrophe and non-catastrophe claims following severe, snowy Northeast winter weather. Q1 2012 claims had been unusually low after a mild winter.
- Prior-year reserve reductions primarily reflected favorable experience in retained auto and homeowners reserves. Management’s recorded net loss and LAE reserve estimate was $378,370, within an actuarial range of $356,021 to $386,864. A one-percentage-point loss and LAE ratio change was estimated to affect reserves by $1,664 and net income by $1,082, or $0.07 per diluted share.
- Unrealized investment losses increased: accumulated other comprehensive income declined to $38,660 from $43,356. Management considered the portfolio declines temporary, attributed them mainly to interest-rate and other market movements, and recorded no OTTI charges in the quarter.
- Q1 comprehensive income was $9,288, down from $18,516, reflecting net income decline and a $4,696 after-tax unrealized loss on available-for-sale securities.
Outlook, risks, and contingencies
- No specific earnings or premium guidance was provided. Management expected operating cash flows to meet liquidity needs over the next 12 months and expected internally generated funds to support needs thereafter, while noting uncertainty over longer-term conditions.
- The board declared a $0.60-per-share dividend payable June 14, 2013, and management said it planned to continue quarterly dividends in 2013 subject to financial position and cash-flow regularity. Q1 dividends were $0.60 per share, versus $0.50 a year earlier.
- Catastrophe exposure, severe weather, Massachusetts regulation and competition, residual-market assessments, and the estimation of loss reserves are key risks. The company reported $515,000 of catastrophe reinsurance coverage for property losses above $50,000, across four layers, effective January 1, 2013; the program was described as protecting against a “127-year storm.”
- Ordinary-course claims and litigation were not expected by management to have a material adverse effect. Future Massachusetts Insurers Insolvency Fund assessments were possible but not expected to be material. The IRS was examining the 2011 federal tax return; management believed adequate tax liabilities were established.
- Management warned that unforeseen cash needs could require securities sales before recovery in value, potentially resulting in additional impairment charges. The revolving facility’s August 2013 maturity is a near-term financing item to monitor.
Important facts for investors to verify
- Whether claims frequency and severity normalize after the severe Q1 winter and how this affects the combined ratio.
- Whether favorable prior-year reserve development continues, and the adequacy of reserves relative to the disclosed actuarial range.
- Premium growth and exposure trends by line, especially declining personal auto exposures and growth in commercial auto and homeowners.
- Renewal, extension, or replacement of the credit facility before its August 14, 2013 maturity.
- Investment portfolio valuation, unrealized losses, liquidity, and any subsequent impairment or realized-loss activity.
- Dividend sustainability, given regulatory limits on subsidiary dividends and cash-flow variability.