Safety Insurance Group, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. The company is a property-and-casualty insurer focused primarily on Massachusetts, with private passenger automobile insurance its largest business line. Unless noted otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $170.4 | $158.8 | +7.3% |
| Net earned premiums | $155.5 | $144.6 | +7.5% |
| Net income (loss) | $17.2 | ($4.0) | Returned to profit |
| Diluted EPS | $1.13 | ($0.26) | — |
| Operating cash flow | $11.4 | ($3.1) | Improved |
- Direct written premiums rose 7.4% to $176.3 million; net written premiums rose 7.5% to $169.3 million. Management attributed growth principally to personal auto and homeowners premiums and exposures.
- Loss and loss adjustment expenses fell 19.4% to $98.0 million. The loss ratio improved to 63.0% from 84.1%; the expense ratio increased to 31.2% from 29.5%; the combined ratio improved to 94.2% from 113.6%.
- Net investment income declined 2.5% to $9.9 million; annualized portfolio yield was 3.6%, down from 3.7%. Net realized investment results improved to a $0.5 million gain from a $0.4 million loss.
- Cash and cash equivalents were $84.8 million, up from $37.9 million at year-end. Total assets were $1,484.6 million; shareholders’ equity was $669.1 million. Q1 dividends paid were $7.6 million, or $0.50 per share.
- No borrowings were outstanding under the $30 million revolving credit facility. Interest expense was $22,000. The company reported compliance with credit-facility covenants.
Material changes and notable items
- The return to profitability principally reflected the absence of catastrophe losses in Q1 2012, versus $19.9 million of pretax catastrophe losses in Q1 2011. Favorable prior-year reserve development also contributed: $4.0 million in Q1 2012, compared with $9.7 million in Q1 2011.
- Underwriting, operating and related expenses increased 13.9% to $48.5 million, primarily due to higher agent commissions.
- At March 31, net loss and LAE reserves were $350.0 million, against management’s actuarial range of $317.0 million to $363.0 million. Management cautions that reserve estimates are uncertain and depend on assumptions about claim frequency, severity and residual-market obligations.
- Available-for-sale investments totaled $1,065.3 million at fair value. Gross unrealized losses were $0.9 million; management considered them temporary and recorded no other-than-temporary impairment charges during the quarter. The filing states that a one-percentage-point change in the loss and LAE ratio would affect reserves by approximately $1.6 million and net income by approximately $1.0 million, or $0.07 per diluted share.
Outlook, risks and contingencies
- The company filed for and received approval of a 3.6% private passenger auto rate increase effective May 15, 2012. Its board declared a $0.50-per-share quarterly dividend payable June 15, 2012 and said it planned to continue quarterly dividends in 2012, subject to financial position and cash flows. No earnings or revenue forecast was provided.
- Management expected internally generated cash flows to meet operating needs, including over the next 12 months, but noted that longer-term liquidity depends on market, regulatory and economic conditions. It warned that unforeseen needs could force investment sales before value recovery.
- Risks include severe weather and catastrophe losses, competition, Massachusetts insurance regulation and residual-market changes, reserve-estimation uncertainty, investment-market and interest-rate risk, and possible financing needs. Catastrophe reinsurance effective January 1, 2012 provided $485 million of coverage for covered property losses above $50 million, up to $535 million.
- Routine claims and potential Massachusetts Insurers Insolvency Fund assessments were described as not expected to materially affect the company. Management reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the improved loss and combined ratios persist absent the prior-year catastrophe comparison, and how catastrophe exposure develops.
- Subsequent claims experience and reserve development, particularly in auto lines and residual-market business.
- Premium and exposure growth, the effect of the approved auto rate increase, and the ability to contain rising acquisition expenses.
- Investment yield, portfolio valuation and credit exposure, and whether liquidity remains sufficient without selling securities at a loss.
- Dividend sustainability, regulatory limits on subsidiary dividends, and continued compliance with credit-facility covenants.