Safety Insurance Group, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; unaudited. Dollar amounts below are in millions unless stated otherwise. The company is a property and casualty insurer focused primarily on Massachusetts, with private passenger automobile insurance its largest line.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net earned premiums | $148.7 | $136.1 | $293.4 | $269.3 |
| Total revenue | $163.9 | $151.4 | $322.7 | $299.8 |
| Loss and loss adjustment expenses | $114.2 | $87.8 | $235.8 | $176.5 |
| Net income | $4.1 | $15.1 | $0.1 | $27.9 |
| Diluted EPS | $0.27 | $1.00 | $0.01 | $1.84 |
| Combined ratio | 106.4% | 95.5% | 110.0% | 96.7% |
- Written premiums grew: direct written premiums were up 7.9% in Q2 and 7.2% year to date; net written premiums rose 9.3% and 8.2%, respectively. Net earned premiums increased 9.2% in Q2 and 8.9% year to date.
- Underwriting deteriorated despite expense-ratio improvement. The loss ratio increased to 76.8% from 64.5% in Q2 and to 80.4% from 65.5% year to date; the expense ratio declined to 29.6% from 31.0% and 31.2%, respectively.
- Net investment income declined 12.8% in Q2 to $9.5 million and 9.3% year to date to $19.6 million, primarily reflecting lower short-term rates and the company’s short-duration investment strategy. Portfolio yield was 3.5% for Q2 and 3.6% year to date, versus 4.1% in both prior-year periods. Net realized investment gains were $1.3 million in Q2 and $0.9 million year to date, versus losses in the 2010 comparables.
- Cash from operations was $6.6 million for the first six months, compared with $2.4 million in 2010. Investing activities provided $22.9 million, while financing activities used $14.2 million, mainly for dividends. Cash and cash equivalents were $55.5 million at June 30, versus $40.3 million at year-end 2010.
- At June 30, total assets were $1,466.6 million, investments $1,060.6 million, total liabilities $820.2 million, and shareholders’ equity $646.4 million. Loss and LAE reserves were $403.8 million; unearned premium reserves were $337.1 million.
- No borrowings were outstanding under the $30 million revolving credit facility; it matures August 14, 2013 and can expand to $50 million. The company reported compliance with its covenants. Cash dividends paid were $0.50 per share in Q2 and $1.00 per share year to date.
Material changes and unusual items
- Severe weather and tornadoes across western and central Massachusetts on June 1 caused $16.7 million of Q2 catastrophe losses. Reassessment of Q1 catastrophe and severe-weather losses added $5.4 million to Q2 expenses. Total catastrophe weather losses included in first-half pretax results were $40.7 million, versus $9.4 million in the 2010 first half.
- Higher claims drove the sharp decline in earnings. Favorable development of prior-year reserves partly offset the increase: $9.2 million in Q2 and $18.8 million year to date, compared with $10.0 million and $22.6 million, respectively, in 2010.
- Management increased Massachusetts private passenger auto rates 3.9% effective May 15, 2011, and reported a 7.5% homeowners rate increase effective August 15, 2011.
- Recorded net loss and LAE reserves of $351.3 million were within management’s actuarial range of $319.5 million to $361.6 million; management said the booked estimate was closer to the range’s high end. A one-percentage-point change in the loss and LAE ratio would affect reserves by $2.9 million and net income by $1.9 million, or $0.13 per diluted share.
Outlook, risks, and contingencies
- No earnings or premium guidance was provided. Management expected operating cash flows and internally generated funds to meet operating needs over the next 12 months and beyond, while noting that longer-term sufficiency depends on market, regulatory, and economic conditions.
- Key risks include severe weather and catastrophe claims, competition, Massachusetts insurance regulation and residual-market assessments, reserve-estimation uncertainty, interest-rate and investment-market changes, and potential liquidity or financing needs. The filing reported no material changes to the risk factors in the 2010 Form 10-K.
- The company participates in Massachusetts automobile and homeowners residual-market arrangements. It reported no material reinsurer recoverables apart from $44.7 million recoverable from CAR. Catastrophe reinsurance effective January 1, 2011 provided $505 million of coverage for property losses above a $30 million retention, subject to stated participation terms.
- Routine claims and potential future assessments by the Massachusetts Insurers Insolvency Fund were not expected by management to have a material effect, although future assessments’ timing and amounts were unknown. Management reported no material off-balance-sheet arrangements and no subsequent events requiring disclosure.
Most important facts for investors to verify
- Whether catastrophe claims and associated loss estimates develop as expected, and the adequacy of booked reserves relative to the actuarial range.
- Whether premium growth and announced rate increases improve underwriting results, particularly given the 110.0% first-half combined ratio.
- Whether investment income remains under pressure from low interest rates and the portfolio’s duration and valuation exposures.
- Whether operating cash flow, insurer dividend capacity, and the $0.50 quarterly dividend remain sustainable under claims and regulatory demands.
- The effect of CAR and FAIR Plan participation, reinsurance recoveries, and any future insolvency-fund assessments on earnings and liquidity.