Safety Insurance Group, Inc. — 2014 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Dollar amounts are in millions unless stated otherwise. The company primarily writes property and casualty insurance in Massachusetts, with a principal focus on automobile insurance.
Financial performance
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Total revenue | $192.9 | $184.0 | $384.0 | $365.8 |
| Net earned premiums | $178.2 | $169.6 | $354.1 | $336.0 |
| Net income | $21.4 | $18.1 | $33.5 | $32.0 |
| Diluted EPS | $1.40 | $1.17 | $2.18 | $2.08 |
| Combined ratio | 91.4% | 93.5% | 95.2% | 95.4% |
- Q2 revenue increased 4.9% and net income increased 18.6% year over year; H1 revenue rose 5.0% and net income rose 4.7%.
- Direct written premiums increased 4.2% in Q2 and 4.0% in H1. Management attributed growth primarily to commercial auto and homeowners business, including increased exposures and average written premiums.
- Q2/H1 loss ratios were 60.9%/64.8%, compared with 63.1%/65.2%; expense ratios were 30.5%/30.4%, compared with 30.4%/30.2%. The lower loss ratio improved combined ratios, while expense ratios edged higher.
- Net investment income was $9.9 million in Q2 and $20.5 million in H1, up modestly year over year. Portfolio annualized yield declined to 3.3% for Q2 and 3.4% for H1, versus 3.4% and 3.5%, respectively.
- H1 comprehensive income was $47.7 million versus $8.5 million in 2013, principally reflecting a change from unrealized investment losses to unrealized gains in other comprehensive income.
Financial position, cash flow, and capital
- At June 30, total assets were $1.653 billion, investments $1.216 billion, cash and cash equivalents $37.7 million, total liabilities $949.2 million, and shareholders’ equity $703.7 million.
- H1 operating cash flow was $24.6 million, down from $35.1 million. Investing activities used $1.1 million; financing activities used $41.7 million, including $18.4 million of dividends and $23.5 million of share repurchases. Cash declined $18.1 million during H1.
- No borrowings were outstanding on the $30 million revolving credit facility at June 30; the agreement permits an increase to $50 million and matures in August 2018. The company reported compliance with facility covenants.
- Loss and LAE reserves were $457.8 million, including $58.8 million recoverable from reinsurers. Net reserves were $399.0 million, within management’s actuarial range of $370.3 million to $411.3 million.
- H1 dividends paid and accrued were $18.5 million. On August 6, the board raised the quarterly dividend from $0.60 to $0.70 per share, payable September 15, 2014. The company repurchased 460,023 shares for $23.5 million during H1.
Changes, outlook, and risks
- Prior-year reserves developed favorably by $19.9 million in H1 2014, compared with $14.4 million in H1 2013. Management cited better-than-estimated private-passenger auto claims and fewer IBNR claims in several lines. This release benefited reported results and is not a forecast of future development.
- 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 earnings or premium guidance was provided.
- The company’s catastrophe reinsurance program, effective January 1, 2014, provided $515 million of coverage for property losses above $50 million, up to $565 million; management described protection against an estimated “115-year storm.” The Massachusetts FAIR Plan purchased additional catastrophe reinsurance effective July 1, 2014.
- Key risks include catastrophe and severe-weather losses, reserve-estimation uncertainty, competition, Massachusetts insurance regulation and residual-market assessments, investment-market and interest-rate risk, and potential liquidity needs. Management said investment unrealized losses were temporary and reported no investment OTTI charges in H1.
- Claims and legal matters were described as incidental to normal business and not expected by management to materially adversely affect the company. Future Massachusetts insolvency-fund assessments are possible but were not expected to be material based on current knowledge.
- The IRS completed its examination of the 2011 federal tax return during Q2 with no findings. The company said there were no subsequent events requiring recognition or disclosure.
Important facts for investors to verify
- Whether favorable reserve development continues, and how actual claims compare with the disclosed reserve range and sensitivity analysis.
- Premium growth, loss trends, and combined ratios by business line, particularly given the Massachusetts concentration.
- Catastrophe exposure, reinsurance recoverability and terms, and the effect of residual-market participation.
- Investment portfolio performance, interest-rate sensitivity, and liquidity if securities must be sold before recovering in value.
- The sustainability of the increased dividend and share repurchases, considering insurer dividend restrictions and cash needs.