Safety Insurance Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; financial statements are unaudited. The company is a property and casualty insurer focused primarily on Massachusetts, with automobile insurance its principal business. Unless noted, dollar amounts below are in thousands.
Financial results and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $191,087 | $181,796; up 5.1% |
| Net earned premiums | $175,970 | $166,439; up 5.7% |
| Net income | $12,125 | $13,984; down 13.3% |
| Diluted EPS | $0.79 | $0.91 |
| GAAP loss / expense / combined ratios | 68.7% / 30.4% / 99.1% | 67.4% / 30.1% / 97.5% |
| Net investment income | $10,573 | $10,387; portfolio yield 3.5% versus 3.6% |
| Operating cash flow | $(8,095) | $4,858 |
| Cash and cash equivalents | $15,670 at March 31 | $55,877 at December 31, 2013 |
| Total investments | $1,225,716 | $1,202,576 at December 31, 2013 |
| Total assets / shareholders’ equity | $1,621,825 / $706,815 | $1,625,457 / $695,187 at December 31, 2013 |
| Credit facility borrowings | None outstanding | $30,000 committed facility |
Direct written premiums increased 3.8% to $192,660 and net written premiums rose 4.1% to $186,023. Dividends were $0.60 per share, unchanged year over year. Comprehensive income was $19,270, including $7,145 of after-tax unrealized investment gains in other comprehensive income.
Material changes and drivers
- Net income declined as losses and loss adjustment expenses rose 7.8% to $120,888, primarily reflecting higher auto claims amid severe, snowy Northeast winter weather. The loss ratio increased 1.3 percentage points and the combined ratio increased 1.6 points.
- Underwriting, operating and related expenses rose 6.6% to $53,407, mainly due to higher agent commissions. Net realized investment gains fell to $20 from $402.
- Prior-year reserves were favorably developed by $10,979, versus $7,400 in Q1 2013. Management attributed the release mainly to improved retained private passenger auto and homeowners experience. Net loss and LAE reserves were $400,412; the actuarial range was $366,656–$407,956.
- Cash decreased by $40,207 during the quarter. Investing activities used $22,971, principally as fixed-maturity purchases exceeded proceeds; financing activities used $9,141, primarily for dividends. The company attributed operating cash use mainly to higher taxes recoverable and lower accounts payable.
Outlook, risks and other notable items
- No quantified earnings or premium guidance was provided. Management expects internally generated cash flows to meet operating needs over the next 12 months and expects the insurance subsidiaries to generate sufficient cash for short- and long-term requirements, while cautioning that unforeseen needs could require securities sales or additional financing.
- The company maintains $515,000 of catastrophe reinsurance coverage for property losses above $50,000, up to $565,000, and stated that the 2014 program protects against an estimated 115-year storm. Reinsurance recoverables included $60,338 from CAR; management reported no other material reinsurer recoverables.
- Key risks include severe weather and catastrophe losses, competition, Massachusetts insurance regulation and rate approvals, residual-market exposure, investment interest-rate and liquidity risk, and uncertainty in loss-reserve estimates. A one-percentage-point change in the loss and LAE ratio was estimated to affect reserves by $1,760 and net income by $1,144, or $0.07 per diluted share.
- Management considered portfolio unrealized losses temporary and reported no OTTI charges in the quarter. It stated that it did not intend, and was not expected to need, to sell affected securities before recovery; a forced sale could result in impairment charges.
- The $30,000 revolving facility, with an accordion feature up to $50,000, had no borrowings at quarter-end; the company reported covenant compliance. The next quarterly dividend of $0.60 per share was declared May 6, 2014, payable June 13. No share repurchases occurred during the quarter.
- Routine legal claims and potential Massachusetts insolvency-fund assessments were not expected by management to have a material effect. The 2011 federal tax return was under IRS examination; management said adequate tax liabilities had been established. No subsequent events requiring recognition or disclosure were reported.
Important facts for investors to verify
- Whether elevated auto claim frequency and severity from the severe winter weather persist, and how the combined ratio develops.
- Whether favorable prior-year reserve development continues; compare actual claims emergence with the $400,412 recorded net reserves and stated actuarial range.
- Cash-flow conversion and liquidity, including the sharp cash decline and the company’s ability to meet claims and dividend needs without selling investments.
- Catastrophe exposure, reinsurance protection and collectability, particularly exposure involving CAR and the Massachusetts residual markets.
- Premium growth and pricing, including Massachusetts rate regulation, competition and the company’s concentration in its core market.