Safety Insurance Group, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014; comparisons are with the three and nine months ended September 30, 2013 unless noted. Unaudited consolidated results. Dollar amounts below are in millions except per-share data.
Business context
Safety is a property and casualty insurer focused primarily on Massachusetts, with automobile insurance as its principal product. It also writes homeowners and other lines and operates in New Hampshire. Distribution is primarily through independent agents.
Financial results and key metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $196.1 | $187.7 | $580.2 | $553.5 |
| Net earned premiums | $180.3 | $172.2 | $534.4 | $508.2 |
| Net investment income | $10.8 | $10.0 | $31.3 | $30.1 |
| Losses and LAE | $119.7 | $109.2 | $349.2 | $328.3 |
| Income before taxes | $22.0 | $25.5 | $68.7 | $70.6 |
| Net income | $15.4 | $17.7 | $49.0 | $49.7 |
| Diluted EPS | $1.03 | $1.14 | $3.21 | $3.23 |
| Combined ratio | 96.6% | 94.1% | 95.7% | 95.0% |
Premium growth was driven mainly by commercial auto and homeowners business. Q3 direct written premiums rose 5.8% to $197.4 million; nine-month direct written premiums rose 4.6% to $597.3 million. For nine months, net written premiums increased 5.3%. The Q3 loss ratio rose to 66.4% from 63.4%; the expense ratio improved to 30.2% from 30.7%. The nine-month loss ratio increased to 65.3% from 64.6%, while the expense ratio was unchanged at 30.4%.
Cash flow from operations was $65.6 million for nine months, versus $65.1 million. Investing activities used $41.0 million and financing activities used $52.2 million, including $28.8 million of dividends and $23.5 million of share repurchases. Cash and equivalents were $28.4 million at September 30, down from $55.9 million at December 31, 2013.
At September 30, total assets were $1,674.6 million, investments were $1,245.2 million, loss and LAE reserves were $467.8 million, and shareholders’ equity was $705.8 million. The company had no borrowings under its $30 million revolving credit facility or from FHLB-Boston; it reported compliance with credit-facility covenants. The facility matures in August 2018.
Material changes and unusual items
- Net income declined 12.6% in Q3 and 1.4% for the first nine months, primarily because losses and LAE rose faster than earned premiums.
- Prior-year reserve releases were $9.4 million in Q3 and $29.3 million for nine months, compared with $7.4 million and $21.8 million, respectively, in 2013. Management attributed favorable development chiefly to lower-than-estimated claims and severity in auto and homeowners reserves.
- Net realized investment gains fell to $0.3 million in Q3 and $0.7 million for nine months, from $0.7 million and $1.2 million, respectively. The portfolio had $5.9 million of gross unrealized losses at quarter-end; the company recorded no OTTI charges and considered the declines temporary.
- The company repurchased 460,023 shares for $23.5 million in the first nine months, versus 90,902 shares for $4.8 million a year earlier. Dividends paid per share were $0.70 in Q3 and $1.90 for nine months, up from $0.60 and $1.80. A $0.70-per-share dividend was declared November 4, payable December 15, 2014.
- Massachusetts rate changes effective June 1, 2014 changed rate variation within the private-passenger tiering system but did not change the overall rate level.
Outlook, risks and contingencies
No quantitative earnings or revenue guidance was provided. Management said operating cash flow should be sufficient for operating needs over the next 12 months and expects internally generated funds to meet longer-term needs, while noting that future conditions could affect this assessment. The company intends to continue quarterly dividends, subject to its financial position and cash flows.
- Key exposures include claim frequency and severity, reserve-estimation uncertainty, severe weather and catastrophe losses, competition, Massachusetts insurance regulation and residual-market assessments, and changes in interest rates and equity markets.
- Catastrophe reinsurance effective January 1, 2014 provided $515 million of coverage for property losses above a $50 million retention, up to $565 million. Management described the protection as covering a “115-year storm.”
- Net loss and LAE reserves were $407.9 million, within an actuarial range of $372.6 million to $422.6 million. Management estimated that a one-percentage-point loss-and-LAE-ratio change would affect reserves by $5.3 million and net income by $3.5 million, or $0.23 per diluted share.
- Various claims and potential Massachusetts Insurers Insolvency Fund assessments were described as not expected to materially affect the company. The filing reported no material change to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the higher loss ratio and weaker combined ratio persist, particularly as favorable prior-year reserve development may not recur at the same level.
- Reserve adequacy and subsequent development, including the actuarial range, residual-market estimates, and the $49.97 million recoverable from CAR disclosed in MD&A.
- Premium growth and mix by line, including whether commercial auto and homeowners exposure growth translates into profitable underwriting.
- Investment portfolio sensitivity to rates and credit conditions; the filing estimates a 100-basis-point rate increase would reduce fixed-maturity fair value by $42.4 million.
- Capital returns and holding-company liquidity, including share repurchases, dividends, and the regulatory limits on subsidiary dividends.