Safety Insurance Group, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited. Dollar amounts are in thousands except per-share data. The company primarily writes personal property and casualty insurance in Massachusetts, with a growing presence in New Hampshire; private-passenger auto is its largest line.
Financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $168,035 | $154,431 | $490,769 | $454,184 |
| Net earned premiums | $151,254 | $139,190 | $444,620 | $408,490 |
| Net investment income | $10,081 | $10,108 | $29,716 | $31,757 |
| Net income | $8,810 | $15,467 | $8,942 | $43,330 |
| Diluted EPS | $0.58 | $1.03 | $0.59 | $2.87 |
| Combined ratio | 103.8% | 95.3% | 107.8% | 96.2% |
For the nine-month period, direct written premiums rose 7.0% to $504,382, and net written premiums increased 7.3% to $483,559. Premium growth reflected higher average premiums and exposures, particularly in personal auto and homeowners. Underwriting results were unprofitable in both 2011 periods, as combined ratios exceeded 100%.
At September 30, total assets were $1,489,197 and shareholders’ equity was $655,284. Investments totaled $1,101,078 and cash and cash equivalents were $44,266. Loss and loss-adjustment reserves were $398,337; unearned premium reserves were $345,165. The company had no borrowings under its $30,000 revolving credit facility; it reported covenant compliance.
Nine-month operating cash flow was $21,015, versus $31,033 in 2010. Investing activities provided $4,836 and financing activities used $21,876, primarily for shareholder dividends. Cash increased by $3,975 to $44,266. Dividends paid were $1.50 per share for the nine months; the board declared another $0.50 quarterly dividend for December, and management said it planned to continue quarterly dividends in 2012 subject to financial position and cash flows.
Changes and significant items
- Net income fell to $8,942 for the first nine months from $43,330 a year earlier, primarily as incurred losses and LAE rose 31.1% to $347,359. The nine-month loss ratio increased to 78.1% from 64.8%.
- Catastrophe losses from the July western Massachusetts wind and hail storm and August Tropical Storm Irene were $12,375 in Q3. Catastrophic weather losses totaled $53,043 year to date, compared with $9,439 in the prior-year period.
- Favorable prior-year reserve development remained significant but declined to $25,122 for nine months, from $32,895. Management attributed much of the 2011 reduction to improved retained auto claims experience.
- Net investment income declined 6.4% year to date, primarily due to lower short-term rates and the company’s short-duration investment posture. Net realized investment gains increased to $2,702 from $295.
- Investment fair value exceeded amortized cost by approximately $50.5 million at September 30; the company recorded no OTTI charges for the nine-month period and characterized unrealized losses as temporary.
Outlook, risks, and contingencies
The filing provides no quantified earnings or premium guidance. Management said operating cash flow should meet liquidity needs over the next 12 months and expects internally generated funds to support longer-term operating needs, while cautioning that future liquidity depends on market, regulatory, and economic conditions. Massachusetts auto and homeowners rate increases took effect in 2011. The company’s catastrophe reinsurance program provided $505 million of coverage for covered property losses above $30 million, subject to stated layers and participation terms.
Key risks include severe weather, competition, Massachusetts insurance regulation and residual-market arrangements, investment and interest-rate exposure, and uncertainty in loss reserves. Net loss and LAE reserves were estimated at $345,758, within an actuarial range of $311,592 to $357,291; management noted that estimates depend on claim frequency and severity and lagged CAR data. A one-percentage-point change in the loss and LAE ratio would change reserves by $4,446, according to the filing. Ordinary-course legal claims and potential Massachusetts insurance insolvency-fund assessments were not expected by management to have a material effect. No material subsequent events or material changes to previously disclosed risk factors were reported.
Disclosure note: The MD&A paragraph reports Q3 underwriting, operating and related expenses of $44,453, while the financial statements report $45,453; the statements’ figure also reconciles to the stated year-over-year increase. Verify the intended amount against the filed financial statements.
Most important facts for investors to verify
- Whether catastrophe claims develop beyond the reported 2011 losses and how reinsurance recoveries affect retained losses.
- Reserve adequacy, including the assumptions behind favorable prior-year development and estimates for CAR and other residual-market business.
- Whether premium growth and the 2011 rate actions improve underwriting results after the combined ratio rose above 100%.
- Investment income and portfolio sensitivity to interest rates, alongside the quality and valuation of investment holdings.
- Capacity to sustain dividends given insurer-subsidiary dividend restrictions, operating cash flows, and the credit facility’s covenants.