Safety Insurance Group, Inc. — 2015 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2015; figures below are in millions of dollars unless stated otherwise. Safety writes property and casualty insurance principally in Massachusetts, with a smaller New Hampshire business, and sells exclusively through independent agents. Private passenger auto represented 59.6% of 2015 direct written premiums. The company reported that record Massachusetts snowfall materially affected results.
Key financial results
| Metric | 2015 | 2014 |
|---|---|---|
| Direct written premiums | $785.7 | $765.7 |
| Net earned premiums | $738.2 | $716.9 |
| Total revenue | $798.0 | $778.8 |
| Net income (loss) | $(13.9) | $59.4 |
| Diluted earnings (loss) per share | $(0.93) | $3.91 |
| Operating cash flow | $22.9 | $97.6 |
| Cash and investments | $1,256.9 | $1,298.7 |
| Total assets | $1,703.9 | $1,675.7 |
| Shareholders’ equity | $644.5 | $708.3 |
| Loss and loss adjustment expense reserves, gross | $554.0 | $482.0 |
Underwriting and investment. The GAAP loss ratio rose to 83.0% from 66.5%; the expense ratio improved to 29.0% from 30.6%, but the combined ratio deteriorated to 112.0% from 97.1%. A combined ratio above 100% indicates an underwriting loss. Net investment income declined to $40.5 million from $42.3 million, and portfolio yield fell to 3.3% from 3.5%. The company recorded $0.8 million of investment impairment losses.
Liquidity and debt. Cash and cash equivalents were $47.5 million at year-end. The company reported no borrowings under its $30 million revolving credit facility and no FHLB-Boston borrowings; it also had access to approximately $180.1 million of borrowing capacity from FHLB-Boston, subject to collateral requirements. The company said operating cash flows were expected to meet liquidity needs, while noting that claims timing and other unforeseen needs could affect liquidity.
Material changes versus 2014
- Net loss and LAE increased 28.6% to $612.6 million, primarily due to the 2015 winter storms. Reported catastrophe losses were $180.9 million, compared with $8.2 million in 2014.
- Net income shifted from $59.4 million profit to $13.9 million loss. Revenue grew 2.5%, while total expenses increased substantially, mainly because of claims.
- Direct written premiums increased 2.6%; net earned premiums increased 3.0%. Commercial auto and homeowners premiums and exposures grew, while private passenger auto exposures declined 1.7%.
- Operating cash flow decreased to $22.9 million from $97.6 million, which management attributed primarily to increased winter-storm claims activity. Cash and investments declined from $1,298.7 million to $1,256.9 million.
- Net prior-year reserve development remained favorable at $30.3 million, but was below the $37.4 million favorable development in 2014. Management cautioned that past development should not be extrapolated.
Outlook, commentary, risks and unusual items
- Storm losses and reinsurance: Expected recovery under the catastrophe program for the 2015 snow event was $67.9 million; $39.6 million of related paid and unpaid loss recoverables was recorded at year-end. The company had filed for arbitration over $22.8 million of disputed recoverables and recorded no collectability provision, stating it believed the amount was valid and would be recovered.
- Coverage and expansion: For 2016, the company increased catastrophe reinsurance protection, adding a fourth layer; it described protection against an estimated “133-year storm,” compared with “115-year” protection in 2015. It anticipated beginning to write business in Maine in the first quarter of 2016. These are management plans, not guaranteed results.
- Rates: Approved 2015 increases included Massachusetts private auto 3.8%, commercial auto 3.5%, and homeowners 9.1%; New Hampshire increases included personal auto 5.0%, commercial auto 7.9%, and homeowners 7.9%.
- Dividends and capital: The company paid $2.80 per share in 2015 and declared a $0.70-per-share quarterly dividend for March 2016. It said future dividends depended on financial position and cash-flow regularity. Massachusetts law limited Safety Insurance’s 2016 dividend capacity without prior regulatory approval to $57.1 million; the holding company depends on subsidiary distributions.
- Management: The company announced CEO David F. Brussard’s retirement effective March 31, 2016, with George M. Murphy appointed to succeed him effective April 1, 2016.
- Principal risks: Concentration in Massachusetts and private auto; rate and other insurance regulation; severe weather and catastrophe exposure; reserve estimation uncertainty; availability and collectability of reinsurance; competition and reliance on independent agents; investment-market and interest-rate risk; and operational and cybersecurity risks.
Most important facts for investors to verify
- Whether the 2015 catastrophe recoverables, particularly the $22.8 million arbitration dispute, are collected and whether additional storm claims or recoveries emerge.
- Whether underwriting returns toward profitability after the 112.0% combined ratio, and whether rate changes adequately address claims costs.
- Whether recorded reserves prove adequate; net reserves were $485.7 million, with an actuarial range of $446.4 million to $495.5 million.
- Whether operating cash flow, subsidiary dividend capacity and the regular quarterly dividend remain sustainable after the unusually high claims year.
- How the expanded 2016 catastrophe reinsurance program performs in practice, and whether Maine expansion and the CEO transition proceed as planned.