Safety Insurance Group, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Unless stated otherwise, dollar amounts are in thousands; per-share amounts are in dollars. The filing also reports unaudited fourth-quarter results.
Business context
Safety is a property and casualty insurer operating in Massachusetts and New Hampshire, selling exclusively through independent agents. Private passenger auto is its core business (63.9% of 2013 direct written premiums). The company reported a 10.8% share of Massachusetts private passenger auto and 13.1% of commercial auto exposures, ranking third in each market.
Financial results and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Direct written premiums | $731,680 | $696,220 | +5.1% |
| Net earned premiums | $681,870 | $642,469 | +6.1% |
| Total revenue | $745,284 | $703,867 | +5.9% |
| Net investment income | $43,054 | $40,870 | +5.3% |
| Net income | $61,351 | $58,070 | +5.6% |
| Diluted EPS | $3.98 | $3.80 | +4.7% |
| Combined ratio | 96.5% | 96.9% | Improved 0.4 pts |
The 2013 GAAP loss ratio was 65.7%, unchanged from 2012; the expense ratio improved to 30.8% from 31.2%. A combined ratio below 100% indicates underwriting profitability. Prior-year reserve releases contributed $28,889 to 2013 results, versus $17,310 in 2012.
Fourth-quarter 2013 revenue was $191,793 and net income was $11,652, compared with $181,222 and $9,571, respectively, in fourth-quarter 2012. Fourth-quarter diluted EPS was $0.76 versus $0.62.
Cash and cash equivalents were $55,877 at year-end, and cash plus investment securities totaled $1,258,453. Operating cash flow was $110,861; investing cash use was $51,295; financing cash use was $39,072. Shareholders’ equity was $695,187, while total liabilities were $930,270. Loss and LAE reserves were $455,014 gross and $394,668 net of reinsurance.
The company had no borrowings outstanding at year-end under its $30,000 revolving credit facility, which includes an option to expand commitments up to $50,000. It reported compliance with facility covenants. Total investment securities were $1,202,576; fixed maturities made up 91.9% of the investment portfolio. Net effective investment yield was 3.7%, unchanged from 2012. Other comprehensive income included a $26,156 after-tax investment-related loss, reducing comprehensive income to $35,195.
Material changes versus 2012
- Direct written premiums grew 5.1%; commercial auto exposures rose 10.9% and homeowners exposures rose 5.7%, while private passenger auto exposures declined 0.3%.
- Loss and LAE expense increased 6.0% to $447,749, broadly in line with earned-premium growth; catastrophe losses declined to $6,161 from $10,332.
- Underwriting, operating and related expenses increased 4.8% to $209,758, primarily due to higher agent commissions.
- Fixed-maturity investments declined in fair value to $1,104,957 from $1,165,553, while equity securities increased to $91,871 from $22,800. Accumulated other comprehensive income fell to $17,200 from $43,356.
- Cash dividends paid totaled $36,920, or $2.40 per share, versus $33,634, or $2.20 per share. The company repurchased 90,902 shares for $4,799 in 2013.
Outlook, risks and unusual items
No earnings or premium guidance is provided. Management said operating cash flow should meet near- and longer-term operating needs, while noting that unforeseen needs and future market, regulatory or economic changes could affect liquidity. The company planned to continue quarterly dividends in 2014 subject to financial position and cash-flow regularity. A $0.60-per-share quarterly dividend was declared in February 2014.
- Reserves: Management’s selected net loss and LAE reserve estimate was $394,668, within an actuarial range of $364,146–$401,265. A one-percentage-point change in the loss and LAE ratio would change reserves by about $6,819 and net income by about $4,432, or $0.29 per diluted share. Reserve estimates are inherently uncertain.
- Catastrophe exposure: The 2014 catastrophe program provides coverage for property losses above $50,000 up to $565,000 and was described as protecting against a “115-year storm,” versus “128-year” protection in 2013. No recoveries were received under primary catastrophe treaties in 2011–2013 because no individual event exceeded treaty retentions.
- Concentration and competition: The business is concentrated in Massachusetts and private passenger auto, exposed to regulation, rate competition, new market entrants, and reliance on independent agents.
- Other risks: Severe weather, climate-related losses, reinsurance availability and counterparty credit, investment-market and interest-rate movements, operational and cybersecurity interruptions, and regulatory limits on insurance-subsidiary dividends could affect results or parent-company liquidity.
- Capital and contingencies: Safety Insurance’s statutory surplus was $627,993; up to $62,799 was available for dividends in 2014 without prior regulatory approval. Ordinary-course lawsuits and potential insolvency-fund assessments were not expected by management to have a material effect. The filing reports no material off-balance-sheet arrangements.
- Audit and controls: The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Reconcile the MD&A’s 2012 net-income figure of $57,404 with the audited statements and selected financial data, which report $58,070.
- Reconcile the 2012 operating-cash-flow figures: the cash-flow statement reports $104,331, while MD&A states $104,311 in one passage and $104,311 elsewhere in the summary discussion.
- Assess how much of 2013 earnings depended on favorable prior-year reserve development and whether reserve adequacy remains sound as claims mature.
- Review the potential impact of Massachusetts regulatory changes, market competition, catastrophe exposure, and the 2014 reduction in modeled storm protection.
- Monitor investment portfolio duration, credit quality, unrealized losses, and the effect of interest-rate or market movements on equity and comprehensive income.
- Confirm future dividend capacity at the holding company, considering insurance-subsidiary dividend restrictions, cash flows, and the credit facility.