Safety Insurance Group, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. Amounts are in thousands of dollars, except per-share data. The filing also reports unaudited fourth-quarter results.
Business context
Safety is a property and casualty insurer operating primarily in Massachusetts, with a growing business in New Hampshire. It sells exclusively through independent agents. Private passenger automobile insurance represented 65.9% of 2012 direct written premiums; homeowners and commercial automobile were the next-largest lines.
Financial performance
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| Direct written premiums | $696,220 | $649,262 | +7.2% |
| Net earned premiums | $642,469 | $598,368 | +7.4% |
| Total revenue | $703,867 | $660,158 | +6.6% |
| Net investment income | $40,870 | $39,060 | +4.6%; portfolio yield was 3.7% versus 3.6% |
| Net income (audited statements) | $58,070 | $13,702 | Reported results rebounded from 2011 |
| Diluted EPS | $3.80 | $0.90 | — |
| GAAP combined ratio | 96.9% | 107.9% | Improved below 100%, indicating underwriting profit |
| Operating cash flow | $104,348 | $39,477 | — |
The 2012 loss ratio was 65.7% (78.0% in 2011); the expense ratio was 31.2% (29.9%). Catastrophe losses were $10,332, compared with $61,384 in 2011. Prior-year reserve releases contributed $17,310 to 2012 results, versus $36,683 in 2011.
At year-end, total assets were $1,574,346, shareholders’ equity was $694,359, and total liabilities were $879,987. Cash and cash equivalents were $35,383; cash and investment securities totaled $1,223,736. There was no balance outstanding under the $30,000 revolving credit facility. Reported interest expense was $88.
Fourth-quarter 2012 revenue was $181,222 and net income was $9,571, or $0.62 per diluted share. Quarterly results show net income declined from $14,334 in Q3; the quarter included Superstorm Sandy losses.
Material changes versus 2011
- Premium growth was supported by higher average premiums in personal auto and homeowners, and increased exposures in homeowners and commercial auto. Total written exposures grew 2.7%; voluntary-agent exposures increased 5.8%.
- Underwriting performance improved substantially as catastrophe losses fell from the prior year’s elevated level. Expenses nevertheless rose 11.7%, mainly reflecting higher agent commissions.
- Net reserves for losses and loss adjustment expenses increased to $371,657 from $352,098; gross reserves rose to $423,842 from $403,872.
- Investments increased to $1,188,353 from $1,107,893. The portfolio remained predominantly fixed maturities, while corporate securities and lower-rated holdings increased; the filing reports $84,457 in senior bank loans at year-end.
- Cash dividends paid rose to $2.20 per share from $2.00. Shareholders’ equity increased to $694,359 from $656,313.
Outlook, risks and unusual items
- Management expects operating cash flows to meet liquidity needs, but provides no earnings or premium guidance. It planned to continue quarterly dividends in 2013 subject to financial position and cash-flow regularity; a $0.60-per-share dividend was declared for March 2013.
- Approved rate changes included Massachusetts personal auto increases totaling approximately 4.7% during 2012, a 6.9% Massachusetts homeowners increase, and New Hampshire auto and homeowners increases. A new Massachusetts auto rating plan with 768 tiers was approved for May 15, 2013.
- Catastrophe risk remains significant. 2013 catastrophe reinsurance covered property losses above $50,000 up to a maximum of $565,000, described as protection against a “127-year storm.” Losses beyond coverage limits, policy retentions, and reinsurance counterparty risk remain exposures.
- Key risks include concentration in Massachusetts private passenger auto, rate and regulatory changes, competition (including direct writers), severe weather, reserve-estimation uncertainty, investment-market and interest-rate risk, and reliance on independent agents. Reinsurance does not discharge the company’s obligations to policyholders.
- Management’s net loss and LAE reserve estimate was $371,657, within an actuarial range of $347,618–$379,385. The filing cautions that actual ultimate losses may differ materially; a one-percentage-point change in the loss and LAE ratio was estimated to affect net income by $4,176.
- The credit facility matures August 14, 2013. Dividends from the insurance subsidiaries are regulated; up to $59,902 was available for dividends in 2013 without prior regulatory approval, subject to other constraints.
- Ordinary-course lawsuits were not expected to have a material adverse effect. The company disclosed unresolved SEC staff comments on its 2011 Form 10-K and expected no material impact from their resolution. Auditors reported effective internal control over financial reporting.
Most important facts to verify
- Net income discrepancy: Audited statements report 2012 net income of $58,070, but one MD&A passage states $57,404. Confirm the audited figure and investigate the inconsistent narrative disclosure.
- Assess how much 2012 profitability depended on lower catastrophe losses and favorable prior-year reserve development, and whether reserve assumptions remain adequate.
- Review the credit facility’s renewal or replacement after its August 2013 maturity and the subsidiaries’ capacity to upstream dividends under regulatory and covenant limits.
- Track the effect of Massachusetts competition, approved rate changes, and the new rating plan on premium growth, retention, and underwriting margins.
- Evaluate catastrophe accumulation and reinsurance protection, including retention, coverage limits, and reinsurer collectability.