Safety Insurance Group, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing was signed March 13, 2012. Unless otherwise noted, dollar amounts are in thousands. The company is a property-and-casualty insurer focused on Massachusetts and New Hampshire, distributing exclusively through independent agents. Private passenger auto generated 67.2% of 2011 direct written premiums.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Direct written premiums | $649,262 | $604,957 |
| Net earned premiums | $598,368 | $551,950 |
| Total revenue | $660,158 | $612,719 |
| Losses and loss adjustment expenses | $466,640 | $360,848 |
| Income before taxes | $14,273 | $78,960 |
| Net income | $13,702 | $56,342 |
| Diluted earnings per share | $0.90 | $3.74 |
| Operating cash flow | $39,943 | $51,106 |
| Total assets | $1,472,566 | $1,439,452 |
| Shareholders’ equity | $656,313 | $653,476 |
- Direct written premiums rose 7.3%; net earned premiums rose 8.4%. Total exposures increased 3.9%, led by voluntary-agent business and growth in homeowners policies.
- The GAAP loss ratio rose to 78.0% from 65.4%; the expense ratio improved to 29.9% from 31.3%. The combined ratio increased to 107.9% from 96.7%, indicating an underwriting loss before investment and other income.
- Catastrophe losses were reported as $62,668 for 2011 versus $9,429 in 2010. The filing also gives $62,688 in one narrative passage, an internal inconsistency to verify. No individual 2011 catastrophe exceeded the company’s reinsurance retention, so it reported no catastrophe treaty recoveries.
- Net investment income declined 5.6% to $39,060, and the portfolio’s net effective yield fell to 3.6% from 3.9%. Net realized investment gains increased to $4,360 from $863.
- Cash and cash equivalents were $37,890; investments totaled $1,108,748. Operating cash flow remained positive but declined year over year. The company reported no amounts outstanding on its $30,000 revolving credit facility at year-end; maturity is August 2013. Total liabilities were $816,253.
- Gross loss and LAE reserves were $403,872, including $51,774 of reinsurance recoverables; net reserves were $352,098. Shareholders received $2.00 per share in dividends during 2011.
Material changes and fourth-quarter results
- Net income fell 75.7% year over year, primarily because of much higher catastrophe and other losses. The company recorded $36,683 of favorable prior-year reserve development, below the $48,157 recorded in 2010; this release reduced reported losses but did not offset current-year catastrophe impacts.
- Homeowners direct written premiums increased to $117,649 from $101,594, while private passenger auto premiums increased to $436,175 from $415,515. New Hampshire direct written premiums were $5,750, up from $2,774.
- Fourth-quarter 2011 revenue was $169,389 and net income was $4,760, versus $158,535 and $13,012 in fourth-quarter 2010. Fourth-quarter diluted EPS was $0.31 versus $0.86. The company cited $9,625 of catastrophe losses in the 2011 quarter, including effects of the October snowstorm and Eastern Massachusetts flooding.
- Statutory surplus at Safety Insurance was $570,492, down from $582,432. The company reported that its insurance subsidiaries’ capital exceeded regulatory risk-based capital action thresholds.
Outlook, risks, and contingencies
- The filing gives no earnings or revenue forecast. Management said operating cash flow should meet needs over the next 12 months and anticipated continued quarterly dividends in 2012, subject to financial position and cash flow. A $0.50-per-share quarterly dividend was declared for March 2012.
- Management reported an approved 3.6% Massachusetts private-passenger-auto rate increase effective May 15, 2012. A separate increase of 7.5% for Massachusetts homeowners coverage took effect in 2011. The company’s 2012 catastrophe reinsurance was designed to cover losses from a modeled 140-year storm, with coverage above a $50,000 retention up to $535,000.
- Key risks include dependence on Massachusetts auto insurance and the independent-agent channel; competition under the state’s managed-competition rate system; severe weather and coastal catastrophe exposure; reserve-estimation uncertainty; reinsurance availability and counterparty credit; interest-rate and investment-market risk; and regulatory limits on dividends from insurance subsidiaries.
- Management’s net reserve estimate was $352,098, within an actuarial range of $317,155–$363,035. The filing warns that actual ultimate losses may differ materially and that reserve releases in prior years should not be extrapolated.
- Ordinary-course lawsuits and potential insurer-insolvency assessments were described as not expected to have a material adverse effect. Contractual obligations totaled $439,702, including reserves, purchase commitments, and operating leases. The filing reported no material off-balance-sheet arrangements.
- PricewaterhouseCoopers issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2011.
Most important facts for investors to verify
- Reconcile the filing’s conflicting 2011 catastrophe-loss figures of $62,668 and $62,688, and assess the net impact of weather losses after retention and reinsurance.
- Review the development and adequacy of loss reserves, including the $36,683 favorable prior-year release and the sensitivity of results to loss frequency and severity.
- Monitor whether rate increases keep pace with claims inflation and competition, particularly given the 107.9% combined ratio and Massachusetts concentration.
- Assess dividend sustainability and holding-company liquidity in light of insurer dividend restrictions, operating cash flow, and the unused but covenant-restricted credit facility.
- Track investment yield, interest-rate exposure, and portfolio credit quality; the filing reports $1,951 of unrealized losses and no other-than-temporary impairment charges at year-end.