Safety Insurance Group, Inc. — FY2018 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2018; amounts below are in thousands except per-share data. Safety is a property-and-casualty insurer operating in Massachusetts, New Hampshire and Maine, selling exclusively through independent agents. Massachusetts accounted for $813,857 of $843,675 in direct written premiums. Private passenger auto represented 55.7% of premiums; commercial auto 16.5%; homeowners 22.9%.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $836,497 | $839,113 |
| Net earned premiums | $781,587 | $774,420 |
| Net income | $83,195 | $62,387 |
| Diluted earnings per share | $5.43 | $4.10 |
| Net cash from operating activities | $127,691 | $82,040 |
| Combined ratio | 93.7% | 97.2% |
- Direct written premiums rose 2.0% to $843,675; net written premiums increased 0.8%. Commercial auto and homeowners drove most direct-premium growth.
- Loss and LAE expense was $485,513, down 3.6%; the loss ratio improved to 62.1% from 65.1%. The expense ratio improved to 31.6% from 32.1%.
- Prior-year reserve releases contributed $56,488 to 2018 pre-tax results, versus $41,784 in 2017. Management’s best estimate of net loss and LAE reserves was $476,321, within an actuarial range of $422,423–$498,216.
- Net investment income rose 13.0% to $43,788; portfolio yield was 3.3%, versus 3.1%. Net realized investment gains fell to $3,226 from $6,036. Partnership investment earnings rose to $6,915 from $2,082.
- Total revenue declined slightly despite premium growth, principally reflecting a $16,324 change in unrealized equity investment gains/losses recognized in earnings under a newly adopted accounting standard. Comprehensive income was $60,379, down from $70,813.
- At December 31, total assets were $1,856,240, shareholders’ equity $718,644, and cash and cash equivalents $37,582. Cash and investment securities totaled $1,370,936. The filing reports no credit-facility debt outstanding; the revolving facility is $30,000, with an accordion option to $50,000, and matures in 2023.
- Operating cash flow covered dividends and investment activity; cash used for investing was $83,004 and cash used for financing was $48,813. Quarterly dividends totaled $3.20 per share for 2018, and the company declared a further $0.80 per share for March 2019.
Fourth-quarter snapshot
Unaudited Q4 2018 revenue was $202,901 and net income was $18,346, compared with $213,565 and $11,309, respectively, in Q4 2017. Diluted EPS was $1.19 versus $0.72.
Changes, outlook and risks
- 2018 earnings improved while reported revenue was nearly flat; stronger underwriting results, reserve releases, higher investment income and lower taxes supported earnings. The statutory corporate tax rate reduction to 21% contributed to a 20.2% effective tax rate, versus 28.0% in 2017.
- Catastrophe losses were $14,426 in 2018, compared with $6,700 in 2017. Catastrophe reinsurance covered property losses above $50,000 up to $665,000; management described 2018 coverage as protecting against a modeled “137-year storm.” The 2019 program was described as covering a “139-year storm.”
- No formal earnings or premium guidance is provided. Management expects internally generated cash flows to meet operating needs and plans to continue quarterly dividends in 2019, subject to financial position and cash-flow regularity. Up to $86,734 of Safety Insurance statutory income was available for dividends in 2019 without prior regulatory approval; this is not a guarantee of payment or capacity.
- Principal risks include concentration in Massachusetts and private passenger auto, competition and dependence on independent agents, severe weather and climate-related losses, catastrophe and reinsurance limits or counterparty failure, reserve-estimation uncertainty, regulatory constraints on rates and subsidiary dividends, and investment-market, interest-rate, credit and liquidity risks. A 1-point change in the loss and LAE ratio would change reserves by approximately $7,817, according to the filing.
- In January 2018, arbitration resolved a dispute over 2015 winter-storm reinsurance: the reinsurer paid $9,200; the remaining $11,718 had been expensed in 2017. Ordinary-course litigation was not expected by management to have a material adverse effect. The filing reports no material off-balance-sheet arrangements.
- The company adopted accounting guidance that records changes in equity-security fair values in net income; the adoption included a $16,895 after-tax transition adjustment to retained earnings. The 2018 fair-value decline in equity investments materially affected reported earnings presentation. Auditors gave an unqualified opinion and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How much future earnings depend on continued favorable reserve development, and whether 2018 reserve releases recur.
- Underlying accident-year loss trends and rate adequacy, especially in Massachusetts private passenger auto; voluntary private-passenger exposures declined 2.0% in 2018.
- Catastrophe exposure net of reinsurance, including retention, coverage limits, model assumptions and reinsurer credit quality.
- The investment portfolio’s sensitivity to market declines and interest rates, and the effect of equity fair-value changes on GAAP net income.
- Dividend capacity at the holding company, regulatory restrictions on subsidiary distributions, and the sustainability of the $0.80 quarterly dividend.