Safety Insurance Group, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. Unless stated otherwise, dollar amounts are in thousands.
Business context
Safety is a property and casualty insurer operating in Massachusetts, New Hampshire and Maine, selling exclusively through independent agents. Private passenger auto is its largest line. In Massachusetts, the company reported 9.3% share in private passenger auto, 15.6% in commercial auto and 7.3% in homeowners insurance.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Direct written premiums | $827.3 million | $811.6 million |
| Net earned premiums | $774.4 million | $755.8 million |
| Total revenue | $839.1 million | $819.8 million |
| Net income | $62.4 million | $64.6 million |
| Diluted earnings per share | $4.10 | $4.27 |
| Operating cash flow | $82.0 million | $98.8 million |
| GAAP combined ratio | 97.2% | 96.1% |
2017 underwriting remained profitable by the combined-ratio measure, but the ratio worsened year over year as the expense ratio rose to 32.1% from 30.8%; the loss ratio improved slightly to 65.1% from 65.3%. Net income declined 3.4%. Cash and cash equivalents were $41.7 million; cash and investment securities totaled $1.35 billion. Total assets were $1.81 billion and shareholders’ equity was $701.0 million.
Net investment income was $38.8 million, with a 3.1% effective yield, unchanged from 2016. The investment portfolio’s fair value was $1.31 billion. The company reported no credit-facility borrowings at year-end; its $30 million revolving facility matured August 14, 2018. Interest expense was $90 thousand.
Fourth-quarter 2017 revenue was $213.6 million and net income was $11.3 million, versus $207.0 million and $12.0 million, respectively, in fourth-quarter 2016. Diluted EPS was $0.72 versus $0.79.
Material changes versus 2016
- Direct written premiums increased 1.9%; net earned premiums increased 2.5%. Average written premium per exposure increased in private passenger auto, commercial auto and homeowners, while exposure counts declined in private passenger auto and homeowners.
- Loss and LAE expense increased 2.1% to $503.9 million. Favorable prior-year reserve development was $41.8 million, down from $45.4 million in 2016; management cautions against extrapolating past reserve releases.
- Underwriting, operating and related expenses increased 6.6% to $248.4 million, attributed mainly to higher contingent commissions and nonrecurring legal fees associated with reinsurance arbitration.
- Catastrophe losses were $6.7 million, compared with $8.9 million in 2016 and $180.9 million in 2015, primarily reflecting the severe 2015 winter storms.
- Operating cash flow declined to $82.0 million from $98.8 million. Year-end cash increased to $41.7 million from $20.1 million.
Outlook, risks and unusual items
- No specific earnings or premium guidance is provided. Management expects the 2017 cash-flow level to meet operating needs and expects the Tax Cuts and Jobs Act to benefit results beginning in 2018; dividends remain dependent on financial position and cash-flow regularity.
- The 2017 tax rate was 28.0%. The tax-law change produced a $1.5 million tax benefit from remeasurement of deferred tax balances; the company said its accounting remained subject to further evaluation and guidance.
- A January 2018 arbitration ruling resolved a dispute over recoveries from the 2015 winter storms: the reinsurer was to pay $9.2 million, and the remaining $11.7 million was expensed in 2017.
- Net loss and LAE reserves were $491.0 million, with an actuarial range of $440.9 million to $510.2 million. A one-percentage-point change in the loss and LAE ratio was estimated to affect reserves by $7.7 million and net income by $5.0 million, or $0.33 per diluted share.
- Catastrophe exposure, severe weather and climate trends, reinsurance availability and counterparty credit, reserve uncertainty, investment-market and interest-rate risk, and competition and regulation in Massachusetts are key risks. The 2017 catastrophe program covered specified property losses above $50 million through $665 million; losses beyond the program and retained participation remain exposed.
- Insurance subsidiaries had statutory surplus of $617.6 million. Up to $61.8 million was available for dividends in 2018 without prior regulatory approval, subject to statutory conditions. Ordinary-course litigation was not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Whether premium growth and approved rate increases can offset declining private-passenger exposure and competitive pressure.
- Whether reserve releases continue—and whether current reserves remain adequate as claims develop.
- The financial effect of the 2015-storm arbitration settlement and future recoveries from reinsurers.
- Investment portfolio credit quality, sensitivity to interest rates, and the impact of tax-accounting changes.
- Subsidiary dividend capacity, the status of the revolving credit facility after its August 2018 maturity, and the sustainability of quarterly dividends.