Safety Insurance Group, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. 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 business in New Hampshire. It distributes exclusively through independent agents and focuses on private passenger auto insurance, which accounted for 61.7% of 2014 direct written premiums. The company reported 930 agents and held approximately 10.7% of the Massachusetts private passenger auto market and 13.5% of the commercial auto market. Maine licenses were obtained in February 2015; management expected to begin writing business there later in 2015.
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $778,797 | $745,284 |
| Net earned premiums | $716,875 | $681,870 |
| Direct written premiums | $765,685 | $731,680 |
| Net investment income | $42,303 | $43,054 |
| Loss and loss adjustment expenses | $476,366 | $447,749 |
| Income before taxes | $83,318 | $87,688 |
| Net income | $59,354 | $61,351 |
| Diluted earnings per share | $3.91 | $3.98 |
| GAAP loss ratio | 66.5% | 65.7% |
| GAAP expense ratio | 30.6% | 30.8% |
| GAAP combined ratio | 97.1% | 96.5% |
- Direct written premiums increased 4.6%; net earned premiums increased 5.1%; total revenue increased 4.5%. Total written exposures rose 3.0%, with commercial auto up 5.7% and homeowners up 7.5%. Private passenger auto exposures increased 0.9%.
- Net income declined about 3.3%. Higher earned premiums were offset by increased losses and expenses, lower investment income, and substantially lower realized investment gains. The loss ratio rose 0.8 percentage points, while the expense ratio improved 0.2 points.
- Fourth-quarter revenue was $198,645 versus $191,793 in 2013; fourth-quarter net income was $10,370 versus $11,652. Diluted EPS was $0.69 versus $0.76.
- Prior-year reserve development reduced loss expense by $37,368 in 2014, compared with $28,889 in 2013. Management attributed much of the 2014 release to improved retained auto and homeowners experience. Net loss and LAE reserves were $420,767, within the actuarial range of $380,067–$434,553.
Cash flow, balance sheet and capital
- Operating cash flow was $97,569, down from $110,864. Investing activities used $48,522 and financing activities used $62,469, principally reflecting dividends and share repurchases. Cash and cash equivalents were $42,455 at year-end, versus $55,877.
- Total assets were $1,675,719; total liabilities were $967,436; shareholders’ equity was $708,283. Cash and investment securities totaled $1,298,716. The filing presents no conventional corporate debt balance; there were no borrowings under the $30,000 revolving credit facility at year-end, which matures in 2018.
- Insurance subsidiary statutory surplus was $630,041. Safety Insurance recorded a $59,186 dividend to the holding company in 2014; dividends above statutory limits require regulatory approval. The company paid $2.60 per share in dividends in 2014 and declared a $0.70 quarterly dividend in February 2015, subject to its financial position and cash flows.
- The company repurchased 460,023 shares for $23,467 during 2014. Its cumulative repurchases under the program were 2,279,570 shares for $83,835 at year-end.
Outlook, risks and unusual items
- Approved rate actions included Massachusetts homeowners +2.46% effective December 2014, New Hampshire auto +3.0% effective November 2014, and New Hampshire homeowners +3.3% effective October 2014. Massachusetts commercial auto +3.5% was effective February 2015; Massachusetts private passenger auto +3.8% was approved effective June 2015. 2014 Massachusetts private passenger auto rate changes netted to approximately zero overall.
- Management expected internally generated operating cash flows to meet liquidity needs, while noting long-term funding depends on market, regulatory and economic conditions. The company planned to continue quarterly dividends in 2015, subject to financial position and cash-flow regularity.
- Catastrophe losses were $8,192 in 2014, versus $6,161 in 2013; there were no recoveries under primary catastrophe treaties during the three-year period because no single event exceeded the company’s retention. The 2015 catastrophe program provided $515,000 of coverage for property losses above $50,000, up to $565,000.
- Key risks include concentration in Massachusetts and private passenger auto, rate and other regulatory constraints, intensified competition, severe weather and catastrophe exposure, reserve estimation uncertainty, reinsurance counterparty risk, investment and interest-rate volatility, and cyber and business-continuity threats. Management reported no material legal proceedings or material off-balance-sheet arrangements.
- The company reported no other-than-temporary impairment charges in 2014 or 2013. Its portfolio had $7,572 of gross unrealized losses at year-end, which management regarded as temporary; it stated it did not intend, and was not likely to be required, to sell affected securities before recovery.
Most important facts for investors to verify
- Whether reserve releases remain available at a similar level: 2014 earnings included $37,368 of favorable prior-year development, and the recorded reserve estimate is near the upper end of the disclosed actuarial range.
- Whether premium growth translates into better underwriting results, given the higher 2014 loss ratio and combined ratio.
- The adequacy of catastrophe reinsurance, residual-market exposure, and the practical effect of any event exceeding the stated coverage limits.
- Investment portfolio sensitivity to interest rates and credit conditions, including the effect of lower yields on investment income.
- Regulatory limits on subsidiary dividends and the extent to which they support parent-company dividends and repurchases.
- Execution and profitability of planned Maine expansion, and the impact of competitors on the company’s Massachusetts agent channel and market share.