SAFETY INSURANCE GROUP INC annual report, FY2019

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Safety Insurance Group, Inc. — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019; filed February 28, 2020. Unless noted, dollar amounts are in thousands. The filing also reports fourth-quarter results.

Business context

Safety is a property and casualty insurer operating in Massachusetts, New Hampshire, and Maine, distributing exclusively through independent agents. Private passenger auto represented 54.8% of 2019 direct written premiums, commercial auto 17.3%, and homeowners 23.0%. Massachusetts generated $819.5 million of $852.4 million in direct written premiums. The company reported leading Massachusetts positions in commercial auto and significant positions in private passenger auto and homeowners.

Financial and operating results

  • Premiums: Direct written premiums rose 1.0% to $852.4 million; net earned premiums increased 0.9% to $788.8 million.
  • Revenue and earnings: Total revenue increased 4.9% to $877.8 million. Net income rose 19.7% to $99.6 million; diluted EPS was $6.46 versus $5.43. Non-GAAP operating income, which excludes specified investment gains and losses and related taxes, declined to $81.0 million from $93.7 million; diluted operating EPS was $5.25 versus $6.12.
  • Underwriting: Loss and LAE expenses increased 5.0% to $509.8 million. The GAAP loss ratio worsened to 64.6% from 62.1%, while the expense ratio improved to 31.0% from 31.6%. The combined ratio increased to 95.6% from 93.7%; underwriting remained profitable on this measure.
  • Reserves: Prior-year favorable reserve development contributed $42.0 million to 2019 pretax results, down from $56.5 million in 2018. Net loss and LAE reserves were $488.2 million, within management’s actuarial range of $450.9 million to $504.8 million.
  • Investments: Net investment income rose 6.6% to $46.7 million, with net effective yield of 3.4% versus 3.3%. A $21.5 million change in unrealized equity gains was recognized in 2019 earnings, compared with a $16.3 million unrealized loss in 2018. Net realized investment gains were $3.0 million; impairment losses were $0.9 million.
  • Cash flow and balance sheet: Operating cash flow was $112.5 million, versus $127.7 million in 2018. Cash and investments totaled $1.487 billion; total assets were $2.023 billion, liabilities $1.214 billion, and shareholders’ equity $808.4 million. Cash and cash equivalents were $44.4 million.
  • Debt and liquidity: No credit-facility borrowings were outstanding at year-end. The company had a $30 million revolving facility, expandable to $50 million, maturing in 2023, and stated it expected operating cash flow to meet liquidity needs. The company also reported access to approximately $289.5 million of potential FHLB borrowing, with no amount outstanding.
  • Capital returns: Cash dividends paid were $3.40 per share in 2019, compared with $3.20 in 2018. The board declared a $0.90 quarterly dividend in February 2020 and said it planned to continue quarterly dividends subject to financial position and cash flows. No shares were repurchased under the program in 2019.

Fourth-quarter snapshot

Fourth-quarter 2019 revenue was $223.9 million and net income was $28.1 million, compared with $202.9 million and $18.3 million, respectively, in fourth-quarter 2018. Diluted EPS was $1.82 versus $1.19. The filing does not provide a clear standalone fourth-quarter combined ratio or cash flow figure.

Changes, outlook, risks, and unusual items

  • Revenue and GAAP net income improved, but underlying non-GAAP operating income fell. The marked difference reflects investment items, especially the year-over-year swing in unrealized equity gains and losses.
  • Premium growth was modest and concentrated mainly in commercial auto and homeowners. Private passenger auto exposures continued to contract; total exposures declined 1.5% in 2019, while commercial auto voluntary-agent exposures grew.
  • Management gave no quantified earnings or premium guidance. It described positive operating cash flow as supporting near- and longer-term liquidity, while noting future results and liquidity depend on markets, regulation, claims, and economic conditions.
  • Catastrophe losses were $5.1 million in 2019 versus $14.4 million in 2018. Catastrophe reinsurance provided $615 million of coverage above a $50 million retention, up to $665 million of covered property losses; losses beyond the program and retained participation remain a risk. The company said its 2020 program covered a modeled 137-year storm, compared with a 139-year storm in 2019.
  • Key exposures include concentration in Massachusetts and private passenger auto, rate and form regulation, competition and reliance on independent agents, weather and climate-related claims, reinsurance availability and counterparty credit, reserve estimation uncertainty, investment-market and interest-rate risk, and cyber and business-continuity risks. Massachusetts limits subsidiary dividends; up to $75.5 million was available from Safety Insurance in 2020 without prior regulatory approval, subject to other constraints.
  • The auditor issued unqualified opinions on the financial statements and internal control. Reserve valuation was identified as a critical audit matter because of actuarial judgment and loss-development assumptions. Management reported effective internal controls. The CFO was scheduled to retire effective March 1, 2020, with the Controller appointed as successor effective March 2, 2020.
  • Other items: the company adopted lease accounting in 2019, recording a $34.0 million operating lease right-of-use asset and liability at year-end. Ordinary-course lawsuits were not expected by management to have a material adverse effect; the company reported no material off-balance-sheet arrangements.

Important facts for investors to verify

  • How much of 2019 earnings growth came from investment valuation changes versus recurring underwriting and investment operations; review the non-GAAP reconciliation and equity portfolio performance.
  • Whether favorable reserve development persists, and how actual claims experience compares with the stated reserve range and assumptions.
  • Whether premium rates, policy exposures, and claims frequency and severity support sustainable combined ratios, particularly in Massachusetts auto.
  • Reinsurance recoverables, catastrophe exposures and retentions, and the financial condition of reinsurers and residual-market counterparties.
  • Subsidiary dividend capacity, holding-company liquidity, and the sustainability of shareholder dividends given regulatory restrictions and cash-flow variability.