Safety Insurance Group, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Unless otherwise noted, financial amounts below are in millions of dollars; the filing presents dollar amounts 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 accounted for 57.7% of 2016 direct written premiums. Massachusetts remains the core market; the company began writing business in Maine in 2016.
Financial results and key metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $819.8 | $798.0 |
| Net earned premiums | $755.8 | $738.2 |
| Net income (loss) | $64.6 | ($13.9) |
| Diluted EPS | $4.27 | ($0.93) |
| Loss ratio | 65.3% | 83.0% |
| Expense ratio | 30.8% | 29.0% |
| Combined ratio | 96.1% | 112.0% |
| Operating cash flow | $98.8 | $22.9 |
Direct written premiums rose 3.3% to $811.6 million; net written premiums increased 2.7%. Commercial auto and homeowners direct premiums grew 11.7% and 6.9%, respectively, while private passenger auto declined slightly. The investment portfolio was $1.28 billion at year-end; net investment income fell 5.2% to $38.4 million, and the net effective yield declined to 3.1% from 3.3%.
Year-end total assets were $1.76 billion, shareholders’ equity was $670.7 million, and cash and cash equivalents were $20.1 million. The company had no borrowings outstanding under its $30 million revolving credit facility; approximately $180.7 million of potential FHLB borrowing capacity was also disclosed, subject to eligible collateral. Cash plus investment securities totaled approximately $1.30 billion.
Net loss and loss-adjustment-expense reserves were $560.3 million gross and $476.6 million net of reinsurance. The company paid $2.80 per share in dividends during 2016; the board declared a further $0.70 quarterly dividend for March 2017.
Material changes and unusual items
- Results rebounded from 2015’s net loss, when severe winter snowfall drove catastrophe losses. 2015 catastrophe losses were $180.9 million, versus $8.9 million in 2016.
- 2016 loss and LAE expense fell 19.4% to $493.4 million, reflecting the absence of the exceptional 2015 snow losses and $45.4 million of favorable prior-year reserve development, compared with $30.3 million in 2015.
- The 2016 combined ratio improved to 96.1% from 112.0%; underwriting, operating and related expenses increased 8.9%, and the expense ratio rose to 30.8%, partly due to higher contingent commissions and bonus compensation.
- Direct written premiums increased, but total written exposures declined 1.6%, including a 3.0% decrease in private passenger auto exposures. Commercial auto exposures increased 3.8%.
- Net realized investment gains were $5.6 million, versus a $0.5 million loss in 2015, primarily due to equity-security sales. The company recorded $0.8 million of investment impairment losses in 2016.
- Fourth-quarter 2016 revenue was $207.0 million and net income was $12.0 million, compared with $201.0 million and $10.3 million, respectively, in fourth-quarter 2015. Diluted EPS was $0.79 versus $0.69.
Outlook, risks and contingencies
The filing provides no earnings or premium guidance. Management expected operating cash flows to meet near- and longer-term operating needs and planned to continue quarterly dividends in 2017, subject to financial position and cash-flow regularity. Management also cited continued investment in independent-agent relationships, technology, product cross-selling, and disciplined pricing.
- Catastrophe exposure remains material: 2017 catastrophe reinsurance was described as covering a modeled “130-year storm,” with coverage of $615 million for property losses above $50 million, up to $665 million. Losses beyond program limits and the company’s retained share remain at risk.
- A $22.8 million winter-storm reinsurance recovery was in arbitration. The company recorded no collectability provision, stating it expected recovery. Total expected recovery related to the 2015 snow event was $67.9 million; $31.7 million remained recoverable at year-end 2016.
- Reserve estimates are inherently uncertain. A one-percentage-point change in the loss and LAE ratio would change reserves by approximately $7.6 million and net income by approximately $4.9 million, or $0.33 per diluted share.
- Key risks include concentration in Massachusetts and private auto, competition, severe weather and climate-related losses, reinsurance availability and collectability, investment-market and interest-rate risks, regulatory constraints, and cyber or business-continuity disruptions.
- Insurance subsidiary dividends are regulatorily restricted. Safety Insurance’s statutory surplus was $604.8 million; up to $60.5 million was available for dividends in 2017 without prior regulatory approval. The parent depends on subsidiary distributions for cash needs.
- Ordinary-course lawsuits were not expected by management to have a material adverse effect. The filing disclosed no material off-balance-sheet arrangements. The CEO transition to George M. Murphy took effect April 1, 2016.
Most important facts for investors to verify
- How much of the earnings recovery reflects sustainable underwriting performance versus the unusually severe 2015 comparison and favorable reserve releases?
- Whether the $22.8 million disputed reinsurance recovery is collected, and whether the remaining 2015 storm recoverables are realized as expected.
- Whether auto exposure declines continue and whether approved rate increases adequately address claim-cost trends and competitive pressure.
- How catastrophe risk, reinsurance costs, and potential losses beyond the $665 million program limit affect future results and capital.
- Whether reserve development remains favorable and whether statutory capital and subsidiary dividend capacity support the parent’s dividend plans.