Safety Insurance(SAFT) - 2023 Q4 - Annual Results

Executive Summary Safety Insurance Group achieved record premium growth in 2023, but inflation and weather events led to an elevated combined ratio and decreased net income Overall Performance and Strategic Context Safety Insurance Group achieved record top-line growth in 2023, but inflationary pressures and weather events elevated the combined ratio - Safety Insurance achieved record top-line growth in 2023, with Direct Written Premiums increasing by 20.4%[2] - Growth was driven by a 10.2% increase in overall policy counts and a 10.9% increase in average premium per policy[2] - Ongoing inflationary impacts and several weather events led to an elevated loss ratio, particularly in Private Passenger Automobile, resulting in a 107.7% combined ratio for FY2023 and 106.5% for Q4 2023[2] - The company is actively filing for rate increases across all major lines and is committed to maintaining underwriting discipline and leveraging investments in pricing and risk management[2] Key Financial Highlights Net income and non-GAAP operating income significantly decreased in 2023 due to increased losses, with book value per share also declining Net Income and EPS (GAAP) | Metric | Q4 2023 | Q4 2022 | Change (YoY) | FY 2023 | FY 2022 | Change (YoY) | | :----------------------- | :------ | :------ | :----------- | :------ | :------ | :----------- | | Net Income (in millions) | $12.3 | $24.6 | -50.0% | $18.9 | $46.6 | -59.5% | | Diluted EPS | $0.83 | $1.67 | -50.3% | $1.28 | $3.15 | -59.4% | Non-GAAP Operating Income per Diluted Share | Metric | Q4 2023 | Q4 2022 | Change (YoY) | FY 2023 | FY 2022 | Change (YoY) | | :------------------------- | :------ | :------ | :----------- | :------ | :------ | :----------- | | Non-GAAP Operating Income per Diluted Share | $0.30 | $0.98 | -69.4% | $0.84 | $5.05 | -83.4% | Book Value per Share | Metric | Dec 31, 2023 | Dec 31, 2022 | Change | | :----------------- | :----------- | :----------- | :----- | | Book Value per Share | $54.37 | $54.88 | -0.9% | Detailed Financial Performance The company achieved strong premium growth and increased investment income, but underwriting results deteriorated due to higher losses from inflation and weather events Premium Growth Analysis Strong premium growth in 2023 was driven by new business, improved retention, and rate increases across all lines Written Premiums (in millions) | Metric | Q4 2023 | Q4 2022 | Change (YoY) | FY 2023 | FY 2022 | Change (YoY) | | :--------------------- | :------ | :------ | :----------- | :------ | :------ | :----------- | | Direct Written Premiums | $246.1 | $201.4 | +22.2% | $991.2 | $823.3 | +20.4% | | Net Written Premiums | $226.4 | $187.5 | +20.7% | $925.3 | $773.7 | +19.6% | - Premium increases were a result of new business production, improved retention, and rate increases[8] Exposure Count Growth (FY 2023 YoY) | Line of Business | Growth | | :---------------------- | :----- | | Private Passenger Auto | +14.7% | | Commercial Automobile | +5.4% | | Homeowners | +11.2% | Average Written Premium per Exposure Increase (FY 2023 YoY) | Line of Business | Increase | | :---------------------- | :------- | | Private Passenger Auto | +10.8% | | Commercial Automobile | +3.8% | | Homeowners | +4.5% | Net Earned Premiums (in millions) | Metric | Q4 2023 | Q4 2022 | Change (YoY) | FY 2023 | FY 2022 | Change (YoY) | | :----------------- | :------ | :------ | :----------- | :------ | :------ | :----------- | | Net Earned Premiums | $226.0 | $193.2 | +17.0% | $834.4 | $758.5 | +10.0% | Underwriting Results and Ratios Underwriting results deteriorated in 2023 due to increased losses from inflation and weather, leading to higher loss and combined ratios Losses and Loss Adjustment Expenses Incurred (in millions) | Metric | Q4 2023 | Q4 2022 | Change (YoY) | FY 2023 | FY 2022 | Change (YoY) | | :-------------------------------------- | :------ | :------ | :----------- | :------ | :------ | :----------- | | Losses and Loss Adjustment Expenses Incurred | $172.1 | $132.0 | +30.4% | $642.3 | $492.0 | +30.6% | - Increase in losses driven by current market conditions, specifically inflation, and weather events including multiple flood events, a high wind event in December, and a severe winter weather event in February[10] Key Underwriting Ratios | Ratio | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :---------- | :------ | :------ | :------ | :------ | | Loss Ratio | 76.1% | 68.4% | 77.0% | 64.9% | | Expense Ratio | 30.4% | 32.3% | 30.7% | 32.3% | | Combined Ratio | 106.5% | 100.7% | 107.7% | 97.2% | - The decrease in the expense ratio is primarily driven by a decrease in contingent commission expenses[11] Investment Income and Portfolio Performance Net investment income increased significantly in 2023 due to higher interest rates, improving the portfolio's effective annualized yield Net Investment Income (in millions) | Metric | Q4 2023 | Q4 2022 | Change (YoY) | FY 2023 | FY 2022 | Change (YoY) | | :------------------ | :------ | :------ | :----------- | :------ | :------ | :----------- | | Net Investment Income | $14.9 | $13.4 | +11.2% | $56.4 | $46.7 | +20.7% | - The increase in net investment income is a result of increases in interest rates on the fixed maturity portfolio[13] Net Effective Annualized Yield on Investment Portfolio | Period | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :----- | :------ | :------ | :------ | :------ | | Yield | 4.2% | 3.7% | 4.0% | 3.2% | - Duration on fixed maturities was 3.6 years at December 31, 2023, down from 3.8 years at December 31, 2022[13] Prior Year Loss Development Total prior year favorable loss development decreased in 2023, with the prior year including a significant COVID-19 reserve reversal Total Prior Year Favorable Development (in millions) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :----------------------------------- | :------ | :------ | :------ | :------ | | Total Prior Year Favorable Development | $12.4 | $14.1 | $47.4 | $57.3 | - The FY2022 figure included the reversal of a $6.5 million accrued reserve for legal defense costs associated with COVID-19 business interruption claims[12] Financial Position and Capital Management The balance sheet shows increased assets and liabilities, reflecting business growth and claims, while shareholder returns were maintained through dividends and share repurchases Balance Sheet Overview Total assets and liabilities increased in 2023, driven by higher loss and unearned premium reserves, reflecting business growth and claims Selected Balance Sheet Items (in thousands) | Item | Dec 31, 2023 | Dec 31, 2022 | | :---------------------------------------- | :----------- | :----------- | | Total Assets | $2,094,004 | $1,972,569 | | Total Liabilities | $1,289,737 | $1,160,570 | | Loss and Loss Adjustment Expense Reserves | $603,081 | $549,598 | | Unearned Premium Reserves | $528,150 | $433,375 | | Total Shareholders' Equity | $804,267 | $811,999 | Shareholder Returns The company maintained its commitment to shareholder returns through consistent quarterly dividends and share repurchases Dividends Paid per Common Share | Period | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :----- | :------ | :------ | :------ | :------ | | Dividend | $0.90 | $0.90 | $3.60 | $3.60 | - The Board of Directors approved a $0.90 per share quarterly cash dividend payable on March 15, 2024[5] - During FY2023, the Company purchased 74,213 shares at a cost of $5.2 million[4] Non-GAAP Financial Measures Non-GAAP operating income is used to clarify underlying business trends by adjusting GAAP net income for specific non-operating items Non-GAAP Operating Income Definition and Reconciliation Non-GAAP operating income adjusts GAAP net income for specific items to provide a clearer view of underlying business trends - Non-GAAP operating income adjusts GAAP net income by excluding net realized gains on investments, change in net unrealized gains on equity securities, credit loss benefit (expense), and related taxes[16] Change in Net Unrealized Gains on Equity Securities (in millions) | Period | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :----- | :------ | :------ | :------ | :------ | | Change | +$9.7 | +$11.9 | +$7.5 | -$44.4 | Non-GAAP Operating Income (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :---------------------- | :------ | :------ | :------ | :------ | | Net Income | $12,262 | $24,630 | $18,875 | $46,561 | | Non-GAAP Operating Income | $4,449 | $14,601 | $12,319 | $74,355 | Company Information and Risk Factors Safety Insurance Group operates as a leading P&C insurer in specific New England states, facing risks from competition, regulation, weather, and economic conditions About Safety Insurance Group Safety Insurance Group is a Boston-based P&C insurer operating in Massachusetts, New Hampshire, and Maine, offering diverse insurance products - Safety Insurance Group, Inc. is based in Boston, MA, and operates exclusively in Massachusetts, New Hampshire, and Maine[17] - The company is a leading writer of property and casualty insurance products, including private passenger automobile, commercial automobile, homeowners, dwelling fire, umbrella, and business owner policies[17] Cautionary Statement and Risk Factors Forward-looking statements are subject to risks including competition, regulations, weather events, inflation, and broader economic and market conditions - Forward-looking statements are subject to risks and uncertainties, and actual future conditions, events, results, or trends may differ significantly and/or materially from projections[19][20][21] - Competitive nature of the industry[20][22] - Conditions for business operations and restrictive regulations in Massachusetts[20][22] - Possibility of losses due to claims resulting from severe weather[20][22] - Impact of inflation and supply chain delays on loss severity[20][22] - Impact of investment, economic, and underwriting market conditions, including interest rates and inflation[20][22] Consolidated Financial Statements This section presents the consolidated balance sheets, statements of operations, and detailed premium information for 2023 and 2022 Consolidated Balance Sheets The consolidated balance sheets detail the company's financial position at year-end 2023 and 2022, showing assets, liabilities, and equity Consolidated Balance Sheets (Dollars in thousands) | Item | Dec 31, 2023 | Dec 31, 2022 | | :-------------------------------------------------------------------------------------------------- | :----------- | :----------- | | Assets | | | | Investments: Fixed maturities, available for sale, at fair value | $1,052,145 | $1,050,155 | | Equity securities, at fair value | $238,022 | $240,155 | | Other invested assets | $133,946 | $112,850 | | Total investments | $1,424,113 | $1,403,160 | | Cash and cash equivalents | $38,152 | $25,300 | | Accounts receivable, net | $256,687 | $192,542 | | Deferred policy acquisition costs | $91,917 | $75,582 | | Total assets | $2,094,004 | $1,972,569 | | Liabilities | | | | Loss and loss adjustment expense reserves | $603,081 | $549,598 | | Unearned Premium Reserves | $528,150 | $433,375 | | Accounts payable and accrued liabilities | $64,235 | $73,875 | | Debt | $30,000 | $35,000 | | Total liabilities | $1,289,737 | $1,160,570 | | Shareholders' equity | | | | Retained earnings | $781,192 | $815,309 | | Treasury stock, at cost | $(150,293) | $(145,000) | | Total shareholders' equity | $804,267 | $811,999 | Consolidated Statements of Operations The statements of operations detail revenues, expenses, and net income for 2023 and 2022, showing increased premiums offset by higher losses Consolidated Statements of Operations (Dollars in thousands) | Item | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :---------------------------------------- | :---------- | :---------- | :---------- | :---------- | | Net earned premiums | $226,029 | $193,153 | $834,414 | $758,505 | | Net investment income | $14,882 | $13,388 | $56,377 | $46,725 | | Total revenue | $258,396 | $226,603 | $930,956 | $797,559 | | Losses and loss adjustment expenses | $172,105 | $132,029 | $642,302 | $491,979 | | Underwriting, operating and related expenses | $68,748 | $62,306 | $256,580 | $245,145 | | Total expenses | $242,612 | $194,797 | $906,536 | $737,978 | | Income before income taxes | $15,784 | $31,806 | $24,420 | $59,581 | | Income tax expense | $3,522 | $7,176 | $5,545 | $13,020 | | Net income | $12,262 | $24,630 | $18,875 | $46,561 | | Diluted EPS | $0.83 | $1.67 | $1.28 | $3.15 | Additional Premium Information This section details written and earned premiums, including direct, assumed, and ceded components, for 2023 and 2022 Written Premiums (Dollars in thousands) | Item | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :---------------- | :--------- | :--------- | :--------- | :--------- | | Direct | $246,091 | $201,371 | $991,224 | $823,318 | | Assumed | $7,620 | $7,667 | $30,850 | $28,835 | | Ceded | $(27,356) | $(21,507) | $(96,779) | $(78,418) | | Net written premiums | $226,355 | $187,531 | $925,295 | $773,735 | Earned Premiums (Dollars in thousands) | Item | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :---------------- | :--------- | :--------- | :--------- | :--------- | | Direct | $243,513 | $205,627 | $897,598 | $803,289 | | Assumed | $7,345 | $7,141 | $29,702 | $28,976 | | Ceded | $(24,829) | $(19,615) | $(92,886) | $(73,760) | | Net earned premiums | $226,029 | $193,153 | $834,414 | $758,505 |