The selected historical consolidated financial data for the years ended December 31, 2018, 2017, and 2016, and as of December 31, 2018 and 2017 have been derived from the financial statements of Safety Insurance Group, Inc. included in this annual report which have been audited. The selected historical consolidated financial data for the years ended December 31, 2015 and 2014 and as of December 31, 2016, 2015 and 2014 has been derived from Safety Insurance Group, Inc.'s consolidated financial statements not included in this annual report, which have been audited.
We are a leading provider of private passenger and commercial automobile insurance in Massachusetts. In addition to private passenger automobile insurance (which represented 55.7% of our direct written premiums in 2018), we offer a portfolio of other insurance products, including commercial automobile (16.5% of 2018 direct written premiums), homeowners (22.9% of 2018 direct written premiums), dwelling fire, umbrella and business owner policies (totaling 4.9% of 2018 direct written premiums). Operating exclusively in Massachusetts, New Hampshire and Maine through our insurance company subsidiaries, Safety Insurance, Safety Indemnity, and Safety P&C (together referred to as the “Insurance Subsidiaries”), we have established strong relationships with independent insurance agents, who numbered 899 in 1,120 locations throughout these three states during 2018. We have used these relationships and our extensive knowledge of the market to become the fourth largest private passenger automobile carrier and the largest commercial automobile carrier in Massachusetts, capturing an approximate 9.0% and 15.7% share, respectively, of the Massachusetts private passenger and commercial automobile markets in 2018, according to statistics compiled by CAR based on automobile exposures. We are the third largest homeowners insurance carrier in Massachusetts, with a market share of 7.2% in 2017. Our principal competitors within the Massachusetts homeowners insurance market are MAPFRE SA, Liberty Mutual Insurance and Chubb, which held 13.5%, 10.7% and 6.6% market shares respectively in 2017 (according to S&P Global Market Intelligence).
Net Earned Premiums. Net earned premiums for the year ended December 31, 2018 increased by $7,167, or 0.9%, to $781,587 from $774,420 for the comparable 2017 period.
Net Written Premiums. Net written premiums for the year ended December 31, 2017 increased by $14,584 or 1.9%, to $781,054 from $766,470 for the comparable 2016 period. The 2017 increase was primarily due to the factors that increased direct written premiums.
Our insurance company’s subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to their parent without prior approval of the Commissioner. The Massachusetts statute limits the dividends an insurer may pay in any twelve-month period, without the prior permission of the Commissioner, to the greater of (i) 10% of the insurer’s surplus as of the preceding December 31 or (ii) the insurer’s net income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. Our Insurance Subsidiaries may not declare an “extraordinary dividend” (defined as any dividend or distribution that, together with other distributions made within the preceding twelve months, exceeds the limits established by Massachusetts statute) until thirty days after the Commissioner has received notice of the intended dividend and has not objected. As historically administered by the Commissioner, this provision requires the Commissioner’s prior approval of an extraordinary dividend. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as earned surplus, and the insurer’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At year-end 2018, the statutory surplus of Safety Insurance was $646,820, and its net income for 2018 was $86,734. As a result, a maximum of $86,734 is available in 2019 for such dividends without prior approval of the Commissioner. Under this Massachusetts statute, the Insurance Subsidiaries has restricted net assets in the amount of $560,086 at December 31, 2018. During the twelve months ended December 31, 2018, Safety Insurance recorded dividends to Safety of $45,271.
At the end of each period, the reserves were re-estimated for all prior accident years. Our prior year reserves decreased by $56,488, $41,784, and $45,448 for the years ended 2018, 2017, and 2016, respectively. The decreases in prior year reserves in 2018 resulted from re-estimations of prior year’s ultimate loss and LAE liabilities and are primarily composed of reductions of $36,266 in our retained automobile reserves and $18,947 in our retained other than auto and homeowner’s reserves, inclusive of the reinsurance recoverable loss. The decreases in prior year reserves in 2017 resulted from re-estimations of prior year’s ultimate loss and LAE liabilities and are primarily composed of reductions of $29,855 in our retained automobile reserves and $10,201 in our retained other than auto and homeowner reserves. The decrease in prior year reserves during 2016 is primarily composed of reductions of $25,019 in our retained automobile reserves and $11,648 in our retained homeowners reserves. It is not appropriate to extrapolate future favorable or unfavorable development of reserves from this past experience.
The following table presents information by line of business for prior year development of retained reserves for losses and LAE for the year ended December 31, 2018 that is, all our reserves except for business ceded or assumed from CAR and other residual markets.
The following table presents information by line of business for prior year development of reserves assumed from residual markets for losses and LAE for the year ended December 31, 2018.
Amounts that vary with and are primarily related to the successful acquisition of a new or renewal insurance contract, principally commissions and premium taxes, are deferred and amortized ratably over the effective period of the policies. All other acquisition expenses are expensed as incurred. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, and if not, are charged to expense. Future investment income attributable to related premiums is not taken into account in measuring the recoverability of the carrying value of this asset. Amortization of acquisition costs in the amount of $146,601, $144,703, and $141,540 was charged to underwriting, operating and other expenses for the years ended 2018, 2017 and 2016, respectively.
Premiums received in advance of the policy effective date are recorded as a liability and not recognized as income until earned. Such amounts are included in accounts payable and accrued liabilities and totaled $14,649 and $14,371 at December 31, 2018 and 2017, respectively.
The unrealized losses in the Company’s fixed income and equity portfolio as of December 31, 2018 were reviewed for potential other-than-temporary asset impairments. The Company held three debt securities at December 31, 2018 with a material (20% or greater) unrealized loss for four or more consecutive quarters that additionally had certain qualitative factors that led to an impairment charge. As a result of our analysis, during the year ended December 31, 2018, the Company recognized $228 of OTTI losses which consisted entirely of credit losses related to fixed maturity securities. During the year ended December 31, 2017, the Company recognized $256 of OTTI losses which consisted entirely of credit losses related to fixed maturity securities.
In the Company’s opinion, adequate tax liabilities have been established for all open years. However, the amount of these tax liabilities could be revised in the near term if estimates of the Company’s ultimate liability are revised. All tax years prior to 2015 are closed.
ASC 820, Fair Value Measurements and Disclosure provides a revised definition of fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value information. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer
Obligations of states and political subdivisions: overall credit quality, including assessments of market sectors and the level and variability of sources of payment such as general obligation, revenue or lease; credit support such as insurance, state or local economic and political base, prefunded and escrowed to maturity covenants.