Safety Insurance Group, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The filing is an annual report, not a standalone fourth-quarter filing. Unless stated otherwise, dollar amounts below are in millions; the filing presents financial statements in thousands.
Business context
Safety is a property-and-casualty insurer operating exclusively in Massachusetts, New Hampshire and Maine, primarily through independent agents. Private-passenger auto, commercial auto and homeowners insurance accounted for 53.6%, 16.2% and 24.9% of 2021 direct written premiums, respectively. Massachusetts generated $765.0 million of $802.1 million in direct written premiums.
Financial results and key metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $884.9 | $846.2 | Up 4.6% |
| Net earned premiums | $774.3 | $771.1 | Up 0.4% |
| Net income | $130.7 | $138.2 | Down 5.4% |
| Diluted EPS | $8.80 | $9.18 | Down 4.1% |
| Non-GAAP operating income | $105.9 | $130.0 | Down 18.5% |
| Net cash provided by operating activities | $141.4 | $109.5 | Up 29.2% |
- Investment results contributed materially to revenue: net investment income was $44.1 million, partnership investment earnings were $19.8 million, net realized investment gains were $14.9 million, and the change in unrealized equity gains was $16.1 million.
- Annual GAAP loss, expense and combined ratios were 59.6%, 33.4% and 93.0%, compared with 52.5%, 34.6% and 87.1% in 2020. The fourth-quarter combined ratio was 96.4%, versus 85.1% in fourth-quarter 2020.
- Loss and loss adjustment expenses rose 14.1% to $461.7 million. The filing attributes the comparison partly to unusually low auto claim frequency in 2020 during the pandemic. 2021 catastrophe losses were $11.7 million, versus $7.3 million in 2020.
- Prior-year reserve releases reduced 2021 loss expenses by $53.7 million, compared with $54.8 million in 2020. Net loss and LAE reserves were $480.0 million; management’s actuarial range was $445.5 million to $504.6 million.
- Direct written premiums increased 0.4% to $802.1 million; net written premiums increased 0.1% to $764.5 million. Private-passenger auto premiums declined to $429.8 million from $438.8 million, while commercial auto premiums increased to $129.8 million from $118.8 million.
- At year-end, total investments were $1.57 billion, cash and cash equivalents were $63.6 million, total assets were $2.12 billion, and shareholders’ equity was $927.2 million. Accumulated other comprehensive income declined to $24.6 million from $53.5 million.
- Debt was $30.0 million, comprising a five-year FHLB-Boston loan at 1.42% due in March 2025. No amounts were outstanding under the separate $30.0 million revolving credit facility. The company reported approximately $211.3 million of potential FHLB borrowing capacity, subject to eligible collateral.
- Cash dividends were $3.60 per share for 2021. The company repurchased 139,405 shares for $11.6 million during the year. In February 2022, the board declared another $0.90 quarterly dividend and authorized an additional $50 million share-repurchase program.
Changes versus the prior comparable period
Premiums were broadly stable, while underwriting results weakened from 2020’s pandemic-affected claim environment: the combined ratio increased 5.9 percentage points and incurred losses rose. Lower contingent commissions helped reduce the expense ratio. Investment income and partnership earnings increased, but net income and non-GAAP operating income declined. Comprehensive income was $101.8 million, down from $163.5 million, including a $28.9 million after-tax other comprehensive loss in 2021.
Outlook, risks and unusual items
- Outlook and liquidity: Management said operating cash flows should meet operating needs over the next 12 months and expects internally generated funds to meet needs thereafter, while noting that longer-term sufficiency depends on market, regulatory and economic conditions. The company plans to continue quarterly dividends in 2022 subject to financial position and cash-flow regularity. No specific earnings or premium guidance is provided.
- Concentration and regulation: The business is concentrated in Massachusetts and private-passenger auto insurance; rates, forms, dividends, capital and other activities are subject to state oversight. Insurance subsidiaries’ dividends to the parent are restricted by Massachusetts law.
- Catastrophe and reinsurance: 2021 catastrophe cover protected against a modeled “135-year storm,” with $615 million of coverage above a $50 million threshold and a maximum covered loss layer up to $665 million. Losses above the program limits, retained shares, reinsurer credit risk and changing catastrophe models remain exposures. The 2022 program terms differ from 2021.
- Claims and litigation: A COVID-19 business-interruption coverage lawsuit remains pending; the company had accrued $6.5 million for legal defense costs, unchanged from 2020. Following a 2021 Massachusetts court ruling on third-party inherent diminished vehicle value claims, the company said it did not expect material claims and recorded no specific loss contingency.
- Other risks: Management identifies severe weather and climate-related uncertainty, inflation and claim severity, competition and agent retention, investment-market and interest-rate risk, cybersecurity and privacy, and possible COVID-19 effects. Management stated it had no specific asbestos or environmental pollution exposure.
- Capital commitments: The company had committed $145.0 million to limited partnerships; $54.5 million remained callable at year-end, including potential recallable distributions.
- Controls and audit: The auditor gave unqualified opinions on the 2021 financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- Whether the higher 2021 loss ratio reflects a lasting change in claim frequency or severity, and how much future earnings depend on favorable prior-year reserve development.
- How premium growth, auto exposure declines and regulator-approved rate changes affect underwriting profitability in Safety’s concentrated Massachusetts market.
- The durability and composition of investment returns, including partnership earnings and realized or unrealized equity gains, alongside interest-rate and credit risks.
- The ultimate cost and outcome of the COVID-19 business-interruption litigation and any claims following the diminished-value ruling.
- Whether catastrophe protection, reinsurer recoverability and statutory dividend capacity remain adequate; confirm the terms and use of the expanded repurchase authorization.