Safety Insurance Group, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing reports annual results; fourth-quarter data are identified where available. Dollar amounts are in thousands unless otherwise noted.
Business context
Safety is a property and casualty insurer operating exclusively in Massachusetts, New Hampshire and Maine, selling through independent agents. Private passenger auto represented 52.0% of 2022 direct written premiums, commercial auto 17.4%, and homeowners 25.3%. Massachusetts generated $782.8 million of the $823.3 million in direct written premiums. The company reported one operating segment.
Financial performance and position
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Direct written premiums | $823.3 million | $802.1 million | +2.6% |
| Net written premiums | $773.7 million | $764.5 million | +1.2% |
| Net earned premiums | $758.5 million | $774.3 million | -2.0% |
| Total revenue | $797.6 million | $884.9 million | -9.9% |
| Net income | $46.6 million | $130.7 million | -64.4% |
| Diluted EPS | $3.15 | $8.80 | |
| Operating cash flow | $44.3 million | $141.4 million | |
| Net investment income | $46.7 million | $44.1 million | +5.9% |
Net income was pressured by a $44.4 million change in unrealized equity investment results, from a $16.1 million gain in 2021 to a $44.4 million loss in 2022. Net realized investment gains also declined to $9.2 million from $14.9 million, and partnership investment earnings fell to $12.5 million from $19.8 million. Net investment yield increased to 3.2% from 3.0% as interest rates rose.
Losses and loss adjustment expenses increased 6.6% to $492.0 million. The annual GAAP loss ratio rose to 64.9% from 59.6%; the expense ratio improved to 32.3% from 33.4%, and the combined ratio increased to 97.2% from 93.0%. For the fourth quarter, the combined ratio was 100.7%, versus 96.4% in the prior-year quarter.
At year-end, total assets were $1.973 billion, shareholders’ equity was $812.0 million, and cash and cash equivalents were $25.3 million. Investments totaled $1.403 billion, down from $1.571 billion. Accumulated other comprehensive loss was $80.5 million, compared with accumulated other comprehensive income of $24.6 million in 2021. Gross loss and LAE reserves were $549.6 million, including $93.4 million recoverable from reinsurers; net reserves were $456.2 million.
Debt was $35.0 million at year-end, consisting of a $30.0 million FHLB-Boston borrowing due in 2025 and a $5.0 million short-term borrowing repaid in January 2023. The company had no borrowings under its revolving credit facility at year-end and reported compliance with its covenants. Operating cash flow remained positive, though materially below 2021. The company paid $3.60 per share in dividends during 2022.
Material changes and unusual items
- Premium growth reflected new business, improved retention and rate increases, while net earned premiums declined.
- Management attributed higher claim costs to a return to pre-pandemic private-auto claim frequency, inflation and supply-chain delays. The annual catastrophe-loss table showed no catastrophe losses in 2022, compared with $11.7 million in 2021.
- Prior-year reserve development was favorable by $57.3 million in 2022, compared with $53.7 million in 2021. The 2022 amount included reversal of a $6.5 million legal-defense accrual after closure of a COVID-19 business-interruption lawsuit.
- On December 1, 2022, the company acquired the assets and operations of Northeast Metrowest Insurance Agency, establishing Safety Northeast Insurance Agency. The acquisition added $17.1 million of goodwill and $7.9 million of intangible assets; the acquired operation was immaterial to consolidated assets and revenue at year-end.
- The investment portfolio carried $126.6 million in gross unrealized losses at year-end. Management attributed most fixed-income losses to interest-rate and other temporary market movements and said it did not expect to need to sell securities before recovery.
Outlook, risks and contingencies
The company provided no earnings or premium guidance. Management said internally generated cash flows were expected to meet operating needs over the next 12 months and beyond, while noting that future needs depend on market, regulatory and economic conditions. It expected to continue quarterly dividends in 2023 subject to financial position and cash-flow regularity; a $0.90-per-share quarterly dividend was declared in February 2023.
Key risks include concentration in Massachusetts and private passenger auto, insurance rate and form regulation, competitive pressure, inflation and claim severity, severe weather and climate-related exposure, catastrophe-reinsurance availability and cost, reinsurer credit risk, reserve-estimation uncertainty, investment-market and interest-rate risk, and cybersecurity or systems disruption. Catastrophe reinsurance protected against modeled losses up to $665 million in 2022; losses above coverage limits and the company’s retained share remain exposures. The company’s A.M. Best rating was A (Excellent), reaffirmed in May 2022.
Management considered ordinary-course litigation not likely to have a material adverse effect. It did not accrue a specific contingency for inherent diminished-value auto claims, which it did not expect to be material. The filing reports no material cyber incident to date. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor facts to verify
- Assess whether the $57.3 million of favorable prior-year reserve development is sustainable; management cautions against extrapolating past reserve releases.
- Review the impact of investment volatility: unrealized equity losses affected earnings, while fixed-income unrealized losses contributed to the decline in equity and accumulated other comprehensive income.
- Track auto claim frequency, inflation-driven severity, approved rate changes and whether pricing keeps pace with loss costs.
- Evaluate exposure to Massachusetts, catastrophe losses, reinsurance recoverables and the cost and terms of future reinsurance protection.
- Confirm dividend capacity against insurer statutory surplus and regulatory limits; review integration and valuation assumptions for the acquired agency.