Safety Insurance Group, Inc. — 2020 Form 10-K
Business and reporting period. This annual report covers the year ended December 31, 2020; dollar figures are in thousands unless stated otherwise. Safety is a property and casualty insurer operating in Massachusetts, New Hampshire and Maine, primarily through independent agents. Private passenger auto, commercial auto and homeowners accounted for 54.9%, 14.9% and 25.0% of 2020 direct written premiums, respectively.
Financial performance
- Revenue: Total revenue was $846.2 million, down 3.6% from $877.8 million. Net earned premiums decreased 2.2% to $771.1 million; direct written premiums fell 6.3% to $798.7 million.
- Profit: Net income rose 38.8% to $138.2 million from $99.6 million. Diluted EPS increased to $9.18 from $6.46. Non-GAAP operating income was $130.0 million versus $81.0 million.
- Underwriting and margins: The GAAP combined ratio improved to 87.1% from 95.6% (below 100% indicates underwriting profit). The loss ratio fell to 52.5% from 64.6%, while the expense ratio increased to 34.6% from 31.0%.
- Investment results: Net investment income decreased 12.0% to $41.0 million; net effective yield fell to 2.9% from 3.4%. Partnership investment earnings rose to $6.9 million from $1.9 million. Net realized investment gains were $1.0 million, and unrealized gains on equity investments were $10.4 million.
- Cash flow and liquidity: Operating cash flow was $109.5 million, compared with $112.5 million. Cash and cash equivalents were $53.8 million; cash and investment securities totaled $1.56 billion. Total assets were $2.05 billion and shareholders’ equity was $884.7 million.
- Debt: Year-end debt was $30.0 million, from a five-year FHLB-Boston loan issued in March 2020 at 1.42%, maturing March 2025. The separate $30 million revolving credit facility was undrawn at year-end; the company reported covenant compliance.
- Capital returns: Dividends paid were $3.60 per share for 2020. The company repurchased 551,598 shares for $40.0 million during the year.
Changes versus 2019
- Lower auto claim frequency during the pandemic reduced losses and LAE by 20.7% to $404.6 million. The company also recorded $54.8 million of favorable prior-year reserve development, versus $42.0 million in 2019.
- Direct written premiums fell $53.7 million. The decline included a 15% personal-auto relief credit for April through June, totaling $17.7 million, and reduced commercial-auto servicing-carrier volume following CAR eligibility and allocation changes. Voluntary exposures also declined.
- Underwriting, operating and related expenses increased 9.2% to $266.5 million, reflecting higher contingent commissions, claims, billing and underwriting system modernization costs, and lower servicing-carrier expense allowances.
- Net investment income fell as bank-loan yields and partnership interest income declined and mortgage-backed security prepayments increased amortization.
Outlook, risks and unusual items
- Management said operating cash flow should meet near- and longer-term operating needs, while noting that economic, market and regulatory changes could affect future liquidity. The company planned to continue quarterly dividends in 2021 subject to financial position and cash-flow regularity; the board declared a $0.90-per-share dividend payable March 15, 2021.
- Safety formed Safety Northeast Insurance Company in November 2020; it became licensed in Massachusetts in January 2021. The company expected to begin writing a fourth homeowners rate tier in 2021. It also planned to implement its new claims system for auto lines in 2021.
- COVID-19 reduced driving and auto claims frequency, but also affected agent activity and premium volume. A lawsuit alleges improper denial of COVID-related business-interruption coverage. Safety’s stated position is that coverage requires direct physical damage or loss; it accrued $6.5 million for legal defense costs. Potential litigation, court or legislative actions expanding coverage, and further premium-relief requirements remain uncertainties.
- Key risks include concentration in Massachusetts and private passenger auto, competition and regulatory constraints, severe weather and catastrophe exposure, investment-market and interest-rate risk, cybersecurity and operational disruption, reinsurer credit risk, and uncertainty in loss reserves. Catastrophe reinsurance covered $615 million of property losses above a $50 million threshold, subject to stated participation terms; coverage does not eliminate all catastrophe exposure.
- Net loss and LAE reserves were $461.3 million, within management’s actuarial range of $424.4 million to $478.3 million. Prior-year reserve releases supported earnings; management cautioned that past favorable development should not be extrapolated. The auditor identified reserve valuation as a critical audit matter. A.M. Best affirmed an “A (Excellent)” financial-strength rating.
Most important facts for investors to verify
- How much of the improved 2020 underwriting result reflects temporary pandemic-related claim frequency changes and favorable prior-year reserve releases, versus sustainable performance.
- Subsequent development of reserves, particularly for auto liability, commercial auto and residual-market claims, and whether actual outcomes remain within the disclosed range.
- The financial and legal outcome of the COVID-19 business-interruption lawsuit and any regulatory, judicial or legislative changes affecting coverage or premium relief.
- Premium and exposure trends after the personal-auto relief credit and CAR program changes, including whether growth and agent production recover.
- Investment income and portfolio sensitivity to lower yields, credit deterioration, equity-market changes and liquidity needs; confirm the effect of the $30 million FHLB borrowing and capital-return commitments.