Safety Insurance: A Question Of True Safety In Turbulent Insurance Markets


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Executive Summary
I recently written an article on Mercury General (MCY), a publicly listed insurance company that had to trim its dividend in 2022 to uphold financial solvency, consequently losing its dividend aristocrat status.
Several months ago, I conducted a comparison between Safety Insurance (NASDAQ:SAFT) Group and Mercury, deeming the former as being in better health than the latter. Both companies recently released their third-quarter results. Mercury General displayed a positive trend in underwriting margins, manifesting a decreased combined ratio.
In contrast, Safety Insurance reported worsened insurance margins, with a quarterly combined ratio of 104.8%, compared to 97.1% in the corresponding period a year ago.
Therefore, it seems that the healthier insurance company is currently facing operational challenges similar to those encountered by Mercury General a few quarters ago.
A Deteriorated Operating Performance
Safety Insurance reported an underwriting loss of approximately $11.6 million for the third quarter. The decline in underwriting margin was primarily attributable to the effects of claims inflation, leading to a deterioration in the loss ratio from 65.3% in Q3 2022 to 74.4% in Q3 2023. On a year-to-date basis, the combined ratio deteriorated by 12.2 points, reaching 108.2%.
Safety Insurance’s Latest 10Q
This decline in the combined ratio was mainly propelled by a significant increase of over 13 points in the loss ratio. The increase in losses is driven by current market conditions, specifically inflation, as well as weather events including multiple flood events, a high wind event, and a severe winter weather event that occurred in February.
To counter the challenging market conditions, the insurer has implemented price rate increases that have received approval from regulators.
Safety Insurance’ Latest 10Q
Similar to Mercury General, certain price increases will impact the portfolio in the coming months, while claims inflation is adversely affecting the profitability of the portfolio.
Superior Position of Mercury General Compared to Safety Insurance in 2023
The combined ratio, a key metric for comparing property and casualty insurers’ underwriting performance, is essential in this evaluation. Mercury General has struggled to achieve a combined ratio below 100% over the past decade, with the temporary improvement in 2020 attributed to COVID-19 restrictions.
Conversely, Safety Insurance has consistently delivered reliable underwriting performance over the same period, with an average combined ratio of 96.6% over the last ten years.
Annual Reports from the different listed companies (gathered by the Author)
However, Safety Insurance has been impacted by the effects of claims inflation coupled with substantial catastrophe losses in the first quarter of the year. The positive price increases have only partially offset the rise in claims severity.
Meanwhile, Mercury General has demonstrated a significant improvement in profitability, although the California-based insurer continues to incur losses.
Mercury General & Safety Insurance’s 10Q (Data gathered by the author)
Therefore, Mercury General appears to be further along in the process of remedying its insurance portfolio, while Safety Insurance is in the early stages of potentially enhancing its underwriting margins.
A Dividend Not Covered By Earnings
Despite maintaining a consistent quarterly dividend of $0.90 per share since Q2 2019, Safety’s dividend is no longer covered in 2023. The insurance company has distributed $2.70 per share to its shareholders since the beginning of the year, while the reported EPS was $0.45.
Safety Insurance’s Latest 10Q
Therefore, the generation of cash flow was insufficient to reward shareholders without compromising the company’s value.
Final Thoughts
In 2023, Mercury’s shareholders have experienced a positive stock price performance (excluding dividends), while Safety’s stock performance has been understandably impacted by diminished earnings resulting from margin reductions.
Data by YCharts
Does this suggest that Mercury will outperform Safety in the upcoming months? Unfortunately, without a crystal ball, providing a definitive answer to this question is highly challenging. However, I would refrain from investing in either Safety Insurance Group or Mercury General, as there are more profitable insurers with a dependable capital distribution policy available. For instance, Travelers (TRV) and Chubb (CB) present superior choices for dividend-oriented investors seeking reliable property and casualty insurers to invest in.
Chubb stands as a dividend aristocrat with a track record of over 25 years of consistent dividend increases, complemented by ongoing active share repurchases. Similarly, Travelers has been increasing its dividend for nearly two decades and has also been engaged in share repurchases.
Both companies have successfully distributed excess capital to shareholders, thanks to their reliable underwriting performance. In contrast, Mercury and, more recently, Safety appear to be grappling with operational challenges. Therefore, I would prefer exploring other companies rather than considering Safety (or Mercury).


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