Safety Insurance Group, Inc. (SAFT) Earnings Call Transcript & Summary

It's now 10:00, and we will commence the Safety Insurance Annual Meeting for 2023.

Ladies and gentlemen, it's now 10:00 a.m. on Wednesday, May 17, 2023. The meeting will please come to order. I am George Murphy, President and Chief Executive Officer of Safety Insurance Group, Inc. On behalf of the Safety Insurance Group, I welcome all of you to the 2023 Annual Meeting of Stockholders. Before we go further, I'd like to introduce you to our directors and officers who are present today at meeting. They are John Farina, Thalia Meehan, our Lead Independent Director; Mary Moran; Jim Berry, the Vice President of Underwriting; and Chris Whitford, Vice President, CFO and Secretary. Joe DeSantis, a representative of Deloitte & Touche LLP. Our independent auditors is on the conference call and is available to respond to appropriate questions. As is stated in the handout that you should have received, we will conduct the formal portion of the meeting first. Following the determent of the annual meeting, you will have an opportunity to relate any questions that you may have. Furthermore questions sent in advance me even will also be addressed at that time. Now back to the official part of this meeting as President and Chief Executive Officer of Safety and Insurance Group, I will act as Chairperson of the 2023 Annual Meeting. I hereby appoint Chris Whitford, Safety's Chief Financial Officer, Vice President and Secretary, as the Secretary of this meeting. I will ask Chris to take care of certain preliminary formalities.

Each of you should receive the top of our one page and out showing the agenda and meeting procedures. They are at the front of the room. Please conduct yourself in accordance with those rules of conduct. The handout also contains information regarding certain forward-looking statements, which may be expressed today regarding Safety's future operations or performance. At this time, I'd also like to introduce Jennifer Borden of Borden Consulting Group. Ms. Borden has been appointed as an Inspector of Elections for this meeting. If you've already voted by a proxy, your vote will be counted automatically without any further action on your part. As a matter of convenience for the Inspector of Elections, it would be preferable for a stockholder who is present and who has given his or her proxy -- who has previously given a proxy and does not wish to change his or her vote to allow his or her shares to be voted by proxy rather than voting in person. Is there any stockholder present who wishes to give their proxy to the Inspector of Elections has not done so? If so, please raise your hand and the Inspector of Election, we'll collect them at this time. Before acting on the matters stated in the notice of the meeting and proxy statement, I will establish with a record that this meeting is properly convened and that there is a quorum present for the transaction of business. According to the Affidavit of Distribution dated April 2023, a notice of this Annual Meeting of Stockholders and instructions as how to access the proxy statement, the proxy card and the annual report to stockholders were sent to each stockholder of record as of the close of business on March 20, 2023. Notice of this meeting has been duly given in accordance with Safety's bylaws and the proxy statement has been filed with the Securities and Exchange Commission. Extra copies of the annual report and proxy statement are available at the front of the room. Prior to the commencement of this meeting, Ms. Borden took a post of office to faithfully and honestly execute the duties of the Inspector with strict impartiality and to the best of her ability. The Affidavit of Distribution and the oath of the Inspector of Election to earn my possession and will be filed after the meeting. On the record date, there were 14,865,525 shares of Safety's common stock outstanding and entitled to vote at this meeting. The list of stockholders of record intel of the vote was taken from Safety Stock Ledgers and have been prepared and certified by Broadridge Financial Solutions. I have been informed by the Inspector of Elections that there are holders of a total of no fewer than 13,619,085 shares of stock present or represented by proxy at this meeting, and I hereby declare a quorum is present and that this meeting is duly convened. That is all the preliminary matters at this point, George.

Thank you, Chris. If there is no objection to the report for the secretary, it will be accepted. There being no objections, it and so accepted. We shall now move on to the transactional business. In addition to certain procedural matters, there are 4 proposals before the stockholders. The first is the election of 2 Safety Directors to Class III were determining in 2026. The second is the ratification of the appointment of Deloitte & Touche LLP as Safety's independent registered public accounting firm for 2023. The third is an advisory vote on the compensation of the named executive officers as disclosed in the company's proxy statement for the 2023 Annual Meeting. And the fourth is an advisory vote on the frequency of future advisory votes on the compensation of the named executive officers. In order to make this process as orderly as possible after a motion has been moved and second in, I will open the floor to any questions or discussions related only to that motion. Please hold all other questions not directly related to the motion until after the formal portion of the meeting. The first order of business is the election of 2 Class II directors to serve a 3-year term expiring in 2026. Can i have a motion?

I move that we elect 2 Class II directors and on behalf of the Board of Directors, I nominate John Farina and Thalia M. Meehan to each serve a 3-year term ending at the 2026 Annual Meeting of Stockholders.

Is there a second?

I second the motion.

Is there any discussion on the motion? The second order of business is the ratification of the appointment of Deloitte & Touche LLP as Safety's independent registered public accounting firm for 2023. May I have a motion?

I move that we ratify the appointment of Deloitte & Touche LLP as Safety's independent registered public accounting firm for 2023.

Is there a second?

I second the motion.

Is there any discussion on the motion? The third order of business is an advisory vote on compensation of the named executive officers as disclosed in the company's proxy statement for the 2023 Annual Meeting. May I have a motion?

I move that we approve the compensation of the named executive officers as disclosed in the company's proxy statement for the 2023 Annual Meeting.

Is there a second?

I second the motion.

Is there any discussion on the motion? The fourth order business is advisory vote on frequency of future advisory votes on the compensation of the named executive officers. May I have a motion?

I move that we approve a 1-year frequency for future advisory votes on executive compensation.

Is there a second?

I second the motion.

Is there any discussion on the voting? Is the Inspector of Election ready to report on the results of the votes?

Yes, Mr. Chairman, I have received and tabulated the proxies and dials on the first item identified in the company's notice of annual meeting of stockholders and proxy statement dated April 6, 2023. As of May 17, 2023, at least 12,055,571 shares of Safety's common stock representing a majority of the votes cast by the stockholders and vote on this matter at the meeting in accordance with the bylaws, have been voted in favor of John D. Farina. Mr. Chairman oversees and tabulated the proxies and ballots on the first item identified in the company's notice of annual meeting of stockholders and proxy statement dated April 6, 2023. As of May 17, 2023, at least 11,786,856 shares of Safety's common stock, representing a majority of the votes cast by the stockholders entitled to vote on this matter at this meeting in accordance with the bylaws, have been voted in favor of Thalia M. Meehan.

I hereby declare that Mr. Farina and Ms. Meehan have been elected as Directors of Safety Insurance Group.

Mr. Chairman, have also received and tabulated the proxies and ballots and the second item identified in the company's notice of annual meeting dated April 6, 2023. As of May 17, 2023, have leased 13,511,603 shares of Safety's common stock representing a majority of the votes present or represented and entitled to vote on this matter at this meeting in accordance with the bylaws, have been voted and save ratifying the appointment of Deloitte Touche LLP as Safety's independent registered public accounting firm for 2023.

I hereby declare that the appointment of Deloitte & Touche LLP as Safety's independent registered public accounting firm for 2023 has been ratified.

Mr. Chairman has also received and tabulated the proxies and ballots on the third item identified in the company's notice meeting dated April 6, 2023. As of May 17, 2023, at least 11,910,798 shares of Safety's common stock representing a majority of the votes present or represented and entitled to vote on this matter at this meeting have been voted in favor of approving on an advisory basis the compensation of the named executive officers as disclosed on the company's proxy statement for the 2023 Annual Meeting.

I hereby declare that the compensation of the named executive officers as disclosed in the company statement for 2023 Annual Meeting has been approved on an advisory basis.

Finally, Mr. Chairman, I have received and tabulated the proxies and ballots on the fourth item identified in the company's notice of annual meeting dated April 6, 2023. As of May 17, 2023, at least 11,496,287 shares of Safety's common stock representing a majority of the votes present or represented and entitled to vote on this matter at this meeting have been voted in favor of approving on an advisory basis, a 1-year frequency for future advisory votes on compensation of the named executive officers as disclosed in the company's proxy statement for the 2023 Annual Meeting.

I hereby declare that a 1-year frequency for future advisory votes on the compensation of the named executive officers has been approved on an advisory basis. Is there any further business to come before the meeting? If there is no other business, I will entertain a motion to adjourn.

So moved.

Is there a second?

I second the motion.

Unless there's injection. I intend to hand over the motion to adjourn by voice note, all those in favor? Looks like the motion is carried. I declare the formal part of the meeting adjourned. Thank you all for attending and those on the phone who have dialed in. Prior to the meeting, we received 3 questions that we will respond to now.

The first question that we received prior to the meeting was, how will Safety Insurance incorporate telematics, like Progressive and now GEICO has?

The Massachusetts auto insurance market, unlike the market in many other states, has been slow to adopt telematics [smartphone-based ] insurance. Similar to Progressive and GEICO, Safety does offer a smartphone-based telematics program. This program was introduced in November of 2017. We've been gathering the data as part of our telematics research and development efforts, including how to best use the program and the data we derive from it to benefit safety, our agents and our policyholders. Safety is focused on [indiscernible] rating and miles driven for individual risk and have refined our rating structure using mileage data in other states where mileage data isn't readily available, carriers rely on telematics data to rate individual risks. In Massachusetts, carriers have access to vehicle safety inspection data, which provides us with the accurate mileage information on an annual basis. As such, mileage has been a primary rating variable for Safety for over 20 years.

The second question we received. With the inherent trade-off between growth and profitability and insurance, which way is Safety leaning towards?

I'd like to say the easiest thing to do is to grow top line of an insurance company, but the hard part is to do it so profitably. Safety is always focused on the profitable growth rather than just top line increases. I would say that if you look back to our history, we would be considered opportunistic growers. In other words, we want to be the carrier of choice when our agency partners are dissatisfied with their other carriers are looking to move business. We're always looking at ways to become more sophisticated in our pricing and are constantly tweaking our pricing models to more closely align risk with rate. Over the last couple of years, we have taken low single-digit increases to ensure we do not fall behind the rate curve. This consistent methodology and attention to service levels put safety in a strong position to address the recent inflationary pressures in the property [indiscernible] market. We are in an opportunistic position to grow our top line business in today's marketplace where our competitors are needing double-digit rate increases to offset inflation, recent combined ratios have frequently been above 100% and a decline in service levels due to staffing challenges. This has been seen by our most 2 recent quarters, having double-digit growth in our net premiums written premium.

The third question that we received was, how will Safety adapt as less and less people in Massachusetts utilize independent agents for their personal auto insurance?

The Massachusetts and larger New England insurance markets are different than the rest of the country. Currently, approximately 63% of the Massachusetts market is controlled by independent insurance agents, and 37% is across the country, the inverse is true. In 2007, the Mass Division of Insurance introduced managed competition, which opened the market to competitive private passenger automobile pricing. At that time, the independent agency controlled about 80% of the market. So over a 15-year period, there has been a decrease in their overall market share, but Safety has growing their share at an agency market by focusing on a rounded account strategy. [ Excellus ] transformed from primarily private passenger automobile insurer to a leading carrier in a variety of property and [ cash ] products. Pre-2007, approximately 30% of our auto policy had an account credit. Today, that number is 65%. More recently, the share of the independent agent market in Massachusetts has leveled in that 2/3, 1/3 split. Across the country, the independent ag channels are actually growing, and there have been larger captive insurers that are now benefiting of a large variety of products from multiple carriers. Safety has always strived to provide our independent agents and our respective policy is those current tools and technologies. We strive to provide the same experiences offered by direct writers but served up through our independent any partners. This strategy has served us well, and we continue to focus -- we continue that focus into the future. We're happy to answer any other questions that anyone in person may have at this time.

Yes, a question. Have you guys thought more about allocate capital to like managing the flow to like equities. I think you guys have been fairly conservative in that area, right?

Yes. I guess I can answer that from both the investment portfolio perspective but also just capital allocation from how we see it as a public company. So going back 10 years ago, our investment portfolio was 100% fixed income. And what we were looking at from both our local and national peer group was that we were with the yields coming down, how do you beat and exceed what your competitors are doing and provide that liquidity and that income to the operations of the organization. So with our investment committee, we went through a strategy to diversify the portfolio out of the fixed income space and to add some different mandates. We -- at that time, had started two active mandates, one in the bank loan, high yield space and one on the equity side. And over time, we've moved from 100% fixed income, 0% risk assets, which is really anything that's not fixed income for us to our current split, which is about 65% fixed income and 35% risk assets. And when we look at our peers, both locally and nationally, we see that our yield is typically higher, and we've really seen a benefit of that in the last call it, 6 to 12 months with the increasing rates, both in our bank loan high-yield portfolio as well as the reinvestment rate on the fixed income side. Over that time, we've also added partnership investments and other mutual fund exposures. And when we look at our overall portfolio and how it's structured, it's behaving as intended and providing that yield that we're looking for. We've always been a cash focused generating on our investment portfolio. From a capital allocation standpoint, our goal has always been to grow the book value of Safety and provide a strong return to our shareholders. We've mainly done that through our dividend yield. When we look at our peer group for total shareholder return, which is about 26 companies, we're typically in the top 3 of those companies when it comes to the yield and we target somewhere in that 3% to 4% range for our yield. At the same time, we supplement that return through share buybacks, but we're really opportunistic buyers when it comes to share buybacks. When we look back at 2020, for example, with the impact of COVID and the stock price reaction, we have purchased about $40 million of share buybacks that year, and we've done some opportunistic buys since then. So no hard and fast policy on that, but that's really our overall goal is to grow that book value, pay a strong dividend and be opportunistic buyers of treasury shares.

Any other question? That concludes the annually.

Thank you for all those that have attended via phone.