Safety Announces Second Quarter 2007 Results and Raises Third Quarter 2007 Dividend

Safety Insurance Group, Inc. (NASDAQ:SAFT) today reported second quarter 2007 results. Net income for the quarter ended June 30, 2007 was $22.9 million, or $1.42 per diluted share, compared to $29.1 million, or $1.81 per diluted share, for the comparable 2006 period. Net income for the six months ended June 30, 2007 was $47.6 million, or $2.95 per diluted share, compared to $59.9 million, or $3.75 per diluted share, for the comparable 2006 period. Safety's book value per share increased to $32.66 at June 30, 2007 compared to $30.84 at December 31, 2006. Safety paid $0.25 per share in dividends to investors during the quarter ended June 30, 2007 compared to $0.18 per share during the comparable 2006 period. Safety paid $0.86 per share in dividends to investors during the year ended December 31, 2006.

The Board of Directors today approved and declared an increase in the quarterly cash dividend from $0.25 to $0.40 per share on the issued and outstanding common stock, payable on September 14, 2007 to shareholders of record at the close of business on September 3, 2007.

The Board of Directors today also approved a share repurchase program of up to $30 million of Safety's outstanding common shares. Under the program, Safety may repurchase shares of its common stock for cash in public or private transactions, in the open market or otherwise, at management's discretion. The timing of such repurchases and actual number of shares repurchased will depend on a variety of factors including price, market conditions and applicable regulatory and corporate requirements. The program does not require Safety to repurchase any specific number of shares and may be modified, suspended or terminated at any time without prior notice.

Direct written premiums for the quarter ended June 30, 2007 decreased by $4.0 million, or 2.4%, to $158.5 million from $162.5 million for the comparable 2006 period. Direct written premiums for the six months ended June 30, 2007 decreased by $0.5 million, or 0.1%, to $340.0 million from $340.5 million for the comparable 2006 period. The 2007 decrease occurred primarily in our personal and commercial automobile lines, which experienced decreases in average written premium of 3.3% and 2.4%, respectively. Partially offsetting these decreases was an increase in average written premium in our homeowners line of 5.9%.

Net written premiums for the quarter ended June 30, 2007 decreased by $5.7 million, or 3.5%, to $156.6 million from $162.3 million for the comparable 2006 period. Net written premiums for the six months ended June 30, 2007 decreased by $5.1 million, or 1.5%, to $330.5 million from $335.6 million for the comparable 2006 period. These decreases were due to the factors that decreased direct written premiums combined with decreases in premiums assumed from Commonwealth Automobile Reinsurers ("CAR"), and partially offset by decreases in premiums ceded to CAR. Net earned premiums for the quarter ended June 30, 2007 decreased by $2.4 million, or 1.5%, to $153.9 million from $156.3 million for the comparable 2006 period. Net earned premiums for the six months ended June 30, 2007 decreased by $6.5 million, or 2.1%, to $307.5 million from $314.0 million for the comparable 2006 period. These decreases were primarily as a result of decreases in premiums assumed from CAR. The effect of assumed and ceded premiums on net written and net earned premiums is presented in the attached tables.

Net investment income for the quarter ended June 30, 2007 was $10.8 million compared to $9.8 million for the comparable 2006 period. Net investment income for the six months ended June 30, 2007 was $21.8 million compared to $19.2 million for the comparable 2006 period. Average cash and investment securities (at cost) increased by $85.4 million, or 9.5%, to $980.4 million for the quarter ended June 30, 2007 from $895.0 million for the comparable 2006 period. Net effective annualized yield on the investment portfolio increased to 4.5% during the six months ended June 30, 2007 from 4.3% during the comparable 2006 period. Our duration decreased to 4.4 years at June 30, 2007 from 4.6 years at December 31, 2006. Net realized losses on investments was $0.1 million for the six months ended June 30, 2007 compared to $0.3 million for the comparable 2006 period.

As of June 30, 2007, our portfolio of fixed maturity investments was comprised entirely of investment grade securities. We hold no subprime mortgage debt securities. All of our mortgage-backed securities are either U.S. Government or Agency guaranteed or are rated Aaa/AAA. We expect the recent subprime mortgage market deterioration to have little or no effect on our portfolio.

Loss, expense and combined ratios calculated under U.S. generally accepted accounting principles ("GAAP") for the quarter ended June 30, 2007 were 60.3%, 27.9% and 88.2% compared to 54.1%, 26.7% and 80.8% for the comparable 2006 period. Loss, expense and combined ratios calculated under GAAP for the six months ended June 30, 2007 were 60.3%, 27.2% and 87.5% compared to 54.2%, 26.2% and 80.4% for the comparable 2006 period. The loss ratio increased as a result of an increase in personal and commercial automobile claim frequency combined with decreases in favorable loss development. Total prior year favorable development included in the pre-tax results for the quarter and six months ended June 30, 2007 was $5.4 million and $14.7 million, respectively, compared to prior year favorable development of $12.1 million and $25.4 million, respectively, for the comparable 2006 periods.

ADA SCHIP provisions

With the enactment of the State Children's Health Insurance Program (SCHIP) ten years ago, the federal government made a promise to provide health care to millions of children in families just above the federal poverty line. As we all know, when it came to assuring access to good oral health care, that promise wasn't kept, and too many children have suffered needlessly from dental disease as a result. This year, the Congress and the President have an opportunity to right that wrong.

The American Dental Association (ADA) is proud to stand with members of the Maryland congressional delegation who have made our cause -- ensuring access to dental care for children in need --their cause. This effort comes too late for Deamonte Driver, the Maryland boy who died earlier this year from complications apparently stemming from untreated dental disease, but it is our obligation to prevent similar tragedies. The House-passed SCHIP reauthorization bill, by including a dental benefit guarantee in SCHIP, is a good first step in that direction.

Emphasis on Prevention

While some people want to focus on the cost of this bill, we want to emphasize that devoting resources to preventive dental care for children is one of the best investments that the government can make. Without access to regular preventive dental services, dental care for many children is postponed until problems like toothache and abscesses become so acute that care is sought in hospital emergency departments. One recent study estimated that, on average, the cost to manage symptoms associated with dental problems in an emergency room was approximately 10 times as expensive as normal preventive treatment. Clearly, the guarantee of dental coverage in the House-passed SCHIP legislation makes sound fiscal sense.
The ADA pledges to continue working with the House, Senate and Administration to ensure that SCHIP recognizes the importance of dental health as a part of overall health.

The not-for-profit ADA is the nation's largest dental association, representing more than 155,000 dentist members. The premier source of oral health information, the ADA has advocated for the public's health and promoted the art and science of dentistry since 1859. The ADA's state-of-the-art research facilities develop and test dental products and materials that have advanced the practice of dentistry and made the patient experience more positive. The ADA Seal of Acceptance long has been a valuable and respected guide to consumer and professional products.

A natural catastrophe commission bill

A natural catastrophe commission bill scheduled for consideration today by the Senate Banking Committee would provide for an important examination of how best to mitigate disaster risks and deal with the after-effects of these events, according to the Property Casualty Insurers Association of America (PCI).

The bill establishing a commission to look at the various aspects of natural disasters and insurance includes evaluating whether there may be catastrophe exposures that are beyond the capability of the private market and individual state catastrophe funds to address. PCI believes that there is a need to encourage new capital to enter property insurance markets and facilitate innovative ways to cover difficult risks through enacting greater regulatory flexibility and lower regulatory costs. The commission's duties, as outlined in the bill, include looking at these issues as well as enactment and enforcement of tougher standards for building codes, property development and other loss prevention and mitigation requirements that are also vital when looking toward the future and evaluating this issue.

“PCI believes that developing and enacting effective public policy to address future natural catastrophes is one of the most significant issues facing the insurance industry,” said June Holmes, PCI’s interim CEO. “Experts agree that the nation faces the prospect of more frequent and severe natural disasters in the coming decade. Moreover, significant property development, population growth, and rapidly rising real estate prices in areas prone to natural disasters exacerbates the potential for increasingly larger human and economic losses as a result of such disasters, requiring stronger mitigation as well as greater financial resources to fund future recovery and repair efforts.”

PCI believes that it may be necessary for the federal government to offer liquidity protection to state catastrophe funds at the highest level consistent with the maintenance of stable markets and avoidance of widespread insurer insolvencies. It is also essential that any federal program include measures intended to promote freedom for markets to respond to these exposures, including meaningful limitations on the ability of participating states to control and/or suppress property insurance rates or to maintain other unnecessary restrictions. PCI is pleased to see that the bill includes an evaluation of federal and state regulatory issues as well.

Furthermore, PCI believes that insurers should also have the ability to establish voluntary, tax-deferred pre-event catastrophe reserves for purposes of funding all or part of their exposure to catastrophe risks. Policymakers should consider ways in which further development of the private catastrophe bond market can be encouraged by removing regulatory or accounting impediments to the use of such vehicles and by other steps which may foster development in this market and the commission is charged with looking at these issues.

“The commission bill, as currently drafted, includes a thorough examination of these issues that are very important to consumers, PCI and our property and casualty insurer members, and the nation, and we support legislation that will fairly evaluate these issues,” Holmes said.

PCI is composed of more than 1,000 member companies, representing the broadest cross-section of insurers of any national trade association. PCI members write over $194 billion in annual premium, 40.1 percent of the nation’s property/casualty insurance. Member companies write 51.3 percent of the U.S. automobile insurance market, 39 percent of the homeowners market, 32.1 percent of the commercial property and liability market, and 38.7 percent of the private workers compensation market.