SAFT Safety Insurance Group Inc

Safety Insurance Group, Inc. (NASDAQ:SAFT) today reported second quarter 2018 results. Net income for the quarter ended June 30, 2018 was $26.8 million, or $1.75 per diluted share, compared to net income of $21.1 million, or $1.39 per diluted share, for the comparable 2017 period. Net income for the six months ended June 30, 2018 was $35.9 million, or $2.35 per diluted share, compared to net income of $33.1 million, or $2.18 per diluted share, for the comparable 2017 period. Non-generally accepted accounting principles (“non-GAAP”) operating income, as defined below, for the quarter ended June 30, 2018 was $1.81 per diluted share, compared to $1.37 per diluted share, for the comparable 2017 period. Non-GAAP operating income for the six months ended June 30, 2018 was $2.52 per diluted share, compared to $2.09 per diluted share, for the comparable 2017 period due to a decline in net unrealized gains. Safety’s book value per share decreased to $45.56 at June 30, 2018 from $46.06 at December 31, 2017. Safety paid $0.80 and $0.70 per share in dividends to investors during the quarters ended June 30, 2018 and 2017, respectively. Safety paid $3.00 per share in dividends to investors during the year ended December 31, 2017.

Direct written premiums for the quarter ended June 30, 2018 increased by $6.0 million, or 2.6%, to $233.0 million from $227.0 million for the comparable 2017 period. Direct written premiums for the six months ended June 30, 2018 increased by $10.1 million, or 2.4%, to $436.8 million from $426.7 million for the comparable 2017 period. The 2018 increase occurred primarily in our commercial automobile and homeowners lines of business.

Net written premiums for the quarter ended June 30, 2018 increased by $1.7 million, or 0.8%, to $215.5 million from $213.8 million for the comparable 2017 period. Net written premiums for the six months ended June 30, 2018 increased by $0.8 million, or 0.2%, to $405.5 million from $404.7 million for the comparable 2017 period. Net earned premiums for the quarter ended June 30, 2018 increased by $1.3 million, or 0.7%, to $194.1 million from $192.8 million for the comparable 2017 period. Net earned premiums for the six months ended June 30, 2018 increased by $3.6 million, or 0.9%, to $386.1 million from $382.5 million for the comparable 2017 period. Net written and net earned premiums increased primarily due to increases in our commercial automobile and homeowners business as discussed above.

For the quarter ended June 30, 2018, loss and loss adjustment expenses incurred decreased by $3.8 million, or 3.3%, to $113.2 million from $117.0 million for the comparable 2017 period. For the six months ended June 30, 2018, loss and loss adjustment expenses incurred increased by $5.4 million, or 2.2%, to $250.9 million from $245.5 million for the comparable 2017 period. Loss, expense, and combined ratios calculated under U.S. generally accepted accounting principles for the quarter ended June 30, 2018 were 58.3%, 31.7%, and 90.0%, respectively, compared to 60.7%, 31.6%, and 92.3%, respectively, for the comparable 2017 period. Loss, expense, and combined ratios calculated under U.S. generally accepted accounting principles for the six months ended June 30, 2018 were 65.0%, 31.7%, and 96.7%, respectively, compared to 64.2%, 31.5%, and 95.7%, respectively, for the comparable 2017 period. Total prior year favorable development included in the pre-tax results for the quarter ended June 30, 2018 was $12.1 million compared to $10.0 million for the comparable 2017 period. Total prior year favorable development included in the pre-tax results for the six months ended June 30, 2018 was $26.3 million compared to $20.4 million for the comparable 2017 period.

Net investment income for the quarter ended June 30, 2018 increased by $0.5 million, or 4.9%, to $10.2 million from $9.7 million for the comparable 2017 period. Net investment income for the six months ended June 30, 2018 increased by $1.9 million, or 10.1%, to $20.7 million from $18.8 million for the comparable 2017 period. The increase is a result of fixed maturity amortization and an increase in the average invested asset balance compared to the prior year. Net effective annualized yield on the investment portfolio for the quarter ended June 30, 2018 was 3.2% compared to 3.1% for the comparable 2017 period. Net effective annualized yield on the investment portfolio for the six months ended June 30, 2018 was 3.2% compared to 3.0% for the comparable 2017 period. Our duration was 3.9 years at June 30, 2018 compared to 3.7 years at December 31, 2017.

Today, our Board of Directors approved a $0.80 per share quarterly cash dividend on its issued and outstanding common stock payable on September 14, 2018 to shareholders of record at the close of business on September 4, 2018.

Recently Adopted Accounting Standard

As disclosed in Safety’s Annual Report on Form 10-K for the year ended December 31, 2017, accounting guidance for financial instruments changed in 2018 under ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. We adopted this accounting standard update, effective January 1, 2018, using a cumulative-effect adjustment. This adjustment moved the historical unrealized gains and losses, net of tax, on the equity portfolio from accumulated other comprehensive earnings to retained earnings, but had no impact on overall shareholders’ equity. In addition, for 2018 and forward, the change in fair value for equity securities is required to be recognized through net income rather than through other comprehensive income. As defined below, we exclude these unrealized gains and losses in arriving at non-GAAP operating income and non-GAAP operating income per diluted share. For the quarter ended June 30, 2018, a decrease of $2.7 million for the change in unrealized gains was recognized within income before income taxes and the income tax expense was reduced by $0.6 million. For the six months ended June 30, 2018, a decrease of $6.2 million for the change in unrealized gains was recognized within income before income taxes and the income tax expense was reduced by $1.3 million.

Non-GAAP Measures

Management has included certain non-GAAP financial measures in presenting the Company’s results. Management believes that these non-GAAP measures better explain the Company’s results of operations and allow for a more complete understanding of the underlying trends in the Company’s business. These measures should not be viewed as a substitute for those determined in accordance with generally accepted accounting principles (“GAAP”). In addition, our definitions of these items may not be comparable to the definitions used by other companies.

Non-GAAP operating income and operating income per diluted share consist of our GAAP net income adjusted by the net realized gains (losses), net impairment losses on investments, change in net unrealized gains (losses) on equity securities and taxes related thereto. The adjustment for net unrealized losses on equity securities is only applicable for 2018 due to the adoption of the above mentioned accounting standard update. Net income and earnings per diluted share are the GAAP financial measures that are most directly comparable to operating income and operating income per diluted share, respectively. A reconciliation of the GAAP financial measures to these non-GAAP measures is included in the 2018 financial highlights below.

About Safety: Safety Insurance Group, Inc., based in Boston, MA, is the parent of Safety Insurance Company, Safety Indemnity Insurance Company, and Safety Property and Casualty Insurance Company. Operating exclusively in Massachusetts, New Hampshire, and Maine, Safety is a leading writer of property and casualty insurance products, including private passenger automobile, commercial automobile, homeowners, dwelling fire, umbrella and business owner policies.

Additional Information: Press releases, announcements, U. S. Securities and Exchange Commission (“SEC”) Filings and investor information are available under “About Safety,” “Investor Information” on our Company website located at www.SafetyInsurance.com. Safety filed its December 31, 2017 Form 10-K with the SEC on February 28, 2018 and urges shareholders to refer to this document for more complete information concerning Safety’s financial results.

Cautionary Statement under "Safe Harbor" Provision of the Private Securities Litigation Reform Act of 1995:

This press release contains, and Safety may from time to time make, written or oral "forward-looking statements" within the meaning of the U.S. federal securities laws. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “aim,” “projects,” or words of similar meaning and expressions that indicate future events and trends, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may”. All statements that address expectations or projections about the future, including statements about the Company’s strategy for growth, product development, market position, expenditures and financial results, are forward-looking statements.

Forward-looking statements are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. There are a number of factors, many of which are beyond our control, that could cause actual future conditions, events, results or trends to differ significantly and/or materially from historical results or those projected in the forward-looking statements. These factors include but are not limited to the competitive nature of our industry and the possible adverse effects of such competition. Although a number of national insurers that are much larger than we are do not currently compete in a material way in the Massachusetts private passenger automobile market, if one or more of these companies decided to aggressively enter the market it could have a material adverse effect on us. Other significant factors include conditions for business operations and restrictive regulations in Massachusetts, the possibility of losses due to claims resulting from severe weather, the possibility that the Commissioner of Insurance may approve future Rule changes that change the operation of the residual market, our possible need for and availability of additional financing, and our dependence on strategic relationships, among others, and other risks and factors identified from time to time in our reports filed with the SEC, such as those set forth under the caption “Risk Factors” in our Form 10-K for the year ended December 31, 2017 filed with the SEC on February 28, 2018.

We are not under any obligation (and expressly disclaim any such obligation) to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise. You should carefully consider the possibility that actual results may differ materially from our forward-looking statements.

 

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

    June 30,   December 31, 2018 2017 (Unaudited) Assets Investments: Fixed maturities, available for sale, at fair value (amortized cost: $1,153,613 and $1,156,697) $ 1,145,335 $ 1,172,026 Equity securities, at fair value (cost: $119,571 and $90,481) 134,764 111,867 Other invested assets   23,074     23,162   Total investments 1,303,173 1,307,055 Cash and cash equivalents 18,722 41,708 Accounts receivable, net of allowance for doubtful accounts 209,468 190,649 Receivable for securities sold 2,673 1,380 Accrued investment income 8,847 8,876 Taxes recoverable 2,735 908 Receivable from reinsurers related to paid loss and loss adjustment expenses 24,073 24,776 Receivable from reinsurers related to unpaid loss and loss adjustment expenses 96,577 83,085 Ceded unearned premiums 36,950 32,175 Deferred policy acquisition costs 75,223 72,202 Deferred income taxes 2,307 — Equity and deposits in pools 29,699 28,246 Other assets   19,879     16,219   Total assets $ 1,830,326   $ 1,807,279     Liabilities Loss and loss adjustment expense reserves $ 579,791 $ 574,054 Unearned premium reserves 452,402 428,257 Accounts payable and accrued liabilities 53,269 60,701 Payable for securities purchased 7,226 4,188 Payable to reinsurers 22,361 13,801 Deferred income taxes — 2,917 Other liabilities   18,809     22,345   Total liabilities   1,133,858     1,106,263       Shareholders’ equity Common stock: $0.01 par value; 30,000,000 shares authorized; 17,566,461 and 17,499,544 shares issued 176 175 Additional paid-in capital 192,495 189,714 Accumulated other comprehensive (loss) income, net of taxes (6,540 ) 24,269 Retained earnings 594,172 570,693 Treasury stock, at cost: 2,279,570 shares   (83,835 )   (83,835 ) Total shareholders’ equity   696,468     701,016   Total liabilities and shareholders’ equity $ 1,830,326   $ 1,807,279      

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands, except share and per share data)

    Three Months Ended June 30,   Six Months Ended June 30, 2018   2017 2018   2017   Net earned premiums $ 194,125 $ 192,824 $ 386,158 $ 382,535 Net investment income 10,188 9,715 20,719 18,810 Earnings from partnership investments 487 769 5,351 882 Net realized gains on investments 1,589 567 2,895 2,109 Change in net unrealized gains on equity investments (2,711 ) — (6,193 ) — Finance and other service income   4,292     4,374     8,759     8,683   Total revenue   207,970     208,249     417,689     413,019     Losses and loss adjustment expenses 113,227 117,049 250,871 245,479 Underwriting, operating and related expenses 61,573 60,979 122,429 120,649 Interest expense   23     23     45     45   Total expenses   174,823     178,051     373,345     366,173     Income before income taxes 33,147 30,198 44,344 46,846 Income tax expense   6,331     9,093     8,403     13,722   Net income $ 26,816   $ 21,105   $ 35,941   $ 33,124     Earnings per weighted average common share: Basic $ 1.77   $ 1.40   $ 2.37   $ 2.19   Diluted $ 1.75   $ 1.39   $ 2.35   $ 2.18     Cash dividends paid per common share $ 0.80   $ 0.70   $ 1.60   $ 1.40     Number of shares used in computing earnings per share: Basic   15,090,435     15,020,028     15,068,321     15,000,127   Diluted   15,213,414     15,114,284     15,202,338     15,105,554       Reconciliation of Net Income to Non-GAAP Operating Income   Net income $ 26,816 $ 21,105 $ 35,941 $ 33,124 Exclusions from net income: Net realized gains on investments (1,589 ) (567 ) (2,895 ) (2,109 ) Change in net unrealized gains on equity investments 2,711 - 6,193 - Income tax (expense) benefit (236 ) 198   (693 ) 738   Non-GAAP operating income $ 27,702   $ 20,736   $ 38,546   $ 31,753     Net income per diluted share $ 1.75 $ 1.39 $ 2.35 $ 2.18 Exclusions from net income: Net realized gains on investments (0.10 ) (0.04 ) (0.19 ) (0.14 ) Change in net unrealized gains on equity investments 0.18 - 0.41 - Income tax (expense) benefit (0.02 ) 0.02   (0.05 ) 0.05   Non-GAAP operating income per diluted share $ 1.81   $ 1.37   $ 2.52   $ 2.09      

Safety Insurance Group, Inc. and Subsidiaries

Additional Premium Information

(Unaudited)

(Dollars in thousands)

    Three Months Ended June 30,     Six Months Ended June 30, 2018   2017 2018   2017 Written Premiums Direct $ 233,050 $ 227,048 $ 436,783 $ 426,714 Assumed 8,297 8,443 16,245 17,035 Ceded   (25,832 )   (21,675 )   (47,500 )   (39,063 ) Net written premiums $ 215,515   $ 213,816   $ 405,528   $ 404,686     Earned Premiums Direct $ 208,297 $ 203,785 $ 412,116 $ 403,039 Assumed 7,880 7,986 16,767 16,712 Ceded   (22,052 )   (18,947 )   (42,725 )   (37,216 ) Net earned premiums $ 194,125   $ 192,824   $ 386,158   $ 382,535  

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Safety Insurance Group, Inc.Office of Investor Relations877-951-2522InvestorRelations@SafetyInsurance.com