SAFT Safety Insurance Group Inc

Safety Insurance Group, Inc. (NASDAQ:SAFT) today reported third quarter 2018 results. Net income for the quarter ended September 30, 2018 was $28.9 million, or $1.88 per diluted share, compared to net income of $18.0 million, or $1.18 per diluted share, for the comparable 2017 period. Net income for the nine months ended September 30, 2018 was $64.8 million, or $4.24 per diluted share, compared to net income of $51.1 million, or $3.36 per diluted share, for the comparable 2017 period. Non-generally accepted accounting principles (“non-GAAP”) operating income, as defined below, for the quarter ended September 30, 2018 was $1.76 per diluted share, compared to $1.06 per diluted share, for the comparable 2017 period. Non-GAAP operating income for the nine months ended September 30, 2018 was $4.29 per diluted share, compared to $3.15 per diluted share, for the comparable 2017 period. Safety’s book value per share increased to $46.57 at September 30, 2018 from $46.06 at December 31, 2017 primarily as a result of net income, offset by decreases in unrealized gains. Safety paid $0.80 per share in dividends to investors during each of the quarters ended September 30, 2018 and 2017. Safety paid $3.00 per share in dividends to investors during the year ended December 31, 2017.

Direct written premiums for the quarter ended September 30, 2018 increased by $4.0 million, or 1.9%, to $219.9 million from $215.9 million for the comparable 2017 period. Direct written premiums for the nine months ended September 30, 2018 increased by $14.1 million, or 2.2%, to $656.7 million from $642.6 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 September 30, 2018 increased by $3.0 million, or 1.5%, to $207.5 million from $204.5 million for the comparable 2017 period. Net written premiums for the nine months ended September 30, 2018 increased by $3.8 million, or 0.6%, to $613.0 million from $609.2 million for the comparable 2017 period. Net earned premiums for the quarter ended September 30, 2018 increased by $1.5 million, or 0.7%, to $197.0 million from $195.5 million for the comparable 2017 period. Net earned premiums for the nine months ended September 30, 2018 increased by $5.1 million, or 0.9%, to $583.1 million from $578.1 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 September 30, 2018, loss and loss adjustment expenses incurred decreased by $7.1 million, or 5.7%, to $116.7 million from $123.8 million for the comparable 2017 period. For the nine months ended September 30, 2018, loss and loss adjustment expenses incurred decreased by $1.7 million, or 0.5%, to $367.6 million from $369.3 million for the comparable 2017 period. Loss, expense, and combined ratios calculated under U.S. generally accepted accounting principles for the quarter ended September 30, 2018 were 59.2%, 31.7%, and 90.9%, respectively, compared to 63.3%, 32.2%, and 95.5%, respectively, for the comparable 2017 period. Loss, expense, and combined ratios calculated under U.S. generally accepted accounting principles for the nine months ended September 30, 2018 were 63.0%, 31.7%, and 94.7%, respectively, compared to 63.9%, 31.8%, and 95.7%, respectively, for the comparable 2017 period. Total prior year favorable development included in the pre-tax results for the quarter ended September 30, 2018 was $13.0 million compared to $10.8 million for the comparable 2017 period. Total prior year favorable development included in the pre-tax results for the nine months ended September 30, 2018 was $39.4 million compared to $31.2 million for the comparable 2017 period.

Net investment income for the quarter ended September 30, 2018 increased by $1.6 million, or 17.0%, to $11.1 million from $9.5 million for the comparable 2017 period. Net investment income for the nine months ended September 30, 2018 increased by $3.5 million, or 12.5%, to $31.8 million from $28.3 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 September 30, 2018 was 3.4% compared to 3.0% for the comparable 2017. Net effective annualized yield on the investment portfolio for the nine months ended September 30, 2018 was 3.3% compared to 3.0% for the comparable 2017. Our duration was 3.7 years at September 30, 2018 and 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 December 14, 2018 to shareholders of record at the close of business on December 3, 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 September 30, 2018, an increase of $2.4 million for the change in unrealized gains was recognized within income before income taxes and income tax expense was increased by $0.5 million. For the nine months ended September 30, 2018, a decrease of $3.7 million for the change in unrealized gains was recognized within income before income taxes and income tax expense was reduced by $0.8 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)

  September 30, December 31, 2018 2017 (Unaudited) Assets Investments: Fixed maturities, available for sale, at fair value (amortized cost: $1,142,816 and $1,156,697) $ 1,131,133 $ 1,172,026 Equity securities, at fair value (cost: $140,796 and $90,481) 158,434 111,867 Other invested assets   25,961   23,162 Total investments 1,315,528 1,307,055 Cash and cash equivalents 51,317 41,708 Accounts receivable, net of allowance for doubtful accounts 209,470 190,649 Receivable for securities sold 984 1,380 Accrued investment income 9,137 8,876 Taxes recoverable 170 908 Receivable from reinsurers related to paid loss and loss adjustment expenses 24,340 24,776 Receivable from reinsurers related to unpaid loss and loss adjustment expenses 100,565 83,085 Ceded unearned premiums 34,414 32,175 Deferred policy acquisition costs 77,533 72,202 Deferred income taxes 3,423 — Equity and deposits in pools 31,469 28,246 Other assets   20,280   16,219 Total assets $ 1,878,630 $ 1,807,279   Liabilities Loss and loss adjustment expense reserves $ 582,957 $ 574,054 Unearned premium reserves 460,405 428,257 Accounts payable and accrued liabilities 57,857 60,701 Payable for securities purchased 7,385 4,188 Payable to reinsurers 33,814 13,801 Deferred income taxes — 2,917 Other liabilities   24,341   22,345 Total liabilities   1,166,759   1,106,263   Shareholders’ equity Common stock: $0.01 par value; 30,000,000 shares authorized; 17,566,180 and 17,499,544 shares issued 176 175 Additional paid-in capital 193,991 189,714 Accumulated other comprehensive (loss) income, net of taxes (9,229) 24,269 Retained earnings 610,768 570,693 Treasury stock, at cost: 2,279,570 shares   (83,835)   (83,835) Total shareholders’ equity   711,871   701,016 Total liabilities and shareholders’ equity $ 1,878,630 $ 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 September 30, Nine Months Ended September 30, 2018     2017 2018     2017   Net earned premiums $ 196,968 $ 195,524 $ 583,126 $ 578,059 Net investment income 11,120 9,503 31,839 28,313 Earnings from partnership investments 1,188 351 6,539 1,233 Net realized gains on investments 53 2,717 2,948 4,826 Change in net unrealized gains on equity investments 2,444 — (3,749 ) — Net impairment losses on investments (a) (228 ) (256 ) (228 ) (256 ) Finance and other service income   4,362     4,690     13,121     13,373   Total revenue   215,907     212,529     633,596     625,548     Losses and loss adjustment expenses 116,693 123,792 367,564 369,271 Underwriting, operating and related expenses 62,496 62,994 184,925 183,643 Interest expense   22     22     67     67   Total expenses   179,211     186,808     552,556     552,981     Income before income taxes 36,696 25,721 81,040 72,567 Income tax expense   7,788     7,767     16,191     21,489   Net income $ 28,908   $ 17,954   $ 64,849   $ 51,078     Earnings per weighted average common share: Basic $ 1.90   $ 1.19   $ 4.28   $ 3.38   Diluted $ 1.88   $ 1.18   $ 4.24   $ 3.36     Cash dividends paid per common share $ 0.80   $ 0.80   $ 2.40   $ 2.20     Number of shares used in computing earnings per share: Basic   15,091,754     15,021,189     15,076,214     15,007,221   Diluted   15,250,332     15,161,962     15,217,927     15,124,044     (a) No portion of the other-than-temporary impairments recognized in the period indicated were included in Other Comprehensive Income.                   Reconciliation of Net Income to Non-GAAP Operating Income       Net income $ 28,908 $ 17,954 $ 64,849 $ 51,078 Exclusions from net income: Net realized gains on investments (53 ) (2,717 ) (2,948 ) (4,826 ) Change in net unrealized gains on equity investments (2,444 ) - 3,749 - Net impairment losses on investments 228 256 228 256 Income tax (expense) benefit   476     861     (216 )   1,600   Non-GAAP operating income $   27,115   $   16,354   $   65,662   $   48,108     Net income per diluted share $ 1.88 $ 1.18 $ 4.24 $ 3.36 Exclusions from net income: Net realized gains on investments - (0.18 ) (0.19 ) (0.32 ) Change in net unrealized gains on equity investments (0.16 ) - 0.25 - Net impairment losses on investments 0.01 0.02 0.02 0.02 Income tax (expense) benefit   0.03     0.04     (0.03 )   0.09   Non-GAAP operating income per diluted share $   1.76   $   1.06   $   4.29   $   3.15                

Safety Insurance Group, Inc. and Subsidiaries

Additional Premium Information

(Unaudited)

(Dollars in thousands)

  Three Months Ended September 30,   Nine Months Ended September 30, 2018       2017   2018       2017   Written Premiums Direct $ 219,930 $ 215,919 $ 656,713 $ 642,633 Assumed 7,750 8,291 23,995 25,326 Ceded   (20,174 )   (19,743 )   (67,674 )   (58,806 ) Net written premiums $ 207,506   $ 204,467   $ 613,034   $ 609,153     Earned Premiums Direct $ 212,209 $ 207,597 $ 624,325 $ 610,636 Assumed 7,469 7,525 24,236 24,237 Ceded   (22,710 )   (19,598 )   (65,435 )   (56,814 ) Net earned premiums $ 196,968   $ 195,524   $ 583,126   $ 578,059  

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