Safety Announces Third Quarter 2019 Results and Declares Fourth Quarter 2019 Dividend

Business Wire

BOSTON--(BUSINESS WIRE)-- Safety Insurance Group, Inc. (NASDAQ:SAFT) today reported third quarter 2019 results. Net income for the quarter ended September 30, 2019 was $15.6 million, or $1.01 per diluted share, compared to net income of $28.9 million, or $1.88 per diluted share, for the comparable 2018 period. Net income for the nine months ended September 30, 2019 was $71.5 million, or $4.64 per diluted share, compared to net income of $64.8 million, or $4.24 per diluted share, for the comparable 2018 period. Non-generally accepted accounting principles (“non-GAAP”) operating income, as defined below, for the quarter ended September 30, 2019 was $0.98 per diluted share, compared to $1.76 per diluted share, for the comparable 2018 period. Non-GAAP operating income for the nine months ended September 30, 2019 was $3.80 per diluted share, compared to $4.30 per diluted share, for the comparable 2018 period. Safety’s book value per share increased to $51.49 at September 30, 2019 from $47.01 at December 31, 2018. Safety paid $0.90 per share in dividends to investors during the quarter ended September 30, 2019 compared to $0.80 per share during the quarter ended September 30, 2018. Safety paid $3.20 per share in dividends to investors during the year ended December 31, 2018.

On September 12, 2019, we reached an agreement to settle litigation involving a liability claim seeking to recover extra-contractual damages against one of our personal umbrella policyholders. The settlement received court approval and the costs associated with such settlement were accrued during the quarter ended September 30, 2019 within loss and loss adjustment expense. The net pre-tax income impact from this settlement during the quarter ended September 30, 2019 was $6.9 million which represents a direct loss of $15.5 million net of $8.6 million of reinsurance. The after-tax impact of the settlement was $5.5 million or $0.36 per diluted share.

For the quarter ended September 30, 2019, loss and loss adjustment expenses incurred increased by $18.3 million, or 15.7%, to $135.0 million from $116.7 million for the comparable 2018 period. For the nine months ended September 30, 2019, loss and loss adjustment expenses incurred increased by $15.8 million, or 4.3%, to $383.4 million from $367.6 million for the comparable 2018 period. Loss, expense, and combined ratios calculated under U.S. generally accepted accounting principles for the quarter ended September 30, 2019 were 68.0%, 30.7%, and 98.7%, respectively, compared to 59.2%, 31.7%, and 90.9%, respectively, for the comparable 2018 period. Loss, expense, and combined ratios calculated under U.S. generally accepted accounting principles for the nine months ended September 30, 2019 were 65.1%, 30.9%, and 96.0%, respectively, compared to 63.0%, 31.7%, and 94.7%, respectively, for the comparable 2018 period. Total prior year favorable development included in the pre-tax results for the quarter ended September 30, 2019 was $3.2 million compared to $13.0 million for the comparable 2018 period. The decrease is mainly a result of the umbrella claim noted above. Total prior year favorable development included in the pre-tax results for the nine months ended September 30, 2019 was $25.5 million compared to $39.4 million for the comparable 2018 period.

Direct written premiums for the quarter ended September 30, 2019 increased by $5.8 million, or 2.6%, to $225.7 million from $219.9 million for the comparable 2018 period. Direct written premiums for the nine months ended September 30, 2019 increased by $6.0 million or 0.9% to $662.7 million from $656.7 million for the comparable 2018 period. The 2019 increase occurred primarily in our commercial automobile and homeowners lines of business.

Net written premiums for the quarter ended September 30, 2019 increased by $4.1 million, or 2.0%, to $211.6 million from $207.5 million for the comparable 2018 period. Net written premiums for the nine months ended September 30, 2019 increased by $5.8 million, or 0.9%, to $618.8 million from $613.0 million for the comparable 2018 period. Net earned premiums for the quarter ended September 30, 2019 increased by $1.4 million, or 0.7%, to $198.4 million from $197.0 million for the comparable 2018 period. Net earned premiums for the nine months ended September 30, 2019 increased by $6.2 million, or 1.1%, to $589.3 million from $583.1 million for the comparable 2018 period.

Net investment income for the quarter ended September 30, 2019 increased by $0.8 million, or 7.4%, to $11.9 million from $11.1 million for the comparable 2018 period. Net investment income for the nine months ended September 30, 2019 increased by $2.5 million, or 7.6%, to $34.3 million from $31.8 million for the comparable 2018 period. The increase is a result of an increase in the average invested asset balance and improved investment income yields compared to the prior year. Net effective annualized yield on the investment portfolio was 3.5% for the three months ended September 30, 2019 compared to 3.4% for the comparable 2018 period. Net effective annualized yield on the investment portfolio for the nine months ended September 30, 2019 was 3.4% compared to 3.3% for the comparable 2018 period. Our duration on fixed maturities was 2.9 years at September 30, 2019 and 3.6 years at December 31, 2018, respectively.

Today, our Board of Directors approved a $0.90 per share quarterly cash dividend on its issued and outstanding common stock payable on December 13, 2019 to shareholders of record at the close of business on December 2, 2019.

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, net impairment losses on investments, change in net unrealized gains on equity securities and taxes related thereto. For the quarter ended September 30, 2019 a decrease of $0.4 million for the change in unrealized gains was recognized within income before income taxes, compared to an increase of $2.4 million recognized in the comparable 2018 period. For the nine months ended September 30, 2019, an increase of $15.2 million for the change in unrealized gains was recognized in income before income taxes, compared to a decrease of $3.7 million recognized in the comparable 2018 period. Net income and earnings per diluted share are the GAAP financial measures that are most directly comparable to non-GAAP operating income and non-GAAP operating income per diluted share, respectively. A reconciliation of the GAAP financial measures to these non-GAAP measures is included in the 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, 2018 Form 10-K with the SEC on February 28, 2019 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, 2018 filed with the SEC on February 28, 2019.

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,
	2019			2018
	(Unaudited)
Assets
Investments:
Fixed maturities, available for sale, at fair value (amortized cost: $1,172,117 and $1,175,413)	$	1,207,829		$	1,161,862
Equity securities, at fair value (cost: $146,829 and $142,948)		167,061			148,011
Other invested assets		34,206			23,481
Total investments		1,409,096			1,333,354
Cash and cash equivalents		47,482			37,582
Accounts receivable, net of allowance for doubtful accounts		209,906			190,062
Receivable for securities sold		702			1,039
Accrued investment income		9,475			8,420
Taxes recoverable		1,454			—
Receivable from reinsurers related to paid loss and loss adjustment expenses		33,209			13,691
Receivable from reinsurers related to unpaid loss and loss adjustment expenses		117,884			108,398
Ceded unearned premiums		35,105			33,974
Deferred policy acquisition costs		78,344			73,355
Deferred income taxes		—			8,749
Equity and deposits in pools		33,231			28,094
Operating lease right-of-use-assets		35,758			—
Other assets		22,155			19,522
Total assets	$	2,033,801		$	1,856,240

Liabilities
Loss and loss adjustment expense reserves	$	601,459		$	584,719
Unearned premium reserves		466,003			435,380
Accounts payable and accrued liabilities		61,515			71,896
Payable for securities purchased		6,145			5,156
Payable to reinsurers		33,101			12,220
Deferred income taxes		2,726			—
Taxes payable		—			6,090
Operating lease liabilities		35,758			—
Other liabilities		35,017			22,135
Total liabilities		1,241,724			1,137,596

Shareholders’ equity
Common stock: $0.01 par value; 30,000,000 shares authorized; 17,663,364 and 17,566,180 shares issued		177			176
Additional paid-in capital		200,836			196,292
Accumulated other comprehensive income (loss), net of taxes		28,212			(10,706	)
Retained earnings		646,687			616,717
Treasury stock, at cost: 2,279,570 shares		(83,835	)		(83,835	)
Total shareholders’ equity		792,077			718,644
Total liabilities and shareholders’ equity	$	2,033,801		$	1,856,240


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,
	2019			2018			2019			2018

Net earned premiums	$	198,410		$	196,968		$	589,327		$	583,126
Net investment income		11,947			11,120			34,272			31,839
(Losses) earnings from partnership investments		(139	)		1,188			1,431			6,539
Net realized gains on investments		1,194			53			1,513			2,948
Change in net unrealized gains on equity investments		(387	)		2,444			15,168			(3,749	)
Net impairment losses on investments (a)		(123	)		(228	)		(397	)		(228	)
Finance and other service income		4,371			4,362			12,540			13,121
Total revenue		215,273			215,907			653,854			633,596

Losses and loss adjustment expenses		134,966			116,693			383,386			367,564
Underwriting, operating and related expenses		60,845			62,496			182,187			184,925
Interest expense		22			22			67			67
Total expenses		195,833			179,211			565,640			552,556

Income before income taxes		19,440			36,696			88,214			81,040
Income tax expense		3,821			7,788			16,715			16,191
Net income	$	15,619		$	28,908		$	71,499		$	64,849

Earnings per weighted average common share:
Basic	$	1.02		$	1.90		$	4.68		$	4.28
Diluted	$	1.01		$	1.88		$	4.64		$	4.24

Cash dividends paid per common share	$	0.90		$	0.80		$	2.50		$	2.40

Number of shares used in computing earnings per share:
Basic		15,220,902			15,091,754			15,194,469			15,076,214
Diluted		15,360,908			15,250,332			15,337,331			15,217,927

(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	$	15,619		$	28,908		$	71,499		$	64,849
Exclusions from net income:
Net realized gains on investments		(1,194	)		(53	)		(1,513	)		(2,948	)
Change in net unrealized gains on equity investments		387			(2,444	)		(15,168	)		3,749
Net impairment losses on investments		123			228			397			228
Income tax expense (benefit) on exclusions from net income		144			476			3,420			(216	)
Non-GAAP operating income	$	15,079		$	27,115		$	58,635		$	65,662

Net income per diluted share	$	1.01		$	1.88		$	4.64		$	4.24
Exclusions from net income:
Net realized gains on investments		(0.08	)		-			(0.10	)		(0.19	)
Change in net unrealized gains on equity investments		0.03			(0.16	)		(0.99	)		0.25
Net impairment losses on investments		0.01			0.01			0.03			0.01
Income tax expense (benefit) on exclusions from net income		0.01			0.03			0.22			(0.01	)
Non-GAAP operating income per diluted share	$	0.98		$	1.76		$	3.80		$	4.30

Safety Insurance Group, Inc. and Subsidiaries Additional Premium Information (Unaudited) (Dollars in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Written Premiums
Direct	$	225,751		$	219,930		$	662,733		$	656,713
Assumed		7,473			7,750			23,893			23,995
Ceded		(21,628	)		(20,174	)		(67,807	)		(67,674	)
Net written premiums	$	211,596		$	207,506		$	618,819		$	613,034

Earned Premiums
Direct	$	213,619		$	212,209		$	631,261		$	624,325
Assumed		7,214			7,469			24,742			24,236
Ceded		(22,423	)		(22,710	)		(66,676	)		(65,435	)
Net earned premiums	$	198,410		$	196,968		$	589,327		$	583,126