Market Overview

Safety Announces Second Quarter 2018 Results and Declares Third Quarter 2018 Dividend

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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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