Business Wire | Aug 5, 2020 04:06PM EDT

Safety Announces Second Quarter 2020 Results and Declares Third Quarter 2020 Dividend

Aug. 05, 2020

BOSTON--(BUSINESS WIRE)--Aug. 05, 2020--Safety Insurance Group, Inc. (NASDAQ:SAFT) ("the Company") today reported second quarter 2020 results. Net income for the quarter ended June 30, 2020 was $42.5 million, or $2.78 per diluted share, compared to net income of $25.9 million, or $1.68 per diluted share, for the comparable 2019 period. Net income for the six months ended June 30, 2020 was $40.5 million, or $2.64 per diluted share, compared to net income of $55.9 million, or $3.63 per diluted share, for the comparable 2019 period. Non-generally accepted accounting principles ("non-GAAP") operating income, as defined below, for the quarter ended June 30, 2020 was $1.95 per diluted share, compared to $1.47 per diluted share, for the comparable 2019 period. Non-GAAP operating income for the six months ended June 30, 2020 was $3.52 per diluted share, compared to $2.83 per diluted share, for the comparable 2019 period.

Safety's book value per share increased to $53.95 at June 30, 2020 from $52.55 at December 31, 2019, primarily as a result of net income and an increase in unrealized gains, partially offset by dividends paid and the purchase of treasury shares during the six months ended June 30, 2020. During the three and six months ended June 30, 2020 the Company purchased 158,552 and 301,844 shares, respectively, on the open market at a cost of $11.8 million and $22.1 million, respectively. Safety paid $0.90 per share in dividends to investors during the quarter ended June 30, 2020 compared to $0.80 per share in dividends to investors during the quarter ended June 30, 2019. Safety paid $3.40 per share during the year ended December 31, 2019.

During this challenging time, the Company has continued to take many actions that address the health and well-being of our employees while still serving the needs of our agents and insureds. Beginning in March 2020, the global pandemic associated with the novel coronavirus COVID-19 ("COVID-19") and related economic conditions caused significant economic effects including temporary closures of many businesses and reduced consumer activity due to shelter-in-place, stay-at-home and other governmental actions.

During the second quarter of 2020, the Company announced the Safety Personal Auto Relief Credit, a 15% policyholder credit, representing $17.7 million in total premium which was applied to personal auto policies for the months of April, May and June. This entire activity was booked as an adjustment to premiums during the second quarter of 2020. Additionally, as part of our efforts to assist policyholders, the Company instituted a moratorium on policy cancellations and assessment of various fees during the three months ended June 30, 2020 which resulted in a decrease in finance and other service income of $0.8 million to $3.3 million from $4.1 million for the comparable 2019 period.

Direct written premiums for the quarter ended June 30, 2020 decreased by $28.3 million, or 12.1%, to $205.3 million from $233.6 million for the comparable 2019 period. Direct written premiums for the six months ended June 30, 2020 decreased by $34.4 million, or 7.9% to $402.6 million from $437.0 million for the comparable 2019 period. The 2020 decrease reflects the personal auto premium relief as described above. In addition, the decrease is also attributable to our commercial automobile line of business and is a result of changes made by Commonwealth Automobile Reinsurers ("CAR") to eligibility requirements which impacted the number of policies that we handle as a Servicing Carrier to the ceded pool. This resulted in a commensurate decrease in ceded written premium to and assumed from these programs.

Net written premiums for the quarter ended June 30, 2020 decreased by $19.6 million, or 9.0%, to $197.7 million from $217.3 million for the comparable 2019 period. Net written premiums for the six months ended June 30, 2020 decreased by $20.6 million, or 5.0%, to $386.6 million from $407.2 million for the comparable 2019 period. Net earned premiums for the quarter ended June 30, 2020 decreased by $14.5 million, or 7.4%, to $181.9 million from $196.4 million for the comparable 2019 period. Net earned premiums for the six months ended June 30, 2020 decreased by $11.2 million, or 2.8%, to $379.7 million from $390.9 million for the comparable 2019 period. The decreases in both periods are a result of the premium relief as described above.

The pandemic has resulted in fewer cars on the road, resulting in a decrease in frequency, primarily in our private passenger automobile line of business. As a result, for the quarter ended June 30, 2020, loss and loss adjustment expenses incurred decreased by $31.4 million, or 25.7%, to $91.0 million from $122.4 million for the comparable 2019 period. For the six months ended June 30, 2020, loss and loss adjustment expenses incurred decreased by $36.7 million, or 14.8%, to $211.7 million from $248.4 million for the comparable 2019 period. Loss, expense, and combined ratios calculated under U.S. generally accepted accounting principles for the quarter ended June 30, 2020 were 50.0%, 34.9%, and 84.9%, respectively, compared to 62.3%, 31.0%, and 93.3%, respectively, for the comparable 2019 period. Loss, expense, and combined ratios calculated under U.S. generally accepted accounting principles for the six months ended June 30, 2020 were 55.7%, 33.3%, and 89.0%, respectively, compared to 63.5%, 31.0%, and 94.5%, respectively, for the comparable 2019 period. Total prior year favorable development included in the pre-tax results for the quarter ended June 30, 2020 was $9.7 million compared to $10.4 million for the comparable 2019 period. Total prior year favorable development included in the pre-tax results for the six months ended June 30, 2020 was $19.3 million compared to $22.3 million for the comparable 2019 period.

The increase in the expense ratios in the respective periods is partially driven by costs associated with various system modernization in our claims, billing and underwriting areas, a reduction in certain expense allowances offered under the Servicing Carrier program that have decreased with the related written premium as noted above and an increase in contingent commission expense. Furthermore, the loss, expense and combined ratios in both periods reflect a lower earned premium base in their respective ratio calculations due to the premium relief efforts noted above.

Net investment income for the quarter ended June 30, 2020 decreased by $0.7 million, or 6.2%, to $9.9 million from $10.6 million for the comparable 2019 period. Net investment income for the six months ended June 30, 2020 decreased by $1.7 million, or 7.6%, to $20.6 million from $22.3 million for the comparable 2019 period. The decrease in net investment income for the quarter ended June 30, 2020 is a result of lower yields on our fixed maturities, specifically bank loans, as well as a decrease in interest income on our partnership investments. The decrease for the six months ended June 30, 2020 is a result of fixed maturity amortization resulting from prepayment activity on certain residential mortgage-backed securities. Net effective annualized yield on the investment portfolio for the quarter ended June 30, 2020 was 2.9% compared to 3.2% for the comparable 2019 period. Net effective annualized yield on the investment portfolio for the six months ended June 30, 2020 was 3.0% compared to 3.3% for the comparable 2019 period. Our duration on fixed maturities was 3.3 years at June 30, 2020 and December 31, 2019.

On August 5, 2020, our Board of Directors approved a $0.90 per share quarterly cash dividend on its issued and outstanding common stock payable on September 15, 2020 to shareholders of record at the close of business on September 1, 2020.

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 non-GAAP operating income per diluted share consist of our GAAP net income adjusted by the net realized (losses) gains on investments, net impairment losses on investments, change in net unrealized gains on equity investments, credit loss expense and taxes related thereto. For the quarter ended June 30, 2020, an increase of $16.8 million for the change in unrealized gains on equity securities was recognized within income before income taxes, compared to $3.8 million recognized in the comparable 2019 period. For the six months ended June 30, 2020, a decrease of $13.2 million for the change in unrealized gains on equity securities was recognized in income before income taxes, compared to an increase of $15.6 million recognized in the comparable 2019 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, 2019 Form 10-K with the SEC on February 28, 2020 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; * 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; * The effects of emerging claim and coverage issues on the Company's business are uncertain, and court decisions or legislative or regulatory changes that take place after the Company issues its policies, including those taken in response to COVID-19 (such as requiring insurers to cover business interruption claims irrespective of terms or other conditions included in the policies that would otherwise preclude coverage), can result in an unexpected increase in the number of claims and have a material adverse impact on the Company's results of operations; * The impact of COVID-19 and related risks, including on the Company's employees, agents or other key partners, could materially affect the Company's results of operations, financial position and/or liquidity; 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, 2019 filed with the SEC on February 28, 2020.

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,

2020 2019

(Unaudited)

Assets

Investments:

Fixed maturities, available for sale, at fairvalue (amortized cost: $1,168,666 and $ 1,219,714 $ 1,228,040 $1,192,357, allowance for expected creditlosses of $2,471 at June 30, 2020)

Equity securities, at fair value (cost: 178,347 177,637 $164,991 and $151,121)

Other invested assets 35,526 37,278

Total investments 1,433,587 1,442,955

Cash and cash equivalents 44,757 44,407

Accounts receivable, net of allowance for 199,356 193,369 credit losses of $914 at June 30, 2020

Receivable for securities sold 2,523 1,784

Accrued investment income 8,000 8,404

Taxes recoverable 411 1,003

Receivable from reinsurers related to paid loss 16,018 11,319 and loss adjustment expenses

Receivable from reinsurers related to unpaid 116,378 122,372 loss and loss adjustment expenses

Ceded unearned premiums 26,073 35,182

Deferred policy acquisition costs 77,350 74,287

Equity and deposits in pools 34,118 29,791

Operating lease right-of-use-assets 33,092 33,998

Other assets 27,251 23,798

Total assets $ 2,018,914 $ 2,022,669



Liabilities

Loss and loss adjustment expense reserves $ 599,747 $ 610,566

Unearned premium reserves 440,007 442,219

Accounts payable and accrued liabilities 60,518 75,016

Payable for securities purchased 7,451 6,377

Payable to reinsurers 11,794 12,911

Deferred income taxes 4,413 5,717

Debt 30,000 -

Operating lease liabilities 33,092 33,998

Other liabilities 14,914 27,459

Total liabilities 1,201,936 1,214,263





Shareholders' equity

Common stock: $0.01 par value; 30,000,000shares authorized; 17,724,866 and 17,662,779 177 177 shares issued

Additional paid-in capital 206,130 202,321

Accumulated other comprehensive income, net of 42,302 28,190 taxes

Retained earnings 674,349 661,553

Treasury stock, at cost: 2,581,414 and (105,980 ) (83,835 )2,279,570 shares

Total shareholders' equity 816,978 808,406

Total liabilities and shareholders' equity $ 2,018,914 $ 2,022,669

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,

2020 2019 2020 2019



Net earned $ 181,902 $ 196,426 $ 379,797 $ 390,917 premiums

Netinvestment 9,916 10,574 20,626 22,325 income

(Losses)earnings from (3,449 ) 735 (2,110 ) 1,570 partnershipinvestments

Net realized(losses) (721 ) 483 (1,352 ) 319 gains oninvestments

Change in netunrealizedgains on 16,828 3,754 (13,160 ) 15,555 equityinvestments

Netimpairmentlosses on - (54 ) - (274 )investments(a)

Credit loss 39 - (2,471 ) - expense

Finance andother service 3,255 4,084 7,484 8,169 income

Total revenue 207,770 216,002 388,814 438,581



Losses andloss 90,974 122,393 211,720 248,420 adjustmentexpenses

Underwriting,operating and 63,514 60,908 126,596 121,342 relatedexpenses

Interest 130 23 177 45 expense

Total 154,618 183,324 338,493 369,807 expenses



Income before 53,152 32,678 50,321 68,774 income taxes

Income tax 10,658 6,744 9,817 12,894 expense

Net income $ 42,494 $ 25,934 $ 40,504 $ 55,880



Earnings perweighted averagecommon share:

Basic $ 2.80 $ 1.70 $ 2.66 $ 3.66

Diluted $ 2.78 $ 1.68 $ 2.64 $ 3.63



Cashdividends $ 0.90 $ 0.80 $ 1.80 $ 1.60 paid percommon share



Number ofshares usedin computing earnings pershare:

Basic 15,120,039 15,220,822 15,175,409 15,181,034

Diluted 15,237,295 15,346,234 15,292,186 15,326,121



(a) No portion of the other-than-temporary impairments recognized in the periodindicated were included in Other Comprehensive Income for the period ended June30, 2019.



Reconciliation of Net Income to Non-GAAP Operating Income



Net income $ 42,494 $ 25,934 $ 40,504 $ 55,880

Exclusionsfrom net income:

Net realizedlosses 721 (483 ) 1,352 (319 )(gains) oninvestments

Change in netunrealizedgains on (16,828 ) (3,754 ) 13,160 (15,555 )equityinvestments

Netimpairment - 54 - 274 losses oninvestments

Credit loss (39 ) - 2,471 - expense

Income taxexpense(benefit) on 3,391 878 (3,566 ) 3,276 exclusionsfrom netincome

Non-GAAPoperating $ 29,739 $ 22,629 $ 53,921 $ 43,556 income



Net incomeper diluted $ 2.78 $ 1.68 $ 2.64 $ 3.63 share

Exclusionsfrom net income:

Net realizedlosses 0.05 (0.03 ) 0.09 (0.02 )(gains) oninvestments

Change in netunrealizedgains on (1.10 ) (0.24 ) 0.86 (1.01 )equityinvestments

Netimpairment - - - 0.02 losses oninvestments

Credit loss - - 0.16 - expense

Income taxexpense(benefit) on 0.22 0.06 (0.23 ) 0.21 exclusionsfrom netincome

Non-GAAPoperating $ 1.95 $ 1.47 $ 3.52 $ 2.83 income perdiluted share

Safety Insurance Group, Inc. and Subsidiaries

Additional Premium Information

(Unaudited)

(Dollars in thousands)



Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Written Premiums

Direct $ 205,301 $ 233,595 $ 402,647 $ 436,982

Assumed 7,128 8,175 15,106 16,420

Ceded (14,693 ) (24,485 ) (31,059 ) (46,179 )

Net written premiums $ 197,736 $ 217,285 $ 386,694 $ 407,223



Earned Premiums

Direct $ 192,945 $ 210,334 $ 403,096 $ 417,642

Assumed 7,767 8,213 16,869 17,528

Ceded (18,810 ) (22,121 ) (40,168 ) (44,253 )

Net earned premiums $ 181,902 $ 196,426 $ 379,797 $ 390,917

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CONTACT: Safety Insurance Group, Inc. Office of Investor Relations 877-951-2522 InvestorRelations@SafetyInsurance.com