Safety Insurance Group Drives on to 55% Higher Earnings

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The winter storms that led to uncharacteristically poor results for Safety Insurance Group's (SAFT -0.45%) in 2015 are firmly in the rearview mirror in the third quarter of 2016. The company recently reported third-quarter earnings of $18.6 million, a 55% increase over the year-ago period, helped by broad rate increases and an improved loss ratio.

Safety Insurance Group results: The raw numbers

Data source: Safety Insurance Group investor relations.

What happened this quarter?

• Rate increases continue to play a factor in rising profits. Average written premium per exposure in its homeowners and commercial auto insurance lines increased 8% and 7% in the first nine months of 2016, respectively.
• In private passenger insurance, which made up about 60% of its direct written premiums in 2015, average written premiums per exposure grew 2.7% compared to the first nine months of 2015. A previously approved 5.8% increase in private passenger rates in Massachusetts took effect on July 15, 2016, which should boost profitability going forward.
• Net investment income fell 10% from the year-ago period to $9 million this quarter due to lower yields on the company's investment portfolio. Safety, like all insurers, generates profits by investing the float generated by collecting premiums in advance of the payment of claims.
• The company experienced $11.7 million of pre-tax prior-year favorable developments. Insurers which repeatedly and consistently report prior-year favorable developments are adequately reserving for risk. Take it as a sign that Safety has historically employed conservative loss assumptions in its financial reporting.
• Safety's combined ratio -- losses and expenses divided by earned premiums -- fell to 96.1% in the third quarter, down from 97.8% during the year-ago period. Insurers generate underwriting profits when combined ratios are less than 100%, and thus a lower combined ratio is better. Consistent underwriting profits are the hallmark of an insurance company that cares deeply about adequately pricing risk. Safety Insurance Group's historical results suggest it is one such insurer.

Looking forward

Safety Insurance Group shareholders can look forward to more rate increases in the fourth quarter. In New Hampshire, rates for private passenger and homeowners insurance policies will take effect on Dec. 1, 2016. In addition, the company will continue to benefit from the rate increase on private passenger insurance in Massachusetts which became effective in the third quarter.

Fluctuations in interest rates are as important to Safety Insurance as they are any insurer. The company's annualized yield on its investment portfolio fell to 2.9% this quarter, down from 3.3% in the year-ago period, and from 3.6% in the third quarter of 2014.

Should rates increase, the impact will quickly flow through to its earnings. Safety reported that the average duration of its investment portfolio sits at just four years, and thus proceeds from maturing investments can be quickly reinvested into higher-yielding investments should rates rise.

For now, though, Safety shareholders can enjoy an above-average dividend yield of about 4.2%. The company will pay a $0.70 quarterly dividend to shareholders on Dec. 15.