Safety Insurance Group (NASDAQ:SAFT) reported net income of $12 million in the fourth quarter, a 17% increase from the year-ago period. Higher earnings were the result of lower insurance losses in what is normally a seasonally poor period for the company.

Safety's Q4 by the numbers


Q4 2016

Q4 2015

Change (YOY)

Combined ratio




Net income

$12 million

$10.3 million


Diluted earnings per share




Book value per share




Data source: company investor relations.

What happened this quarter?

  • Rate increases took effect in New Hampshire, where homeowner and private auto insurance rates were increased 4.4% and 4.1%, respectively, effective Dec. 1. A previously approved 3.6% increase in rates on Massachusetts homeowner policies took effect Nov. 1.
  • For the full year, average written premiums per exposure increased 7.5% and 7.4% in commercial auto and homeowners lines, respectively. Rate increases in private passenger insurance (which make up about 60% of written premiums) led to a 3.1% increase in average written premiums per exposure in 2016.

  • Rising interest rates were to blame for a sequential decline in book value per share. At quarter's end, book value stood at $44.27 per share, down from $45.36 per share as of Sept. 30. Safety's investment portfolio declined in value as bond yields rocketed during the fourth quarter. Unrealized losses on its bond portfolio flow through other comprehensive income rather than net income.

  • The company's fourth-quarter underwriting profit is an uncommon sight. In the past six years, Safety has earned an underwriting profit in the fourth quarter only twice (2015 and 2016). Unusually warm and dry weather in core New England markets probably contributed to lower losses and its sub-100 combined ratio.
Bar chart of Safety Insurance Group's combined ratio

Image source: author.

Looking ahead

The majority of meaningful rate increases have probably already played through into Safety's earned premiums and profit. Generally speaking, rate increases in Massachusetts are the most notable, given that any increases in New Hampshire or Maine are likely to be immaterial because of Safety's smaller footprint outside Massachusetts. (Maine's contribution is a mere rounding error; New Hampshire made up about 3% of direct written premiums in the first nine months of 2016).

But while the largest price increases may be in the rearview mirror, Safety Insurance should soon start to see the benefits of rising interest rates. The company reported that its bond portfolio yielded about 3.2% and had an average duration (a rough measure of interest-rate sensitivity) of 4.3 years. With a total value of about $1.15 billion at the end of the fourth quarter, Safety's bond portfolio can contribute meaningfully to earnings, but only if bond yields rise higher and, more importantly, stay there. 

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