Safety Insurance Group Drives Through Its First Quarter With an Underwriting Profit

Safety Insurance Group (SAFT -1.79%) reported a first-quarter 2017 profit of $12 million, helped by an underwriting profit and modest realized gains on its investment portfolio.

Safety's first quarter by the numbers

Data source: Safety Insurance Group investor relations. "ppt" = percentage points; EPS = earnings per share.

What happened this quarter?

In an industry where boring is better -- exciting times for insurers are usually bad news for investors -- Safety's mature property and casualty business only rarely reports any surprises. Here's what investors should know about its first-quarter earnings report:

• Rate increases aren't providing the easy lift to premiums and profits experienced in prior periods. The company reported that average written premiums per exposure grew just 4.1% and 4.3% year over year in commercial auto and homeowners insurance, respectively. The tailwind of rising premiums from outsize rate increases after a disastrous 2015 snowfall are mostly in the rearview mirror.
• Safety generated an underwriting profit, recording a combined ratio of 99.2%. In the same period last year, Safety reported a combined ratio of 98%. (Lower is better.) Since it is based in Massachusetts, Safety's insurance results are greatly affected by weather in the first quarter of the year. Boston experienced snowfall slightly higher than normal in the first quarter, compared to historical precipitation, but not in large enough amounts to threaten Safety's underwriting record.
• Conservatism in the past is rewarding shareholders today. The company recorded $10.4 million in prior-year favorable developments in the first quarter. Ideally, all insurers would report favorable developments with regularity, as it indicates that the insurer is using conservative assumptions when making underwriting decisions. Safety investors have become almost spoiled by the regularity with which it reports positive developments, a staple of its quarterly earnings reports for several years running.
• Net investment income declined slightly, as yields on its investment portfolio fell to 2.9%, down from 3.2% a year ago. As the company invests in short-term bonds, investment income is most sensitive to rate changes on the short end of the yield curve. Safety shareholders should root for rates to rise, which would provide a boost to its profitability.

Image source: Getty Images.

Looking ahead

Safety Insurance writes several lines of insurance, but car insurance remains its staple. Auto insurance made up roughly 73% of its direct written premiums in 2016, with homeowners insurance making up most of the remainder.

For this reason, its profitability will largely follow that of car insurers in New England and the nation as a whole. Recent reports by auto insurance companies have been a mixed bag, as in many cases, increased rates charged to customers aren't keeping up with increased losses. Distracted driving and an increase in the number of miles logged by the average driver in recent years have plagued many insurers.

This hasn't been the case at Safety, where a conservative underwriting culture is evident in its financials. Investors simply need to refer to its consistent underwriting profits and favorable prior-year developments. The company also uses less leverage than larger, national auto insurers -- yet another sign of its preference toward profitable growth, rather than growth at all costs. That said, conservatism does come at the cost of premium growth; net written premiums grew at a rate of just 2.8% in the past year.

The company can now look forward to two quarters with historically higher profitability, as warmer spring and summer weather usually leads to a seasonally low period for insurance losses.