A blast from the past took a bite out of Safety Insurance Group's (NASDAQ:SAFT) fourth-quarter earnings. Insurance losses increased as the company made a downward revision to its expectations for how much it would collect from reinsurance relating to snowstorms in 2015.

Safety Insurance's fourth quarter: The raw numbers

Metric

Q4 2017

Q4 2016

Year-Over-Year Change

Combined ratio

101.6%

98.1% 3.5 ppt

Net income

$11.3 million

$12.0 million (5.4%)

Diluted EPS

$0.72

$0.79 (6%)

Book value per share

$46.06

$44.27 4%

Data source: Safety Insurance.

What happened this quarter

  • Remember the snowstorms of 2015? They're still playing through in Safety Insurance's earnings today. The company said it will only collect $9.2 million from reinsurance relating to these storms. Safety previously expected $20.9 million in recoveries from reinsurance, so it took an $11.7 million charge in the fourth quarter for the difference. Excluding this charge, Safety's combined ratio would have been roughly 95.6%, 6 percentage points lower than the reported 101.6%.
  • Net written premium inched higher compared to the year-ago period, increasing by $3.6 million, or 2.1%, from the fourth quarter of 2016. Price increases in auto and homeowners insurance appear to be the primary driver of growth in net written premium. 
  • The company earned about $10.4 million of net investment income from its investment portfolio, up slightly from $10.2 million in the year-ago period. The company's effective annualized yield on its investment portfolio was flat, at 3.2%, even as average duration fell to 3.7 years from 4.3 years. Over time, rising interest rates should buoy Safety's investment income as its portfolio is rotated into higher-yielding securities. 
  • Safety reported prior-year favorable development of $10.6 million in the fourth quarter. Prior-year favorable developments occur when an insurance company's loss experience is less than previously estimated. Conservative insurers regularly report prior-year favorable development -- Safety is one such insurer -- while insurers who are too aggressive with their early loss estimates would report adverse developments. The fourth quarter marked the ninth consecutive quarter where prior-year favorable development added $10 million or more to its pre-tax earnings.
Safety Insurance logo

Image source: Safety Insurance.

Looking ahead

Safety operates in just three states -- Massachusetts, New Hampshire, and Maine -- so it was insulated from large hurricane losses that hit larger insurers hard in the third quarter, as well as California wildfires that weighed on other property & casualty insurers in the fourth quarter.

Other than a large snowfall early in the year, Massachusetts has seen relatively warmer weather in the first two months of 2018. That could be a boon in the first quarter, helping Safety Insurance dodge costly weather-related claims in what has historically been one of its seasonally weakest periods for underwriting profit.

Safety Insurance generates all of its profit in the United States, so a lower corporate tax rate could boost its earnings power in 2018. The statutory corporate tax rate fell from 35% to 21%, thanks to the Tax Cut and Jobs Act, but we'll have to see whether it can retain the tax savings for the benefit of shareholders, or whether fierce competition in insurance will force it to pass on the benefit to customers through lower premiums.

Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool recommends Safety Insurance Group. The Motley Fool has a disclosure policy.