Safety Insurance Group's Solid Underwriting Profit Boosts Earnings

Extending its momentum from the fourth quarter of 2018, property and casualty insurer Safety Insurance Group (SAFT +0.00%) generated a substantial underwriting profit in Q1, which translated into nearly triple the net income of a year ago. Even excluding unrealized gains in the investment portfolio, earnings per share nearly doubled.

The main reason for the dramatic rise in profitability? Property-casualty insurers like Safety are rather dependent on weather. In other words, bad weather events like winter storms and hurricanes can lead to big losses. While the first quarter is a potential trouble spot for winter weather activity, this year's Q1 saw significantly milder weather than the year-ago period.

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Safety Insurance Group's first-quarter results: By the numbers

EPS = earnings per share. Data sources: Safety Insurance Group and author's own calculations.

What happened with Safety Insurance Group this quarter?

• First, it's important to note the substantial difference between Safety's EPS and non-GAAP operating income per share in the table. The EPS figure of $1.95 per share includes unrealized gains on the equity investments in Safety's portfolio, while the non-GAAP figure of $1.36 does not. Since unrealized gains aren't usable earnings, the latter figure is the more important for investors to pay attention to.
• Losses decreased substantially in the first quarter compared to last year. The $126 million in loss and loss-adjustment expenses represented an 8.4% decline over the past year. This is why Safety ran an underwriting profit this year, and why net income and EPS growth were so strong. This loss figure translates into 64.8% of net earned premiums and other business expenses were 31.1%, for a total combined ratio of 95.9%. In other words, 4.1% of the net premium income Safety earned was profit, in sharp contrast to last year's first quarter, when the company experienced an underwriting loss equal to 3.4% of premiums. In the insurance business, seemingly small changes in the combined ratio can result in big swings in profitability.
• Safety's investment portfolio generated $11.8 million during Q1. This is 11.6% more than in the first quarter a year ago, and is a result of both the higher amount of investable assets ($1.36 billion vs. $1.33 billion) as well as the generally higher yields paid by Safety's fixed-income investments.
• Direct written premiums for the first quarter were $203.4 million, a slight 0.2% decrease over the prior-year period.
• Safety decided to maintain its $0.80 quarterly dividend, at least for the first quarter. This translates to a 3.4% annualized yield at the current stock price.

Looking forward

The first quarter is generally a difficult one for Safety, as winter weather can wreak havoc on the company's bottom line (especially since Safety primarily writes auto insurance policies in Massachusetts).

That said, the second and third quarters are generally the company's most profitable. For context, Safety's combined ratios in the second and third quarters of 2018 were 90% and 90.9%, respectively, which is a significantly higher underwriting profit than it just earned.

The most concerning thing for investors is the decline in written premiums from a year ago. If Safety can manage to increase its premium volume and put up midyear profitability numbers similar to what it produced in 2018, the rest of 2019 could be a good year for Safety and its investors.