Massachusetts auto insurer Safety Insurance Group
What analysts say:
- Buy, sell, or waffle? Just three analysts cover Safety Insurance, and apparently there's safety in numbers: All three say hold.
- Revenues. Revenues are essentially expected to stay flat at $165.8 million.
- Earnings. Profits, though, are anticipated to fall 12% to $1.48 per share, as Massachusetts' mandated rate reduction kicks in.
What management says:
With one of the most tightly regulated insurance markets in the country, it's not surprising that Massachusetts is the least profitable state for insurers in the Northeast. Over the past two years, the state has mandated premium decreases of 1.7% and 8.6%, respectively. Last year, which just happened to be an election year for the state attorney general, said official recommended a whopping 18.2% rate cut, while the Automobile Insurers Bureau recommended a more modest 3.7%. Using the wisdom of Solomon, apparently, the State Rating Bureau roughly split the difference, mandating an 11.7% rate cut.
Since Safety Insurance doesn't provide guidance, analysts are left to their own devices to divine how the insurer will do. That's usually led to earnings surprises. For nine straight quarters, Safety Insurance has surprised to the upside by an average $0.36 per share each time.
What management does:
While the Motley Fool Stock Advisor pick is the second-largest passenger auto insurer in Massachusetts, it also writes commercial auto policies, homeowners' insurance, and dwelling fire, umbrella, and business owners' policies. As regulated as the state is, the niche Safety Insurance has carved for itself allows the company to earn an average 27.5% return on equity and a steadily rising return on assets, which stood at 8% in 2005. More importantly for insurers, perhaps, is the company's combined ratio -- the sum of the loss and expense ratios. There, Safety Insurance has landed consistently and significantly below the industry average, at 81% over the last nine months.
|
06/05 |
09/05 |
12/05 |
03/06 |
06/06 |
|
|---|---|---|---|---|---|
|
Operating |
17.8% |
20.7% |
24.1% |
25.4% |
25.2% |
|
Net |
12.2% |
14.2% |
16.5% |
17.4% |
17.1% |
One Fool says:
The mandated rate decrease will hurt all insurers in the state. The cyclical Massachusetts insurance market is coming off its peak years, which has allowed the state to decrease rates. It has studied the insurers' profitability and mandated cuts accordingly. When the state goes too far, as it invariably will to appease the electorate, insurers' profits will decline, and rates will once again be allowed to rise commensurate with the risk covered.
Safety Insurance has one of the lowest price-to-earnings ratios of any insurer in the state, and one of the best combined ratios. Those strengths should help it stave off the worst effects of the state's hefty mandatory rate cut.
However, underwriting and operating expenses have been rising at the insurer. They amounted to 27.5% of revenues last year, up more than 8% from the year before. Safety Insurance will need to keep those in line as premiums take a hit. Still, I foresee the company surprising analysts and the markets once again.
Competitors:
-
Commerce Group
(NYSE:CGI) -
Berkshire Hathaway
(NYSE:BRK-A) -
Allstate
(NYSE:ALL) -
Progressive
(NYSE:PGR)
Related Foolishness:
- Insurance Industry Basics: Combined Ratio
- Insurance Industry Basics: Premiums
- Insurance Industry Basics: Float
- Foolish Fundamentals: Margins
Safety Insurance Group has earned a five-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the new stock-rating service by joining today. It's free!
Tom Gardner recommended Safety Insurance to Stock Advisor subscribers. Check out all the market-beating recommendations with a 30-day trial subscription. Berkshire Hathaway is an Inside Value recommendation.
Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
