Price Increases Boost Safety Insurance Group's Second-Quarter Earnings

By Markets Fool.com

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Image source: Getty Images.

Safety Insurance Group (NASDAQ: SAFT) saw its net income rise in the second quarter as its results were helped by lower losses and higher premiums per written exposure in its core commercial auto and homeowners lines of insurance.

By the Numbers

Per-Share Metric

Q2 2016

Q2 2015

Earnings

$1.41

($0.07)

Book value

$44.86

$42.82

Combined ratio

92.1%

109.2%

Data source: Company investor relations.

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What happened this quarter?

  • Having sought and received approval for rate increases, Safety's average premium per written exposure jumped 7.4% year over year in commercial auto and by 8.4% in homeowners insurance. (In November 2015, Safety received approval to increase rates on homeowners policies by 9.1% and 7.9% in Massachusetts and New Hampshire, respectively.)
  • The second quarter 2016 lapped dismal second-quarter 2015 performance, which included outsize losses due to severe winter weather in Safety's core market of Massachusetts.
  • Thanks to rate increases and low insurance losses, Safety reported a second-quarter combined ratio of just 92.1%, down from 109.2% last year. The combined ratio reveals the profitability of a company's underwriting. At 92.1%, Safety spent roughly $0.92 of every dollar earned in premiums on insurance losses and expenses. A lower combined ratio is better. (This was Safety's best quarter for underwriting since the second quarter of 2014.)
  • The company benefited from prior-year favorable developments, boosting pre-tax earnings by $11.8 million during the quarter. An insurer that consistently reports favorable prior-year developments is an insurer that is adequately accounting for risk at the time policies are written -- take it as a sign of conservatism in accounting and underwriting.

Looking ahead

All signs seem to suggest that Safety Insurance Group is poised to recover well from extraordinary losses from record snowfall in many New England communities last year.

Going forward, the company will benefit from approved rate increases that take effect later this year. Subsequent to the end of the second quarter, in July, Safety had approval to increase private passenger auto rates in Massachusetts by 5.8%. Later this year, in December, rates on New Hampshire homeowners and private passenger automobile policies are set to increase by 4.4% and 4.1%, respectively.

Interest rates are also a key earnings driver. The company noted in its release that its investment portfolio yielded just 3.2%, generating just $9.6 million in investment income for the company during the second quarter. Though Safety shareholders don't need higher rates to do well -- Safety's excellent underwriting does the heavy lifting -- rising interest rates could be a boon for this under-the-radar insurance company.

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Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Safety Insurance Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.