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Safety Insurance Group Earnings: Low Losses Mean Larger Dividends

Safety Insurance Group (NASDAQ: SAFT) reported second-quarter net income of $21.1 million, a 1% decline from the year-ago period. Slightly lower losses on insurance policies were offset by an increase in operating expenses and a slight decline in combined investment income.

Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Combined ratio

92.3%

92.1%

(0.2 ppt)

Net income

21.1 million

21.4 million

(1%)

Diluted EPS

$1.39

$1.41

(1%)

Book value per share

$45.59

$44.86

1.6%

Data source: Safety Insurance Group.

What happened this quarter?

  • Net earned premiums grew to $192.8 million, up approximately 2.9% from $187.4 million during the year-ago period. Increases in premiums are largely the result of low single-digit rate increases on homeowners, private passenger, and commercial auto insurance policies. A 4.1% increase in private passenger premiums per written exposure was most meaningful, given that personal auto insurance made up approximately 58% of direct written premiums last year.
  • Safety Insurance's exemplary underwriting record showed up again in the second quarter, as the company reported a combined ratio of 92.3% compared to 92.1% in the year-ago period. Insurance companies that regularly show combined ratios of less than 100% achieve the "holy grail" in the insurance industry, as most property and casualty insurers lose money on their underwriting with the goal of making it up with investment profits. Amazingly, Safety incurred only $0.61 of losses and loss adjustment expenses per dollar of premiums earned during the quarter.
  • Higher interest rates have yet to play through in its investment income. The company earned $9.7 million in investment income this quarter, compared to $9.6 million in the second quarter of 2016. Safety reports that its average yield on its investment portfolio fell slightly to 3.1% from 3.2% a year ago.

Image source: Getty Images.

Looking ahead

Safety Insurance Group increased its quarterly dividend from $0.70 per share to $0.80 per share starting in the third quarter of 2017, the first dividend increase in three years.

It's important to remember that Safety Insurance is a very seasonal business. Profits are typically elevated in the second and third calendar quarters, as spring and summer weather brings fewer car and homeowners insurance claims. The first and fourth quarters typically bring elevated losses, due in no small part to snow and ice accumulation in its core New England markets (mostly Massachusetts).

That said, Safety Insurance Group's underwriting record suggests that it's a very capable underwriter and risk manager that can deliver underwriting profits over the long haul, not just in its seasonally best periods.

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