Safety Insurance Group Inc. (SAFT) Waving Not Drowing
Ten months ago I recommended SAFT. Its share price is down since then, but far from out. While I prefer absolute returns my sense of well being dictates I must look at 2008 through a relative lens. Relatively SAFT was a great performer, beating the pants off the S&P500 by 22%; SAFT is down 20% over the last ten months while the S&P500 has fallen 42%.
In a tough 2008, Safety managed to increase book value by 5.6% to $37.17. With the current share price of $30.84 representing a discount to book value of 21%, P/B is 0.83. As the graph below shows SAFT has increased book value every quarter.
The dividend yield is now a healthy 5.2% easily covered by earnings and SAFT continues to be profitable.
So is it time to pop the champagne and forget about SAFT until the next dividend payment or could you now find a better place for your money. Well that decision is up to you, but I ask when isn’t it a good time to pop the champagne? Let’s look at some more numbers before deciding whether SAFT is a buy, sell or can’t make up my mind. As the following data shows the trends for SAFT have been down ever since 2006. Earnings are falling, written premiums are falling and their once legendary combined ratio has faltered.
Yes Safety’s insurance business may soon consolidate making the current price a screaming buy, but I don;t like to count on future events, espeically when they are against the current business trends. With bargains abounding is SAFT currently a buy?
Here is my range of estimated returns for SAFT for one to three years. I have assumed book value grows at 3% a year, almost half of what it did in its worst year year of 2008, and the dividend remains constant at $0.40 a quarter. The probable returns from SAFT appear good, especially considering the limited risk due to the stock price trading below book value. A 5.2% dividend which represents a mere 37% if earnings looks safe and an increase in investors appetite for equities should see SAFT once again trade hands at a P/B of 1.3. While there is likely better potential elsewhere SAFT still deserves a spot in my portfolio as it reduces my portfolio risk with attractive probable returns.
Related posts:
MA auto insurance reform.
Compare state specialists (like SAFT) to past state specialists in the auto insurance reform markets of NJ (2003) and SC (1999). State specialists tend to get hammered in changing environments, and usually there’s an unprofitable rate war for several years as the market sorts itself out. SAFT is 100% MA and 80% PPA.
Your projected returns might be optimistic.
SAFT has done better than other insurers because of their investment portfolio (which you haven’t mentioned), and frankly, a PPA monoline typically has less reason to get “inventive” with their investments. No “value investing” writeup of an insurer is complete without a treatment of their investing philosophy.
Thanks for your insightful comments. I agree with all of the SAFT comments. An 80%+ return over three years is clearly optimistic, while an 8% return in a year seems conservative to me. I am not a value investor and this is not a value investing write-up. It was a quick write-up; however, you are correct that I neglected to mention several key points. Thanks for bringing them up.
As of December 31, 2008, our portfolio of fixed maturity investments was comprised entirely of investment grade securities. We continue to hold no subprime mortgage debt securities. All of our mortgage-backed securities are either U.S. Government or Agency guaranteed or are rated Aaa/AAA.
Safety’s investment yield from Q4 2008 to Q1 2005; 4.3%, 4.4%, 4.3%, 4.4%, 4.4%, 4.4%, 4.5%, 4.5%, 4.4%, 4.4%, 4.3%, 4.2%, 3.8%, 3.7%, 3.7%, 3.7% (from my spreadsheet, figures not double checked)
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