Compass Point analyst Ken Billingsley elevated Safety Insurance Group Inc.'s shares to "neutral" after the company weathered a significant hit to earnings due to an adverse arbitration ruling and still maintained positive earnings and its high dividend.
Safety Insurance's long history of reserve releases should allow the company to maintain an elevated trading multiple versus the return it generates, Billingsley wrote.
On Jan. 8, an arbitration panel ruled that the reinsurer would be responsible for only $9.2 million of the $20.9 million the insurer believed it was due. The company had not reserved for a reinsurance recoverable related to winter events in 2015.
The remaining $11.7 million was written as a loss for the fourth quarter of 2017, representing a 6% increase to the loss ratio. However, despite the unexpected charge to 2015, the prior-year reserve release in the quarter still represented $10.6 million, or 5.4% to the loss ratio, Billingsley wrote.
The analyst believes the company has between $138 million and $156 million of redundant reserves, which should allow it to comfortably release reserves for the next three to four years at its current pace, he wrote.
The analyst's price target is $70. His EPS predictions are $4.50 and $4.65 for 2018 and 2019, respectively.
