Safety Insurance: Strong Player in Massachusetts Auto Insurance Market

One of the best combinations you can get in value investing is low P/E, Low price per book value and a low price to free cash flow. But the most valuable criteria that Ben Graham used was an existence of moat around the company. In other words, high barriers to entry in that business.

Safety Insurance (SAFT) is one such company, trading at 5.6 P/E , market cap of $557mn, book value of $530mn . It solely caters to the Massachusetts insurance market .It was the second largest private passenger automobile carrier, capturing an approximate 11.2% share of the Massachusetts private passenger automobile insurance market, and the third largest commercial automobile carrier, with an 11.8% share of the Massachusetts commercial automobile insurance market in 2006, according to statistics compiled by Commonwealth Automobile Reinsurers [CAR].

Massachusetts - a highly regulated Insurance market: Private passenger automobile insurance is heavily regulated in Massachusetts. In many respects, this market in Massachusetts is unique, in comparison to other states. This is due to a number of factors, including unusual regulatory conditions, the market dominance of domestic companies, the relative absence of large national companies, and the heavy reliance on independent insurance agents as the market’s principal distribution channel.

The principal factors that generally distinguish the Massachusetts private passenger automobile insurance market from that market in other states are as follows:

Compulsory insurance: With very few exceptions, CAR, which is the residual market program for automobile insurance in Massachusetts, may not refuse to cover an applicant. Servicing carriers of CAR, such as Safety Insurance, may not refuse to issue a policy to an applicant based on the applicant’s driving record or other underwriting criteria commonly used by insurers in other states to decide whether to insure a motorist.

Standard Policy Form : The policy form that is used by all automobile insurers is developed by the Commissioner and must be used by all companies. The policy consists of several mandatory coverages: no fault coverage (i.e., “personal injury protection”); minimum limits of bodily injury and property damage liability coverage; and coverage for accidents caused by uninsured or hit-and-run motorists.

In addition to these standard mandatory coverages, several additional optional coverages (such as higher bodily injury and property damage liability coverages, and collision and comprehensive coverages) must be offered. No carrier may offer any other type of coverage or deductible or use any form of policy endorsement without the prior approval of the Commissioner, which can be granted only after a formal hearing.

Premium Rates are “fixed and established” by the Commissioner: In Massachusetts, automobile insurance companies are obligated to use premium rates that are determined on an annual basis by the Commissioner. As a matter of law, the Commissioner’s rate must be adequate, which the Massachusetts courts have ruled requires that the rate be sufficient to allow insurers the opportunity to earn a reasonable rate of return.

The rate setting process involves a lengthy and complex administrative proceeding in which the Commissioner considers historic information related to claim costs as well as outside factors affecting insurance costs.Different data is presented for the Commissioner’s consideration by the Automobile Insurers Bureau (on behalf of the insurance industry), the State Rating Bureau, and the Massachusetts Attorney General.

At the close of this proceeding, the Commissioner sets a premium rate for each of several classes of drivers, many different types of vehicles, and thirty-three different geographic territories within Massachusetts. The Commissioner usually sets the rate on or before December 15th of the preceding year.

Safe Driver Insurance Plan: In other states, insurance companies are free to design their own systems for rewarding drivers with superior driving records by providing lower prices to such drivers and charging higher prices for drivers who have caused claims or who have poor driving records.

In Massachusetts, all companies must use the system the Commissioner has developed. Known as the Safe Driver Insurance Plan, the system was revised effective January 1, 2006 and is based on points assessed for at-fault accidents and conviction of certain traffic violations.

The Plan consists of a series of points ranging from 0 points to 45 points, with each point above 0 points imposing surcharges on motorists. The revised Plan offers credits to motorists with two excellent driver awards, an Excellent Driver Discount Plus (Credit code 99) for a driver with no accidents or violations in the preceding 6 years, and an Excellent Driver Discount (Credit code 98) for a driver with no accidents or violations in the preceding 5 years.

Each driver is assigned points by the state. The Safe Driver Insurance Plan system is revenue neutral, which means that the aggregate cost of the discounts must be funded by the aggregate income of the surcharges.

Price competition is limited: An insurer may charge less than the Commissioner’s fixed and established premium rates by offering discounts to all members of a particular class of motorists, but only if the discount is approved by the Commissioner after a public hearing.

During the years 1996 to 2001, most insurance companies offered rate discounts for drivers with the best driving records. Safety Insurance offered competitively priced discounts during the 1996 to 2001 time period, but like most of their competitors, they have discontinued using these discounts since 2001. Only two companies offered such discounts in 2005, further reduced to one company in 2006.

Dominance of Domestic Companies: Many large national private passenger automobile insurance writers, such as State Farm, Allstate (ALL), Progressive (PGR), Berkshire Hathaway(BRK-A), and Farmers, write very little or no private passenger automobile insurance business in Massachusetts. Safety insurance companies actively participate in major industry policy-making organizations in Massachusetts, such as the Automobile Insurers Bureau and CAR, where their employees serve on a number of committees.

Independent agent based sales system: According to A.M.Best 40% of the nation's insurance premiums were written by agents, but in Massachussets this number was as high as 78.2%.

SAFT 1-year chart

Comments

[bill parker:]

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2008 Jul 24 04:44 AM

[jonathan030786:]

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jonathan
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Great Auto Insurance-Great Auto Insurance

Mar 17 01:02 PM