The following discussion should be read in conjunction with our accompanying
consolidated financial statements and notes thereto, which appear elsewhere in
this document. In this discussion, all dollar amounts are presented in
thousands, except share and per share data.
The following discussion contains forward-looking statements. We intend
statements which are not historical in nature to be, and are hereby identified
as "forward-looking statements" to be covered by the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. In addition, the Company's
senior management may make forward-looking statements orally to analysts,
investors, the media and others. This safe harbor requires that we specify
important factors that could cause actual results to differ materially from
those contained in forward-looking statements made by or on behalf of us. We
cannot promise that our expectations in such forward-looking statements will
turn out to be correct. Our actual results could be materially different from
and worse than our expectations. See "Forward-Looking Statements" below for
specific important factors that could cause actual results to differ materially
from those contained in forward-looking statements.
Executive Summary and Overview
In this discussion, "Safety" refers to Safety Insurance Group, Inc. and "our
Company," "we," "us" and "our" refer to Safety Insurance Group, Inc. and its
consolidated subsidiaries. Our subsidiaries consist of Safety Insurance Company
("Safety Insurance"), Safety Indemnity Insurance Company ("Safety Indemnity"),
Safety Property and Casualty Insurance Company ("Safety P&C"), Whiteshirts Asset
Management Corporation ("WAMC"), and Whiteshirts Management Corporation, which
is WAMC's holding company.
We are a leading provider of private passenger automobile insurance in
Massachusetts. In addition to private passenger automobile insurance (which
represented 67.2% of our direct written premiums in 2011), we offer a portfolio
of other insurance products, including commercial automobile (10.5% of 2011
direct written premiums), homeowners (18.1% of 2011 direct written premiums),
dwelling fire, umbrella and business owner policies (totaling 4.2% of 2011
direct written premiums). Operating exclusively in Massachusetts and New
Hampshire through our insurance company subsidiaries, Safety Insurance, Safety
Indemnity, and Safety P&C (together referred to as the "Insurance
Subsidiaries"), we have established strong relationships with independent
insurance agents, who numbered 852 in 987 locations throughout Massachusetts and
New Hampshire during 2011. We have used these relationships and our extensive
knowledge of the Massachusetts market to become the third largest private
passenger automobile and the third largest commercial automobile insurance
carrier in Massachusetts, capturing an approximate 11.1% and 11.4% share,
respectively, of the Massachusetts private passenger and commercial automobile
markets in 2011, according to the Commonwealth Automobile Reinsurers ("CAR")
Cession Volume Analysis Report of February 29, 2012, based on automobile
exposures. These statistics total, for each vehicle insured, the number of
months during the year insurance for that vehicle is in effect, to arrive at an
aggregate number of car-months for each insurer; this aggregate number, divided
by 12, equals the insurer's number of car-years, a measure we refer to in this
report as automobile exposures.
The Insurance Subsidiaries began writing private passenger automobile and
homeowners insurance in New Hampshire during 2008, personal umbrella business
during 2009, and commercial automobile business during 2011. During the years
ended December 31, 2011, 2010, and 2009, we wrote $5,750, $2,774, and $978 in
direct written premiums, respectively, and approximately 4,500, 3,300, and 1,250
policies, respectively, in New Hampshire.
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Recent Trends and Events
º •
º The quarter ended December 31, 2011 was marked by two severe weather
events in October, the 2011 Halloween snow storm and the Eastern
Massachusetts flood event, both of which caused extensive property damage. Similar to the prior three quarters of 2011, we experienced
elevated catastrophe claims activity in our personal and commercial
property lines for the quarter ended December 31, 2011. As a result,
we incurred $9,625 of catastrophe losses for the quarter ended
December 31, 2011.
º •
º For the year ended December 31, 2011, we incurred $62,668 million of
catastrophe losses compared to $9,429 and $3,054 for the comparable
2010 and 2009 periods, respectively.
º •
º We increased our Massachusetts homeowners rates 7.5% effective
August 15, 2011.
º • º We increased our Massachusetts private passenger automobile rates 3.9%
effective May 15, 2011 and 0.7% effective March 1, 2012.
º •
º We filed and were approved for a private passenger automobile rate
increase of 3.6% to be effective May 15, 2012.
We define a "catastrophe" as an event that produces pre-tax losses before
reinsurance in excess of $1,000 and involves multiple first-party policyholders,
or an event that produces a number of claims in excess of a preset, per-event
threshold of average claims in a specific area, occurring within a certain
amount of time following the event. Catastrophes are caused by various natural
events including high winds, winter storms, tornadoes, hailstorms, and
hurricanes. The nature and level of catastrophes in any period cannot be
reliably predicted.
Catastrophe losses incurred by the type of event are shown in the following
table.
Years Ended December 31,
Event 2011 2010 2009
Windstorms and hailstorms $ 12,311 $ - $ 3,054
Tornado 16,697 3,300 -
Rainstorms - 6,129 -
Floods 1,380 - -
Icestorms and snowstorms 25,255 - -
Hurricane and tropical storms 7,025 - -
Total losses incurred(1) $ 62,668 $ 9,429 $ 3,054
--------------------------------------------------------------------------------
º (1)
º Total losses incurred includes losses plus defense and cost containment
expenses and excludes adjusting and other claims settlement expenses.
We did not have any recoveries from our primary catastrophe reinsurance
treaties during the three-year period ended December 31, 2011 because there was
no individual catastrophe for which our losses exceeded our retention under the
treaties.
Massachusetts Automobile Insurance Market
We have been subject to extensive regulation in the private passenger
automobile insurance industry in Massachusetts, which represented 67.2% of our
direct written premiums in 2011. Private passenger automobile insurance has been
heavily regulated in Massachusetts. In any respects, the private passenger
automobile insurance market in Massachusetts prior to 2008 was unique, in
comparison to other states. This was 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
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distribution channel. Perhaps most significantly, prior to 2008, the
Massachusetts Commissioner of Insurance fixed and established the premium rates
and the rating plan to be used by all insurance companies doing business in the
private passenger automobile insurance market and the Massachusetts private
passenger automobile insurance residual market mechanism featured a reinsurance
program run by CAR in which companies were assigned producers.
In 2008, the Commissioner issued a series of decisions to introduce what she
termed "managed competition" to Massachusetts automobile insurance premium rates
and in doing so replaced the fixed and established regime with a prior approval
rate review process, governed by regulations that set certain terms and
conditions that insurers must comply with in establishing their rates. The
Commissioner also replaced the former reinsurance program with an assigned risk
plan.
These decisions removed many of the factors that had historically
distinguished the Massachusetts private passenger automobile insurance market
from the market in other states. However, certain of the historically unique
factors have not been eliminated, including compulsory insurance, affinity group
marketing, and the prominence of independent agents.
CAR runs a reinsurance pool for commercial automobile policies and,
beginning January 1, 2006, CAR implemented a Limited Servicing Carrier Program
("LSC") for ceded commercial automobile policies. CAR approved Safety Insurance
and five other servicing carriers through a Request for Proposal to process
ceded commercial automobile business, which was spread equitably among the six
servicing carriers. In 2010 CAR reduced the number of servicing carriers to
four, and CAR has approved Safety Insurance and three other servicing carriers
effective July 1, 2011 to continue the program. Subject to the Commissioner's
review, CAR sets the premium rates for commercial automobile policies reinsured
through CAR and this reinsurance pool can generate an underwriting result that
is a profit or deficit based upon CAR's rate level. This underwriting result is
allocated among every Massachusetts commercial automobile insurance company,
including us, based on a company's commercial automobile voluntary market share.
CAR also runs a reinsurance pool for Taxi, Limousine and Car Service risks
(the "Taxi/Limo Program"). On April 25, 2007, Safety Insurance submitted through
a Request for Proposal a bid to process a portion of the Taxi/Limo Program. CAR
approved Safety Insurance as one of the two servicing carriers for this program
beginning January 1, 2008, and CAR has again approved Safety Insurance beginning
January 1, 2011 as one of the two servicing carriers.
During 2011, we increased our rates approximately 3.7%, and on March 1,
2012, we began using 17 rating tiers which resulted in a rate increase of 0.7%.
Our rates include a 13.0% commission rate for agents. Our direct automobile
written premiums increased by 5.5% in 2011 with increased exposures and average
written premium per exposure in our private passenger and commercial automobile
lines of business.
Statutory Accounting Principles
Our results are reported in accordance with GAAP, which differ from amounts
reported in accordance with statutory accounting principles ("SAP") as
prescribed by insurance regulatory authorities, which in general reflect a
liquidating, rather than going concern concept of accounting. Specifically,
under GAAP:
º •
º Policy acquisition costs such as commissions, premium taxes and other
variable costs incurred in connection with writing new and renewal
business are capitalized and amortized on a pro rata basis over the
period in which the related premiums are earned, rather than expensed
as incurred, as required by SAP.
º •
º Certain assets are included in the consolidated balance sheets
whereas, under SAP, such assets are designated as "nonadmitted
assets," and charged directly against statutory surplus. These
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assets consist primarily of premium receivables that are outstanding
over ninety days, federal deferred tax assets in excess of statutory
limitations, furniture, equipment, leasehold improvements and prepaid
expenses.
º •
º Amounts related to ceded reinsurance are shown gross of ceded unearned
premiums and reinsurance recoverables, rather than netted against
unearned premium reserves and loss and loss adjustment expense
reserves, respectively, as required by SAP.
º •
º Fixed maturities securities, which are classified as
available-for-sale, are reported at current fair values, rather than at amortized cost, or the lower of amortized cost or market, depending
on the specific type of security, as required by SAP.
º •
º The differing treatment of income and expense items results in a
corresponding difference in federal income tax expense. Changes in deferred income taxes are reflected as an item of income tax benefit
or expense, rather than recorded directly to surplus as regards
policyholders, as required by SAP. Admittance testing may result in a
charge to unassigned surplus for non-admitted portions of deferred tax
assets. Under GAAP reporting, a valuation allowance may be recorded
against the deferred tax asset and reflected as an expense.
Insurance Ratios
The property and casualty insurance industry uses the combined ratio as a
measure of underwriting profitability. The combined ratio is the sum of the loss
ratio (losses and loss adjustment expenses incurred as a percent of net earned
premiums) plus the expense ratio (underwriting and other expenses as a percent
of net earned premiums, calculated on a GAAP basis). The combined ratio reflects
only underwriting results and does not include income from investments or
finance and other service income. Underwriting profitability is subject to
significant fluctuations due to competition, catastrophic events, weather,
economic and social conditions, and other factors.
Our GAAP insurance ratios are presented in the following table for the
periods indicated.
Years Ended December 31,
2011 2010 2009
GAAP ratios:
Loss ratio 78.0 % 65.4 % 65.1 %
Expense ratio 29.9 31.3 32.2
Combined ratio 107.9 % 96.7 % 97.3 %
Stock-Based Compensation
On June 25, 2002, the Board of Directors of the Company (the "Board")
adopted the 2002 Management Omnibus Incentive Plan (the "Incentive Plan"). The
Incentive Plan provides for a variety of awards, including nonqualified stock
options ("NQSOs"), stock appreciation rights and restricted stock ("RS") awards.
On March 10, 2006, the Board approved amendments to the Incentive Plan,
subject to shareholder approval, to (i) increase the number of shares of common
stock available for issuance by 1,250,000 shares, (ii) remove obsolete
provisions, and (iii) make other non-material changes. A total of 1,250,000
shares of common stock had previously been authorized for issuance under the
Incentive Plan. The Incentive Plan, as amended, was approved by the shareholders
at the 2006 Annual Meeting of Shareholders which was held on May 19, 2006. Under
the Incentive Plan, as amended, the maximum number of shares of common stock
with respect to which awards may be granted is 2,500,000. As of December 31,
2011, there were 718,859 shares available for future grant. The Board and the
Compensation Committee intend to issue more awards under the Incentive Plan in
the future. Grants
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outstanding under the Incentive Plan as of December 31, 2011, were comprised of
254,117 restricted shares and 125,700 nonqualified stock options.
Grants made under the Incentive Plan during the years 2007 through 2011 are
as follows:
Type of Number of
Equity Awards Fair Value
Awarded Effective Date Granted per Share Vesting Terms RS February 26, 2007 65,760 $ 45.62 (1) 3 years, 30%-30%-40%
RS February 26, 2007 4,000 $ 45.62 (1) No vesting period(2)
RS March 22, 2007 49,971 $ 38.78 (1) 5 years, 20% annually
RS March 10, 2008 76,816 $ 35.80 (1) 3 years, 30%-30%-40%
RS March 10, 2008 4,000 $ 35.80 (1) No vesting period(2)
RS March 20, 2008 45,779 $ 34.37 (1) 5 years, 20% annually
RS March 9, 2009 95,953 $ 28.66 (1) 3 years, 30%-30%-40%
RS March 9, 2009 4,000 $ 28.66 (1) No vesting period(2)
RS March 19, 2009 38,046 $ 33.24 (1) 5 years, 20% annually
RS March 9, 2010 77,360 $ 38.78 (1) 3 years, 30%-30%-40%
RS March 9, 2010 4,000 $ 38.78 (1) No vesting period(2)
RS March 23, 2010 25,590 $ 38.09 (1) 5 years, 20% annually
RS March 9, 2011 68,637 $ 47.35 (1) 3 years, 30%-30%-40%
RS March 9, 2011 4,000 $ 47.35 (1) No vesting period(2)
RS March 23, 2011 22,567 $ 44.94 (1) 5 years, 20% annually
--------------------------------------------------------------------------------
º (1)
º The fair value per share of the restricted stock grant is equal to the
closing price of the Company's common stock on the grant date.
º (2)
º The shares cannot be sold, assigned, pledged, or otherwise transferred,
encumbered or disposed of until the recipient is no longer a member of the
Board of Directors.
Reinsurance
We reinsure with other insurance companies a portion of our potential
liability under the policies we have underwritten, thereby protecting us against
an unexpectedly large loss or a catastrophic occurrence that could produce large
losses, primarily in our homeowners line of business. We use various software
products to measure our exposure to catastrophe losses and the probable maximum
loss to us for catastrophe losses such as hurricanes. The models include
estimates for our share of the catastrophe losses generated in the residual
market for property insurance by the Massachusetts Property Insurance
Underwriting Association ("FAIR Plan"). The reinsurance market has seen from the
various software modelers, increases in the estimate of damage from hurricanes
in the southern and northeast portions of the United States due to revised
estimations of increased hurricane activity and increases in the estimation of
demand surge in the periods following a significant event. We continue to manage
and model our exposure and adjust our reinsurance programs as a result of the
changes to the models. As of January 1, 2012, we have purchased four layers of
excess catastrophe reinsurance providing $485,000 of coverage for property
losses in excess of $50,000 up to a maximum of $535,000. Our reinsurers
co-participation is 50.0% of $30,000 for the 1st layer, 80.0% of $90,000 for the
2nd layer, 80.0% of $200,000 for the 3rd layer, and 80.0% of $165,000 for the
4th layer. As a result of the changes to the models, and our revised reinsurance
program, our catastrophe reinsurance in 2012 protects us in the event of a
"140-year storm" (that is, a storm of a severity expected to occur once in a
140-year period). Swiss Re, our primary reinsurer, maintains an A.M. Best rating
of "A" (Excellent). Most of our other reinsurers have an A.M. Best rating of "A"
(Excellent) however in no case is a reinsurer rated below "A-" (Excellent). Our
losses from the individual catastrophe events of 2011 were less than our
reinsurance retention.
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We are a participant in CAR, a state-established body that runs the residual
market reinsurance programs for both private passenger and commercial automobile
insurance in Massachusetts under which premiums, expenses, losses and loss
adjustment expenses on ceded business are shared by all insurers writing
automobile insurance in Massachusetts. We also participate in the FAIR Plan in
which premiums, expenses, losses and loss adjustment expenses on homeowners
business that cannot be placed in the voluntary market are shared by all
insurers writing homeowners insurance in Massachusetts. The FAIR Plan has grown
dramatically over the past few years as insurance carriers have reduced their
exposure to coastal property. The FAIR Plan's exposure to catastrophe losses
increased and as a result, the FAIR Plan decided to buy reinsurance to reduce
their exposure to catastrophe losses. On July 1, 2011, the FAIR Plan purchased
$1,000,000 of catastrophe reinsurance for property losses in excess of $200,000.
At December 31, 2011, we had no material amounts recoverable from any reinsurer,
excluding $44,850 recoverable from CAR.
On March 10, 2005, our Board of Directors adopted a resolution that
prohibits Safety from purchasing finite reinsurance (reinsurance that transfers
only a finite or limited amount of risk to the reinsurer) without approval by
the Board. To date, the Company has never purchased a finite reinsurance
contract.
Effects of Inflation
We do not believe that inflation has had a material effect on our
consolidated results of operations, except insofar as inflation may affect
interest rates.
Results of Operations
The following table shows certain of our selected financial results.
Years Ended December 31,
2011 2010 2009
Direct written premiums $ 649,262 $ 604,957 $ 559,747
Net written premiums $ 620,316 $ 576,807 $ 532,629
Net earned premiums $ 598,368 $ 551,950 $ 531,969
Net investment income 39,060 41,395 43,308 Net realized gains (losses) on investments 4,360 863
(167 )
Finance and other service income 18,370 18,511
16,844
Total revenue 660,158 612,719 591,954
Loss and loss adjustment expenses 466,640 360,848
346,301
Underwriting, operating and related expenses 179,157 172,823
171,124
Interest expense 88 88 135
Total expenses 645,885 533,759 517,560
Income before income taxes 14,273 78,960
74,394
Income tax expense 571 22,618 20,242
Net income $ 13,702 $ 56,342 $ 54,152
Earnings per weighted average common share:
Basic $ 0.90 $ 3.74 $ 3.49
Diluted $ 0.90 $ 3.74 $ 3.48
Cash dividends paid per common share $ 2.00 $ 1.80 $ 1.60
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YEAR ENDED DECEMBER 31, 2011 COMPARED TO YEAR ENDED DECEMBER 31, 2010
Direct Written Premiums. Direct written premiums for the year ended
December 31, 2011 increased by $44,305, or 7.3%, to $649,262 from $604,957 for
the comparable 2010 period. The 2011 increases occurred primarily in our
personal automobile and homeowners lines, which experienced increases of 3.5%
and 3.9%, respectively, in average written premium per exposure and increases of
1.5% and 11.5%, respectively, in written exposures. The increase in homeowners
exposures is primarily the result of our pricing strategy of offering account
discounts to policyholders who insure both an automobile and home with us. In
addition, our commercial automobile line experienced an increase in average
written premium per exposure of 2.2% and an increase in written exposures of
6.4%. This increase in exposures is a result of additional business submitted by
ERPs through the CAR LSC program as the number of Limited Servicing Carriers was
reduced from six to four effective July 1, 2011.
Net Written Premiums. Net written premiums for the year ended December 31,
2011 increased by $43,509, or 7.5%, to $620,316 from $576,807 for 2010. The 2011
increase was primarily due to the factors that increased direct written
premiums.
Net Earned Premiums. Net earned premiums for the year ended December 31,
2011 increased by $46,418, or 8.4%, to $598,368 from $551,950 for the comparable
2010 period. The 2011 increase was primarily due to the factors that increased
direct written premiums.
The effect of reinsurance on net written and net earned premiums is
presented in the following table.
Years Ended
December 31,
2011 2010
Written Premiums
Direct $ 649,262 $ 604,957
Assumed 16,521 13,738
Ceded (45,467 ) (41,888 )
Net written premiums $ 620,316 $ 576,807
Earned Premiums
Direct $ 626,483 $ 580,942
Assumed 15,790 14,134
Ceded (43,905 ) (43,126 )
Net earned premiums $ 598,368 $ 551,950
Net Investment Income. Net investment income for the year ended
December 31, 2011 decreased by $2,335, or 5.6% to $39,060 from $41,395 for the
comparable 2010 period. The 2011 decrease primarily resulted from lower
short-term interest rates and ongoing maintenance of short duration to protect
the portfolio from rising interest rates. Net effective annual yield on the
investment portfolio decreased to 3.6% for the year ended December 31, 2011 from
3.9% for the comparable 2010 period. Our duration was 3.7 years at December 31,
2011, up from 3.4 years at December 31, 2010.
Net Realized Gains on Investments. Net realized gains on investments were
$4,360 for the year ended December 31, 2011 compared to $863 for the comparable
2010 period.
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The gross unrealized gains and losses on investments in fixed maturity
securities, equity securities, including interests in mutual funds, and other
invested assets were as follows:
As of December 31, 2011
Gross Unrealized Losses(4)
Cost or Gross Non-OTTI OTTI
Amortized Unrealized Unrealized Unrealized Estimated
Cost Gains Losses Losses(5) Fair Value
U.S. Treasury
securities $ 7,525 $ 366 $ - $ - $ 7,891
Obligations of
states and
political
subdivisions 443,338 25,630 (150 ) - 468,818
Residential
mortgage-backed
securities(1) 277,885 17,147 (106 ) - 294,926
Commercial
mortgage-backed
securities 51,986 1,439 (278 ) - 53,147
Other
asset-backed
securities(2) 12,848 932 - - 13,780
Corporate and
other
securities 232,232 10,128 (955 ) - 241,405
Subtotal, fixed
maturity
securities 1,025,814 55,642 (1,489 ) - 1,079,967
Equity
securities(3) 20,431 1,111 (462 ) - 21,080
Other invested
assets 7,701 - - - 7,701
Totals $ 1,053,946 $ 56,753 $ (1,951 ) $ - $ 1,108,748
--------------------------------------------------------------------------------
º (1)
º Residential mortgage-backed securities consists of obligations of U.S.
Government agencies including collateralized mortgage obligations issued,
guaranteed and/or insured by the following issuers: Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation
(FHLMC), Federal National Mortgage Association (FNMA) and the Federal Home
Loan Bank (FHLB).
º (2)
º Other asset-backed securities includes obligations of the U.S. Small
Business Administration which totaled $6,054 at amortized cost and $6,584
at estimated fair value at December 31, 2011.
º (3)
º Equity securities includes interests in mutual funds of $12,937 at cost and
$12,564 at fair value as of December 31, 2011 held to fund the Company's
executive deferred compensation plan.
º (4)
º Our investment portfolio included 55 securities in an unrealized loss
position at December 31, 2011.
º (5) º Amounts in this column represent other-than-temporary impairment ("OTTI")
recognized in accumulated other comprehensive income.
The composition of our fixed income security portfolio by Moody's rating was
as follows:
As of December 31, 2011
Estimated
Fair Value Percent
U.S. Treasury securities and obligations of U.S.
Government agencies $ 309,401 28.6 %
Aaa/Aa 526,622 48.8
A 117,735 10.9
Baa 68,850 6.4
Ba 1,932 0.2
Not rated 55,427 5.1
Total $ 1,079,967 100.0 %
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As of December 31, 2011, our portfolio of fixed maturity investments was
comprised entirely of investment grade corporate fixed maturity securities, U.S.
government and agency securities, and asset-backed securities, with the
exception of two securities which represented 0.2% of our total investment in
fixed income securities. All of our securities received a rating assigned by
Moody's of Ba or higher, except the few securities not rated by Moody's, all
except one of which are rated investment grade by Standard & Poor's. Such
ratings are generally assigned upon the issuance of the securities and are
subject to revision on the basis of ongoing evaluations. Ratings in the table
are as of the date indicated.
The following table illustrates the gross unrealized losses included in our
investment portfolio and the fair value of those securities, aggregated by
investment category. The table also illustrates the length of time that they
have been in a continuous unrealized loss position as of December 31, 2011.
As of December 31, 2011
Less than 12 Months 12 Months or More Total
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
Obligations of
states and
political
subdivisions 8,804 135 4,590 15 13,394 150
Residential
mortgage-backed
securities 4,333 99 79 7 4,412 106
Commercial
mortgage-backed
securities 4,563 278 - - 4,563 278
Corporate and
other
securities 22,745 943 1,986 12 24,731 955
Subtotal, fixed
maturity
securities 40,445 1,455 6,655 34 47,100 1,489
Equity
securities 7,185 462 - - 7,185 462
Total
temporarily
impaired
securities $ 47,630 $ 1,917 $ 6,655 $ 34 $ 54,285 $ 1,951
As of December 31, 2011, we held insured investment securities of
approximately $143,467, which represented approximately 12.9% of our total
investments. Approximately $43,562 of these securities are pre-refunded, meaning
that funds have been set aside in escrow to satisfy the future interest and
principal obligations of the bond.
The following table shows our insured investment securities that are backed
by financial guarantors including pre-refunded securities as of December 31,
2011. We do not have any direct investment holdings in a financial guarantee
insurance company.
As of December 31, 2011
Exposure Net
Pre-refunded of Pre-refunded
Financial Guarantor Total Securities Securities
Municipal bonds
Ambac Assurance Corporation $ 18,578 $ 3,349 $ 15,229
Financial Guaranty Insurance Company 285 285 -
Assured Guaranty Municipal Corporation 63,877 33,143
30,734
National Public Finance Guaranty
Corporation 56,591 6,785 49,806
Total municipal bonds 139,331 43,562 95,769
Other asset-backed securities
Ambac Assurance Corporation 4,136 - 4,136
Total other asset-backed securities 4,136 - 4,136
Total $ 143,467 $ 43,562 $ 99,905
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The Moody's ratings of our insured investments held at December 31, 2011 are
essentially the same with or without the investment guarantees.
We reviewed the unrealized losses in our fixed income and equity portfolio
as of December 31, 2011 for potential other-than-temporary asset impairments. We
held no securities at December 31, 2011 with a material (20% or greater)
unrealized loss for four or more consecutive quarters. Specific qualitative
analysis was performed for securities appearing on our "Watch List," if any.
Qualitative analysis considered such factors as the financial condition and the
near term prospects of the issuer, whether the debtor is current on its
contractually obligated interest and principal payments, changes to the rating
of the security by a rating agency and the historical volatility of the fair
value of the security.
Of the $1,951 gross unrealized losses as of December 31, 2011, $150 relates
to obligations of U.S. Treasuries, states and political subdivisions. The
remaining $1,801 of gross unrealized losses relates primarily to holdings of
investment grade asset-backed, corporate, other fixed maturity and equity
securities.
The unrealized losses recorded on the investment portfolio at December 31,
2011 resulted from fluctuations in market interest rates and other temporary
market conditions as opposed to fundamental changes in the credit quality of the
issuers of such securities. Given our current level of liquidity, the fact that
we do not intend to sell these securities, and that it is more likely than not
that we will not be required to sell these securities prior to recovery of the
cost basis of these securities, these decreases in values are viewed as being
temporary.
During the years ended December 31, 2011 and 2010, there was no significant
deterioration in the credit quality of any of our holdings and no OTTI charges
were recorded related to our portfolio of investment securities.
For information regarding fair value measurements of our investment
portfolio, refer to Item 8-Financial Statements and Supplementary Data, Note 13,
Fair Value Measurements, of this Form 10-K.
Finance and Other Service Income. Finance and other service income includes
revenues from premium installment charges, which we recognize when earned, and
other miscellaneous income and fees. Finance and other service income decreased
by $141, or 0.8%, to $18,370 for the year ended December 31, 2011 from $18,511
for the comparable 2010 period.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
incurred for the year ended December 31, 2011 increased by $105,792, or 29.3%,
to $466,640 from $360,848 for the comparable 2010 period. Our GAAP loss ratio
for the year ended December 31, 2011 increased to 78.0% from 65.4% for the
comparable 2010 period. Included in pre-tax results for the year ended
December 31, 2011 is approximately $62,688 attributable to catastrophic weather
event losses sustained throughout the year compared to $9,429 for the comparable
2010 period. Our GAAP loss ratio excluding loss adjustment expenses for the year
ended December 31, 2011 increased to 68.6% from 56.0% for the comparable 2010
period. Total prior year favorable development included in the pre-tax results
for the year ended December 31, 2011 was $36,683, compared to $48,157, for the
comparable 2010 period.
Underwriting, Operating and Related Expenses. Underwriting, operating and
related expenses for the year ended December 31, 2011 increased by $6,334, or
3.7%, to $179,157 from $172,823 for the comparable 2010 period, primarily due to
an increase in commissions to agents as a result of premium increases, as
discussed above. Our GAAP expense ratios for the year ended December 31, 2011
decreased to 29.9% from 31.3% for the comparable 2010 period.
Interest Expenses. Interest expense for the years ended December 31, 2011
and 2010 was $88. The credit facility commitment fee included in interest
expense was $75 for each of the years ended December 31, 2011 and 2010.
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Income Tax Expense. Our effective tax rates were 4.0% and 28.6% for the
years ended December 31, 2011 and 2010, respectively. These effective rates were
lower than the statutory rate of 35.0% primarily due to adjustments for
tax-exempt investment income.
Net Income. Net income for the year ended December 31, 2011 was $13,702
compared to $56,342 for the comparable 2010 period. This decrease was primarily
attributable to the increase in losses and loss adjustment expenses, as
discussed above.
YEAR ENDED DECEMBER 31, 2010 COMPARED TO YEAR ENDED DECEMBER 31, 2009
Direct Written Premiums. Direct written premiums for the year ended
December 31, 2010 increased by $45,210, or 8.1%, to $604,957 from $559,747 for
the comparable 2009 period. The 2010 increase occurred primarily in our personal
automobile and homeowners lines, which experienced increases of 3.8% and 3.2%,
respectively, in average written premium per exposure and increases of 3.3% and
19.6%, respectively, in written exposures. The increase in homeowners exposures
is primarily the result of our pricing strategy of offering account discounts to
policyholders who insure both an automobile and home with us. Partially
offsetting these increases was a 4.6% decrease in average written premium per
exposure and a 2.2% decrease in written exposures in our commercial automobile
line. This decrease is primarily a result of reduced exposures from ERPs
submitting business through the CAR LSC program and general economic conditions
which have reduced the size of the overall commercial automobile insurance
market in Massachusetts.
Net Written Premiums. Net written premiums for the year ended December 31,
2010 increased by $44,178, or 8.3%, to $567,807 from $532,629 for the comparable
2009 period. The 2010 increase was primarily due to the factors that increased
direct written premiums.
Net Earned Premiums. Net earned premiums for the year ended December 31,
2010 increased by $19,981, or 3.8%, to $551,950 from $531,969 for the comparable
2009 period. The 2010 increase was primarily due to the factors that increased
direct written premiums combined with decreases in earned premiums ceded to CAR,
and partially offset by decreases in earned premiums assumed from CAR. Earned
premiums assumed from and ceded to CAR decreased as a result of the phase-out of
the CAR personal automobile reinsurance pool, which was fully replaced by an
assigned risk plan, the MAIP, beginning with personal automobile policy
effective dates after March 31, 2009.
The effect of reinsurance on net written and net earned premiums is
presented in the following table.
Years Ended
December 31,
2010 2009
Written Premiums
Direct $ 604,957 $ 559,747
Assumed 13,738 14,564
Ceded (41,888 ) (41,682 )
Net written premiums $ 576,807 $ 532,629
Earned Premiums
Direct $ 580,942 $ 555,020
Assumed 14,134 26,552
Ceded (43,126 ) (49,603 )
Net earned premiums $ 551,950 $ 531,969
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Net Investment Income. Net investment income for the year ended
December 31, 2010 decreased by $1,913, or 4.4%, to $41,395 from $43,308 for the
comparable 2009 period. The 2010 decrease primarily resulted from lower
short-term interest rates, risk reduction actions related to municipal bonds,
and ongoing maintenance of short duration to protect the portfolio from rising
interest rates. Net effective annual yield on the investment portfolio decreased
to 3.9% for the year ended December 31, 2010 from 4.1% for the comparable 2009
period. Our duration was 3.4 years at December 31, 2010, up slightly from
3.3 years at December 31, 2009.
Net Realized Gains (Losses) on Investments. Net realized gains on
investments were $863 for the year ended December 31, 2010 compared to net
realized losses of $167 the year ended December 31, 2009.
The gross unrealized gains and losses on investments in fixed maturity
securities, equity securities, including interests in mutual funds, and other
invested assets were as follows:
As of December 31, 2010
Gross Unrealized
Losses(4)
Gross Non-OTTI OTTI
Cost or Unrealized Unrealized Unrealized Estimated
Amortized Cost Gains Losses Losses(5) Fair Value
U.S. Treasury
securities $ 87,830 $ 280 $ (1,841 ) $ - $ 86,269
Obligations of
states and
political
subdivisions 436,082 12,014 (2,906 ) - 445,190
Residential
mortgage-backed
securities(1) 237,405 15,295 (39 ) - 252,661
Commercial
mortgage-backed
securities 61,259 2,332 - - 63,591
Other
asset-backed
securities(2) 16,543 862 - - 17,405
Corporate and
other
securities 191,235 7,769 (883 ) - 198,121
Subtotal, fixed
maturity
securities 1,030,354 38,552 (5,669 ) - 1,063,237
Equity
securities(3) 13,704 920 - - 14,624
Other invested
assets 2,817 - - - 2,817
Totals $ 1,046,875 $ 39,472 $ (5,669 ) $ - $ 1,080,678
--------------------------------------------------------------------------------
º (1)
º Residential mortgage-backed securities consists primarily of obligations of
U.S. Government agencies including collateralized mortgage obligations
issued, guaranteed and/or insured by the following issuers: Government
National Mortgage Association (GNMA), Federal Home Loan Mortgage
Corporation (FHLMC), Federal National Mortgage Association (FNMA) and the
Federal Home Loan Bank (FHLB). The total of these fixed maturity securities
was $237,335 at amortized cost and $ $252,592 at fair value as of
December 31, 2010.
º (2)
º Other asset-backed securities includes obligations of the U.S. Small
Business Administration which totaled $9,553 at amortized cost and $10,307
at estimated fair value at December 31, 2010.
º (3)
º Equity securities includes interests in mutual funds of $11,210 at cost and
$11,699 at fair value as of December 31, 2010 held to fund the Company's
executive deferred compensation plan.
º (4)
º Our investment portfolio included 80 securities in an unrealized loss
position at December 31, 2010.
º (5) º Amounts in this column represent other-than-temporary impairment ("OTTI")
recognized in accumulated other comprehensive income.
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The composition of our fixed income security portfolio by Moody's rating was
as follows:
As of December 31, 2010
Estimated
Fair Value Percent
U.S. Treasury securities and obligations of U.S.
Government agencies $ 349,168 32.8 %
Aaa/Aa 491,480 46.2
A 122,440 11.5
Baa 57,054 5.4
Ba 328 -
Not rated 42,767 4.0
Total $ 1,063,237 100.0 %
As of December 31, 2010, with the exception of one security which
represented less than 0.1% of our total investment in fixed income securities,
our portfolio of fixed maturity investments was comprised entirely of investment
grade corporate fixed maturity securities, U.S. government and agency
securities, and asset-backed securities. All of our securities received a rating
assigned by Moody's of "Ba" or higher, except the few securities not rated by
Moody's, all of which are rated investment grade by Standard & Poor's. The
Company holds no subprime mortgage debt securities. All of the Company's
holdings in mortgage-backed securities are either U.S. Government or Agency
guaranteed or are rated investment grade by either Moody's or Standard & Poor's.
The following table illustrates the gross unrealized losses included in our
investment portfolio and the fair value of those securities, aggregated by
investment category. The table also illustrates the length of time that they
have been in a continuous unrealized loss position as of December 31, 2010.
As of December 31, 2010
Less than 12 Months 12 Months or More Total
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
U.S. Treasury
securities $ 38,318 $ 1,841 $ - $ - $ 38,318 $ 1,841
Obligations of
states and
political
subdivisions 109,883 2,490 7,325 416 117,208 2,906
Residential
mortgage-backed
securities 1,312 31 298 8 1,610 39
Corporate and
other
securities 27,736 883 - - 27,736 883
Total
temporarily
impairedsecurities $ 177,249$ 5,245$ 7,623 $ 424 $ 184,872$ 5,669
As of December 31, 2010, we held insured investment securities of
approximately $244,893, which represented approximately 22.7% of our total
investment portfolio. Approximately $63,398 of these securities are
pre-refunded, meaning that funds have been set aside in escrow to satisfy the
future interest and principal obligations of the bond.
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The following table shows our insured investment securities that are backed
by financial guarantors including pre-refunded securities as of December 31,
2010. We do not have any direct investment holdings in a financial guarantee
insurance company.
As of December 31, 2010
Exposure Net
Pre-refunded of Pre-refunded
Financial Guarantor Total Securities Securities
Municipal bonds
Ambac Assurance Corporation $ 32,055 $ 12,214 $ 19,841
Financial Guaranty Insurance Company 267 267 -
Assured Guaranty Municipal Corporation 91,819 34,936
56,883
National Public Finance Guaranty
Corporation 116,704 15,981 100,723
Total municipal bonds 240,845 63,398 177,447
Other asset-backed securities
Ambac Assurance Corporation 4,048 - 4,048
Total other asset-backed securities 4,048 - 4,048
Total $ 244,893 $ 63,398 $ 181,495
The following table shows our insured investments by Moody's rating where it
is available with and without the impact of the insurance guarantee as of
December 31, 2010.
As of December 31, 2010
Rating Rating
With Without
Rating Insurance Insurance
Aaa $ 3,866 $ 3,866
Aa1 28,976 28,976
Aa2 65,265 65,265
Aa3 88,550 77,461
A1 11,964 12,887
A2 11,003 18,021
A3 12,546 15,694
Baa1 267 267
Baa2 4,048 4,048
Totals $ 226,485 $ 226,485
We reviewed the unrealized losses in our fixed income and equity portfolio
as of December 31, 2010 for potential other-than-temporary asset impairments. We
held no securities at December 31, 2010 with a material (20% or greater)
unrealized loss for four or more consecutive quarters. Specific qualitative
analysis was performed for securities appearing on our "Watch List," if any.
Qualitative analysis considered such factors as the financial condition and the
near term prospects of the issuer, whether the debtor is current on its
contractually obligated interest and principal payments, changes to the rating
of the security by a rating agency and the historical volatility of the fair
value of the security.
Of the $5,669 gross unrealized losses as of December 31, 2010, $4,747
relates to obligations of U.S. Treasuries, states and political subdivisions.
The remaining $922 of gross unrealized losses relates primarily to holdings of
investment grade asset-backed, corporate, other fixed maturity and equity
securities.
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The unrealized losses recorded on the investment portfolio at December 31,
2010 resulted from fluctuations in market interest rates and other temporary
market conditions as opposed to fundamental changes in the credit quality of the
issuers of such securities. Given our current level of liquidity, the fact that
we do not intend to sell these securities, and that it is more likely than not
that we will not be required to sell these securities prior to recovery of the
cost basis of these securities, these decreases in values are viewed as being
temporary.
During the years ended December 31, 2010 and 2009, there was no significant
deterioration in the credit quality of any of our holdings and no
other-than-temporary impairment ("OTTI") charges were recorded related to our
portfolio of investment securities.
For information regarding fair value measurements of our investment
portfolio, refer to Item 8-Financial Statements and Supplementary Data, Note 13,
Fair Value Measurements, of this Form 10-K.
Transfers in and out of Level 3 are attributable to changes in the ability
to observe significant inputs in determining fair value exit pricing. On
January 1, 2010, our Level 3 securities consisted of one asset-backed security
whose price was based solely on a single broker quote which was deemed to be
obtained through unobservable inputs. This security was sold in October 2010.
Finance and Other Service Income. Finance and other service income includes
revenues from premium installment charges, which we recognize when earned, and
other miscellaneous income and fees. Finance and other service income for the
year ended December 31, 2010 was $18,511 compared to $16,844 for the comparable
2009 period.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
incurred for year ended December 31, 2010 increased by $14,547, or 4.2%, to
$360,848 from $346,301 for the comparable 2009 period. Our GAAP loss ratio for
the year ended December 31, 2010 increased to 65.4% from 65.1% for the
comparable 2009 period. Our GAAP loss ratio excluding loss adjustment expenses
for the year ended December 31, 2010 increased to 56.0% from 55.8% for the
comparable 2009 period. The total prior year favorable development included in
pre-tax results for the year ended December 31, 2010 was $48,157 compared to
$44,065 for the comparable 2009 period.
Underwriting, Operating and Related Expenses. Underwriting, operating and
related expenses for year ended December 31, 2010 increased by $1,699, or 1.0%,
to $172,823 from $171,124 for the comparable 2009 period. Our GAAP expense
ratios for the year ended December 31, 2010 decreased to 31.3% from 32.2% for
the comparable 2009 period.
Interest Expenses. Interest expense for the year ended December 31, 2010
was $88, compared to $135 for the comparable 2009 period. The credit facility
commitment fee included in interest expense was $75 for both the years ended
December 31, 2010 and 2009.
Income Tax Expense. Our effective tax rates were 28.6% and 27.2% for the
years ended December 31, 2010 and 2009, respectively. These effective rates were
lower than the statutory rate of 35.0% primarily due to adjustments for
tax-exempt investment income.
Net Income. Net income for the year ended December 31, 2010 increased by
$2,190, or 4.0%, to $56,342 from $54,152 for the comparable 2009 period. This
increase was primarily due to the factors discussed above.
Liquidity and Capital Resources
As a holding company, Safety's assets consist primarily of the stock of our
direct and indirect subsidiaries. Our principal source of funds to meet our
obligations and pay dividends to shareholders, therefore, is dividends and other
permitted payments from our subsidiaries, principally Safety Insurance. Safety
is the borrower under our credit facility.
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Safety Insurance's sources of funds primarily include premiums received,
investment income and proceeds from sales and redemptions of investments. Safety
Insurance's principal uses of cash are the payment of claims, operating expenses
and taxes, the purchase of investments and payment of dividends to Safety.
Net cash provided by operating activities was $39,943, $51,106, and $64,478
during the years ended December 31, 2011, 2010, and 2009, respectively. Our
operations typically generate positive cash flows from operations as most
premiums are received in advance of the time when claim and benefit payments are
required. These positive operating cash flows are expected to continue to meet
our liquidity requirements.
Net cash used for investing activities was $12,879 and $54,420 during the
years ended December 31, 2011 and 2010, respectively, as purchases of fixed
maturity and equity securities exceeded sales, paydowns, calls and maturities of
fixed maturity and equity securities. Net cash provided by investing activities
during the year ended December 31, 2009 was $16,091 as sales, paydowns, calls
and maturities of fixed maturity and equity securities exceeded purchases of
fixed maturity and equity securities.
Net cash used for financing activities was $$29,465, $30,865, and $66,550
during the years ended December 31, 2011, 2010 and 2009, respectively. Net cash
used for financing activities is primarily comprised of dividend payments to
shareholders and the acquisition of treasury stock.
The Insurance Subsidiaries maintain a high degree of liquidity within their
respective investment portfolios in fixed maturity and short-term investments.
In recent years, global financial markets experienced unprecedented and
challenging conditions, including a tightening in the availability of credit,
the failure of several large financial institutions and concerns about the
creditworthiness of the sovereign debt of several European and other countries.
We believe that recent and ongoing government actions, including The Emergency
Economic Stabilization Act of 2008, the 2009 American Recovery and Reinvestment
Act and other U.S. and global government programs and the quality of the assets
we hold will allow us to realize these securities' anticipated long-term
economic value. Furthermore, as of December 31, 2011, we had the intent and
ability to retain such investments for the period of time anticipated to allow
for this expected recovery in fair value. We do not anticipate the need to sell
these securities to meet the Insurance Subsidiaries cash requirements. We expect
the Insurance Subsidiaries to generate sufficient operating cash to meet all
short-term and long-term cash requirements. However, there can be no assurance
that unforeseen business needs or other items will not occur causing us to have
to sell securities before their values fully recover; thereby causing us to
recognize additional impairment charges in that time period.
Credit Facility
For information regarding our Credit Facility, please refer to
Item 8-Financial Statements and Supplementary Data, Note 7, Debt, of this
Form 10-K.
Recent Accounting Pronouncements
For information regarding Recent Accounting Pronouncements, please refer to
Item 8-Financial Statements and Supplementary Data, Note 2, Summary of
Significant Accounting Policies, of this Form 10-K.
Regulatory Matters
Our insurance company's subsidiaries are subject to various regulatory
restrictions that limit the maximum amount of dividends available to be paid to
their parent without prior approval of the Commissioner. The Massachusetts
statute limits the dividends an insurer may pay in any twelve-month
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period, without the prior permission of the Commissioner, to the greater of
(i) 10% of the insurer's surplus as of the preceding December 31 or (ii) the
insurer's net income for the twelve-month period ending the preceding
December 31, in each case determined in accordance with statutory accounting
practices. Our insurance company subsidiaries may not declare an "extraordinary
dividend" (defined as any dividend or distribution that, together with other
distributions made within the preceding twelve months, exceeds the limits
established by Massachusetts statute) until thirty days after the Commissioner
has received notice of the intended dividend and has not objected. As
historically administered by the Commissioner, this provision requires the
Commissioner's prior approval of an extraordinary dividend. Under Massachusetts
law, an insurer may pay cash dividends only from its unassigned funds, also
known as earned surplus, and the insurer's remaining surplus must be both
reasonable in relation to its outstanding liabilities and adequate to its
financial needs. At year-end 2011, the statutory surplus of Safety Insurance was
$570,492, and its net income for 2011 was $8,958. As a result, a maximum of
$57,049 is available in 2012 for such dividends without prior approval of the
Commissioner. During the twelve months ended December 31, 2011, Safety Insurance
recorded dividends to Safety of $25,744.
The maximum dividend permitted by law is not indicative of an insurer's
actual ability to pay dividends, which may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's ratings or competitive position, the amount of
premiums that can be written and the ability to pay future dividends.
Since the initial public offering of its common stock in November 2002, the
Company has paid regular quarterly dividends to shareholders of its common
stock. Quarterly dividends paid during 2011 and 2010 were as follows:
Record Payment Dividend per Total
Declaration Date Date Date Common Share Dividends Paid
November 2, 2011 December 1, 2011 December 15, 2011 $ 0.50 $ 7,593
August 3, 2011 September 1, 2011 September 15, 2011 $ 0.50 $ 7,594
May 4, 2011 June 1, 2011 June 15, 2011 $ 0.50 $ 7,593
February 15, 2011 March 1, 2011 March 15, 2011 $ 0.50 $ 7,542
November 2, 2010 December 1, 2010 December 15, 2010 $ 0.50 $ 7,525
August 4, 2010 September 1, 2010 September 15, 2010 $ 0.50 $ 7,510
May 5, 2010 June 1, 2010 June 15, 2010 $ 0.40 $ 6,038
February 16, 2010 March 1, 2010 March 15, 2010 $ 0.40 $ 6,024
On February 15, 2012, our Board approved and declared a quarterly cash
dividend on our common stock of $0.50 per share to be paid on March 15, 2012 to
shareholders of record on March 1, 2012. We plan to continue to declare and pay
quarterly cash dividends in 2012, depending on our financial position and the
regularity of our cash flows.
On August 3, 2007, our Board approved a share repurchase program of up to
$30,000 of the Company's outstanding common shares. On March 19, 2009, our Board
increased this existing share repurchase program by authorizing repurchase of up
to $60,000 of the Company's outstanding common shares. On August 4, 2010, our
Board again increased the existing share repurchase program by authorizing
repurchase of up to $90,000 of the Company's outstanding common shares. Under
the program, we may repurchase shares of our common stock for cash in public or
private transactions, in the open market or otherwise. The timing of such
repurchases and actual number of shares repurchased will depend on a variety of
factors including price, market conditions and applicable regulatory and
corporate requirements. The program does not require us to repurchase any
specific number of shares and may be modified, suspended or terminated at any
time without prior notice.
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During the year ended December 31, 2011, the Company purchased 1,190 of its
common shares on the open market under the program at a cost of $43 resulting in
total shares purchased of 1,728,645 at a cost of $55,569 as of December 31,
2011. During the year ended December 31, 2010, the Company purchased 162,907 of
its common shares on the open market under the program at a cost of $5,814
resulting in total shares purchased of 1,727,455 at a cost of $55,526 as of
December 31, 2010.
Management believes that the current level of cash flow from operations
provides us with sufficient liquidity to meet our operating needs over the next
12 months. We expect to be able to continue to meet our operating needs after
the next 12 months from internally generated funds. Since our ability to meet
our obligations in the long term (beyond such twelve-month period) is dependent
upon such factors as market changes, insurance regulatory changes and economic
conditions, no assurance can be given that the available net cash flow will be
sufficient to meet our operating needs. We expect that we would need to borrow
or issue capital stock if we needed additional funds, for example, to pay for an
acquisition or a significant expansion of our operations. There can be no
assurance that sufficient funds for any of the foregoing purposes would be
available to us at such time.
Off-Balance Sheet Arrangements
We have no material obligations under a guarantee contract meeting the
characteristics identified in Accounting Standards Codification ("ASC") 460,
Guarantees. We have no material retained or contingent interests in assets
transferred to an unconsolidated entity. We have no material obligations,
including contingent obligations, under contracts that would be accounted for as
derivative instruments. We have no obligations, including contingent
obligations, arising out of a variable interest in an unconsolidated entity held
by, and material to, us, where such entity provides financing, liquidity, market
risk or credit risk support to, or engages in leasing, hedging or research and
development services with us. We have no direct investments in real estate and
no holdings of mortgages secured by commercial real estate. Accordingly, we have
no material off-balance sheet arrangements.
Contractual Obligations
We have obligations to make future payments under contracts and
credit-related financial instruments and commitments. At December 31, 2011,
certain long-term aggregate contractual obligations and credit-related
commitments are summarized as follows:
Payments Due by Period
Within Two to Three Four to Five After
One Year Years Years Five Years Total
Loss and LAE
reserves $ 197,897 $ 177,704 $ 24,232 $ 4,039 $ 403,872
Purchase commitments 1,030 2,001 1,409 - 4,440
Operating leases 4,491 8,881 9,061 8,957 31,390
Total contractual
obligations $ 203,418 $ 188,586 $ 34,702 $ 12,996 $ 439,702
As of December 31, 2011, the Company had loss and LAE reserves of $403,872,
unpaid reinsurance recoverables of $51,774 and net loss and LAE reserves of
$352,098. Our loss and LAE reserves are estimates as described in more detail
under Critical Accounting Policies and Estimates. The specific amounts and
timing of obligations related to case reserves, IBNR reserves and related LAE
reserves are not set contractually, and the amounts and timing of these
obligations are unknown. Nonetheless, based upon our cumulative claims paid over
the last ten years, the Company estimates that its loss and LAE reserves will be
paid in the period shown above. While management believes that historical
performance of loss payment patterns is a reasonable source for projecting
future claims payments, there is inherent uncertainty in this estimated
projected settlement of loss and LAE reserves, and as a result these estimates
will differ, perhaps significantly, from actual future payments. Our
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operations typically generate substantial positive cash flows from operations as
most premiums are received in advance of the time when claim and benefit
payments are required. These positive operating cash flows are expected to
continue to meet our liquidity requirements, including any unexpected variations
in the timing of claim settlements.
Critical Accounting Policies and EstimatesLoss and Loss Adjustment Expense Reserves.
Significant periods of time can elapse between the occurrence of an insured
loss, the reporting to us of that loss and our final payment of that loss. To
recognize liabilities for unpaid losses, we establish reserves as balance sheet
liabilities. Our reserves represent estimates of amounts needed to pay reported
and unreported losses and the expenses of investigating and paying those losses,
or loss adjustment expenses. Every quarter, we review our previously established
reserves and adjust them, if necessary.
When a claim is reported, claims personnel establish a "case reserve" for
the estimated amount of the ultimate payment. The amount of the reserve is
primarily based upon an evaluation of the type of claim involved, the
circumstances surrounding each claim and the policy provisions relating to the
loss. The estimate reflects the informed judgment of such personnel based on
general insurance reserving practices and on the experience and knowledge of the
claims person. During the loss adjustment period, these estimates are revised as
deemed necessary by our claims department based on subsequent developments and
periodic reviews of the cases. When a claim is closed with or without a payment,
the difference between the case reserve and the settlement amount creates a
reserve deficiency if the payment exceeds the case reserve or a reserve
redundancy if the payment is less than the case reserve.
In accordance with industry practice, we also maintain reserves for
estimated losses incurred but not yet reported ("IBNR"). IBNR reserves are
determined in accordance with commonly accepted actuarial reserving techniques
on the basis of our historical information and experience. We review and make
adjustments to incurred but not yet reported reserves quarterly. In addition,
IBNR reserves can also be expressed as the total loss reserves required less the
case reserves on reported claims.
When reviewing reserves, we analyze historical data and estimate the impact
of various loss development factors, such as our historical loss experience and
that of the industry, trends in claims frequency and severity, our mix of
business, our claims processing procedures, legislative enactments, judicial
decisions, legal developments in imposition of damages, and changes and trends
in general economic conditions, including the effects of inflation. A change in
any of these factors from the assumption implicit in our estimate can cause our
actual loss experience to be better or worse than our reserves, and the
difference can be material. There is no precise method, however, for evaluating
the impact of any specific factor on the adequacy of reserves, because the
eventual development of reserves is affected by many factors.
Management determines our loss and LAE reserves estimate based upon the
analysis of our actuaries. A reasonable estimate is derived by selecting a point
estimate within a range of indications as calculated by our actuaries using
generally accepted actuarial techniques. The key assumption in most actuarial
analysis is that past patterns of frequency and severity will repeat in the
future, unless a significant change in the factors described above takes place.
Our key factors and resulting assumptions are the ultimate frequency and
severity of claims, based upon the most recent ten years of claims reported to
the Company, and the data CAR reports to us to calculate our share of the
residual market, as of the date of the applicable balance sheet. For each
accident year and each coverage within a line of business our actuaries
calculate the ultimate losses incurred. Our total reserves are the difference
between the ultimate losses incurred and the cumulative loss and loss adjustment
payments made to date. Our IBNR reserves are calculated as the difference
between our total reserves and the outstanding case reserves at the end of the
accounting period. To determine ultimate losses, our
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actuaries calculate a range of indications and select a point estimation using
such actuarial techniques as:
º •
º Paid Loss Indications: This method projects ultimate loss estimates
based upon extrapolations of historic paid loss trends. This method
tends to be used on short tail lines such as automobile physical
damage.
º •
º Incurred Loss Indications: This method projects ultimate loss estimates based upon extrapolations of historic incurred loss trends.
This method tends to be used on long tail lines of business such as
automobile liability and homeowner's liability.
º •
º Bornhuetter-Ferguson Indications: This method projects ultimate loss
estimates based upon extrapolations of an expected amount of IBNR,
which is added to current incurred losses or paid losses. This method
tends to be used on small, immature, or volatile lines of business,
such as our BOP and umbrella lines of business.
º •
º Bodily Injury Code Indications: This method projects ultimate loss
estimates for our private passenger and commercial automobile bodily
injury coverage based upon extrapolations of the historic number of
accidents and the historic number of bodily injury claims per accident. Projected ultimate bodily injury claims are then segregated
into expected claims by type of injury (e.g. soft tissue injury vs.
hard tissue injury) based on past experience. An ultimate severity, or
average paid loss amounts, is estimated based upon extrapolating
historic trends. Projected ultimate loss estimates using this method
are the aggregate of estimated losses by injury type.
Such techniques assume that past experience, adjusted for the effects of
current developments and anticipated trends, is an appropriate basis for
predicting our ultimate losses, total reserves and resulting IBNR reserves. It
is possible that the final outcome may fall above or below these amounts as a
result of a number of factors, including immature data, sparse data, or
significant growth in a line of business. Using these methodologies our
actuaries established a range of reasonably possible estimations for net
reserves of approximately $317,155 to $363,035 as of December 31, 2011 compared
to a range of $311,570 to $359,802 as of December 31, 2010. In general, the low
and high values of the ranges represent reasonable minimum and maximum values of
the indications based on the techniques described above. Our selected point
estimate of net loss and LAE reserves based upon the analysis of our actuaries
was $352,098 as of December 31, 2011 compared to $351,244 as of December 31,
2010.
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The following tables present the point estimation of the recorded reserves
and the range of estimations by line of business for net loss and LAE reserves
as of December 31, 2011 and December 31, 2010.
As of December 31, 2011
Line of Business Low Recorded High
Private passenger automobile $ 206,350 $ 226,222 $ 230,961
Commercial automobile 38,610 45,687 45,911
Homeowners 50,100 52,777 56,837
All other 22,095 27,412 29,326
Total $ 317,155 $ 352,098 $ 363,035
As of December 31, 2010
Line of Business Low Recorded High
Private passenger automobile $ 213,803 $ 240,129 $ 244,749
Commercial automobile 40,413 45,772 46,483
Homeowners 38,814 44,741 47,181
All other 18,540 20,602 21,389
Total $ 311,570 $ 351,244 $ 359,802
The following tables present our total net reserves and the corresponding
case reserves and IBNR reserves for each line of business as of December 31,
2011 and 2010.
As of December 31, 2011
Line of Business Case IBNR Total Private passenger automobile $ 235,216 $ (13,603 ) $
221,613
CAR assumed private passenger auto 3,577 1,032 4,609
Commercial automobile 30,804 3,479
34,283
CAR assumed commercial automobile 7,291 4,113
11,404
Homeowners 41,451 6,750
48,201
FAIR Plan assumed homeowners 2,326 2,250
4,576
All other 19,316 8,096
27,412
Total net reserves for losses and LAE $ 339,981 $ 12,117 $ 352,098
As of December 31, 2010
Line of Business Case IBNR Total
Private passenger automobile $ 230,330 $ 50 $230,380
CAR assumed private passenger auto 7,274 2,475 9,749
Commercial automobile 30,424 4,143
34,567
CAR assumed commercial automobile 7,325 3,880
11,205
Homeowners 25,117 8,467
33,584
FAIR Plan assumed homeowners 5,567 5,590
11,157
All other 11,452 9,150
20,602
Total net reserves for losses and LAE $ 317,489$ 33,755$ 351,244
Our IBNR reserves consist of our estimate of the total loss reserves
required less our case reserves. The IBNR reserves for CAR assumed private
passenger and commercial automobile business are 22.4% and 36.1%, respectively,
of our total reserves for CAR assumed private passenger and
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commercial automobile business as of December 31, 2011 due to the reporting
delays in the information we receive from CAR, as described further in the
section on CAR Loss and Loss Adjustment Expense Reserves. Our IBNR reserves for
FAIR Plan assumed homeowners are 49.2% of our total reserves for FAIR Plan
assumed homeowners at December 31, 2011 due to similar reporting delays in the
information we receive from FAIR Plan. Our IBNR reserves for private passenger
automobile have decreased due to the favorable development of case reserves in
recent years.
The following tables present information by line of business for our total
net reserves and the corresponding retained (i.e. direct less ceded) reserves
and assumed reserves as of December 31, 2011 and 2010.
As of December 31, 2011
Line of Business Retained Assumed Net
Private passenger automobile $ 221,613
CAR assumed private passenger automobile $ 4,609
Net private passenger automobile $
226,222
Commercial automobile 34,283
CAR assumed commercial automobile 11,404
Net commercial automobile 45,687
Homeowners 48,201
FAIR Plan assumed homeowners 4,576
Net homeowners 52,777
All other 27,412 - 27,412
Total net reserves for losses and LAE $ 331,509 $ 20,589 $ 352,098
As of December 31, 2010
Line of Business Retained Assumed Net
Private passenger automobile $ 230,380
CAR assumed private passenger automobile $ 9,749
Net private passenger automobile $240,129
Commercial automobile 34,567
CAR assumed commercial automobile 11,205
Net commercial automobile 45,772
Homeowners 33,584
FAIR Plan assumed homeowners 11,157
Net homeowners 44,741
All other 20,602 - 20,602
Total net reserves for losses and LAE $ 319,133$ 32,111$ 351,244
Residual market Loss and Loss Adjustment Expense Reserves
We are a participant in CAR, the FAIR Plan and other various residual
markets and assume a portion of losses and LAE on business ceded by the industry
participants to the residual markets. We estimate reserves for assumed losses
and LAE that have not yet been reported to us by the residual markets. Our
estimations are based upon the same factors we use for our own reserves, plus
additional factors due to the nature of and the information we receive. The
portion of reserves based upon CAR estimates for private passenger automobile
line of business has declined substantially over time as a result of the
institution of the MAIP and phase-out of the private passenger automobile CAR
reinsurance pool on April 1, 2009, as described elsewhere in this report.
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Residual market deficits consist of premium ceded to the various residual
markets less losses and LAE and is allocated among insurance companies based on
a various formulas (the "Participation Ratio") that takes into consideration a
company's voluntary market share.
Because of the lag in the various residual market estimations, and in order
to try to validate to the extent possible the information provided, we must try
to estimate the effects of the actions of our competitors in order to establish
our Participation Ratio.
Although we rely to a significant extent in setting our reserves on the
information the various residual markets provide, we are cautious in our use of
that information, both because of the delays in receiving data from the various
residual markets. As a result, we are cautious in recording residual market
reserves for the calendar years for which we have to estimate our Participation
Ratio and these reserves are subject to significant judgments and estimates.
Sensitivity Analysis
Establishment of appropriate reserves is an inherently uncertain process.
There can be no certainty that currently established reserves based on our key
assumptions regarding frequency and severity in our lines of business, or our
assumptions regarding our share of the CAR loss will prove adequate in light of
subsequent actual experience. To the extent that reserves are inadequate and are
strengthened, the amount of such increase is treated as a charge to earnings in
the period that the deficiency is recognized. To the extent that reserves are
redundant and are released, the amount of the release is a credit to earnings in
the period the redundancy is recognized. For the twelve months ended
December 31, 2011, a 1 percentage-point change in the loss and LAE ratio would
result in a change in reserves of $5,984. Each 1 percentage-point change in the
loss and loss expense ratio would have had a $3,889 effect on net income, or
$0.26 per diluted share.
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Our assumptions consider that past experience, adjusted for the effects of
current developments and anticipated trends, are an appropriate basis for
establishing our reserves. Our individual key assumptions could each have a
reasonable possible range of plus or minus 5 percentage-points for each
estimation, although there is no guarantee that our assumptions will not have
more than a 5 percentage point variation. The following sensitivity tables
present information for each of our primary lines of business on the effect each
1 percentage-point change in each of our key assumptions on unpaid frequency and
severity could have on our retained (i.e., direct minus ceded) loss and LAE
reserves and net income for the twelve months ended December 31, 2011. In
evaluating the information in the table, it should be noted that a
1 percentage-point change in a single assumption would change estimated reserves
by 1 percentage-point. A 1 percentage-point change in both our key assumptions
would change estimated reserves within a range of plus or minus
2 percentage-points.
-1 Percent No +1 Percent
Change in Change in Change in
Frequency Frequency Frequency
Private passenger automobile retained loss
and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves $ (4,432 ) $ (2,216 ) $ -
Estimated increase in net income 2,881 1,440
-
No Change in Severity
Estimated (decrease) increase in reserves (2,216 ) -
2,216
Estimated increase (decrease) in net income 1,440 - (1,440 )
+1 Percent Change in Severity
Estimated increase in reserves - 2,216
4,432
Estimated decrease in net income - (1,440 ) (2,881 )
Commercial automobile retained loss and LAE
reserves
-1 Percent Change in Severity
Estimated decrease in reserves (686 ) (343 )
-
Estimated increase in net income 446 223
-
No Change in Severity
Estimated (decrease) increase in reserves (343 ) -
343
Estimated increase (decrease) in net income 223 - (223 )
+1 Percent Change in Severity
Estimated increase in reserves - 343
686
Estimated decrease in net income - (223 ) (446 )
Homeowners retained loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves (964 ) (482 )
-
Estimated increase in net income 627 313
-
No Change in Severity
Estimated (decrease) increase in reserves (482 ) -
482
Estimated increase (decrease) in net income 313 - (313 )
+1 Percent Change in Severity
Estimated increase in reserves - 482
964
Estimated decrease in net income - (313 ) (627 )
All other retained loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves (548 ) (274 )
-
Estimated increase in net income 356 178
-
No Change in Severity
Estimated (decrease) increase in reserves (274 ) -
274
Estimated increase (decrease) in net income 178 - (178 )
+1 Percent Change in Severity
Estimated increase in reserves - 274
548
Estimated decrease in net income - (178 ) (356 )
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Our estimated share of CAR loss and LAE reserves is based on assumptions
about our Participation Ratio, the size of CAR, and the resulting deficit
(similar assumptions apply with respect to the FAIR Plan). Our assumptions
consider that past experience, adjusted for the effects of current developments
and anticipated trends, is an appropriate basis for establishing our CAR
reserves. Each of our assumptions could have a reasonably possible range of plus
or minus 5 percentage-points for each estimation.
The following sensitivity table presents information of the effect each
1 percentage-point change in our assumptions on our share of reserves for CAR
and other residual markets could have on our assumed loss and LAE reserves and
net income for the year ended December 31, 2011. In evaluating the information
in the table, it should be noted that a 1 percentage-point change in our
assumptions would change estimated reserves by 1 percentage-point.
-1 Percent +1 Percent
Change in Change in
Estimation Estimation CAR assumed private passenger automobile
Estimated (decrease) increase in reserves $ (46 ) $ 46
Estimated increase (decrease) in net income 30
(30 )
CAR assumed commercial automobile
Estimated (decrease) increase in reserves (114 )
114
Estimated increase (decrease) in net income 74
(74 )
FAIR Plan assumed homeowners
Estimated (decrease) increase in reserves (46 )
46
Estimated increase (decrease) in net income 30
(30 )
Reserve Development Summary
The changes we have recorded in our reserves in the past illustrate the
uncertainty of estimating reserves. Our prior year reserves decreased by
$36,683, $48,157 and $44,065 for the years ended December 31, 2011, 2010 and
2009, respectively.
The following table presents a comparison of prior year development of our
net reserves for losses and LAE for the years ended December 31, 2011, 2010 and
2009. Each accident year represents all claims for an annual accounting period
in which loss events occurred, regardless of when the losses are actually
reported, booked or paid. Our financial statements reflect the aggregate results
of the current and all prior accident years.
Years Ended December 31,
Accident Year 2011 2010 2009
2001 & prior $ (288 ) $ (1,096 ) $ (1,624 )
2002 (442 ) (1,031 ) (1,431 )
2003 (699 ) (1,669 ) (1,385 )
2004 (1,293 ) (2,147 ) (3,827 )
2005 (3,584 ) (4,488 ) (5,999 )
2006 (4,585 ) (7,996 ) (9,829 )
2007 (5,264 ) (9,662 ) (8,079 )
2008 (9,198 ) (10,992 ) (11,891 )
2009 (6,627 ) (9,076 ) -
2010 (4,703 ) - -
All prior years $ (36,683 ) $ (48,157 ) $ (44,065 )
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The decreases in prior years reserves during the years ended December 31,
2011, 2010 and 2009 resulted from re-estimations of prior year ultimate loss and
LAE liabilities. The 2011 decrease is primarily composed of reductions of
$28,302, in our retained automobile reserves and $4,921 in our retained
homeowners reserves. The 2010 decrease is primarily composed of reductions of
$34,248 in our retained automobile reserves, and $7,269 in our retained
homeowners reserves and all other reserves and $5,572 in CAR assumed reserves.
The 2009 decrease is primarily composed of reductions of $24,979 in our retained
automobile reserves and $11,551 in CAR assumed reserves and $6,103 in our
retained homeowners and all other reserves.
The following table presents information by line of business for prior year
development of our net reserves for losses and LAE for the year ended
December 31, 2011.
Private Passenger Commercial
Accident Year Automobile Automobile Homeowners All Other Total
2001 & prior $ (25 ) $ (172 ) $ (32 ) $ (59 ) $ (288 )
2002 (161 ) (2 ) (248 ) (31 ) (442 )
2003 (483 ) (215 ) (1 ) - (699 )
2004 (807 ) (294 ) (112 ) (80 ) (1,293 )
2005 (2,739 ) (632 ) (132 ) (81 ) (3,584 )
2006 (3,047 ) (420 ) (871 ) (247 ) (4,585 )
2007 (3,209 ) (929 ) (813 ) (313 ) (5,264 )
2008 (6,134 ) (1,083 ) (982 ) (999 ) (9,198 )
2009 (5,618 ) (618 ) (312 ) (79 ) (6,627 )
2010 (1,910 ) (914 ) (1,850 ) (29 ) (4,703 )
All prior years $ (24,133 ) $ (5,279 ) $ (5,353 ) $ (1,918 ) $ (36,683 )
To further clarify the effects of changes in our reserve estimates for CAR
and other residual markets, the next two tables break out the information in the
table above by source of the business (i.e., non-residual market vs. residual
market).
The following table presents information by line of business for prior year
development of retained reserves for losses and LAE for the year ended
December 31, 2011; that is, all our reserves except for business ceded or
assumed from CAR and other residual markets.
Retained Retained
Private Passenger Commercial Retained Retained
Accident Year Automobile Automobile Homeowners All Other Total
2001 & prior $ (25 ) $ (172 ) $ (32 ) $ (59 ) $ (288 )
2002 (189 ) (2 ) (248 ) (31 ) (470 )
2003 (479 ) (209 ) (1 ) - (689 )
2004 (779 ) (279 ) (106 ) (80 ) (1,244 )
2005 (2,658 ) (602 ) (127 ) (81 ) (3,468 )
2006 (2,929 ) (367 ) (847 ) (247 ) (4,390 )
2007 (3,131 ) (786 ) (783 ) (313 ) (5,013 )
2008 (5,958 ) (987 ) (922 ) (999 ) (8,866 )
2009 (5,332 ) (567 ) (81 ) (79 ) (6,059 )
2010 (1,783 ) (1,068 ) (1,774 ) (29 ) (4,654 )
All prior years $ (23,263 ) $ (5,039 ) $ (4,921 ) $ (1,918 ) $ (35,141 )
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The following table presents information by line of business for prior year
development of reserves assumed from residual markets for losses and LAE for the
year ended December 31, 2011.
CAR Assumed CAR Assumed
Private Passenger Commercial FAIR Plan
Accident Year Automobile Automobile Homeowners Total
2001 & prior $ - $ - $ - $ -
2002 28 - - 28
2003 (4 ) (6 ) - (10 )
2004 (28 ) (15 ) (6 ) (49 )
2005 (81 ) (30 ) (5 ) (116 )
2006 (118 ) (53 ) (24 ) (195 )
2007 (78 ) (143 ) (30 ) (251 )
2008 (176 ) (96 ) (60 ) (332 )
2009 (286 ) (51 ) (231 ) (568 )
2010 (127 ) 154 (76 ) (49 )
All prior years $ (870 ) $ (240 ) $ (432 ) $ (1,542 )
Our private passenger automobile line of business prior year reserves
decreased by $24,133 for the year ended December 31, 2011. The decrease was
primarily due to improved retained private passenger results of $20,008 for the
accident years 2005 through 2009 The improved retained private passenger results
were primarily due to fewer IBNR claims than previously estimated and better
than previously estimated severity on our established bodily injury and property
damage case reserves.
Our commercial automobile line of business prior year reserves decreased by
$5,279 for the year ended December 31, 2011 due primarily to fewer IBNR claims
than previously estimated.
Our retained homeowners line of business prior year reserves decreased by
$4,921 for the year ended December 31, 2011. Our FAIR Plan homeowners reserve
decreased by $432 for the year ended December 31, 2011.
In estimating all our loss reserves, including CAR, we follow the guidance
prescribed by ASC 944, Financial Services-Insurance.
For further information, see "Results of Operations: Losses and Loss
Adjustment Expenses."
Other-Than-Temporary Impairments.
We use a systematic methodology to evaluate declines in fair values below
cost or amortized cost of our investments. This methodology ensures that we
evaluate available evidence concerning any declines in a disciplined manner.
In our determination of whether a decline in fair value below amortized cost
is an other-than-temporary impairment ("OTTI"), we consider and evaluate several
factors and circumstances including the issuer's overall financial condition,
the issuer's credit and financial strength ratings, a weakening of the general
market conditions in the industry or geographic region in which the issuer
operates, a prolonged period (typically six months or longer) in which the fair
value of an issuer's securities remains below our amortized cost, and any other
factors that may raise doubt about the issuer's ability to continue as a going
concern.
ASC 320, Investments-Debt and Equity Securities requires entities to
separate an OTTI of a debt security into two components when there are credit
related losses associated with the impaired debt security for which the Company
asserts that it does not have the intent to sell the security, and it is more
likely than not that it will not be required to sell the security before
recovery of its cost basis. Under ASC 320, the amount of the OTTI related to a
credit loss is recognized in earnings, and the amount of the OTTI related to
other factors is recorded as a component of other comprehensive
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income (loss). In instances where no credit loss exists but it is more likely
than not that the Company will have to sell the debt security prior to the
anticipated recovery, the decline in market value below amortized cost is
recognized as an OTTI in earnings. In periods after the recognition of an OTTI
on debt securities, the Company accounts for such securities as if they had been
purchased on the measurement date of the OTTI at an amortized cost basis equal
to the previous amortized cost basis less the OTTI recognized in earnings. For
debt securities for which OTTI was recognized in earnings, the difference
between the new amortized cost basis and the cash flows expected to be collected
will be accreted or amortized into net investment income.
For further information, see "Results of Operations: Net Realized Gains
(Losses) on Investments."
Forward-Looking Statements
Forward-looking statements might include one or more of the following, among
others:
º •
º Projections of revenues, income, earnings per share, capital
expenditures, dividends, capital structure or other financial items;
º •
º Descriptions of plans or objectives of management for future
operations, products or services;
º • º Forecasts of future economic performance, liquidity, need for funding
and income;
º •
º Descriptions of assumptions underlying or relating to any of the
foregoing; and
º •
º Future performance of credit markets.
Forward-looking statements can be identified by the fact that they do not
relate strictly to historical or current facts. They often include words such as
"believe," "expect," "anticipate," "intend," "plan," "estimate," "aim,"
"projects," or words of similar meaning and expressions that indicate future
events and trends, or future or conditional verbs such as "will," "would,"
"should," "could," or "may." All statements that address expectations or
projections about the future, including statements about the Company's strategy
for growth, product development, market position, expenditures and financial
results, are forward-looking statements.
Forward-looking statements are not guarantees of future performance. By
their nature, forward-looking statements are subject to risks and uncertainties.
There are a number of factors, many of which are beyond our control, that could
cause actual future conditions, events, results or trends to differ
significantly and/or materially from historical results or those projected in
the forward-looking statements. These factors include but are not limited to the
competitive nature of our industry and the possible adverse effects of such
competition. Although a number of national insurers that are much larger than we
are do not currently compete in a material way in the Massachusetts private
passenger automobile market, if one or more of these companies decided to
aggressively enter the market it could have a material adverse effect on us.
Other significant factors include conditions for business operations and
restrictive regulations in Massachusetts, the possibility of losses due to
claims resulting from severe weather, the possibility that the Commissioner may
approve future Rule changes that change the operation of the residual market,
the possibility that existing insurance-related laws and regulations will become
further restrictive in the future, our possible need for and availability of
additional financing, and our dependence on strategic relationships, among
others, and other risks and factors identified from time to time in our reports
filed with the SEC. Refer to Part I, Item 1A-Risk Factors.
Some other factors, such as market, operational, liquidity, interest rate,
equity and other risks, are described elsewhere in this Annual Report on
Form 10-K. Factors relating to the regulation and supervision of our Company are
also described or incorporated in this report. There are other factors besides
those described or incorporated in this report that could cause actual
conditions, events or results to differ from those in the forward-looking
statements.
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Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date on which they are made. We do not
undertake any obligation to update publicly or revise any forward-looking
statements to reflect circumstances or events that occur after the date the
forward-looking statements are made.
