OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 11.8% and 13.0% share,
respectively, of the Massachusetts private passenger and commercial automobile
markets in 2012 according to the Commonwealth Automobile Reinsurers ("CAR")
Cession Volume Analysis Report of April 25, 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 insurance
in New Hampshire during 2009, and commercial automobile insurance in New
Hampshire during 2011. During the three months ended March 31, 2012 and 2011,
we wrote $1,663 and $973, respectively, in direct written premiums in New
Hampshire.
Recent Trends and Events
† For the quarter ended March 31, 2012, loss and loss adjustment
expenses incurred decreased by $23,586, or 19.4%, to $98,044 from $121,630 for
the comparable 2011 period. The decrease was primarily due to the absence of
catastrophe losses during the quarter ended March 31, 2012, compared to $19,902
in pre-tax catastrophic weather event losses during the comparable 2011 quarter.
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† We filed and were approved for a private passenger automobile rate
increase of 3.6% to be effective May 15, 2012.
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 many 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 distribution channel.
Perhaps most significantly, prior to 2008, the Massachusetts Commissioner of
Insurance (the "Commissioner") 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 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 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.
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.
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Our GAAP insurance ratios are outlined in the following table.
Three Months Ended March 31,
2012 2011
GAAP ratios:
Loss ratio 63.0 % 84.1 %
Expense ratio 31.2 29.5
Combined ratio 94.2 % 113.6 %
Stock-Based Compensation
Long-term incentive compensation is provided under the our 2002 Management
Omnibus Incentive Plan (the "Incentive Plan") which provides for a variety of
stock-based compensation awards, including nonqualified stock options, incentive
stock options, stock appreciation rights and restricted stock ("RS") awards.
The maximum number of shares of common stock with respect to which awards may be
granted is 2,500,000. Shares of stock covered by an award under the Incentive
Plan that are forfeited will again be available for issuance in connection with
future grants of awards under the plan. At March 31, 2012, there were 617,538
shares available for future grant. The Board of Directors and the Compensation
Committee intend to issue more awards under the Incentive Plan in the future.
A summary of stock-based awards granted under the Incentive Plan during the
three months ended March 31, 2012 is as follows.
Type of Number of Fair
Equity Awards Value per
Awarded Effective Date Granted Share (1) Vesting Terms
RS March 8, 2012 77,844 $ 41.75 3 years, 30%-30%-40%
RS March 8, 2012 4,000 $ 41.75 No vesting period (2)
RS March 21, 2012 20,912 $ 41.96 5 years, 20% annually
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(1) The fair value per share of the restricted stock grant is equal to the
closing price of our common stock on the grant date.
(2) 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.
We are a participant in CAR, a state-established body that runs the residual
market reinsurance programs for commercial automobile insurance in Massachusetts
under which premiums, expenses, losses and loss adjustment expenses on ceded
business are
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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 March 31, 2012, we had no material
amounts recoverable from any reinsurer, excluding $37,839 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
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
The following table shows certain of our selected financial results.
Three Months Ended March 31,
2012 2011
Direct written premiums $ 176,253 $ 164,084
Net written premiums $ 169,298 $ 157,519
Net earned premiums $ 155,536 $ 144,646
Net investment income 9,909 10,165
Net realized gains (losses) on investments 456 (419 )
Finance and other service income 4,505 4,405
Total revenue 170,406
158,797
Loss and loss adjustment expenses 98,044
121,630
Underwriting, operating and related expenses 48,538 42,629
Interest expense 22 22
Total expenses 146,604 164,281
Income (loss) before income taxes 23,802 (5,484 )
Income tax expense (benefit) 6,593 (1,530 )
Net income (loss) $ 17,209 $
(3,954 )
Earnings (loss) per weighted average common share:
Basic
$ 1.13 $ (0.26 )
Diluted $ 1.13 $ (0.26 )
Cash dividends paid per common share $ 0.50 $ 0.50
Direct Written Premiums. Direct written premiums for the three months ended
March 31, 2012 increased by $12,169, or 7.4%, to $176,253 from $164,084 for the
comparable 2011 period. The 2012 increase occurred primarily in our personal
automobile and homeowners lines, which experienced increases of 5.4% and 3.6%,
respectively, in average written premium per exposure and increases of 0.5% and
10.9%, respectively, in written exposures for the three months ended March 31,
2012 from the comparable 2011 period. 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.
Net Written Premiums. Net written premiums for the three months ended March 31,
2012 increased by $11,779, or 7.5%, to $169,298 from $157,519 for the comparable
2011 period. The 2012 increase was primarily due to the factors that increased
direct written premiums.
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Net Earned Premiums. Net earned premiums for the three months ended March 31,
2012 increased by $10,890, or 7.5% to $155,536 from $144,646 for the comparable
2011 period. The 2012 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.
Three Months Ended March 31,
2012 2011
Written Premiums
Direct $ 176,253 $ 164,084
Assumed 4,723 4,167
Ceded (11,678 ) (10,732 )
Net written premiums $ 169,298 $ 157,519
Earned Premiums
Direct $ 162,406 $ 151,471
Assumed 4,267 3,890
Ceded (11,137 ) (10,715 )
Net earned premiums $ 155,536 $ 144,646
Net Investment Income. Net investment income for the three months ended
March 31, 2012 decreased by $256, or 2.5%, to $9,909 from $10,165 for the
comparable 2011 period. The 2012 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 annualized yield on the
investment portfolio decreased to 3.6% for the three months ended March 31, 2012
from 3.7%, for the comparable 2011 period. Our portfolio duration was 3.8 years
at March 31, 2012, up from 3.7 years at December 31, 2011.
Net Realized Gains (Losses) on Investments. Net realized gains on investments
were $456 for the three months ended March 31, 2012 compared to net realized
losses of $419 for the comparable 2011 period.
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 March 31, 2012
Gross Unrealized Losses (4)
Cost or Gross Non-OTTI OTTI Estimated
Amortized Unrealized Unrealized Unrealized Fair
Cost Gains Losses Losses (5) Value
U.S. Treasury securities $ 7,523 $ 305 $ - $ - $ 7,828
Obligations of states and
political subdivisions 436,745 25,658 (395 ) - 462,008
Residential mortgage-backed
securities (1) 230,748 15,708 (110 ) - 246,346
Commercial mortgage-backed
securities 50,102 1,655 - - 51,757
Other asset-backed securities
(2) 15,737 867 (14 ) - 16,590
Corporate and other securities 246,832 11,800 (332 ) - 258,300
Subtotal, fixed maturity
securities 987,687 55,993 (851 ) - 1,042,829
Equity securities (3) 20,823 1,695 (25 ) - 22,493
Totals $ 1,008,510 $ 57,688 $ (876 ) $ - $ 1,065,322
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(1) Residential mortgage-backed securities consists of obligations of U.S.
Government agencies including collateralized mortgage obligations and
mortgage-backed securities 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).
(2) Other asset-backed securities includes obligations of the U.S. Small
Business Administration which totaled $5,719 at amortized cost and $6,214 at
estimated fair value at March 31, 2012.
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(3) Equity securities includes interests in mutual funds of $13,329 at cost and
$13,841 at fair value as of March 31, 2012 held to fund the Company's executive
deferred compensation plan.
(4) Our investment portfolio included 43 securities in an unrealized loss
position at March 31, 2012.
(5) Amounts in this column represent other-than-temporary impairments
recognized in accumulated other comprehensive income.
The composition of our fixed income security portfolio by Moody's rating was as
follows.
As of March 31, 2012
Estimated
Fair Value Percent
U.S. Treasury securities and obligations of U.S.
Government agencies $ 260,388 25.0 %
Aaa/Aa 565,440 54.2
A 113,061 10.8
Baa 72,030 6.9
Ba 1,775 0.2
B 6,851 0.7
Caa 2,487 0.2
Not rated 20,797 2.0
Total $ 1,042,829 100.0 %
As of March 31, 2012, our portfolio of fixed maturity investments was almost
entirely comprised of investment grade corporate fixed maturity securities, U.S.
government and agency securities, and asset-backed securities. Only 1.1% of our
portfolio of fixed maturity investments had both a Moody's and Standard & Poor's
ratings that was below investment grade. 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 March 31, 2012.
As of March 31, 2012
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 $ 12,244 $ 395 $ - $ - $ 12,244 $ 395
Residential
mortgage-backed
securities 11,736 105 60 5 11,796 110
Other asset-backed
securities 1,985 14 - - 1,985 14
Corporate and other
securities 11,506 332 - - 11,506 332
Subtotal, fixed
maturity securities 37,471 846 60 5 37,531 851
Equity securities 2,782 20 235 5 3,017 25
Total temporarily
impaired securities $ 40,253 $ 866 $ 295 $ 10 $ 40,548 $ 876
As of March 31, 2012, we held insured investment securities of approximately
$133,365, which represented approximately 12.5% of our total investments.
Approximately $34,670 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 March 31, 2012. We
do not have any direct investment holdings in a financial guarantee insurance
company.
As of March 31, 2012
Exposure Net
Pre-refunded of Pre-refunded
Financial Guarantor Total Securities Securities
Municipal bonds
Ambac Assurance Corporation $ 18,681 $ 3,328 $ 15,353
Financial Guaranty Insurance Company 278 278 -
Assured Guaranty Municipal Corporation 54,047 23,378 30,669
National Public Finance Guaranty Corporation 56,301 7,686 48,615
Total municipal bonds 129,307 34,670 94,637
Other asset-backed securities
Ambac Assurance Corporation 4,058 - 4,058
Total other asset-backed securities 4,058 - 4,058
Total $ 133,365 $ 34,670 $ 98,695
The Moody's ratings of the Company's insured investments held at March 31, 2012
are essentially the same with or without the investment guarantees.
We reviewed the unrealized losses in our fixed income and equity portfolio as of
March 31, 2012 for potential other-than-temporary asset impairments. We held no
securities at March 31, 2012 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 $876 gross unrealized losses as of March 31, 2012, $395 relates to
obligations of states and political subdivisions. The remaining $481 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 March 31, 2012
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 three months ended March 31, 2012 and 2011, 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 1-Financial Statements, Note 5, Investments, of this Form 10-Q.
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 increased
by $100, or 2.3%, to $4,505 for the three months ended March 31, 2012 from
$4,405 for the comparable 2011 period.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
incurred for the three months ended March 31, 2012 decreased by $23,586 or
19.4%, to $98,044 from $121,630 for the comparable 2011 period. The decrease
was primarily due to the absence of catastrophe losses during the three months
ended March 31, 2012, compared to $19,902 in pre-tax catastrophic weather event
losses during the comparable 2011 period. Our GAAP loss ratio for the three
months ended March 31, 2012 decreased to 63.0% from 84.1% for the comparable
2011 period. Our GAAP loss ratio excluding loss adjustment expenses for the
three months ended March 31, 2012 decreased to 53.5% from 73.9% for the
comparable 2011 period. Total prior year favorable development
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included in the pre-tax results for three months ended March 31, 2012 was $3,987
compared to $9,662 for the comparable 2011 period.
Underwriting, Operating and Related Expenses. Underwriting, operating and
related expenses for the three months ended March 31, 2012 increased by $5,909,
or 13.9%, to $48,538 from $42,629 for the comparable 2011 period, primarily due
to an increase in commissions to agents. Our GAAP expense ratio for the three
months ended March 31, 2012 increased to 31.2 % from 29.5% for the comparable
2011 period.
Interest Expense. Interest expense for both the three months ended March 31,
2012 and 2011 was $22. The credit facility commitment fee included in interest
expense for both the three months ended March 31, 2012 and 2011 was $19.
Income Tax Expense. Our effective tax rates were 27.7% and 27.9% for the three
months ended March 31, 2012 and 2011, 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 quarter ended March 31, 2012 was $17,209
compared to a net loss of $3,954 for the comparable 2011 period. This increase
is primarily due to the decrease in loss and loss adjustment expenses as
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.
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 the payment of dividends to
Safety.
Net cash provided by operating activities was $11,444 during the three months
ended March 31, 2012 compared to net cash used for operations of $3,094 during
the comparable 2011 period. 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 provided by investing activities during the three months ended
March 31, 2012 and 2011 was $42,654 and $25,107, respectively, primarily the
result of proceeds from sales, paydowns, redemptions, calls and maturities of
fixed maturity securities exceeding purchases of fixed maturity securities.
Net cash used for financing activities was $7,218 and $6,876 during the three
months ended March 31, 2012 and 2011, respectively. Net cash used for financing
activities is primarily comprised of dividend payments to shareholders.
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 March, 2012, 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 1- Financial
Statements, Note 8, Debt, of this Form 10-Q.
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Recent Accounting Pronouncements
For information regarding Recent Accounting Pronouncements, please refer to Item
1- Financial Statements, Note 2, Recent Accounting Pronouncements, of this
Form 10-Q.
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 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
December 31, 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 three months ended March 31, 2012, Safety Insurance
recorded dividends to Safety of $6,348.
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.
On February 15, 2012, our Board approved and declared a quarterly cash dividend
on our common stock of $0.50 per share, or $7,598, which was paid on March 15,
2012 to shareholders of record on March 1, 2012. On May 3, 2012, our Board
approved and declared a quarterly cash dividend of $0.50 per share which will be
paid on June 15, 2012 to shareholders of record on June 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. As of March 31, 2012 and December 31, 2011, the
Company had purchased 1,728,645 shares on the open market at a cost of $55,569.
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 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
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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.
Critical Accounting Policies and Estimates
Loss 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 actuaries calculate a
range of indications and select a point estimation using such actuarial
techniques as:
† 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.
† 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.
† 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.
† 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.
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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
$317,001 to $363,019 as of March 31, 2012. 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 $349,975 as of
March 31, 2012.
The following table presents the point estimation of the recorded reserves and
the range of estimations by line of business for net loss and LAE reserves as of
March 31, 2012.
Line of Business Low Recorded High
Private passenger automobile $ 204,965 $ 222,277 $ 230,517
Commercial automobile 39,752 45,382 47,354
Homeowners 46,453 52,208 53,437
All other 25,831 30,108 31,711
Total $ 317,001 $ 349,975 $ 363,019
The following table presents our total net reserves and the corresponding case
reserves and IBNR reserves for each line of business as of March 31, 2012.
Line of Business Case IBNR Total
Private passenger automobile $ 231,742 $ (13,290 ) $
218,452
CAR assumed private passenger automobile 3,136 689 3,825
Commercial automobile
30,882 3,192
34,074
CAR assumed commercial automobile 7,135 4,173
11,308
Homeowners 39,498 6,298
45,796
FAIR Plan assumed homeowners 2,843 3,569
6,412
All other 19,708 10,400
30,108
Total net reserves for losses and LAE $ 334,944$ 15,031$ 349,975
Our IBNR reserves consist of our estimate of the total loss reserves required
less our case reserves. The IBNR reserves for CAR assumed commercial automobile
business are 36.9% of our total reserves for CAR assumed commercial automobile
business as of March 31, 2012 due to the reporting delays in the information we
receive from CAR, as described further in the section on Residual Market Loss
and Loss Adjustment Expense Reserves. Our IBNR reserves for FAIR Plan assumed
homeowners are 55.7% of our total reserves for FAIR Plan assumed homeowners at
March 31, 2012 due to similar reporting delays in the information we receive
from FAIR Plan.
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The following table presents 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 March 31, 2012.
Line of Business Retained Assumed Net
Private passenger automobile $ 218,452
CAR assumed private passenger automobile $ 3,825
Net private passenger automobile $ 222,277
Commercial automobile 34,074
CAR assumed commercial automobile 11,308
Net commercial automobile 45,382
Homeowners 45,796
FAIR Plan assumed homeowners 6,412
Net homeowners 52,208
All other 30,108 - 30,108
Total net reserves for losses and LAE $ 328,430$ 21,545$ 349,975
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 an assigned risk plan in Massachusetts and phase-out of the
private passenger automobile CAR reinsurance pool on April 1, 2009.
Residual market deficits, consists 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 three months ended March 31,
2012, a 1 percentage-point change in the loss and LAE ratio would result in a
change in reserves of $1,555. Each 1 percentage-point change in the loss and
loss expense ratio would have had a $1,011 effect on net income, or $0.07 per
diluted share.
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 three months ended March 31, 2012. 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
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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 $ (4,369 ) $ (2,185 ) $ -
Estimated increase in net income 2,840 1,420 -
No Change in Severity
Estimated (decrease) increase in reserves (2,185 ) - 2,185
Estimated increase (decrease) in net
income 1,420 - (1,420 )
+1 Percent Change in Severity
Estimated increase in reserves - 2,185 4,369
Estimated decrease in net income - (1,420 ) (2,840 )
Commercial automobile retained loss and
LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves (681 ) (341 ) -
Estimated increase in net income 443 222 -
No Change in Severity
Estimated (decrease) increase in reserves (341 ) - 341
Estimated increase (decrease) in net
income 222 - (222 )
+1 Percent Change in Severity
Estimated increase in reserves - 341 681
Estimated decrease in net income - (222 ) (443 )
Homeowners retained loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves (916 ) (458 ) -
Estimated increase in net income 595 298 -
No Change in Severity
Estimated (decrease) increase in reserves (458 ) - 458
Estimated increase (decrease) in net
income 298 - (298 )
+1 Percent Change in Severity
Estimated increase in reserves - 458 916
Estimated decrease in net income - (298 ) (595 )
All other retained loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves (602 ) (301 ) -
Estimated increase in net income 391 196 -
No Change in Severity
Estimated (decrease) increase in reserves (301 ) - 301
Estimated increase (decrease) in net
income 196 - (196 )
+1 Percent Change in Severity
Estimated increase in reserves - 301 602
Estimated decrease in net income - (196 ) (391 )
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.
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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 three months ended March 31, 2012. 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 $ (38 ) $ 38
Estimated increase (decrease) in net income
25 (25 )
CAR assumed commercial automobile
Estimated (decrease) increase in reserves (113 ) 113
Estimated increase (decrease) in net income 73 (73 )
FAIR Plan assumed homeowners
Estimated (decrease) increase in reserves (64 ) 64
Estimated increase (decrease) in net income 42 (42 )
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
$3,987, and $9,662 during the three months ended March 31, 2012 and 2011,
respectively.
The following table presents a comparison of prior year development of our net
reserves for losses and LAE for the three months ended March 31, 2012 and 2011.
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.
Three Months Ended March 31,
Accident Year 2012 2011
2002 & prior $ (171 ) $ (79 )
2003 (283 ) (351 )
2004 (204 ) (386 )
2005 (473 ) (561 )
2006 (633 ) (1,797 )
2007 (500 ) (1,165 )
2008 (755 ) (3,227 )
2009 (893 ) (1,533 )
2010 (1,081 ) (563 )
2011 1,006 -
All prior years $ (3,987 ) $ (9,662 )
The decreases in prior years reserves during the three months ended March 31,
2012 and 2011 resulted from re-estimations of prior year ultimate loss and LAE
liabilities. The 2012 decrease is primarily composed of reductions of $4,726 in
our retained automobile reserves, partially offset by an increase of $1,286 in
the prior year reserves of all other than automobile and homeowners lines. The
2011 decrease is primarily composed of reductions of $7,298 in our retained
automobile reserves and $1,250 in our retained homeowners reserves.
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The following table presents information by line of business for prior year
development of our net reserves for losses and LAE for the three months ended
March 31, 2012.
Private Passenger Commercial
Accident Year Automobile Automobile Homeowners All Other Total
2002 & prior $ (157 ) $ (14 ) $ - $ - $ (171 )
2003 (263 ) (7 ) (13 ) - (283 )
2004 (175 ) (29 ) - - (204 )
2005 (303 ) (167 ) (3 ) - (473 )
2006 (545 ) (86 ) (1 ) (1 ) (633 )
2007 (405 ) (89 ) (3 ) (3 ) (500 )
2008 (659 ) (90 ) (3 ) (3 ) (755 )
2009 (900 ) 30 (8 ) (15 ) (893 )
2010 (756 ) (286 ) (27 ) (12 ) (1,081 )
2011 (326 ) 80 (68 ) 1,320 1,006
All prior years $ (4,489 ) $ (658 ) $ (126 ) $ 1,286 $ (3,987 )
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 three months ended
March 31, 2012; 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
2002 & prior $ (157 ) $ (14 ) $ - $ - $ (171 )
2003 (263 ) - (13 ) - (276 )
2004 (175 ) (2 ) - - (177 )
2005 (303 ) (111 ) (3 ) - (417 )
2006 (480 ) (18 ) (1 ) (1 ) (500 )
2007 (289 ) (11 ) (3 ) (3 ) (306 )
2008 (553 ) (102 ) (3 ) (3 ) (661 )
2009 (835 ) (22 ) (8 ) (15 ) (880 )
2010 (742 ) (287 ) (27 ) (12 ) (1,068 )
2011 (326 ) (36 ) (68 ) 1,320 890
All prior years $ (4,123 ) $ (603 ) $ (126 ) $ 1,286 $ (3,566 )
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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
three months ended March 31, 2012.
CAR Assumed CAR Assumed
Private Passenger Commercial FAIR Plan
Accident Year Automobile Automobile Homeowners Total
2002 & prior $ - $ - $ - $ -
2003 - (7 ) - (7 )
2004 - (27 ) - (27 )
2005 - (56 ) - (56 )
2006 (65 ) (68 ) - (133 )
2007 (116 ) (78 ) - (194 )
2008 (106 ) 12 - (94 )
2009 (65 ) 52 - (13 )
2010 (14 ) 1 - (13 )
2011 - 116 - 116
All prior years $ (366 ) $ (55 ) $ - $ (421 )
Our private passenger automobile line of business prior year reserves decreased
by $4,489 for the three months ended March 31, 2012. The decrease was primarily
due to improved retained private passenger results of $3,528 for the accident
years 2005 through 2011. 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 $658
for the three months ended March 31, 2012 due primarily to fewer IBNR claims
than previously estimated.
Our retained homeowners line of business prior year reserves decreased by $126
and all other lines increased by $1,286 for the three months ended March 31,
2012.
In estimating all our loss reserves, including CAR, we follow the guidance
prescribed by Accounting Standards Codification ("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 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.
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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:
† Projections of revenues, income, earnings per share, capital
expenditures, dividends, capital structure or other financial items;
† Descriptions of plans or objectives of management for future
operations, products or services;
† Forecasts of future economic performance, liquidity, need for funding
and income;
† Descriptions of assumptions underlying or relating to any of the
foregoing; and
† 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 of our Annual
Report on Form 10-K for the year ended December 31, 2011.
Some other factors, such as market, operational, liquidity, interest rate,
equity and other risks, are described elsewhere in this Quarterly Report on
Form 10-Q. 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.
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.
