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MANAGEMENT'S DISCUSSION AND ANALYSIS
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," "the 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"), Safety Northeast Insurance Company ("Safety Northeast"), Safety
Asset Management Corporation ("SAMC"), and Safety Management Corporation , which
is SAMC's holding company.
We are a leading provider of private passenger automobile, commercial
automobile, homeowners and commercial other-than-auto insurance in
Massachusetts . In addition to private passenger automobile insurance (which
represented 54.9% of our direct written premiums in 2020), we offer a portfolio
of other insurance products, including commercial automobile (14.9% of 2020
direct written premiums), homeowners (25.0% of 2020 direct written premiums) and
dwelling fire, umbrella and business owner policies (totaling 5.2% of 2020
direct written premiums). Operating exclusively in Massachusetts , New Hampshire ,
and Maine through our insurance company subsidiaries, Safety Insurance , Safety
Indemnity, Safety P&C and Safety Northeast (together referred to as the
"Insurance Subsidiaries"), we have established strong relationships with
independent insurance agents, who numbered 871 in 1,095 locations throughout
these three states at December 31, 2020 . We have used these relationships and
our extensive knowledge of the Massachusetts market to become the third largest
private passenger automobile carrier and the second largest commercial
automobile insurance carrier in Massachusetts , capturing an approximate 8.4% and
12.8% share, respectively, of the Massachusetts private passenger and commercial
automobile markets in 2020 according to statistics compiled by the Commonwealth
Automobile Reinsurers ("CAR"). We are also the third largest homeowners
insurance carrier in Massachusetts with a 7.0% share of the Massachusetts
homeowners insurance market.
policyholders, currently assigns
"A" rating was reaffirmed by
Our Insurance Subsidiaries began writing insurance inNew Hampshire during 2008 and inMaine in 2016. InNovember 2020 , we formed a fourth insurance subsidiary, Safety Northeast, which became licensed to write insurance products inMassachusetts in January of 2021. The table below shows the amount of direct written premiums written in each state during the three and nine months endedSeptember 30, 2021 and 2020. 23 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, Direct Written Premiums 2021 2020 2021
2020 Massachusetts $ 201,036 $ 203,887$ 593,370 $ 590,919 New Hampshire 9,286 8,988 25,195 23,867 Maine 776 563 2,003 1,299 Total $ 211,098 $ 213,438$ 620,568 $ 616,085 Recent Trends and Events Beginning inMarch 2020 , the global pandemic associated with the novel coronavirus COVID-19 ("COVID-19") and related economic conditions caused significant economic effects including temporary closures of many businesses and reduced consumer activity due to shelter-in-place, stay-at-home and other governmental actions. The Company continues to take actions that address the health and well-being of our employees while still serving the needs of our agents and insureds. The immediate and long-term impacts of potential regulatory action, including rate changes, could affect the property and casualty insurance industry, our business, and our future financial results. For additional information, see Item 1A. Risk Factors and our statement on Forward Looking Statements. There are many uncertainties with respect to COVID-19. For further discussion regarding the potential impacts of COVID-19 and related economic conditions on the Company, see "Part II-Item 1A-Risk Factors." These risks include legal challenges or legislative actions that extend business interruption coverage outside of our policy terms for business owner policies, which require direct physical loss or damage to property. As discussed in Note 8 - Commitments and Contingencies, the Company has been named in a lawsuit alleging that the Company improperly denied coverage to commercial insureds for loss of business income resulting from the COVID-19 pandemic. Our business owner policies serve eligible small and medium sized commercial accounts including but not limited to apartments and condominiums; mercantile establishments; limited cooking restaurants; offices; and special trade contractors. The majority of these business owner policies do not contain a specific exclusion for viruses. However, as viruses do not produce direct physical damage or loss to property, our position is that no coverage exists for this peril. As a result, the Company accrued a reserve of$6,500 for legal defense costs in 2020. This amount is still accrued as ofSeptember 30, 2021 . While we continue to evaluate each claim based on the specific facts and circumstances involved, our business owner policies do not provide coverage for business interruption claims unless there is direct physical damage or loss to property. Losses and loss adjustment expenses incurred for the three months endedSeptember 30, 2021 increased by$22,075 , or 22.7%, to$119,129 from$97,054 for the comparable 2020 period. Losses and loss adjustment expenses incurred for the nine months endedSeptember 30, 2021 increased by$32,011 , or 10.4%, to$340,785 from$308,774 for the comparable 2020 period. The 2020 losses and loss adjustment expenses in both periods reflected a decrease in frequency, primarily in our private passenger automobile line of business as a result of the COVID-19 pandemic.
Non-generally accepted accounting principles ("non-GAAP") operating income, as
defined below, was $25,823 and $82,667 for the three and nine months ended
September 30, 2021 , respectively, compared to $38,128 and $92,049 for the
comparable 2020 periods, respectively. The decrease in non-GAAP operating income
for the three and nine months ended September 30, 2021 was primarily the result
of an increase in losses and loss adjustment expenses compared to the prior
period which were impacted by the onset of the COVID-19 pandemic. The decrease
in non-GAAP operating income for the nine months ended September 30, 2021 was
partially offset by an increase in net earned premiums compared to the prior
period which was impacted by the Safety Personal Auto Relief Credit, a 15%
policyholder credit that was applied to personal auto policies for the months of
April, May and June 2020 and was booked as an adjustment to premiums during the
second quarter of 2020. Non-GAAP operating income for the three and nine months
ended September 30, 2021 was $1.70 and $5.51 per diluted share, respectively,
compared to $2.53 and $6.02 per diluted share, respectively, for the comparable
2020 period. Refer to the Non-GAAP Measures section of this Management's
Discussion and Analysis for additional detail of the non-GAAP measures
calculations.
24
Table of Contents
The following rate changes have been filed and approved by the insurance
regulators of Massachusetts and New Hampshire in 2021 and 2020. Our
Massachusetts private passenger automobile rates include a 13% commission rate
for agents.
Line of Business Effective Date Rate Change
New Hampshire Homeowner May 1, 2021 2.9%
Massachusetts Homeowner April 1, 2021 1.8%
Massachusetts Private Passenger Automobile
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 calculated on a GAAP basis) 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 outlined in the following table.
Three Months Ended September 30 ,
Nine Months Ended
2021 2020 2021 2020 GAAP ratios: Loss ratio 61.3 % 49.8 % 58.6 % 53.7 % Expense ratio 32.6 35.2 33.3 34.0 Combined ratio 93.9 % 85.0 % 91.9 % 87.7 % Share-Based Compensation OnApril 2, 2018 , the Company's Board of Directors adopted theSafety Insurance Group, Inc. 2018 Long-Term Incentive Plan ("the 2018 Plan"), which was subsequently approved by our shareholders at the 2018 Annual Meeting of Shareholders. The 2018 Plan enables the grant of stock awards, performance shares, cash based performance units, other stock based awards, stock options, stock appreciation rights, and stock unit awards, each of which may be granted separately or in tandem with other awards. Eligibility to participate includes officers, directors, employees and other individuals who provide bona fide services to the Company. The 2018 Plan supersedes the Company's 2002 Management Omnibus Incentive Plan ("the 2002 Incentive Plan").
The 2018 Plan establishes an initial pool of 350,000 shares of common stock
available for issuance to our employees and other eligible participants.
The maximum number of shares of common stock between both the 2018 Plan and 2002 Incentive Plan with respect to which awards may be granted is 2,850,000. No further grants will be allowed under the 2002 Incentive Plan. AtSeptember 30, 2021 , there were 164,908 shares available for future grant. 25 Table of Contents
A summary of share based awards granted under the Incentive Plan during the nine
months ended
Type of Number of Fair
Equity Awards Value per
Awarded Effective Date Granted Share (1) Vesting Terms
RS - Service February 24, 2021 33,840 $ 79.27 3 years, 30%-30%-40%
RS - Performance February 24, 2021 29,422 $ 79.27 3 years, cliff vesting (3)
RS February 24, 2021 6,000 $ 79.27
No vesting period
RS
(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) four times their annual cash retainer. This requirement must be met within
five years of becoming a director.
The shares represent performance-based restricted shares award. Vesting of
these shares is dependent upon the attainment of pre-established performance
(3) objectives, and any difference between shares granted and shares earned at
the end of the performance period will be reported at the conclusion of the
performance period.
The shares represent a true-up of previously awarded performance-based
(4) restricted share awards. The updated shares were calculated based on the
attainment of pre-established performance objectives and granted under the
2002 Incentive Plan. 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 are selective in choosing our reinsurers, seeking only those companies that we consider to be financially stable and adequately capitalized. In an effort to minimize exposure to the insolvency of a reinsurer, we continually evaluate and review the financial condition of our reinsurers. Most of our reinsurers have anA.M. Best rating of "A+" (Superior) or "A" (Excellent). We maintain reinsurance coverage to help lessen the effect of losses from catastrophic events, maintaining coverage during 2021 that protects us in the event of a "135-year storm" (that is, a storm of a severity expected to occur once in a 135-year period). 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 theMassachusetts Property Insurance Underwriting Association ("FAIR Plan").
For 2021, we have purchased four layers of excess catastrophe reinsurance
providing
of
We also have casualty excess of loss reinsurance for large casualty losses occurring in our automobile, homeowners, dwelling fire, business owners, and commercial package lines of business in excess of$2,000 up to a maximum of$10,000 . We have property excess of loss reinsurance coverage for large property losses, with coverage in excess of$2,000 up to a maximum of$20,760 , for our homeowners, business owners, and commercial package policies. In addition, we have liability excess of loss reinsurance for umbrella large losses in excess of$1,000 up to a maximum of$10,000 . We also have various reinsurance agreements withHartford Steam Boiler Inspection and Insurance Company , of which the primary contract is a quota share agreement under which we cede 100% of the premiums and losses for the equipment breakdown coverage under our business owner policies and commercial package policies. We are a participant in CAR, a state-established body that runs the residual market reinsurance programs for commercial automobile insurance inMassachusetts under which premiums, expenses, losses and loss adjustment expenses on ceded business are shared by all insurers writing automobile insurance inMassachusetts . 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 inMassachusetts . 26 Table of Contents 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. OnJuly 1, 2021 , the FAIR Plan purchased$1,800,000 of catastrophe reinsurance for property losses with retention of$100,000 .
At
loss adjustment expense reserves, unearned premiums and reinsurance
recoverables.
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 and
costs associated with claim payments.
Non-GAAP Measures
Management has included certain non-GAAP financial measures in presenting the
Company's results. Management believes that these non-GAAP measures better
explain the Company's results of operations and allow for a more complete
understanding of the underlying trends in the Company's business. These measures
should not be viewed as a substitute for those determined in accordance with
GAAP. In addition, our definitions of these items may not be comparable to the
definitions used by other companies.
Non-GAAP operating income and non-GAAP operating income per diluted share
consist of our GAAP net income adjusted by the net realized gains (losses) on
investments, changes in net unrealized gains on equity securities, credit loss
benefit (expense) and taxes related thereto. Net income and earnings per diluted
share are the GAAP financial measures that are most directly comparable to
non-GAAP operating income and non-GAAP operating income per diluted share,
respectively. A reconciliation of the GAAP financial measures to these non-GAAP
measures is included in the financial highlights below.
27
Table of Contents
Results of Operations
Three and Nine Months Ended
Ended September 30, 2020
The following table shows certain of our selected financial results.
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Direct written premiums $ 211,098 $ 213,438 $ 620,568 $ 616,085
Net written premiums $ 202,604 $ 205,758 $ 593,648 $ 592,452
Net earned premiums $ 194,395 $ 194,843 $ 581,542 $ 574,640
Net investment income 11,112 9,718 32,418 30,344
Earnings from partnership investments 5,720 4,699 12,625 2,589
Net realized gains (losses) on investments 2,226 669 8,507 (683)
Change in net unrealized gains on equity securities (3,447) 7,521 11,414 (5,639)
Credit loss (expense) benefit (49) 182 325 (2,289)
Finance and other service income 3,751 4,768 11,660 12,252
Total revenue 213,708 222,400 658,491 611,214
Losses and loss adjustment expenses 119,129 97,054 340,785 308,774
Underwriting, operating and related expenses 63,291 68,596 193,404 195,192
Interest expense 131 131 390 308
Total expenses 182,551 165,781 534,579 504,274
Income before income taxes 31,157 56,619 123,912 106,940
Income tax expense 6,337 11,877 25,251 21,694
Net income $
24,820 $ 44,742 $ 98,661
Earnings per weighted average common share:
Basic
$ 1.65 $ 2.99 $ 6.63 $ 5.62 Diluted $ 1.64 $ 2.96 $ 6.58 $ 5.58 Cash dividends paid per common share $ 0.90 $ 0.90 $ 2.70 $ 2.70
Reconciliation of Net Income to Non-GAAP Operating Income:
Net income $
24,820 $ 44,742 $ 98,661
Exclusions from net income:
Net realized (gains) losses on investments
(2,226) (669) (8,507) 683 Change in net unrealized gains on equity securities 3,447 (7,521) (11,414) 5,639 Credit loss expense (benefit) 49 (182) (325) 2,289 Income tax (benefit) expense on exclusions from net income (267) 1,758 4,252 (1,808) Non-GAAP Operating income $
25,823 $ 38,128 $ 82,667
Net income per diluted share $ 1.64 $ 2.96 $ 6.58 $ 5.58 Exclusions from net income: Net realized (gains) losses on investments (0.15) (0.04) (0.57) 0.04 Change in net unrealized gains on equity securities 0.23 (0.50) (0.76) 0.37 Credit loss expense (benefit) - (0.01) (0.02) 0.15 Income tax (benefit) expense on exclusions from net income (0.02) 0.12 0.28 (0.12) Non-GAAP Operating income per diluted share $ 1.70 $ 2.53 $ 5.51 $ 6.02
Direct Written Premiums. Direct written premiums for the three months endedSeptember 30, 2021 decreased by$2,340 , or 1.1%, to$211,098 from$213,438 for the comparable 2020 period. Direct written premiums for the nine months endedSeptember 30, 2021 increased by$4,483 or 0.7%, to$620,568 from$616,085 for the comparable 2020 period. The nine months endedSeptember 30, 2020 direct written premium reflects the Safety Personal Auto Relief Credit, a 15% policyholder credit that was applied to personal auto policies for the months of April, May andJune 2020 and was booked as an adjustment to premiums during
the second quarter of 2020. Net Written Premiums. Net written premiums for the three months endedSeptember 30, 2021 decreased by$3,154 , or 1.5%, to$202,604 from$205,758 for the comparable 2020 period. Net written premiums for the nine months endedSeptember 30, 2021 increased by$1,196 , or 0.2%, to$593,648 from$592,452 for the comparable 2020 period. The changes in both periods are a result of the changes in direct written premiums as described above. 28 Table of Contents Net Earned Premiums. Net earned premiums for the three months endedSeptember 30, 2021 decreased by$448 , or 0.2%, to$194,395 from$194,843 for the comparable 2020 period. Net earned premiums for the nine months endedSeptember 30, 2021 increased by$6,902 , or 1.2%, to$581,542 from$574,640 for the comparable 2020 period. The changes in both periods are a result of the changes in direct written premiums as described above. The effect of reinsurance on net written and net earned premiums is presented in the following table. Three Months EndedSeptember 30 ,
Nine Months Ended
2021 2020 2021 2020 Written Premiums Direct$ 211,098 $ 213,438 $ 620,568 $ 616,085 Assumed 7,585 5,675 23,345 20,781 Ceded (16,079) (13,355) (50,265) (44,414) Net written premiums$ 202,604 $ 205,758 $ 593,648 $ 592,452 Earned Premiums Direct$ 204,429 $ 205,421 $ 608,448 $ 608,517 Assumed 7,202 6,542 23,199 23,411 Ceded (17,236) (17,120) (50,105) (57,288) Net earned premiums$ 194,395 $ 194,843 $ 581,542 $ 574,640 Net Investment Income. Net investment income for the three months endedSeptember 30, 2021 increased by$1,394 , or 14.3%, to$11,112 from$9,718 for the comparable 2020 period. Net investment income for the nine months endedSeptember 30, 2021 increased by$2,074 , or 6.8%, to$32,418 from$30,344 for the comparable 2020 period. The increase is a result of an increase in the average invested asset balance and an increase in the equity in earnings of other invested assets compared to the prior year. Net effective annualized yield on the investment portfolio was 3.1% for the three months endedSeptember 30, 2021 compared to 2.8% for the comparable 2020 period. Net effective annualized yield on the investment portfolio was 3.0% for the nine months endedSeptember 30, 2021 compared to 2.9% for the nine months endedSeptember 30, 2020 . The investment portfolio's duration on fixed maturities was 3.5 years atSeptember 30, 2021 and 3.2 years atDecember 31, 2020 . Earnings from Partnership Investments. Earnings from partnership investments were$5,720 for the three months endedSeptember 30, 2021 compared to$4,699 for the comparable 2020 period. Earnings from partnership investments were$12,625 for the nine months endedSeptember 30, 2021 compared to$2,589 for the comparable 2020 period. The 2021 earnings reflect an increase in investment appreciation and timing of cash proceeds received compared to the prior year. Net Realized Gains (Losses) on Investments. Net realized gains on investments was$2,226 for the three months endedSeptember 30, 2021 compared to$669 for the comparable 2020 period. Net realized gains on investments was$8,507 for the nine months endedSeptember 30, 2021 compared to net realized losses of$683 for the comparable 2020 period. 29 Table of Contents The gross unrealized gains and losses on investments in fixed maturity securities, including redeemable preferred stocks that have characteristics of fixed maturities, equity securities, including interests in mutual funds, and other invested assets were as follows for the periods indicated: As of September 30, 2021 Cost or Allowance for Gross Unrealized Estimated Amortized Expected Credit Fair Cost Losses Gains Losses (3) Value
U.S. Treasury securities$ 1,819 $ -$ 18 $ -$ 1,837 Obligations of states and political subdivisions 150,839 - 5,243 (131) 155,951 Residential mortgage-backed securities (1) 237,523 - 8,010 (428) 245,105 Commercial mortgage-backed securities 141,471 - 6,252 (246) 147,477 Other asset-backed securities 88,672 - 686 (9) 89,349 Corporate and other securities 614,883 (729) 25,781 (2,252) 637,683 Subtotal, fixed maturity securities 1,235,207 (729) 45,990 (3,066) 1,277,402 Equity securities (2) 204,243 - 50,126 (1,746) 252,623 Other invested assets (4) 66,323 -
- - 66,323 Totals$ 1,505,773 $ (729)$ 96,116 $ (4,812) $ 1,596,348 (1)Residential mortgage-backed securities consisted primarily of obligations ofU.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 theFederal Home Loan Bank (FHLB). (2)Equity securities included common stock, preferred stock, mutual funds and interests in mutual funds held to fund the Company's executive
deferred compensation plan.
(3)Our investment portfolio included 390 securities in an unrealized loss
position at
(4)Other invested assets are accounted for under the equity method which
approximated fair value.
The composition of our fixed income security portfolio by Moody's rating was as
follows:
As of September 30, 2021
Estimated
Fair Value Percent
U.S. Treasury securities and obligations of U.S.
Government agencies $ 255,065 20.0 %
Aaa/Aa 306,980 24.0
A 278,582 21.8
Baa 233,734 18.3
Ba 67,583 5.3
B 98,376 7.7
Caa/Ca 4,270 0.3
Not rated 32,812 2.6
Total $ 1,277,402 100.0 %
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.
As ofSeptember 30, 2021 , our portfolio of fixed maturity investments was comprised principally of investment grade corporate fixed maturity securities,U.S. government and agency securities, and asset-backed securities. The portion of our non-investment grade portfolio of fixed maturity investments is primarily comprised of variable rate secured and senior bank loans and high yield bonds. 30 Table of Contents 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 ofSeptember 30, 2021 . As of September 30, 2021 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
3,994 131 - - 3,994 131 Residential mortgage-backed securities 43,795 427 17 1 43,812 428 Commercial mortgage-backed securities 10,100 246 - - 10,100 246 Other asset-backed securities 12,374 9 - - 12,374 9 Corporate and other securities 162,449 2,187 8,601 65 171,050 2,252 Subtotal, fixed maturity securities 232,712 3,000 8,618 66 241,330 3,066 Equity securities 34,998 1,514 632 232 35,630 1,746 Total temporarily impaired securities$ 267,710 $ 4,514 $ 9,250 $ 298 $ 276,960 $ 4,812 The Company's analysis of its fixed maturity portfolio atSeptember 30, 2021 concluded that$729 of unrealized losses were due to credit factors and were recorded as an allowance for expected credit losses atSeptember 30, 2021 . The Company concluded that outside of the securities that were recognized as credit impaired, the unrealized losses recorded on the fixed maturity portfolio atSeptember 30, 2021 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. Based upon the analysis performed, the Company's decision to hold these securities, the Company's current level of liquidity and our history of positive operating cash flows, management believes it is more likely than not that it will not be required to sell any of its securities before the anticipated recovery in the fair value to its amortized cost basis. Specific qualitative analysis was also performed for securities appearing on our "Watch List ." 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.
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 for the three months endedSeptember 30, 2021 decreased by$1,017 , or 21.3%, to$3,751 from$4,768 for the comparable 2020 period. Finance and other service income for the nine months endedSeptember 30, 2021 decreased by$592 , or 4.8%, to$11,660 from$12,252 for the comparable 2020 period. The decrease in both periods is primarily driven by a change in our late fee assessment policy. The nine months endedSeptember 30, 2020 finance and other service income also reflects a moratorium on certain policy cancellations and fees that were in place during the 2020 as a result of the COVID-19 pandemic. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred for the three months endedSeptember 30, 2021 increased by$22,075 , or 22.7%, to$119,129 from$97,054 for the comparable 2020 period. Losses and loss adjustment expenses incurred for the nine months endedSeptember 30, 2021 increased by$32,011 , or 10.4%, to$340,785 from$308,774 for the comparable 2020 period. The 2020 losses and loss adjustment expenses in both periods reflect a decrease in frequency, primarily in our private passenger automobile line of business as a result of the COVID-19 pandemic. Our GAAP loss ratio for the three months endedSeptember 30, 2021 increased to 61.3% from 49.8% for the comparable 2020 period. Our GAAP loss ratio for the nine months endedSeptember 30, 2021 increased to 58.6% from 31 Table of Contents 53.7% for the comparable 2020 period. Our GAAP loss ratio excluding loss adjustment expenses for the three months endedSeptember 30, 2021 was 52.1% compared to 38.5% for the comparable 2020 period. Our GAAP loss ratio excluding loss adjustment expenses for the nine months endedSeptember 30, 2021 was 48.3% compared to 43.9% for the comparable 2020 period. Total prior year favorable development included in the pre-tax results for the three months endedSeptember 30, 2021 was$15,403 compared to$15,291 for the comparable 2020 period. Total prior year favorable development included in the pre-tax results for the nine months endedSeptember 30, 2021 was$41,211 compared to$34,619 for the comparable 2020 period.
Underwriting, Operating and Related Expenses. Underwriting, operating and related expenses for the three months endedSeptember 30, 2021 decreased by$5,305 , or 7.7%, to$63,291 from$68,596 for the comparable 2020 period. Underwriting, operating and related expenses for the nine months endedSeptember 30, 2021 decreased by$1,788 , or 0.9%, to$193,404 from$195,192 for the comparable 2020 period. The decreases in both periods are driven by a decrease in contingent commission expense. Our GAAP expense ratio for the three months endedSeptember 30, 2021 decreased to 32.6% from 35.2% for the comparable 2020 period. Our GAAP expense ratio for the nine months endedSeptember 30, 2021 decreased to 33.3% from 34.0% for the comparable 2020 period. Interest Expense. Interest expense was$131 for the three months endedSeptember 30, 2021 and 2020, respectively. Interest expense was$390 for the nine months endedSeptember 30, 2021 compared to$308 for the comparable 2020 period. The credit facility commitment fee included in interest expense was$56 for the nine months endedSeptember 30, 2021 and 2020. Income Tax Expense. Our effective tax rate was 20.3% and 21.0% for the three months endedSeptember 30, 2021 and 2020, respectively. Our effective tax rate was 20.4% and 20.3% for the nine months endedSeptember 30, 2021 and 2020. The effective tax rates for the three and nine months endedSeptember 30, 2021 and 2020 were lower than the statutory rate primarily due to the effects of tax-exempt investment income and the impact of stock-based compensation. Net Income. Net income for the three months endedSeptember 30, 2021 was$24,820 compared to net income of$44,742 for the comparable 2020 period. Net income for the nine months endedSeptember 30, 2021 was$98,661 compared to net income of$85,246 for the comparable 2020 period. Non-GAAP Operating Income. Non-GAAP operating income, as defined above, was$25,823 for the three months endedSeptember 30, 2021 compared to$38,128 for the comparable 2020 period. Non-GAAP operating income was$82,667 for the nine months endedSeptember 30, 2021 compared to$92,049 for the comparable 2020
period.
Liquidity and Capital Resources
As discussed in the Regulatory Matters section below, 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
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$110,584 and$76,112 during the nine months endedSeptember 30, 2021 and 2020, 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. Positive operating cash flows are expected in the future to meet our liquidity requirements. Net cash used for investing activities was$79,005 and$9,497 during the nine months endedSeptember 30, 2021 and 2020, respectively. Fixed maturities, equity securities, and other invested assets purchased were$336,374 for 32 Table of Contents the nine months endedSeptember 30, 2021 compared to$172,527 for the comparable prior year period. Proceeds from maturities, redemptions, calls and sales, of securities were$264,224 during the nine months endedSeptember 30, 2021 compared to$171,155 for the comparable prior year period. Net cash used for financing activities was$40,645 and$51,273 during the nine months endedSeptember 30, 2021 and 2020, respectively. Net cash used for financing activities during the nine months endedSeptember 30, 2021 consisted of dividend payments to shareholders. Net cash used for financing activities during the nine months endedSeptember 30, 2020 is comprised of dividend payments to shareholders and share buybacks, partially offset by the proceeds from a$30,000 borrowing from the FHLB-Boston onMarch 17, 2020 . The borrowing is for a term of five years, bearing interest at a rate of 1.42%. Interest is payable monthly, and the principal is due on the maturity date ofMarch 17, 2025 but may be prepaid in whole or in part by the Company in advance. The Insurance Subsidiaries maintain a high degree of liquidity within their respective investment portfolios in fixed maturity and equity securities. 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 9, Debt, of this Form 10-Q.
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 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 of theDivision of Insurance ofMassachusetts ("Commissioner"). TheMassachusetts 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 precedingDecember 31 or (ii) the insurer's net income for the twelve-month period ending the precedingDecember 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 byMassachusetts 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. UnderMassachusetts 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-endDecember 31, 2020 , the statutory surplus ofSafety Insurance was$754,066 , and its statutory net income for 2020 was$121,446 . As a result, a maximum of$121,446 is available in 2021 for such dividends without prior approval of the Commissioner. As a result of thisMassachusetts statute, the Insurance Subsidiaries had restricted net assets in the amount of$632,620 atDecember 31, 2020 . During the nine months endedSeptember 30, 2021 ,Safety Insurance paid dividends to Safety of$37,435 . 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. 33 Table of Contents
Since the initial public offering of its common stock in
Company has paid regular quarterly dividends to shareholders of its common
stock. Quarterly dividends paid during 2021 were as follows:
Total
Declaration Record Payment Dividend per Dividends Paid
Date Date Date Common Share and Accrued
February 16, 2021 March 5, 2021 March 15, 2021 $ 0.90 $ 13,459
May 5, 2021 June 1, 2021 June 15, 2021 $ 0.90 $ 13,490
August 4, 2021 September 1, 2021 September 15, 2021 $ 0.90 $ 13,493
On November 3, 2021 , our Board approved and declared a quarterly cash dividend
of $0.90 per share which will be paid on December 15, 2021 to shareholders of
record on December 1, 2021 . We plan to continue to declare and pay quarterly
cash dividends in 2021, depending on our financial position and the regularity
of our cash flows.
On August 3, 2007 , the Board of Directors approved a share repurchase program of
up to $30,000 of the Company's outstanding common shares. The Board of Directors
had cumulatively authorized increases to the existing share repurchase program
of up to $150,000 of its outstanding common shares. Under the program, the
Company may repurchase shares of its 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 September 30, 2021 , and December 31, 2020 , the Company had
purchased 2,831,168 shares of common stock at a cost of $123,834 .
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.
Risk-Based Capital Requirements
The NAIC has adopted a formula and model law to implement risk-based capital requirements for most property and casualty insurance companies, which are designed to determine minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations. UnderMassachusetts law, insurers having less total adjusted capital than that required by the risk-based capital calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The risk-based capital law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of total adjusted capital to risk-based capital falls. As ofDecember 31, 2020 , the Insurance Subsidiaries had total adjusted capital of$754,066 , which is in excess of amounts requiring company or regulatory action at any prescribed risk-based capital action level. Minimum statutory capital and surplus, or company action level risk-based capital, was$197,193 atDecember 31, 2020 .
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 development services with us. We have no direct
34
Table of Contents
investments in real estate and no holdings of mortgages secured by commercial
real estate. Accordingly, we have no material off-balance sheet arrangements.
As discussed in Note 8 - Commitments and Contingencies, the Company has
committed
contributed
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 estimated losses incurred but not yet reported ("IBNR") 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 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.
In estimating all our loss reserves, we follow the guidance prescribed by ASC
944, Financial Services - Insurance.
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
35
Table of Contents
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. 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$445,580 to$501,063 as ofSeptember 30, 2021 . 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$479,299 as ofSeptember 30, 2021 . The following table presents the point estimation of the recorded reserves and the range of estimations by line of business for net loss and LAE reserves
as ofSeptember 30, 2021 . As of September 30, 2021 Line of Business Low Recorded High Private passenger automobile$ 174,466 $ 187,088 $ 191,969 Commercial automobile 98,807 107,365 108,189 Homeowners 94,805 99,482 101,718 All other 77,502 85,364 99,187 Total$ 445,580 $ 479,299 $ 501,063 36 Table of Contents The following table presents our total net reserves and the corresponding case reserves and IBNR reserves for each line of business as ofSeptember 30, 2021 . As of September 30, 2021 Line of Business Case IBNR Total Private passenger automobile$ 225,211 $ (38,131) $
187,080
CAR assumed private passenger auto 1 7 8 Commercial automobile 61,644 13,153
74,797
CAR assumed commercial automobile 18,354 14,214
32,568
Homeowners 87,252 1,779
89,031
FAIR Plan assumed homeowners 3,592 6,859
10,451
All other 48,237 37,127
85,364
Total net reserves for losses and LAE
At
automobile line of business was comprised of (
ultimate decreases in the case reserves, including anticipated recoveries
(i.e. salvage and subrogation), and
yet reported losses.
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 43.6% of our total reserves for CAR assumed commercial automobile business as ofSeptember 30, 2021 , 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 65.6% of our total reserves for FAIR Plan assumed homeowners atSeptember 30, 2021 , due to similar reporting delays in the information we receive from FAIR Plan. 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 ofSeptember 30, 2021 . As of September 30, 2021 Line of Business Retained Assumed Net Private passenger automobile$ 187,080 CAR assumed private passenger automobile$ 8 Net private passenger automobile $
187,088
Commercial automobile 74,797 CAR assumed commercial automobile 32,568 Net commercial automobile
107,365
Homeowners 89,031 FAIR Plan assumed homeowners 10,451 Net homeowners
99,482
All other 85,364 -
85,364
Total net reserves for losses and LAE
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.
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.
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Table of Contents
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, because of the delays in receiving data from the various residual markets. As a result, 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 nine months endedSeptember 30, 2021 , a 1 percentage-point change in the loss and LAE ratio would result in a change in reserves of$5,815 . Each 1 percentage-point change in the loss and loss expense ratio would have had a$4,593 effect on net income, or$0.31 per diluted share.
Our assumptions consider that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for establishing our reserves. Our individual key assumptions could each have a reasonable possible range of plus or minus 5 percentage-points for each estimation, although there is no guarantee that our assumptions will not have more than a 5 percentage point variation. The following sensitivity tables present information for each of our primary lines of business on the effect each 1 percentage-point change in each of our key assumptions on unpaid frequency and severity could have on our retained (i.e., direct minus ceded) loss and LAE reserves and net income for the nine months endedSeptember 30, 2021 . In evaluating the information in the table, it should be noted that a 1 percentage-point change in a single assumption would change estimated reserves by 1 percentage-point. A 1 percentage-point change in both our key assumptions would change estimated reserves within a range of plus or minus 2 percentage-points. 38 Table of Contents -1 Percent No +1 Percent Change in Change in Change in Frequency Frequency Frequency Private passenger automobile retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves$ (3,742) $ (1,871) $ - Estimated increase in net income 2,956 1,478 - No Change in Severity Estimated (decrease) increase in reserves (1,871) -
1,871
Estimated increase (decrease) in net income 1,478 -
(1,478)
+1 Percent Change in Severity Estimated increase in reserves - 1,871
3,742
Estimated decrease in net income - (1,478)
(2,956)
Commercial automobile retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves (1,496) (748) - Estimated increase in net income 1,182 591 - No Change in Severity Estimated (decrease) increase in reserves (748) - 748 Estimated increase (decrease) in net income 591 -
(591)
+1 Percent Change in Severity Estimated increase in reserves - 748
1,496
Estimated decrease in net income - (591)
(1,182)
Homeowners retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves (1,781) (890) - Estimated increase in net income 1,407 703 - No Change in Severity Estimated (decrease) increase in reserves (890) - 890 Estimated increase (decrease) in net income 703 -
(703)
+1 Percent Change in Severity Estimated increase in reserves - 890
1,781
Estimated decrease in net income - (703)
(1,407)
All other retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves (1,707) (854) - Estimated increase in net income 1,349 675 - No Change in Severity Estimated (decrease) increase in reserves (854) - 854 Estimated increase (decrease) in net income 675 -
(675)
+1 Percent Change in Severity Estimated increase in reserves - 854
1,707
Estimated decrease in net income - (675)
(1,349) 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 nine months endedSeptember 30, 2021 . 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. 39 Table of Contents -1 Percent +1 Percent Change in Change in Estimation Estimation
CAR assumed private passenger automobile
Estimated (decrease) increase in reserves $ - $ -
Estimated increase (decrease) in net income
- - CAR assumed commercial automobile Estimated (decrease) increase in reserves (326) 326 Estimated increase (decrease) in net income 258 (258) FAIR Plan assumed homeowners Estimated (decrease) increase in reserves (105) 105 Estimated increase (decrease) in net income 83 (83)
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
and
respectively.
The following table presents a comparison of prior year development of our net reserves for losses and LAE for the nine months endedSeptember 30, 2021 and 2020. 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. Nine Months Ended September 30, Accident Year 2021 2020 2011 & prior $ (604) $ (632) 2012 (826) (909) 2013 178 (432) 2014 (1,342) (376) 2015 (1,961) (2,514) 2016 (869) (4,235) 2017 (3,559) (7,508) 2018 (7,991) (10,921) 2019 (13,330) (7,092) 2020 (10,907) - All prior years$ (41,211) $ (34,619) The decreases in prior years' reserves during the nine months endedSeptember 30, 2021 and 2020 resulted from re-estimations of prior year ultimate loss and LAE liabilities. The 2021 decrease is composed of reductions of$13,736 in our retained private passenger automobile reserves,$3,284 in our retained commercial automobile reserves,$13,065 in our retained homeowners reserves and$6,989 in our retained other lines reserves. The 2020 decrease is primarily composed of reductions of$13,396 in our retained private passenger automobile reserves,$2,309 in our retained commercial automobile reserves,$10,205 in our retained homeowners reserves and$4,845 in our retained other lines reserves. 40 Table of Contents
The following table presents information by line of business for prior year
development of our net reserves for losses
Private Passenger Commercial
Accident Year Automobile Automobile Homeowners All Other Total
2011 & prior $ (109) $ (6) $ (3) $ (486) $ (604)
2012 (169) (11) - (646) (826)
2013 (31) (87) 2 294 178
2014 6 (79) (210) (1,059) (1,342)
2015 (186) 251 (1,028) (998) (1,961)
2016 (375) (204) (15) (275) (869)
2017 (262) (856) (1,576) (865) (3,559)
2018 (2,095) (1,385) (2,364) (2,147) (7,991)
2019 (5,123) (2,027) (5,428) (752) (13,330)
2020 (5,392) (2,290) (3,170) (55) (10,907)
All prior years $ (13,736) $ (6,694) $ (13,792) $ (6,989) $ (41,211)
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 nine months ended
assumed from CAR and other residual markets.
Retained Retained
Private Passenger Commercial Retained Retained
Accident Year Automobile Automobile Homeowners All Other Total 2011 & prior $ (109)$ (6) $ (3) $ (486) $ (604) 2012 (169) (11) - (646) (826) 2013 (31) (87) 2 294 178 2014 6 (54) (210) (1,059) (1,317) 2015 (186) 319 (1,026) (998) (1,891) 2016 (375) (137) 8 (275) (779) 2017 (262) (582) (1,481) (865) (3,190) 2018 (2,095) (943) (2,251) (2,147) (7,436) 2019 (5,123) (1,018) (5,082) (752) (11,975) 2020 (5,392) (765) (3,022) (55) (9,234) All prior years $ (13,736)$ (3,284) $ (13,065) $ (6,989) $ (37,074)
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
nine months ended
CAR Assumed CAR Assumed
Private Passenger Commercial FAIR Plan
Accident Year Automobile Automobile Homeowners Total
2011 & prior $ - $ - $ - $ -
2012 - - - -
2013 - - - -
2014 - (25) - (25)
2015 - (68) (2) (70)
2016 - (67) (23) (90)
2017 - (274) (95) (369)
2018 - (442) (113) (555)
2019 - (1,009) (346) (1,355)
2020 - (1,525) (148) (1,673)
All prior years $ - $ (3,410) $ (727) $ (4,137)
The improved private passenger and commercial automobile results were primarily
due to fewer IBNR claims than previously estimated and better than previously
estimated severity on our established bodily injury and property
41
Table of Contents
damage case reserves. Our retained other than auto and homeowners lines of
business prior year reserves decreased, due primarily to fewer IBNR claims than
previously estimated.
For further information, see "Results of Operations: Losses and Loss Adjustment
Expenses."
Investment Impairments. The Company uses a systematic methodology to evaluate declines in fair values below cost or amortized cost of our investments. Some of the factors considered in assessing impairment of fixed maturities due to credit losses include the extent to which the fair value is less than amortized cost, the financial condition of and the near and long-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, the historical volatility of the fair value of the security and whether it is more like than not that the Company will be required to sell the investment prior to an anticipated recovery in value. This methodology ensures that we evaluate available evidence concerning any declines in a disciplined manner. For fixed maturities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates the expected credit loss component of the impairment from the amount related to all other factors. The expected credit loss component is recognized as an allowance for expected credit losses. The allowance is adjusted for any additional credit losses and subsequent recoveries, which are booked in income as either credit loss expense or credit loss benefit, respectively. Upon recognizing a credit loss, the cost basis is not adjusted. The impairment related to all other factors (non-credit factors) is reported in other comprehensive income.
For further information, see "Results of Operations: Net Impairment 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;
The impact of COVID-19 and related economic conditions, including the Company's
? assessment of the vulnerability of certain categories of investments due to the
economic disruptions associated with COVID-19;
? Legal and regulatory commentary
? 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:
42
Table of Contents
? The competitive nature of our industry and the possible adverse effects of such
competition;
? Conditions for business operations and restrictive regulations in
? 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;
The effects of emerging claim and coverage issues on the Company's business are
uncertain, and court decisions or legislative or regulatory changes that take
place after the Company issues its policies, including those taken in response
? to COVID-19 (such as requiring insurers to cover business interruption claims
irrespective of terms or other conditions included in the policies that would
otherwise preclude coverage), can result in an unexpected increase in the
number of claims and have a material adverse impact on the Company's results of
operations;
? The possibility that civil litigation and/or the Commissioner may require
additional premium relief payouts related to COVID-19;
The impact of COVID-19 and related risks, including on the Company's employees,
? agents or other key partners, could materially affect the Company's results of
operations, financial position and/or liquidity; and
Other risks and factors identified from time to time in our reports filed with
? the
Form 10-K for the year endedDecember 31, 2020 .
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.
43
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Court Grants “Taxpayers Against Fraud” to File Brief Against Stanford, Accused of $468 Million Medicare Fraud
REINSURANCE GROUP OF AMERICA INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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