Newswires
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 53.6% of our direct written premiums in 2021), we offer a portfolio
of other insurance products, including commercial automobile (16.2% of 2021
direct written premiums), homeowners (24.9% of 2021 direct written premiums) and
dwelling fire, umbrella and business owner policies (totaling 5.3% of 2021
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 856 in 1,088 locations throughout
these three states at December 31, 2021 . 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 7.9% and
12.0% share, respectively, of the Massachusetts private passenger and commercial
automobile markets in 2021 according to statistics compiled by the Commonwealth
Automobile Reinsurers ("CAR"). We are also the third largest homeowners
insurance carrier in Massachusetts with a 6.8% share of the Massachusetts
homeowners insurance market.
policyholders, currently assigns
"A" rating was reaffirmed by
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Our Insurance Subsidiaries began writing insurance in
and in
premiums written in each state during the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
Direct Written Premiums 2022 2021
2022 2021 Massachusetts $ 206,830$ 201,036 $ 592,512 $ 593,370 New Hampshire 9,935 9,286 26,608 25,195 Maine 1,113 776 2,827 2,003 Total $ 217,878$ 211,098 $ 621,947 $ 620,568 Recent Trends and Events OnOctober 6, 2022 , the Company announced the execution of a non-binding Letter of Intent to acquire, through a wholly-owned subsidiary, the assets and operations ofNortheast Metrowest Insurance Agency, Inc. ("Northeast / Metrowest"). Since 1989, Northeast / Metrowest has provided personal and commercial insurance to properly protect its customers by determining the best coverage to suit their unique needs. Over that time, Northeast / Metrowest has grown to include over$40 million in policy premiums and continues to expand its offering to its customers. The transaction will be subject to customary conditions and is expected to be completed in the fourth quarter of 2022. Following the acquisition, Northeast / Metrowest will continue as a stand-alone business operation within Safety's holding company. Losses and loss adjustment expenses incurred for the three months endedSeptember 30, 2022 increased by$4,940 , or 4.1%, to$124,069 from$119,129 for the comparable 2021 period. Losses and loss adjustment expenses incurred for the nine months endedSeptember 30, 2022 increased by$19,165 , or 5.6%, to$359,950 from$340,785 for the comparable 2021 period. The increase in losses is due to a return of pre-pandemic frequency in our private passenger automobile line of business and current market conditions including inflation and supply chain delays. Non-generally accepted accounting principles ("non-GAAP") operating income, as defined below, was$16,715 and$59,754 for the three and nine months endedSeptember 30, 2022 , respectively, compared to$25,823 and$82,667 for the comparable 2021 periods, respectively. The decrease in non-GAAP operating income for the three and nine months endedSeptember 30, 2022 was primarily the result of an increase in losses and loss adjustment expenses compared to the prior period. Non-GAAP operating income for the three and nine months endedSeptember 30, 2022 was$1.13 and$4.05 per diluted share, respectively, compared to$1.70 and$5.51 per diluted share, respectively, for the comparable 2021 period.
The following rate changes have been filed and approved by the insurance
regulators of
for agents.
Line of Business Effective Date Rate
Change
Massachusetts Commercial Automobile May 1, 2022 3.1% Massachusetts Homeowner July 1, 2022 2.6% Massachusetts Private Passenger Automobile April 1, 2022 -2.3%
Massachusetts Private Passenger Automobile
New Hampshire Commercial Automobile
September 1, 2022 5.8% New Hampshire Homeowners September 1, 2022 3.5% New Hampshire Private Passenger Automobile September 1, 2022 2.8%
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
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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
2022 2021 2022 2021 GAAP ratios: Loss ratio 65.3 % 61.3 % 63.7 % 58.6 % Expense ratio 31.8 32.6 32.3 33.3 Combined ratio 97.1 % 93.9 % 96.0 % 91.9 % Share-Based Compensation OnMarch 24, 2022 , the Company's Board of Directors adopted theAmended and Restated Safety Insurance Group, Inc. 2018 Long-Term Incentive Plan ("the Amended 2018 Plan"), which was subsequently approved by our shareholders at the 2022 Annual Meeting of Shareholders. The Amended 2018 Plan increases the share pool limit by adding 350,000 common shares to the previously adoptedSafety Insurance Group, Inc , 2018 Long-Term Incentive Plan. The Amended 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 Amended 2018 Plan supersedes the Company's 2002 Management Omnibus Incentive Plan ("the 2002 Incentive Plan"). The Amended 2018 Plan establishes a pool of 700,000 shares of common stock available for issuance to our employees and other eligible participants. The Board of Directors and the Compensation Committee intend to issue awards under the Amended 2018 Plan in the future. The maximum number of shares of common stock between both the 2018 Amended Plan and 2002 Incentive Plan with respect to which awards may be granted is 3,200,000. No further grants will be allowed under the 2002 Incentive Plan. AtSeptember 30, 2022 , there were 444,216 shares available for future grant.
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 23, 2022 31,864 $ 84.98 3 years, 30%-30%-40%
RS - Performance February 23, 2022 26,037 $ 84.98 3 years, cliff vesting (3)
RS February 23, 2022 5,000 $ 84.98 No vesting period (2)
RS March 24, 2022 2,000 $ 89.63
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.
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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 an A.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 2022 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 the Massachusetts Property Insurance Underwriting Association
("FAIR Plan").
For 2022, 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 . The FAIR Plan buys reinsurance to reduce their exposure to catastrophe losses. OnJuly 1, 2022 , the FAIR Plan purchased$1,740,000 of catastrophe reinsurance for property losses with retention of$100,000 .
At
loss adjustment expense reserves, unearned premiums and reinsurance recoverable.
Non-GAAP Measures
Management has included certain non-GAAP financial measures in presenting the
Company's results. Management believes that these non-GAAP measures are useful
to 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
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diluted share, respectively. A reconciliation of the GAAP financial measures to
these non-GAAP measures is included in the financial highlights below.
Results of Operations
Three and Nine Months Ended
Ended September 30, 2021
The following table shows certain of our selected financial results.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Direct written premiums $ 217,878 $ 211,098 $ 621,947 $ 620,568
Net written premiums $ 205,428 $ 202,604 $ 586,204 $ 593,648
Net earned premiums $ 189,931 $ 194,395 $ 565,352 $ 581,542
Net investment income 11,112 11,112 33,337 32,418
Earnings from partnership investments 876 5,720 9,675 12,625 Net realized gains on investments 1,251 2,226 8,613 8,507 Change in net unrealized (losses) gains on equity securities (14,364) (3,447) (56,283) 11,414 Credit loss (expense) benefit (207) (49) (207) 325 Finance and other service income 3,749 3,751 10,469 11,660 Total revenue 192,348 213,708 570,956 658,491 Losses and loss adjustment expenses 124,069 119,129 359,950 340,785 Underwriting, operating and related expenses
60,373 63,291 182,839 193,404 Interest expense 132 131 392 390 Total expenses 184,574 182,551 543,181 534,579
Income before income taxes 7,774 31,157 27,775 123,912 Income tax expense 1,582 6,337 5,844 25,251 Net income $
6,192 $ 24,820 $ 21,931 $ 98,661
Earnings per weighted average common share:
Basic
$ 0.42 $ 1.65 $ 1.49 $ 6.63 Diluted $ 0.42 $ 1.64 $ 1.48 $ 6.58 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 $
6,192 $ 24,820 $ 21,931 $ 98,661
Exclusions from net income:
Net realized gains on investments
(1,251) (2,226) (8,613) (8,507) Change in net unrealized losses (gains) on equity securities 14,364 3,447 56,283 (11,414) Credit loss expense (benefit) 207 49 207 (325) Income tax expense on exclusions from net income (2,797) (267) (10,054) 4,252 Non-GAAP Operating income $ 16,715 $ 25,823 $ 59,754 $ 82,667 Net income per diluted share $ 0.42 $ 1.64 $ 1.48 $ 6.58 Exclusions from net income:
Net realized gains on investments (0.09) (0.15) (0.59) (0.57) Change in net unrealized losses (gains) on equity securities 0.98 0.23 3.83 (0.76) Credit loss expense (benefit) 0.01 - 0.01 (0.02) Income tax expense on exclusions from net income (0.19) (0.02) (0.68) 0.28 Non-GAAP Operating income per diluted share $ 1.13 $ 1.70 $ 4.05 $ 5.51 Direct Written Premiums. Direct written premiums for the three months endedSeptember 30, 2022 increased by$6,780 , or 3.2%, to$217,878 from$211,098 for the comparable 2021 period. Direct written premiums for the nine months endedSeptember 30, 2022 increased by$1,379 or 0.2%, to$621,947 from$620,568 for the comparable 2021 period. The increase is primarily in our commercial automobile and homeowners lines of business. 27
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Net Written Premiums. Net written premiums for the three months endedSeptember 30, 2022 increased by$2,824 , or 1.4%, to$205,428 from$202,604 for the comparable 2021 period. Net written premiums for the nine months endedSeptember 30, 2022 decreased by$7,444 , or 1.3%, to$586,204 from$593,648 for the comparable 2021 period. Net Earned Premiums. Net earned premiums for the three months endedSeptember 30, 2022 decreased by$4,464 , or 2.3%, to$189,931 from$194,395 for the comparable 2021 period. Net earned premiums for the nine months endedSeptember 30, 2022 decreased by$16,190 , or 2.8%, to$565,352 from$581,542 for the comparable 2021 period.
The effect of reinsurance on net written and net earned premiums is presented in
the following table.
Three Months Ended September 30 ,
Nine Months Ended
2022 2021 2022 2021 Written Premiums Direct$ 217,878 $ 211,098 $ 621,947 $ 620,568 Assumed 6,460 7,585 21,168 23,345 Ceded (18,910) (16,079) (56,911) (50,265) Net written premiums$ 205,428 $ 202,604 $ 586,204 $ 593,648 Earned Premiums Direct$ 202,190 $ 204,429 $ 597,662 $ 608,448 Assumed 6,497 7,202 21,835 23,199 Ceded (18,756) (17,236) (54,145) (50,105) Net earned premiums$ 189,931 $ 194,395 $ 565,352 $ 581,542 Net Investment Income. Net investment income for the three months endedSeptember 30, 2022 was consistent at$11,112 with the comparable 2021 period. Net investment income for the nine months endedSeptember 30, 2022 increased by$919 , or 2.8%, to$33,337 from$32,418 for the comparable 2021 period. The increase is a result of increases in interest rates on our fixed maturity portfolio as compared to the prior year. Net effective annualized yield on the investment portfolio was 3.1% for the three months endedSeptember 30, 2022 compared to 3.0% for the comparable 2021 period. Net effective annualized yield on the investment portfolio was 3.0% for the nine months endedSeptember 30, 2022 and 2021. The investment portfolio's duration on fixed maturities was 3.6 years atSeptember 30, 2022 andDecember 31, 2021 . Earnings from Partnership Investments. Earnings from partnership investments were$876 for the three months endedSeptember 30, 2022 compared to$5,720 for the comparable 2021 period. Earnings from partnership investments were$9,675 for the nine months endedSeptember 30, 2022 compared to$12,625 for the comparable 2021 period. The 2022 earnings reflect a decrease in investment appreciation and timing of cash proceeds received compared to the prior year. Timing and generation of these returns on capital can vary based on the results and transactions of the underlying partnerships. Net Realized Gains on Investments. Net realized gains on investments was$1,251 for the three months endedSeptember 30, 2022 compared to$2,226 for the comparable 2021 period. Net realized gains on investments was$8,613 for the nine months endedSeptember 30, 2022 compared to$8,507 for the comparable 2021 period. The increase in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 is the result of realized gains on the sale of equity securities compared to the prior year. 28
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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, other invested assets, and short-term investments were as follows for the periods
indicated:
As of September 30, 2022
Cost or Allowance for Gross Unrealized Estimated
Amortized Expected Credit Fair
Cost Losses Gains Losses (3) Value
U.S. Treasury securities $ 1,826 $ - $ - $ (169) $ 1,657
Obligations of states and
political subdivisions 70,753 - 251 (4,242) 66,762
Residential
mortgage-backed securities
(1) 249,892 - 133 (29,290) 220,735
Commercial mortgage-backed
securities 151,852 - - (15,114) 136,738
Other asset-backed
securities 74,623 - - (5,148) 69,475
Corporate and other
securities 605,557 (898) 202 (61,126) 543,735
Subtotal, fixed maturity
securities 1,154,503 (898) 586 (115,089) 1,039,102
Equity securities (2) 229,153 - 27,064 (30,250) 225,967
Other invested assets 107,070 - - - 107,070
Totals $ 1,490,726 $ (898) $ 27,650 $ (145,339) $ 1,372,139
(1)Residential mortgage-backed securities consisted primarily of obligations of
U.S. Government agencies including collateralized mortgage obligations issued,
guaranteed and/or insured by the following issuers: Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal
National Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB).
(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 1,274 securities in an unrealized loss
position at
The composition of our fixed income security portfolio by Moody's rating was as
follows:
As of September 30, 2022
Estimated
Fair Value Percent
U.S. Treasury securities and obligations of U.S.
Government agencies $ 220,380 21.2 %
Aaa/Aa 232,079 22.3
A 221,427 21.3
Baa 195,674 18.8
Ba 58,138 5.6
B 91,054 8.8
Caa/Ca 4,086 0.4
Not rated 16,264 1.6
Total $ 1,039,102 100.0 %
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, 2022 , 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. 29 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, 2022 . As of September 30, 2022 Less than 12 Months 12 Months or More Total Estimated Unrealized Estimated Unrealized Estimated Unrealized Fair Value Losses Fair Value Losses Fair Value Losses U.S. Treasury securities$ 1,657 $ 169 $ - $ -$ 1,657 $ 169 Obligations of states and political subdivisions 44,270 3,425 2,154 817 46,424 4,242 Residential mortgage-backed securities 193,570 24,470 22,269 4,820 215,839 29,290 Commercial mortgage-backed securities 128,526 12,991 8,212 2,123 136,738 15,114 Other asset-backed securities 65,183 4,955 4,292 193 69,475 5,148 Corporate and other securities 444,137 42,759 90,967 18,367 535,104 61,126 Subtotal, fixed maturity securities 877,343 88,769 127,894 26,320 1,005,237 115,089 Equity securities 128,994 28,203 3,409 2,047 132,403 30,250 Total temporarily impaired securities$ 1,006,337 $ 116,972 $
131,303
The Company's analysis of its fixed maturity portfolio atSeptember 30, 2022 concluded that$898 of unrealized losses were due to credit factors and were recorded as an allowance for expected credit losses atSeptember 30, 2022 . 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, 2022 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, 2022 decreased by$2 , or 0.1%, to$3,749 from$3,751 for the comparable 2021 period. Finance and other service income for the nine months endedSeptember 30, 2022 decreased by$1,191 , or 10.2%, to$10,469 from$11,660 for the comparable 2021 period. The decrease in the nine months period is primarily driven by a change in our late fee assessment policy. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred for the three months endedSeptember 30, 2022 increased by$4,940 , or 4.1%, to$124,069 from$119,129 for the comparable 2021 period. Losses and loss adjustment expenses incurred for the nine months endedSeptember 30, 2022 increased by$19,165 , or 5.6%, to$359,950 from$340,785 for the comparable 2021 period. The increase in losses is due to a return of pre-pandemic frequency in our private passenger automobile line of business and current market conditions including inflation and supply chain delays. Our GAAP loss ratio for the three months endedSeptember 30, 2022 increased to 65.3% from 61.3% for the comparable 2021 period. Our GAAP loss ratio for the nine months endedSeptember 30, 2022 increased to 63.7% from 58.6% for the comparable 2021 period. Our GAAP loss ratio excluding loss adjustment expenses for the three months endedSeptember 30, 2022 was 55.0% compared to 52.1% for the comparable 2021 period. Our GAAP loss ratio excluding loss adjustment expenses for the nine months endedSeptember 30, 2022 was 54.6% compared to 48.3% for the comparable 2021 period. Total prior year favorable development included in the pre-tax results for the three months 30
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endedSeptember 30, 2022 was$13,950 compared to$15,403 for the comparable 2021 period. Total prior year favorable development included in the pre-tax results for the nine months endedSeptember 30, 2022 was$43,223 compared to$41,211 for the comparable 2021 period. The increase is the prior year favorable development in 2022 is primarily related to the reversal of$6,500 legal expense reserve during the second quarter of 2022. Underwriting, Operating and Related Expenses. Underwriting, operating and related expenses for the three months endedSeptember 30, 2022 decreased by$2,918 , or 4.6%, to$60,373 from$63,291 for the comparable 2021 period. Underwriting, operating and related expenses for the nine months endedSeptember 30, 2022 decreased by$10,565 , or 5.5%, to$182,839 from$193,404 for the comparable 2021 period. The decrease in the three months and nine months endingSeptember 30, 2022 is driven by a decrease in contingent commission expenses. Our GAAP expense ratio for the three months endedSeptember 30, 2022 decreased to 31.8% from 32.6% for the comparable 2021 period. Our GAAP expense ratio for the nine months endedSeptember 30, 2022 decreased to 32.3% from 33.3% for the comparable 2021 period. Interest Expense. Interest expense was$132 and$131 for the three months endedSeptember 30, 2022 and 2021, respectively. Interest expense was$392 for the nine months endedSeptember 30, 2022 compared to$390 for the comparable 2021 period. The credit facility commitment fee included in interest expense was$56 for the nine months endedSeptember 30, 2022 and 2021. Income Tax Expense. Our effective tax rate was 20.3% for the three months endedSeptember 30, 2022 and 2021. Our effective tax rate was 21.0% and 20.4% for the nine months endedSeptember 30, 2022 and 2021, respectively. Net Income. Net income for the three months endedSeptember 30, 2022 was$6,192 compared to net income of$24,820 for the comparable 2021 period. Net income for the nine months endedSeptember 30, 2022 was$21,931 compared to net income of$98,661 for the comparable 2021 period. Non-GAAP Operating Income. Non-GAAP operating income, as defined above, was$16,715 for the three months endedSeptember 30, 2022 compared to$25,823 for the comparable 2021 period. Non-GAAP operating income was$59,754 for the nine months endedSeptember 30, 2022 compared to$82,667 for the comparable 2021 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$23,366 and$110,584 during the nine months ended 2022 and 2021, 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 provided by investing activities was$1,166 and net cash used for investing activities was$79,005 during the nine months endedSeptember 30, 2022 and 2021, respectively. Fixed maturities, equity securities, and other invested assets purchased were$207,179 for the nine months endedSeptember 30, 2022 compared to$336,374 for the comparable prior year period. Proceeds from maturities, redemptions, calls and sales, of securities were$209,872 during the nine months endedSeptember 30, 2022 compared to$264,224 for the comparable prior year period. 31 Table of Contents Net cash used for financing activities was$54,500 and$40,645 during the nine months endedSeptember 30, 2022 and 2021, respectively. Net cash used for financing activities during the nine months endedSeptember 30, 2022 consisted of dividend payments to shareholders and the acquisition of treasury stock. The Insurance Subsidiaries maintain a high degree of liquidity within their respective investment portfolios in fixed maturity and 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, 2021 , the statutory surplus ofSafety Insurance was$826,979 , and its statutory net income for 2021 was$97,169 . As a result, a maximum of$97,169 is available in 2022 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$729,810 atDecember 31, 2021 . During the nine months endedSeptember 30, 2022 ,Safety Insurance paid dividends to Safety of$64,165 . The maximum dividend permitted by law is not indicative of an insurer's actual ability to pay dividends, which may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer's ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends.
Since the initial public offering of its common stock in
Company has paid regular quarterly dividends to shareholders of its common
stock. Quarterly dividends paid during 2022 were as follows:
Total
Declaration Record Payment Dividend per Dividends Paid
Date Date Date Common Share and Accrued
February 15, 2022 March 5, 2022 March 15, 2022 $ 0.90 $ 13,246
May 6, 2022 June 1, 2022 June 15, 2022 $ 0.90 $ 13,281
August 3, 2022 September 1, 2022 September 15, 2022 $ 0.90 $ 13,259
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On November 2, 2022 , our Board approved and declared a quarterly cash dividend
of $0.90 per share which will be paid on December 15, 2022 to shareholders of
record on December 1, 2022 . We plan to continue to declare and pay quarterly
cash dividends in 2022, depending on our financial position and the regularity
of our cash flows.
On February 23, 2022 , the Board of Directors approved a share repurchase program
of up to $50,000 of the Company's outstanding common shares. As of June 30,
2022 , the Board of Directors has cumulatively authorized increases to the
existing share repurchase program of up to $200,000 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, 2022 , the Company had purchased 3,141,477 shares of common stock
at a cost of $150,000 . As of December 31, 2021 , the Company had purchased
2,970,573 shares of common stock at a cost of $135,397 .
Under the program, Safety may repurchase shares of its common stock for cash in
public or private transactions, in the open market or otherwise, at management's
discretion. 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 Safety to repurchase any specific number of shares and may be
modified, suspended or terminated at any time without prior notices.
Management believes that the current level of cash flow 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. The Company
anticipates utilizing cash flows from operations in the acquisition of Northeast
/ Metrowest. 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, 2021 , the Insurance Subsidiaries had total capital of$826,979 , 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$200,196 atDecember 31, 2021 .
Off-Balance Sheet Arrangements
We have no material obligations under a guarantee contract meeting the
characteristics identified in Accounting Standards Codification ("ASC") 460,
Guarantees. We have no material retained or contingent interests in assets
transferred to an unconsolidated entity. We have no material obligations,
including contingent obligations, under contracts that would be accounted for as
derivative instruments. We have no obligations, including contingent
obligations, arising out of a variable interest in an unconsolidated entity held
by, and material to, us, where such entity provides financing, liquidity, market
risk or credit risk support to, or engages in leasing, hedging or research and
development services with us. We have no direct investments in real estate and
no holdings of mortgages secured by commercial real estate. Accordingly, we have
no material off-balance sheet arrangements.
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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 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.
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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$421,332 to$479,036 as ofSeptember 30, 2022 . 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$453,386 as ofSeptember 30, 2022 . The following table presents the point estimation of the recorded reserves and the range of estimations by line of business for net loss and LAE reserves
as ofSeptember 30, 2022 . As of September 30, 2022 Line of Business Low Recorded High Private passenger automobile$ 169,755 $ 181,087 $ 187,394 Commercial automobile 98,969 105,672 109,389 Homeowners 84,033 89,447 93,534 All other 68,575 77,180 88,719 Total$ 421,332 $ 453,386 $ 479,036
The following table presents our total net reserves and the corresponding case
reserves and IBNR reserves for each line of business as of
As of September 30, 2022
Line of Business Case IBNR Total
Private passenger automobile $ 226,881 $ (45,802) $
181,079
CAR assumed private passenger auto 1 7 8 Commercial automobile 65,816 9,043
74,859
CAR assumed commercial automobile 18,191 12,622
30,813
Homeowners 83,519 (3,794)
79,725
FAIR Plan assumed homeowners 4,122 5,600
9,722
All other 42,012 35,168
77,180
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 41.0% of our total reserves for CAR assumed commercial automobile business as ofSeptember 30, 2022 , 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 35
Table of Contents
IBNR reserves for FAIR Plan assumed homeowners are 57.6% of our total reserves for FAIR Plan assumed homeowners atSeptember 30, 2022 , 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, 2022 . As of September 30, 2022 Line of Business Retained Assumed
Net
Private passenger automobile$ 181,079 CAR assumed private passenger automobile$ 8 Net private passenger automobile $
181,087
Commercial automobile 74,859 CAR assumed commercial automobile 30,813 Net commercial automobile
105,672
Homeowners 79,725 FAIR Plan assumed homeowners 9,722 Net homeowners
89,447
All other 77,180 -
77,180
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. 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, 2022 , a 1 percentage-point change in the loss and LAE ratio would result in a change in reserves of$5,652 . Each 1 percentage-point change in the loss and LAE ratio would have had a$4,465 effect on net income, or$0.30 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
36
Table of Contents
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 ended September 30, 2022 . In
evaluating the information in the table, it should be noted that a 1
percentage-point change in a single assumption would change estimated reserves
by 1 percentage-point. A 1 percentage-point change in both our key assumptions
would change estimated reserves within a range of plus or minus 2
percentage-points.
-1 Percent No +1 Percent
Change in Change in Change in
Frequency Frequency Frequency
Private passenger automobile retained
loss and LAE reserves
-1 Percent Change in Severity
Estimated decrease in reserves $ (3,622) $ (1,811) $ -
Estimated increase in net income 2,861 1,431 -
No Change in Severity
Estimated (decrease) increase in reserves (1,811) -
1,811
Estimated increase (decrease) in net income 1,431 -
(1,431)
+1 Percent Change in Severity Estimated increase in reserves - 1,811
3,622
Estimated decrease in net income - (1,431)
(2,861)
Commercial automobile retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves (1,497) (749) - Estimated increase in net income 1,183 592 - No Change in Severity Estimated (decrease) increase in reserves (749) - 749 Estimated increase (decrease) in net income 592 -
(592)
+1 Percent Change in Severity Estimated increase in reserves - 749
1,497
Estimated decrease in net income - (592)
(1,183)
Homeowners retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves (1,595) (797) - Estimated increase in net income 1,260 630 - No Change in Severity Estimated (decrease) increase in reserves (797) - 797 Estimated increase (decrease) in net income 630 -
(630)
+1 Percent Change in Severity Estimated increase in reserves - 797
1,595
Estimated decrease in net income - (630)
(1,260)
All other retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves (1,544) (772) - Estimated increase in net income 1,220 610 - No Change in Severity Estimated (decrease) increase in reserves (772) - 772 Estimated increase (decrease) in net income 610 -
(610)
+1 Percent Change in Severity Estimated increase in reserves - 772
1,544
Estimated decrease in net income - (610)
(1,220)
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, 2022 . In evaluating the information in the table, it 37 Table of Contents
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 commercial automobile
Estimated (decrease) increase in reserves
Estimated increase (decrease) in net income
243 (243) FAIR Plan assumed homeowners Estimated (decrease) increase in reserves (97) 97 Estimated increase (decrease) in net income 77 (77)
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, 2022 and 2021. 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 2022 2021 2012 & prior $ (204)$ (1,430) 2013 (653) 178 2014 (667) (1,342) 2015 (1,777) (1,961) 2016 (1,307) (869) 2017 (2,259) (3,559) 2018 (5,617) (7,991) 2019 (8,033) (13,330) 2020 (13,890) (10,907) 2021 (8,816) - All prior years$ (43,223) $ (41,211) The decreases in prior years' reserves during the nine months endedSeptember 30, 2022 and 2021 resulted from re-estimations of prior year ultimate loss and LAE liabilities. The 2022 decrease is composed of reductions of$10,668 in our private passenger automobile reserves,$6,432 in our commercial automobile reserves,$11,717 in our homeowners reserves and$14,406 in our other lines reserves. The 2021 decrease is primarily 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. 38
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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
2012 & prior $ (41) $ (7) $ (52) $ (104) $ (204)
2013 (46) (3) (17) (587) (653)
2014 (10) (34) (98) (525) (667)
2015 (203) (371) (479) (724) (1,777)
2016 193 (169) (502) (829) (1,307)
2017 (536) (137) (396) (1,190) (2,259)
2018 (2,037) (1,318) (1,503) (759) (5,617)
2019 (3,433) (1,212) (2,604) (784) (8,033)
2020 (4,541) (2,130) (5,199) (2,020) (13,890)
2021 (14) (1,051) (867) (6,884) (8,816)
All prior years $ (10,668) $ (6,432) $ (11,717) $ (14,406) $ (43,223)
The improved private passenger and commercial automobile results were primarily
due to fewer claims than previously estimated and better than previously
estimated severity on our established bodily injury and property damage case
reserves. Our retained other than auto and homeowners lines of business prior
year reserves decreased, due primarily to fewer 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;
? Legal and regulatory commentary
? Descriptions of assumptions underlying or relating to any of the foregoing; and
? Future performance of credit markets.
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Table of Contents
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;
? Conditions for business operations and restrictive regulations in
? The possibility of losses due to claims resulting from severe weather;
? The impact of inflation and supply chain delays on loss severity;
? 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;
? The impact of investment, economic and underwriting market conditions,
including interest rates and inflation;
? 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
Form 10-K for the year ended
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.
Q3 2022 10-Q
REINSURANCE GROUP OF AMERICA INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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