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SAFETY INSURANCE GROUP INC – 10-K – 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," "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 (53.6% of our direct
written premiums in 2021), commercial automobile, (16.2% of 2021 direct written
premiums), and homeowners (24.9% of 2021 direct written premiums) insurance. In
addition to these coverages, we offer a portfolio of other insurance products,
including 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 during 2021. We have used these relationships and
our extensive knowledge of the market to become the fourth largest private
passenger automobile carrier and the second largest commercial automobile
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 CAR based on automobile
exposures. We are the third largest homeowners insurance carrier in
Massachusetts , with a market share of 6.8% in 2020. Our principal competitors
within the Massachusetts homeowners insurance market are MAPFRE SA, Liberty
Mutual Insurance and The Andover Companies, which held 12.5%, 9.1% and 6.2%
market shares respectively in 2020 (according to S&P Global Market
Intelligence ).
Our Insurance Subsidiaries began writing insurance in New Hampshire during 2008
and Maine in 2016. In November 2020 , we formed a fourth insurance subsidiary,
Safety Northeast, which became licensed to write insurance products in
Massachusetts in January of 2021. The table below shows the amount of direct
written premiums in each state during the years ended December 31, 2021 , 2020,
and 2019.
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Years Ended December 31,
Direct Written Premiums 2021 2020 2019
Massachusetts $ 765,007 $ 764,479 $ 819,534
New Hampshire 34,261 32,334 31,676
Maine 2,871 1,899 1,194
Total $ 802,139 $ 798,712 $ 852,404
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 has continued to take many actions that address the health and well-being of our employees while still serving the needs of our agents and insureds. 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 I-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 result, the Company accrued a reserve of$6,500 for legal defense costs in 2020. This amount is still accrued as ofDecember 31, 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. Losses and loss adjustment expenses incurred for the year endedDecember 31, 2021 increased by$57,171 , or 14.1%, to$461,727 from$404,556 for the comparable 2020 period. The 2020 losses and loss adjustment expenses reflected a decrease in frequency, primarily in our private passenger automobile line of business as a result of the COVID-19 pandemic. Loss, expense, and combined ratios calculated underU.S. generally accepted accounting principles for the quarter endedDecember 31, 2021 were 62.7%, 33.7%, and 96.4%, respectively, compared to 48.8%, 36.3%, and 85.1%, respectively, for the comparable 2020 period. Loss, expense, and combined ratios calculated underU.S. generally accepted accounting principles for the year endedDecember 31, 2021 were 59.6%, 33.4%, and 93.0%, respectively, compared to 52.5%, 34.6%, and 87.1%, respectively, for the comparable 2020 period. The 2021 decrease in the expense ratios in both periods is driven by a decrease in contingent commission expense. We define a "catastrophe" as an event that produces pre-tax losses before reinsurance in excess of$1,000 and involves multiple first-party policyholders, or an event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time following the event. Catastrophes are caused by various natural events including high winds, winter storms, tornadoes, hailstorms, and hurricanes. The nature and level of catastrophes in any period cannot be reliably predicted. Catastrophe losses incurred by the type of event are shown in the following table. 37 Table of Contents Years Ended December 31, Event 2021 2020 2019 Windstorms and hailstorms$ 11,677 $ 7,291 $ 5,123 Total losses incurred (1)$ 11,677 $ 7,291 $ 5,123
(1) Total losses incurred include losses plus defense and cost containment
expenses and excludes adjusting and other claims settlement expenses.
The following rate changes have been filed and approved by the insurance regulators ofMassachusetts andNew Hampshire in 2021 and 2020. OurMassachusetts 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
Statutory Accounting Principles
Our results are reported in accordance with GAAP, which differ from amounts
reported in accordance with statutory accounting principles ("SAP") as
prescribed by insurance regulatory authorities, which in general reflect a
liquidating, rather than going concern concept of accounting. Specifically,
under GAAP:
Policy acquisition costs such as commissions, premium taxes and other variable
costs incurred which are directly related to the successful acquisition of a
? new or renewal insurance contract are capitalized and amortized on a pro rata
basis over the period in which the related premiums are earned, rather than
expensed as incurred, as required by SAP.
Certain assets are included in the consolidated balance sheets whereas, under
SAP, such assets are designated as "nonadmitted assets," and charged directly
? against statutory surplus. These assets consist primarily of premium
receivables that are outstanding over ninety days, federal deferred tax assets
in excess of statutory limitations, furniture, equipment, leasehold improvements and prepaid expenses.
Amounts related to ceded reinsurance are shown gross of ceded unearned premiums
? and reinsurance recoverables, rather than netted against unearned premium
reserves and loss and loss adjustment expense reserves, respectively, as required by SAP.
Fixed maturities securities, which are classified as available-for-sale, are
? reported at current fair values, rather than at amortized cost, or the lower of
amortized cost or market, depending on the specific type of security, as required by SAP.
The differing treatment of income and expense items results in a corresponding
difference in federal income tax expense. Changes in deferred income taxes are
reflected as an item of income tax benefit or expense, rather than recorded
? directly to surplus as regards policyholders, as required by SAP. Admittance
testing may result in a charge to unassigned surplus for non-admitted portions
of deferred tax assets. Under GAAP reporting, a valuation allowance may be
recorded against the deferred tax asset and reflected as an expense.
Insurance Ratios
The property and casualty insurance industry uses the combined ratio as a
measure of underwriting profitability. The combined ratio is the sum of the
loss ratio (losses and loss adjustment expenses incurred as a percent of net
earned premiums) plus the expense ratio (underwriting and other expenses as a
percent of net earned premiums, calculated on a GAAP basis). The combined ratio
reflects only underwriting results and does not include income from
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investments or finance and other service income. Underwriting profitability is
subject to significant fluctuations due to competition, catastrophic events,
weather, economic and social conditions, and other factors.
Our GAAP insurance ratios are presented in the following table for the periods
indicated.
Years Ended December 31,
2021 2020 2019
GAAP ratios:
Loss ratio 59.6 % 52.5 % 64.6 %
Expense ratio 33.4 34.6 31.0
Combined ratio 93.0 % 87.1 % 95.6 %
Share-Based Compensation
On April 2, 2018 , the Company's Board of Directors adopted the Safety 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. AtDecember 31, 2021 , there were 164,908 shares available for future grant. Grants outstanding under the Plans as ofDecember 31, 2021 , were comprised of 137,589 restricted shares. Grants made under the Incentive Plan during the years 2019 through 2021 were as follows. Type of Number of Fair Equity Awards Value per Awarded Effective Date Granted Share (1) Vesting Terms RS - Service February 26, 2019 28,778$ 92.52 3 years, 30%-30%-40% RS - Performance February 26, 2019 23,191$ 92.52 3 years, cliff vesting(3) RS February 26, 2019 5,000$ 92.52 No vesting period(2) RS - Performance February 26, 2019 40,256$ 92.52 No vesting period(4) RS - Service February 26, 2020 28,799$ 90.50 3 years, 30%-30%-40% RS - Performance February 26, 2020 24,062$ 90.50 3 years, cliff vesting(3) RS February 26, 2020 5,000$ 90.50 No vesting period(2) RS - Performance February 26, 2020 12,587$ 90.50 No vesting period(4) RS March 27, 2020 1,000$ 76.60 No vesting period(2) 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)Board of Director members must maintain stock ownership equal to at least four times their annual cash retainer. This requirement must be met within five years of becoming a director. (3) The shares represent performance-based restricted shares award. Vesting of these shares is dependent upon the attainment of pre-established performance 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.
(4) The shares represent a true-up of previously awarded performance-based
restricted share awards. The updated shares were calculated based on the
attainment of pre-established performance objectives.
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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 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 FAIR Plan. The reinsurance market has seen
from the various software modelers, increases in the estimate of damage from
hurricanes in the southern and northeast portions of the United States due to
revised estimations of increased hurricane activity and increases in the
estimation of demand surge in the periods following a significant event. We
continue to manage and model our exposure and adjust our reinsurance programs as
a result of the changes to the models. As of January 1, 2021 , we have purchased
four layers of excess catastrophe reinsurance providing $615,000 of coverage for
property losses in excess of $50,000 up to a maximum of $665,000 . Our
reinsurers' co-participation is 50.0% of $50,000 for the 1st layer, 80.0% of
$50,000 for the 2nd layer, 80.0% of $250,000 for the 3rd layer and 80.0% of
$265,000 for the 4th layer. As a result of the changes to the models, our
catastrophe reinsurance in 2021 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).
Most of our reinsurers have an A.M. Best rating of "A+" (Superior) or "A"
(Excellent).
We are a participant in CAR, a state-established body that runs the residual
market reinsurance programs for commercial automobile insurance in Massachusetts
under which premiums, expenses, losses and loss adjustment expenses on ceded
business are shared by all insurers writing commercial automobile insurance in
Massachusetts . We also participate in the FAIR Plan in which premiums, expenses,
losses and loss adjustment expenses on homeowners business that cannot be placed
in the voluntary market are shared by all insurers writing homeowners insurance
in Massachusetts . The FAIR Plan buys reinsurance to reduce their exposure to
catastrophe losses. On July 1, 2021 , the FAIR Plan purchased $1,800,000 of
catastrophe reinsurance for property losses with retention of $100,000 .
We also had
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.
Non-GAAP Measures
Management has included certain non-generally accepted accounting principles
("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 generally accepted accounting principles
("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 on
investments, net impairment 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.
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Results of Operations
The following table shows certain of our selected financial results.
Years Ended December 31,
2021 2020 2019
Direct written premiums $ 802,139 $ 798,712 $ 852,404
Net written premiums $ 764,526 $ 763,537 $ 794,409
Net earned premiums $ 774,328 $ 771,078 $ 788,777
Net investment income 44,135 41,045 46,665
Earnings from partnership investments 19,829 6,901 1,937 Net realized gains on investments 14,885 957 2,976 Change in net unrealized gains on equity securities 16,130 10,449 21,454 Net impairment losses on investments - - (889) Credit loss benefit (expense) 363 (1,054) - Finance and other service income 15,241 16,872 16,833 Total revenue 884,911 846,248 877,753 Loss and loss adjustment expenses 461,727 404,556 509,846 Underwriting, operating and related expenses 258,392
266,482 244,136 Interest expense 522 440 90 Total expenses 720,641 671,478 754,072
Income before income taxes 164,270
174,770 123,681 Income tax expense 33,560 36,559 24,080 Net income$ 130,710 $ 138,211 $ 99,601 Earnings per weighted average common share: Basic$ 8.85 $ 9.25 $ 6.52 Diluted$ 8.80 $ 9.18 $ 6.46 Cash dividends paid per common share$ 3.60
Reconciliation of Net Income to Non-GAAP Operating Income:
Net income$ 130,710 $ 138,211 $ 99,601 Exclusions from net income: Net realized gains on investments (14,885) (957) (2,976) Change in net unrealized gains on equity securities (16,130) (10,449) (21,454) Net impairment losses on investments -
- 889 Credit loss expense (363) 1,054 - Income tax benefit 6,589 2,174 4,944 Non-GAAP Operating income$ 105,921 $ 130,033 $ 81,004 Net income per diluted share$ 8.80 $ 9.18 $ 6.46 Exclusions from net income:
Net realized gains on investments (1.00) (0.06) (0.19) Change in net unrealized gains on equity securities (1.08) (0.69) (1.40) Net impairment losses on investments -
- 0.06 Credit loss expense (0.02) 0.07 - Income tax benefit 0.44 0.14 0.32
Non-GAAP Operating income per diluted share$ 7.14
$ 8.64 $ 5.25 YEAR ENDEDDECEMBER 31, 2021 COMPARED TO YEAR ENDEDDECEMBER 31, 2020 Direct Written Premiums. Direct written premiums for the year endedDecember 31, 2021 increased by$3,427 , or 0.4%, to$802,139 from$798,712 for the comparable 2020 period. The 2020 period reflects the Safety Personal Auto Relief Credit, a 15% policyholder credit, representing$17,711 in total premium which was applied to personal auto policies for the months of April, May andJune 2020 as well as changes made by CAR to eligibility requirements which impacted the number of commercial automobile policies that we handle as a Servicing Carrier to the ceded pool. This results in a commensurate decrease in ceded written premium to and assumed from these programs. 41 Table of Contents
Net Written Premiums. Net written premiums for the year endedDecember 31, 2021 increased by$989 , or 0.1%, to$764,526 from$763,537 for the comparable 2020 period. The 2021 increase was primarily due to the factors
that increased direct written premiums.
Net Earned Premiums. Net earned premiums for the year endedDecember 31, 2021 increased by$3,250 , or 0.4%, to$774,328 from$771,078 for the comparable 2020 period. The 2021 increase was primarily due to the factors that increased direct written premiums. The effect of reinsurance on net written and net earned premiums is presented in the following table. Year Ended December 31, 2021 2020 Written Premiums Direct$ 802,139 $ 798,712 Assumed 31,359 26,316 Ceded (68,972) (61,491) Net written premiums$ 764,526 $ 763,537 Earned Premiums Direct$ 811,329 $ 815,981 Assumed 30,583 29,365 Ceded (67,584) (74,268) Net earned premiums$ 774,328 $ 771,078 Net Investment Income. Net investment income for the year endedDecember 31, 2021 increased by$3,090 , or 7.5%, to$44,135 from$41,045 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 annual yield on the investment portfolio was 3.0% for the year endedDecember 31, 2021 compared to 2.9% for the year endedDecember 31, 2020 . Our duration was 3.6 years atDecember 31, 2021 , compared to 3.2 years atDecember 31, 2020 . Earnings from Partnership Investments. Earnings from partnership investments were$19,829 for the year endedDecember 31, 2021 compared to$6,901 for the year endedDecember 31, 2020 . The 2021 earnings reflects an increase in investment appreciation and distribution of investment returns 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 were$14,885 for the year endedDecember 31, 2021 compared to$957 for the comparable 2020 period. The increase is a result of an increase in realized gains on the sale of equity securities compared to the prior year. 42 Table of Contents The gross unrealized gains and losses on investments in fixed maturity securities, including redeemable preferred stocks that have characteristics of fixed maturities, short term investments, equity securities, including interests in mutual funds, and other invested assets were as follows: As of December 31, 2021 Cost or Allowance for Gross Unrealized Estimated Amortized Expected Credit Fair Cost Losses Gains Losses (3) Value
U.S. Treasury securities$ 318 $ - $ 6 $ -$ 324 Obligations of states and political subdivisions 111,578 - 4,847 (123) 116,302 Residential mortgage-backed securities (1) 237,026 - 5,941 (1,503) 241,464 Commercial mortgage-backed securities 146,318 - 5,007 (442) 150,883 Other asset-backed securities 83,376 - 475 (255) 83,596 Corporate and other securities 609,241 (691) 20,647 (3,487) 625,710 Subtotal, fixed maturity securities 1,187,857 (691) 36,923 (5,810) 1,218,279 Equity securities (2) 211,848 - 54,861 (1,764) 264,945 Other invested assets (4) 87,911 -
- - 87,911 Totals$ 1,487,616 $ (691)$ 91,784 $ (7,574) $ 1,571,135
(1) Residential mortgage-backed securities consists of obligations of
Government
guaranteed and/or insured by the following issuers:
Association
National Mortgage Association (FNMA) and the
(2) Equity securities include 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 444 securities in an unrealized loss
position at
(4) Other invested assets are accounted for under the equity method which
approximates fair value.
The composition of our fixed income security portfolio by rating was as follows:
As of December 31, 2021
Estimated
Fair Value Percent
U.S. Treasury securities and obligations of U.S.
Government agencies $ 242,911 19.9 %
Aaa/Aa 276,059 22.7
A 279,187 22.9
Baa 231,267 19.0
Ba 60,822 5.0
B 103,086 8.5
Caa/Ca 4,284 0.4
Not rated 20,663 1.6
Total $ 1,218,279 100.0 %
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 ofDecember 31, 2021 , our portfolio of fixed maturity investments was principally comprised 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.
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 presents the length of time that they have
been in a continuous unrealized loss position of
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As of December 31, 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 2,985 85 1,012 38 3,997 123 Residential mortgage-backed securities 97,116 1,502 11 1 97,127 1,503 Commercial mortgage-backed securities 29,660 442 - - 29,660 442
Other asset-backed securities 39,266 255 - - 39,266 255 Corporate and other securities 181,470 3,140 11,436 347 192,906 3,487 Subtotal, fixed maturity securities 350,497 5,424 12,459 386 362,956 5,810 Equity securities 19,457 1,559 1,029 205 20,486 1,764 Total temporarily impaired securities$ 369,954 $ 6,983 $
13,488
The Company's analysis of its fixed maturity portfolio atDecember 31, 2021 concluded that$691 of unrealized losses were due to credit factors and were recorded as an allowance for expected credit losses atDecember 31, 2021 , compared to$1,054 atDecember 31, 2020 . The Company concluded that outside of the securities that were recognized as credit impaired, the unrealized losses recorded on the fixed maturity portfolio atDecember 31, 2021 andDecember 31, 2020 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
"
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. The majority of unrealized losses recorded on the investment portfolio atDecember 31, 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. Given our current level of liquidity, the fact that we do not intend to sell these securities, and that it is more likely than not that we will not be required to sell these securities prior to recovery of the cost basis of these securities, these decreases in values are viewed as being temporary. For information regarding fair value measurements of our investment portfolio, refer to Item 8-Financial Statements and Supplementary Data, Note 16, Fair Value of Financial Instruments, of this Form 10-K. Finance and Other Service Income. Finance and other service income includes revenues from premium installment charges, which we recognize when earned, and other miscellaneous income and fees. Finance and other service income decreased by$1,631 , or 9.7%, to$15,241 for the year endedDecember 31, 2021 from$16,872 for the comparable 2020 period. The decrease is primarily driven by a change in our late fee assessment policy. The 2020 period also reflects a moratorium on certain policy cancellations and fees that were in place during 2020 as a result of the COVID-19 pandemic. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred for the year endedDecember 31, 2021 increased by$57,171 , or 14.1%, to$461,727 from$404,556 for the comparable 2020 period. The 2020 losses and loss adjustment expenses reflected 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 years endedDecember 31, 2021 and 2020 were 59.6% and 52.5%, respectively. Our GAAP loss ratio excluding loss adjustment expenses was 50.0% and 43.7% for the years endedDecember 31, 2021 and 2020, respectively. Total prior year favorable development included in the pre-tax results for the year endedDecember 31, 2021 was$53,673 , compared to$54,844 , for the comparable 2020 period.
Underwriting, Operating and Related Expenses. Underwriting, operating and
related expenses for the year ended
3.0%, to
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Our GAAP expense ratio for the year ended
from 34.6% for the comparable 2020 period. The 2021 decrease is driven by a
decrease in contingent commission expense.
Interest Expense. Interest expense was$522 and$440 for the years endedDecember 31, 2021 and 2020, respectively. Interest expense primarily relates to the borrowing from the FHLB as noted within Item 8 - Financial Statements and Supplementary Data, Note 10, Debt, of this Form 10-K. The credit facility commitment fee included in interest expense was$75 for each of the years endedDecember 31, 2021 and 2020. Income Tax Expense Our effective tax rates were 20.4% and 20.9% for the years endedDecember 31, 2021 and 2020, respectively. The effective rates for the years endedDecember 31, 2021 and 2020 were lower than the statutory rates primarily due to the effects of tax-exempt investment income and the impact of stock-based compensation. The comparison of results for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 can be found in the Company's 2020 Annual Report on Form 10-K filed with theSEC onFebruary 26, 2021 . Liquidity and Capital Resources As a holding company, Safety's assets consist primarily of the stock of our direct and indirect subsidiaries. Our principal source of funds to meet our obligations and pay dividends to shareholders, therefore, is dividends and other permitted payments from our subsidiaries, principallySafety Insurance . Safety is the borrower under our credit facility.Safety Insurance's sources of funds primarily include premiums received, investment income and proceeds from sales and redemptions of investments.Safety Insurance's principal uses of cash are the payment of claims, operating expenses and taxes, the purchase of investments and payment of dividends to Safety. Net cash provided by operating activities was$141,394 ,$109,460 , and$112,456 during the years endedDecember 31, 2021 , 2020, and 2019, respectively. Our operations typically generate positive cash flows from operations as most premiums are received in advance of the time when claim and benefit payments are required. These positive operating cash flows are expected to continue to meet our liquidity requirements. Net cash used for investing activities was$65,989 ,$35,524 , and$52,964 for the years endedDecember 31, 2021 , 2020, and 2019, respectively, as purchases of fixed maturity and equity securities exceeded proceeds from the sales, paydowns, calls and maturities of fixed maturity and equity securities. Net cash used for financing activities was$65,571 ,$64,574 , and$52,667 during the years endedDecember 31, 2021 , 2020 and 2019, respectively. Net cash used for financing activities during the year endedDecember 31, 2021 is comprised of dividend payments to shareholders and share buybacks. Net cash used for financing activities during the year endedDecember 31, 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. Net cash used for financing activities during the years endedDecember 31, 2019 is comprised of dividend payments to shareholders. The Insurance Subsidiaries maintain a high degree of liquidity within their respective investment portfolios in fixed maturity and short-term investments. 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. 45 Table of Contents Credit Facility
For information regarding our Credit Facility, please refer to Item 8-Financial
Statements and Supplementary Data, Note 10, Debt, of this Form 10-K.
Recent Accounting Pronouncements
For information regarding Recent Accounting Pronouncements, please refer to Item 8-Financial Statements and Supplementary Data, Note 2, Summary of Significant Accounting Policies, of this Form 10-K. Regulatory Matters Our insurance company's subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to their parent without prior approval of the Commissioner. 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 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-end 2021, the statutory surplus ofSafety Insurance was$826,979 , and its net income for 2021 was$97,169 . As a result, a maximum of$97,169 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$729,810 atDecember 31, 2021 . During the twelve months endedDecember 31, 2021 ,Safety Insurance recorded dividends to Safety of$49,488 . 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 2021 and 2020 were as follows:
Total
Declaration Record Payment Dividend per Dividends Paid
Date Date Date Common Share and Accrued
February 14, 2020 March 2, 2020 March 16, 2020 $ 0.90 $ 13,872
May 6, 2020 June 1, 2020 June 15, 2020 $ 0.90 $ 13,836
August 5, 2020 September 1, 2020 September 15, 2020 $ 0.90 $ 13,622
November 4, 2020 December 1, 2020 December 15, 2020 $ 0.90 $ 13,405
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
November 3, 2021 December 1, 2021 December 15, 2021 $ 0.90 $ 13,554
On February 15, 2022 , our Board approved and declared a quarterly cash dividend
on our common stock of $0.90 per share to be paid on March 15, 2022 to
shareholders of record on March 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.
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Table of Contents
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 the Company to repurchase
any specific number of shares and may be modified, suspended or terminated at
any time without prior notice. As of December 31, 2021 , the Company had
purchased 2,970,573 shares on the open market at a cost $135,397 . As of
December 31, 2020 , the Company had purchased 2,831,168 shares on the open market
at a cost of $123,834 . The Company purchased an additional 170,904 shares on the
open market at a cost of $14,603 through February 23, 2022 . As of that date, the
previously authorized share repurchase program in the amount of $150 million has
been utilized. On February 23, 2022 , the Board approved an increase to the
Company's share repurchase program of up to $50,000 of the Company's 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, 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 the Company to repurchase any specific number of
shares and may be modified, suspended or terminated at any time without prior
notice.
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. Contractual Obligations
We have obligations to make future payments under contracts and credit-related
financial instruments and commitments.
As ofDecember 31, 2021 , the Company had loss and LAE reserves of$570,651 , unpaid reinsurance recoverables of$90,667 and net loss and LAE reserves of$479,984 . Our loss and LAE reserves are estimates as described in more detail under Critical Accounting Policies and Estimates. The specific amounts and timing of obligations related to case reserves, IBNR reserves and related LAE reserves are not set contractually, and the amounts and timing of these obligations are unknown. While management believes that historical performance of loss payment patterns is a reasonable source for projecting future claims payments, there is inherent uncertainty in this estimated projected settlement of loss and LAE reserves, and as a result these estimates will differ, perhaps significantly, from actual future payments. Our operations typically generate substantial positive cash flows from operations as most premiums are received in advance of the time when claim and benefit payments are required. These positive operating cash flows are expected to continue to meet our liquidity requirements, including any unexpected variations in the timing of claim settlements.
As part of the Company's investment activity, we have committed
investments in limited partnerships. The Company has contributed
these commitments as of
remaining committed capital that could be called is
potential recallable capital distributions.
47
Table of Contents
Critical Accounting Policies and Estimates
Loss and Loss Adjustment Expense Reserves
Significant periods of time can elapse between the occurrence of an insured loss, the reporting to us of that loss and our final payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities. Our reserves represent estimates of amounts needed to pay reported and unreported losses and the expenses of investigating and paying those losses, or loss adjustment expenses. Every quarter, we review our previously established reserves and adjust them, if necessary. When a claim is reported, claims personnel establish a "case reserve" for the estimated amount of the ultimate payment. The amount of the reserve is primarily based upon an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss. The estimate reflects the informed judgment of such personnel based on general insurance reserving practices and on the experience and knowledge of the claims person. During the loss adjustment period, these estimates are revised as deemed necessary by our claims department based on subsequent developments and periodic reviews of the cases. When a claim is closed with or without a payment, the difference between the case reserve and the settlement amount creates a reserve deficiency if the payment exceeds the case reserve or a reserve redundancy if the payment is less than the case reserve. In accordance with industry practice, we also maintain reserves for 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.
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.
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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$445,511 to$504,580 as ofDecember 31, 2021 compared to a range of$424,437 to$478,251 as ofDecember 31, 2020 . 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$479,984 as ofDecember 31, 2021 compared to$461,270 as ofDecember 31, 2020 . The following tables present the point estimation of the recorded reserves and the range of estimations by line of business for net loss and LAE reserves as ofDecember 31, 2021 andDecember 31, 2020 . As of December 31, 2021 Line of Business Low Recorded High Private passenger automobile$ 182,390 $ 194,940 $ 198,675 Commercial automobile 99,798 108,158 109,853 Homeowners 87,639 93,065 97,390 All other 75,684 83,821 98,662 Total$ 445,511 $ 479,984 $ 504,580 As of December 31, 2020 Line of Business Low Recorded High Private passenger automobile$ 167,218 $ 182,494 $ 184,373 Commercial automobile 93,395 102,313 104,495 Homeowners 97,063 99,724 102,356 All other 66,761 76,739 87,027 Total$ 424,437 $ 461,270 $ 478,251 The following table presents our total net reserves and the corresponding case reserves and IBNR reserves for each line of business as ofDecember 31, 2021 andDecember 31, 2020 . As of December 31, 2021 Line of Business Case IBNR Total Private passenger automobile$ 237,808 $ (42,876) $
194,932
CAR assumed private passenger auto 1 7 8 Commercial automobile 67,017 8,858
75,875
CAR assumed commercial automobile 18,465 13,818
32,283
Homeowners 82,977 (200)
82,777
FAIR Plan assumed homeowners 3,493 6,795
10,288
All other 45,871 37,950
83,821
Total net reserves for losses and LAE$ 455,632 $ 24,352 $ 479,984 49 Table of Contents As of December 31, 2020 Line of Business Case IBNR Total Private passenger automobile$ 211,893 $ (29,407) $
182,486
CAR assumed private passenger auto 1 7 8 Commercial automobile 57,008 11,559
68,567
CAR assumed commercial automobile 18,824 14,923
33,747
Homeowners 86,362 3,371
89,733
FAIR Plan assumed homeowners 3,405 6,586
9,991
All other 44,128 32,610
76,738
Total net reserves for losses and LAE
AtDecember 31, 2021 and 2020, our total IBNR reserves for our private passenger automobile line of business were comprised of$(60,228) and$(45,308) related to estimated ultimate decreases in the case reserves, including anticipated recoveries (i.e. salvage and subrogation), and$17,352 and$15,901 related to our estimation for not yet reported losses, respectively. Our IBNR reserves consist of our estimate of the total loss reserves required less our case reserves. The IBNR reserves for CAR assumed commercial automobile business are 42.8% of our total reserves for CAR assumed commercial automobile business as ofDecember 31, 2021 due to the reporting delays in the information we receive from CAR, as described further in the section on Residual Market Loss and Loss Adjustment Expense Reserves. Our IBNR reserves for FAIR Plan assumed homeowners are 66.0% of our total reserves for FAIR Plan assumed homeowners atDecember 31, 2021 due to similar reporting delays in the information we receive from FAIR Plan. The following tables present information by line of business for our total net reserves and the corresponding retained (i.e. direct less ceded) reserves and assumed reserves as ofDecember 31, 2021 and 2020. As of December 31, 2021 Line of Business Retained Assumed
Net
Private passenger automobile$ 194,932 CAR assumed private passenger automobile$ 8 Net private passenger automobile $
194,940
Commercial automobile 75,875 CAR assumed commercial automobile 32,283 Net commercial automobile
108,158
Homeowners 82,777 FAIR Plan assumed homeowners 10,288 Net homeowners
93,065
All other 83,821 -
83,821
Total net reserves for losses and LAE$ 437,405 $ 42,579 $ 479,984 As of December 31, 2020 Line of Business Retained Assumed Net Private passenger automobile$ 182,486 CAR assumed private passenger automobile$ 8 Net private passenger automobile $
182,494
Commercial automobile 68,567 CAR assumed commercial automobile 33,747 Net commercial automobile
102,314
Homeowners 89,733 FAIR Plan assumed homeowners 9,991 Net homeowners
99,724
All other 76,738 -
76,738
Total net reserves for losses and LAE
50
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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 consist of premium ceded to the various residual markets less losses and LAE and is allocated among insurance companies based on a various formulas (the "Participation Ratio") that take 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 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 twelve months endedDecember 31, 2021 , a 1 percentage-point change in the loss and LAE ratio would result in a change in reserves of$7,743 . Each 1 percentage-point change in the loss and loss expense ratio would have had a$6,117 effect on net income, or$0.41 per diluted share.
Our assumptions consider that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for establishing our reserves. Our individual key assumptions could each have a reasonable possible range of plus or minus 5 percentage-points for each estimation, although there is no guarantee that our assumptions will not have more than a 5 percentage point variation. The following sensitivity tables present information for each of our primary lines of business on the effect each 1 percentage-point change in each of our key assumptions on unpaid frequency and severity could have on our retained (i.e., direct minus ceded) loss and LAE reserves and net income for the twelve months endedDecember 31, 2021 . In evaluating the information in the table, it should be noted that a 1 percentage-point change in a single assumption would change estimated reserves by 1 percentage-point. A 1 percentage-point change in both our key assumptions would change estimated reserves within a range of plus or minus 2 percentage-points. 51 Table of Contents -1 Percent No +1 Percent Change in Change in Change in Frequency Frequency Frequency Private passenger automobile retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves$ (3,899) $ (1,949) $ - Estimated increase in net income 3,080 1,540 - No Change in Severity Estimated (decrease) increase in reserves (1,949) -
1,949
Estimated increase (decrease) in net income 1,540 -
(1,540)
+1 Percent Change in Severity Estimated increase in reserves - 1,949
3,899
Estimated decrease in net income - (1,540)
(3,080)
Commercial automobile retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves (1,518) (759) - Estimated increase in net income 1,199 600 - No Change in Severity Estimated (decrease) increase in reserves (759) - 759 Estimated increase (decrease) in net income 600 -
(600)
+1 Percent Change in Severity Estimated increase in reserves - 759
1,518
Estimated decrease in net income - (600)
(1,199)
Homeowners retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves (1,656) (828) - Estimated increase in net income 1,308 654 - No Change in Severity Estimated (decrease) increase in reserves (828) - 828 Estimated increase (decrease) in net income 654 -
(654)
+1 Percent Change in Severity Estimated increase in reserves - 828
1,656
Estimated decrease in net income - (654)
(1,308)
All other retained loss and LAE reserves -1 Percent Change in Severity Estimated decrease in reserves (1,676) (838) - Estimated increase in net income 1,324 662 - No Change in Severity Estimated (decrease) increase in reserves (838) - 838 Estimated increase (decrease) in net income 662 -
(662)
+1 Percent Change in Severity Estimated increase in reserves - 838
1,676
Estimated decrease in net income - (662)
(1,324)
Our estimated share of CAR loss and LAE reserves is based on assumptions about our Participation Ratio, the size of CAR, and the resulting deficit (similar assumptions apply with respect to the FAIR Plan). Our assumptions consider that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for establishing our CAR reserves. Each of our assumptions could have a reasonably possible range of plus or minus 5 percentage-points for each estimation. The following sensitivity table presents information of the effect each 1 percentage-point change in our assumptions on our share of reserves for CAR and other residual markets could have on our assumed loss and LAE reserves and net income for the year endedDecember 31, 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. 52 Table of Contents -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
255 (255) FAIR Plan assumed homeowners Estimated (decrease) increase in reserves (103) 103 Estimated increase (decrease) in net income 81 (81)
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
2019, respectively.
The following table presents a comparison of prior year development of our net reserves for losses and LAE for the years endedDecember 31, 2021 , 2020 and 2019, respectively. 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. Year Ended December 31, Accident Year 2021 2020 2019 2011 & prior$ (647) $ (1,170) $ (2,380) 2012 (962) (1,553) (1,359) 2013 (194) (822) (2,689) 2014 (1,534) (452) (4,525) 2015 (2,757) (3,265) (3,557) 2016 (1,096) (5,496) (4,531) 2017 (4,682) (10,726) (15,119) 2018 (10,190) (16,697) (7,889) 2019 (16,810) (14,663) - 2020 (14,801) - - All prior years$ (53,673) $ (54,844) $ (42,049) At the end of each period, the reserves were re-estimated for all prior accident years. Our prior year reserves decreased by$53,673 ,$54,844 , and$42,049 for the years ended 2021, 2020, and 2019, respectively. The decreases in prior year reserves in 2021 resulted from re-estimations of prior year's ultimate loss and LAE liabilities and are primarily composed of reductions of$22,313 in our retained automobile reserves and$26,220 in our retained other than auto and homeowner's reserves. The decreases in prior year reserves in 2020 resulted from re-estimations of prior year's ultimate loss and LAE liabilities and are primarily composed of reductions of$26,902 in our retained automobile reserves and$21,717 in our retained other than auto and homeowner reserves. The decrease in prior year reserves during 2019 resulted from re-estimations of prior year's ultimate loss and LAE liabilities and are primarily composed of reductions of$25,623 in our retained automobile reserves and$14,182 in our retained homeowners reserves. It is not appropriate to extrapolate future favorable or unfavorable development of reserves from this past experience. 53
Table of Contents
The following table presents information by line of business for prior year development of our net reserves for losses and LAE for the year endedDecember 31, 2021 . Private Passenger Commercial Accident Year Automobile Automobile Homeowners All Other Total 2011 & prior $ (143)$ (8) $ (7) $ (489) $ (647) 2012 (176) (11) - (775) (962) 2013 (376) (88) 17 253 (194) 2014 6 (92) (210) (1,238) (1,534) 2015 (189) (97) (1,140) (1,331) (2,757) 2016 (386) (197) (125) (388) (1,096) 2017 (584) (876) (1,926) (1,296) (4,682) 2018 (2,787) (1,645) (3,098) (2,660) (10,190) 2019 (6,583) (2,489) (6,947) (791) (16,810) 2020 (6,695) (2,957) (4,871) (278) (14,801) All prior years $ (17,913)$ (8,460) $ (18,307) $ (8,993) $ (53,673)
To further clarify the effects of changes in our reserve estimates for CAR and other residual markets, the next two tables break out the information in the table above by source of the business (i.e., non-residual market vs. residual market).
The following table presents information by line of business for prior year
development of retained reserves for losses and LAE for the year ended
from CAR and other residual markets.
Retained Retained
Private Passenger Commercial Retained Retained
Accident Year Automobile Automobile Homeowners All Other Total
2011 & prior $ (143) $ (8) $ (7) $ (489) $ (647)
2012 (176) (11) - (775) (962)
2013 (376) (88) 17 253 (194)
2014 6 (54) (210) (1,238) (1,496)
2015 (189) (18) (1,138) (1,331) (2,676)
2016 (386) (137) (102) (388) (1,013)
2017 (584) (608) (1,831) (1,296) (4,319)
2018 (2,787) (1,174) (2,956) (2,660) (9,577)
2019 (6,583) (1,295) (6,522) (791) (15,191)
2020 (6,695) (1,007) (4,478) (278) (12,458)
All prior years $ (17,913) $ (4,400) $ (17,227) $ (8,993) $ (48,533)
The following table presents information by line of business for prior year
development of reserves assumed from residual markets for losses and LAE for the
year ended
CAR Assumed CAR Assumed
Private Passenger Commercial FAIR Plan
Accident Year Automobile Automobile Homeowners Total
2011 & prior $ - $ - $ - $ -
2012 - - - -
2013 - - - -
2014 - (38) - (38)
2015 - (79) (2) (81)
2016 - (60) (23) (83)
2017 - (268) (95) (363)
2018 - (471) (142) (613)
2019 - (1,194) (425) (1,619)
2020 - (1,950) (393) (2,343)
All prior years $ - $ (4,060) $ (1,080) $ (5,140)
The improved retained 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
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property damage case reserves. Our retained other than auto and homeowners line of business prior year reserves decreased, due primarily to fewer IBNR claims than previously estimated.
In estimating all our loss reserves, including CAR, we follow the guidance
prescribed by ASC 944,
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: Credit Loss Benefit
(Expense)."
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
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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 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
Some other factors, such as market, operational, liquidity, interest rate, equity and other risks, are described elsewhere in this Annual Report on Form 10-K. Factors relating to the regulation and supervision of our Company are also described or incorporated in this report. There are other factors besides those described or incorporated in this report that could cause actual conditions, events or results to differ from those in the forward-looking statements.
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.
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UNIVERSAL INSURANCE HOLDINGS, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2021 Annual Report
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