Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
Or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-50070
SAFETY INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
13-4181699
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
20 Custom House Street, Boston, Massachusetts 02110
(Address of principal executive offices including zip code)
(617) 951-0600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Shares, $0.01 par value per share
SAFT
The Nasdaq Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer ☐
Non-accelerated filer
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s voting and non-voting common equity (based on the closing sales price on NASDAQ) held by non-affiliates of the registrant as of June 30, 2021, was approximately $1,123,747,601.
As of February 22, 2022 there were 14,671,893 Common Shares with a par value of $0.01 per share outstanding.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement for its Annual Meeting of Shareholders, which Safety Insurance Group, Inc. (“Safety”, the “Company”, “we”, “our”, “us”) intends to file within 120 days after its December 31, 2021 year-end, are incorporated by reference into Part II and Part III hereof.
PART I.
Page
Item 1.
Business
1
Item 1A.
Risk Factors
24
Item 1B.
Unresolved Staff Comments
32
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
33
PART II.
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
34
Item 6.
[Reserved]
36
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
57
Item 8.
Financial Statements and Supplementary Data
58
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
98
Item 9A.
Controls and Procedures
Item 9B.
Other Information
100
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III.
Item 10.
Directors, Executive Officers and Corporate Governance
101
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV.
Item 15.
Exhibits, Financial Statement Schedules
Item 16
Form 10-K Summary
113
SIGNATURES
114
In this Form 10-K, all dollar amounts are presented in thousands, except average premium, average claim and per claim data, share, and per share data.
PART I.
ITEM 1. BUSINESS
General
We are a leading provider of private passenger automobile, commercial automobile, and homeowners insurance in Massachusetts. In addition to these coverages, we offer a portfolio of other insurance products, including dwelling fire, umbrella and business owner policies. Operating exclusively in Massachusetts, New Hampshire and Maine through our insurance company subsidiaries, Safety Insurance Company ("Safety Insurance"), Safety Indemnity Insurance Company ("Safety Indemnity"), Safety Property and Casualty Insurance Company ("Safety P&C"), and Safety Northeast Insurance Company (“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, in particular, our extensive knowledge of the Massachusetts 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 Commonwealth Automobile Reinsurers ("CAR"). We also are the third largest homeowners insurance carrier in Massachusetts with a 6.8% share of that market in 2020. We were ranked the 56th largest automobile writer in the country according to S&P Global Market Intelligence, based on 2020 direct written premiums. We were incorporated under the laws of Delaware in 2001, but through our predecessors, we have underwritten insurance in Massachusetts since 1979.
Our Insurance Subsidiaries began writing insurance in New Hampshire during 2008 and Maine in 2016. The table below shows the amount of direct written premiums written in each state during the year ended December 31, 2021, 2020, and 2019.
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
Website Access to Information
The Internet address for our website is www.SafetyInsurance.com. All of our press releases and United States Securities and Exchange Commission ("SEC") reports are available for viewing or download at our website. These documents are made available as soon as reasonably practicable after each press release is made and SEC report is filed with, or furnished to, the SEC. Copies of any current public information about our company is available without charge upon written, telephone, faxed or e-mailed request to the Office of Investor Relations, Safety Insurance Group, Inc., 20 Custom House Street, Boston, MA 02110, Tel: 877-951-2522, Fax: 617-603-4837, or e-mail: InvestorRelations@SafetyInsurance.com. The materials on our website are not part of this report on Form 10-K nor are they incorporated by reference into this report and the URL above is intended to be an inactive textual reference only. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
Our Competitive Strengths
We Have Strong Relationships with Independent Agents. In 2021, independent agents accounted for approximately 56.9% of the Massachusetts automobile insurance market measured by direct written premiums as compared to approximately 30.8% nationwide, based on data made available by Independent Insurance Agents and Brokers of America, Inc. and CAR. For that reason, our strategy is centered around, and we sell exclusively through, a network of independent agents. In order to support our independent agents and enhance our relationships with them, we:
Through these measures, we strive to become the preferred provider of the independent agents in our agency network and capture a growing share of the total insurance business written by these agents in Massachusetts, New Hampshire and Maine. We must compete with other insurance carriers for the business of independent agents.
We Have a History of Profitable Operations. In 40 out of 41 years since our inception in 1979, we have been profitable. We have achieved our profitability, among other things, by:
We Continue to Develop and Deploy Advanced Technology and Services for Our Business. We have dedicated significant human and financial resources to the development and deployments of advanced information systems and technologies, customer and agent facing websites, mobile applications, and customer engagement tools including online chat and text. Over the last several years we have modernized all of our core systems along with many of our surround systems and technology platforms in an effort to increase efficiencies within the organization and provide a better user experience for our employees, agents, and customers. These modern systems and platforms position us to continue to take advantage of the latest in InsureTech offerings, Software as a Service (SaaS) products and cloud-based technologies to improve the customer experience, engage with customers on their terms, and assist with customer retention all while improving operational efficiencies and reducing operational costs. We also continue to expand our usage of Robotics Process Automation (RPA) throughout the organization to automate manual processes, streamline the software testing process and perform application performing testing to insure a robust technical environment.
We Have an Experienced, Committed and Knowledgeable Management Team. Our senior management team has an average of over 28 years of experience with Safety and a demonstrated ability to operate successfully within the property and casualty market.
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Our Strategy
To achieve our goal of increasing shareholder value, our strategy is to maintain and develop strong independent agent relationships by providing our agents with a full package of insurance products and information technology services. We believe this strategy will allow us to:
Property and Casualty Insurance Market
Introduction. We are licensed by the respective state insurance departments to transact property and casualty insurance in Massachusetts, New Hampshire, and Maine. All of our business is regulated by these departments, with the most extensive oversight from our domestic regulator, the Massachusetts Division of Insurance (“Division”).
Products
Historically, we have focused on underwriting private passenger automobile insurance, which is written through our subsidiary, Safety Insurance. In 1989, we formed Safety Indemnity to offer commercial automobile insurance at preferred rates. Since 1997, we have expanded the breadth of our product line in order for agents to address a greater portion of their clients' insurance needs by selling multiple products. Homeowners, business owner, personal umbrella, dwelling fire and commercial umbrella insurance policies are written by Safety Insurance at standard rates and written by Safety Indemnity at preferred rates. In December 2006, we formed Safety P&C to offer homeowners and commercial automobile insurance at ultra preferred rates. In November 2020, we formed Safety Northeast to offer a fourth insurance subsidiary, which became licensed to write homeowners insurance products in Massachusetts during 2021.
The table below shows our premiums in each of these product lines for the periods indicated and the portions of our total premiums each product line represented.
Private passenger automobile
429,819
53.6
%
438,824
54.9
466,697
54.8
Commercial automobile
129,832
16.2
118,773
14.9
147,177
17.3
Homeowners
199,886
24.9
199,482
25.0
196,764
23.0
Business owners
23,334
2.9
22,317
2.8
22,241
2.6
Personal umbrella
8,417
1.1
8,087
1.0
8,316
Dwelling fire
9,698
1.2
10,148
1.3
10,109
Commercial umbrella
1,153
0.1
1,081
1,100
100.0
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Our product lines are as follows:
Private Passenger Automobile (53.6% of 2021 direct written premiums). Private passenger automobile insurance is our primary product. These policies provide coverage for bodily injury and property damage to others, no-fault personal injury coverage for the insured/insured's car occupants, and physical damage coverage for an insured's own vehicle for collision or other perils.
Commercial Automobile (16.2% of 2021 direct written premiums). Commercial automobile policies provide coverage for bodily injury and property damage to others, no-fault personal injury coverage, and physical damage coverage for an insured's own vehicle for collision or other perils resulting from the ownership or use of commercial vehicles in a business. We offer insurance for commercial vehicles used for business purposes such as private passenger-type vehicles, trucks, tractors and trailers (excluding long-haul trucking), and insure individual vehicles as well as commercial fleets.
Homeowners (24.9% of 2021 direct written premiums). We offer a broad selection of coverage forms for qualified policyholders. Homeowners policies provide coverage for losses to a dwelling and its contents from numerous perils, and coverage for liability to others arising from ownership or occupancy. We write policies on homes, condominiums, and apartments.
Business Owner Policies (2.9% of 2021 direct written premiums). We serve eligible small and medium sized commercial accounts with a program that covers apartments and residential condominiums; mercantile establishments, including limited cooking restaurants; offices, including office condominiums; processing and services businesses; special trade contractors; and wholesaling businesses. Business owner policies provide liability and property coverage for many perils, including business interruption from a covered loss. Equipment breakdown coverage is automatically included, and a wide range of additional coverage is available to qualified customers. We write policies for business owners at standard rates with qualifying risks eligible for preferred lower rates.
Personal Umbrella (1.1% of 2021 direct written premiums). We offer personal excess liability coverage over and above the limits of individual automobile, watercraft, and homeowner's insurance policies to clients. We write policies at standard rates with limits of $1,000 to $5,000.
Dwelling Fire (1.2% of 2021 direct written premiums). We underwrite dwelling fire insurance, which is a limited form of a homeowner's policy for non-owner occupied residences. We write all forms of dwelling fire coverage at standard rates with qualifying risks eligible for preferred lower rates.
Commercial Umbrella (0.1% of 2021 direct written premiums). We offer an excess liability product to clients for whom we underwrite both commercial automobile and business owner policies. The program is directed at commercial automobile risks with private passenger-type automobiles or light and medium trucks. We write commercial umbrella policies at standard rates with limits ranging from $1,000 to $5,000.
Inland Marine (Included in our Homeowners direct written premiums). We offer inland marine coverage as an endorsement for all homeowners and business owner policies, and as part of our commercial package policy. Inland marine provides additional coverage for jewelry, fine arts and other items that a homeowners or business owner policy would limit or not cover. Scheduled items valued at more than $5 must meet our underwriting guidelines and be appraised.
Watercraft (Included in our Homeowners direct written premiums). We offer watercraft coverage for small and medium sized pleasure craft with maximum lengths of 32 feet, valued at less than $75 and maximum speed of 39 knots. We write this coverage as an endorsement to our homeowner's policies.
The insurance industry can also be impacted by terrorism, and we have filed and received approval for a number of terrorism endorsements, which limit our liability and property exposure according to the Terrorism Risk
4
Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005, the Terrorism Risk Insurance Program Reauthorization Act of 2007, the Terrorism Risk Insurance Program Reauthorization of 2015 and the Terrorism Risk Insurance Program Reauthorization Act of 2019. See "Reinsurance," discussed below.
Distribution
We distribute our products exclusively through independent agents, unlike some of our competitors who use multiple distribution channels. We believe this gives us a competitive advantage with the agents. With the exception of personal automobile business assigned to us by the Massachusetts Automobile Insurance Plan (“MAIP”) or written through CAR’s commercial automobile Servicing Carrier program, we do not accept business from insurance brokers. Our voluntary agents have authority pursuant to our voluntary agency agreement to bind our Insurance Subsidiaries for any coverage that is within the scope of their authority. We reserve the ability to cancel any coverage bound, in accordance with applicable law. In total, our independent agents numbered 856 and had 1,088 offices (some agencies have more than one office) and approximately 9,805 customer service representatives during 2021.
Voluntary Agents. In 2021, we obtained approximately 96.5% of our direct written premiums for automobile insurance and 100% of our direct written premiums for all of our other lines of business through our voluntary agents. As of December 31, 2021, we had agreements with 735 voluntary agents. Our voluntary agents are located in all regions of Massachusetts, New Hampshire and Maine.
We look for agents with profitable portfolios of business. To become a voluntary agent for our Company, we generally require that an agency: (i) have been in business for at least five years; (ii) have exhibited a three year private passenger average ratio of losses, excluding loss adjustment expenses, to net earned premiums ("pure loss ratio") of 65.0% or less on the portion of the agent's portfolio that we would underwrite; (iii) make a commitment for us to underwrite at least 300 policies from the agency during the first twelve months after entering an agreement with us; and (iv) offer multiple product lines. Every year, we review the prior year performance of our agents. If an agent fails to meet our profitability standards, we try to work with the agent to improve the profitability of the business it places with us. We generally terminate contracts each year with a few agencies, which, despite our efforts, have been consistently unable to meet our standards. Although independent agents usually represent several unrelated insurers, our goal is to be one of the top two insurance companies represented in each of our agencies, as measured by direct written premiums. No individual agency generated more than 9.2% of our direct written premiums in 2021.
Massachusetts law guarantees that CAR provides motor vehicle insurance coverage to all eligible risks. Under the MAIP, personal automobile policies are assigned to us for three years, unless the policyholder is offered a voluntary policy by another insurer. All Massachusetts agents are authorized to submit eligible business to the MAIP for random assignment to a carrier such as Safety Insurance. We are allocated all private passenger residual market business through the MAIP.
CAR runs a reinsurance pool for ceded commercial automobile policies through the Commercial Automobile Program (the “Commercial Automobile Program”). CAR has appointed Safety and three other servicing carriers to process ceded commercial automobile insurance. Safety was reappointed for this program on January 1, 2022 for an additional five-year term. Historically, CAR ran a separate reinsurance pool for Taxi, Limousine and Car Service risks, however, beginning with the January 1, 2022 policy year, this pool was combined into the Commercial Automobile Program. Approximately $187,900 of ceded premium is spread equitably among the four servicing carriers. Subject to the review of the Massachusetts Commissioner of Insurance (“the Commissioner”), CAR sets the premium rates for commercial automobile policies reinsured through CAR and this reinsurance pool can generate an underwriting result that is a profit or deficit based upon CAR's rate level. This underwriting result is allocated among every Massachusetts commercial automobile insurance company, including us, based on a company's commercial automobile voluntary market share.
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We are assigned independent agents by CAR who can submit commercial business to us in the Commercial Automobile Program and the Taxi/Limo Program, and we classify those agents as Exclusive Representative Producers (“ERPs”).
The table below shows our direct written exposures in each of our product lines for the periods indicated and the change in exposures for each product line.
Line of Business
Exposures
Change
Private passenger automobile:
Voluntary agents
390,919
(4.4)
408,873
(2.4)
418,894
(1.6)
MAIP
2,110
(36.0)
3,298
(42.9)
5,777
(29.1)
Total private passenger automobile
393,029
(4.6)
412,171
(2.9)
424,671
(2.1)
Commercial automobile:
65,848
3.2
63,828
(4.8)
67,074
5.4
ERP
3,755
(1.2)
3,802
(50.8)
7,725
(31.1)
Total commercial automobile
69,603
67,630
(9.6)
74,799
(0.1)
Other:
153,980
(2.3)
157,611
(0.8)
158,848
(0.3)
8,770
0.4
8,735
(1.9)
8,903
(2.2)
21,530
(2.7)
22,124
22,620
(1.4)
6,000
(7.0)
6,454
6,632
672
3.1
652
(4.7)
684
1.5
Total other
190,952
195,576
(1.1)
197,687
(0.6)
653,584
(3.2)
675,377
(3.1)
697,157
(1.5)
Total voluntary agents
647,719
668,277
683,655
(0.7)
In 2021, 65.6% of the private passenger automobile exposures we insure had an other than private passenger policy with us, compared to 66.1% and 64.2% in 2020 and 2019, respectively. In addition, 82.6% of our homeowners’ policyholders had a matching automobile policy with us in 2021 compared to 82.8% in 2020 and 82.5% in 2019.
Marketing
We view the independent agent as our customer and business partner. As a result, a component of our marketing efforts focuses on developing interdependent relationships with leading Massachusetts, New Hampshire and Maine agents that write profitable business and positioning ourselves as the preferred insurance carrier of those agents, thereby receiving a larger portion of each agent's aggregate business. Our principal marketing strategies to agents are:
We have a comprehensive branding campaign using a variety of radio, television, digital and print advertisements.
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Commission Schedule and Profit Sharing Plan. We have several programs designed to attract profitable new business from agents by paying them competitive commissions. We recognize our top performing agents by making them members of either our Chairman's Elite, Chairman's, President's, Executive's or Preferred Agent's Club. In 2021, members of these Clubs received a commission of up to 18.0% of premiums for each new private passenger auto policy, up to 22.0% of premiums for each new homeowner policy, up to 20.0% for each new commercial auto policy and up to 20.0% for each new commercial property policy.
Further, we have a competitive agency incentive commission program under which we pay agents up to 7.5% of premiums based on the loss ratio on their business.
Service and Support. We believe that the level and quality of service and support we provide helps differentiate us from other insurers. We have made a significant investment in information technology designed to facilitate our agents' business. Our AVC website helps agents manage their work efficiently. We provide a substantial amount of information online that agents need to serve their customers, such as information about the status of new policies, bill payments and claims. Providing this type of content reduces the number of customer calls we receive and empowers the agent's customer service representatives by enabling them to respond to customers' inquiries while the customer is on the telephone. Finally, we believe that the knowledge and experience of our employees enhances the quality of support we provide.
Underwriting and Insurance Operations
Our underwriting department is responsible for a number of key decisions affecting the profitability of our business, including:
Pricing. Subject to the applicable state insurance department’s review, we set rates for all of our products using our own loss experience, industry loss cost data, residual market deficits, catastrophe modeling and prices charged by our competitors. We have four pricing segments for most products, utilizing Safety Insurance for standard rates, Safety Indemnity for preferred rates, Safety P&C for ultra preferred rates and Safety Northeast for homeowners rates.
Massachusetts Residual Automobile Insurance Markets. CAR establishes the rates for personal automobile policies assigned to carriers through the MAIP. In accordance with Massachusetts law, insurers may only charge MAIP policyholders the lower of the MAIP rate or the company's competitive voluntary market rate. CAR also sets rates for commercial automobile policies, including taxi/limousine/car service policies, reinsured through the CAR residual market pool. All commercial automobile business and taxi/limousine/car service business that is not written in the voluntary market in Massachusetts is apportioned to one of these servicing carriers which handles that business on behalf of CAR. Every Massachusetts commercial automobile insurer must bear a portion of the losses of the total commercial reinsurance pool that is serviced by the approved servicing carriers. We are one of four servicing carriers in CAR’s Commercial Automobile Program.
Bulk Policy Transfers and New Voluntary Agents. From time to time, we receive proposals from an existing voluntary agent to transfer a portfolio of the agent's business from another insurer to us. Our underwriters model the profitability of these portfolios before we accept these transfers. We generally require any new voluntary agent to commit to transfer a portfolio to us consisting of at least 300 policies.
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Policy Processing. Our underwriting department assists in processing policy applications, endorsements, renewals and cancellations. Our proprietary software, Safety Express, provides our agents with new business and endorsement entry, real-time policy issuance for personal lines, immediate printing of declarations pages in agents' offices, policy downloads to most major agency management systems and data imports from Boston Software's SinglePoint (Massachusetts) and Vertafore's PL Rater (Massachusetts, New Hampshire and Maine).
Rate Pursuit. We aggressively monitor all insurance transactions to make sure we receive the correct premium for the risk insured. We accomplish this by verifying pricing criteria. For automobile policies, we verify proper classification of drivers, the make, model, and age of insured vehicles, and the availability of discounts. We also verify that operators are properly listed and classified, assignment of operators to vehicles, and vehicle garaging. In our homeowners and dwelling fire lines, we use third party software to evaluate property characteristics and we conduct property inspections. We have a premium audit program in our business owner program, as well as other loss control reviews for additional commercial lines of business.
Product Management. The Product Management department is responsible for the overall review and updating of our products. The department maintains an annual schedule where each line of business is reviewed and benchmarked with our major competitors. Product offerings, discounts, rate levels and underwriting guidelines are reviewed and updates are performed as required. The department also is responsible for updating producer materials such as rate and rule manuals, and underwriting guidelines as well as promotional materials. In conjunction with the underwriting operations area, the department works with third party vendors that assist with risk information gathering and rate pursuit for in force policies. The department also provides product training and general marketplace education for the organization.
Legal and Regulatory Compliance. The Legal and Regulatory Compliance department provides legal and compliance support to all business units within the company. The department serves as the primary liaison with regulators, government, industry trade associations and residual market mechanisms. The department also provides legal support to all areas of the company, including general corporate matters and vendor contracting. The department monitors legal and regulatory changes affecting the enterprise and provides guidance on how to comply with those changes. The department additionally reviews business unit operations to identify and address compliance vulnerabilities.
Business Intelligence. The Business Intelligence department uses Safety’s data assets to support decision-making in areas including underwriting, pricing, claims, reserving, reinsurance and assessing catastrophe risks. Data analytics are used to analyze and estimate exposures, loss trends and other risks, and are leveraged to improve company business performance and customer satisfaction.
Customer Engagement. The Customer Engagement department provides professional customer service to our agents and insureds by continuously identifying new ways to enhance the ease of doing business with us and by looking for new ways to personalize our services for each customer.
Technology
The focuses of our information technology (“IT”) efforts are:
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We believe that our technology initiatives have increased revenue and decreased costs while at the same time improving the customer experience of both our agents and policyholders. We are continuously investing in new technologies including areas such as robotic process automation and a new claims system which we began using for other than auto lines of business in 2020 and for auto lines of business in 2021.
Innovation Lab. In 2018 we established an Innovation Lab. The purpose of the Innovation Lab is to foster a culture of innovative thinking, monitor the InsureTech landscape and provide Safety and our independent agents with the tools and processes necessary to continuously improve the customer experiences and remain competitive in both the current and future insurance marketplace. During 2021, the Innovation Lab did substantial research, performed multiple proof of concepts, initiated pilot projects, and presented fully functional technologies to the business for their use. In early 2021, the Innovation Lab partnered with Safety’s Product Management department to select an InsureTech company to implement a Home Sensor Proof of Concept program including freeze and water detection sensors along with a Smartphone Mobile app allowing participants to monitor the status of their sensors remotely. To date the Proof of Concept has been able to mitigate several potential water and freeze incidents by notifying participants of the presence of water or low temperatures within their property. The Innovation Lab also partnered with the Claims department to introduce an electronic appraisals program using Smartphone technology that guides a consumer through a remote, touchless appraisal process that not only speeds the claims settlement process but proved very timely during the pandemic with our customers’ desire for touchless insurance services. Several other initiatives are currently in the pipeline including the latest in payment technologies, customer communication methods, artificial intelligence, and robotics.
Internal Applications
Our employees access our proprietary and vendor supplied applications through our corporate intranet. Our intranet applications streamline internal processes and improve overall operational efficiencies in areas including:
Claims. Our claims workload management application allows our claims and subrogation adjusters to better manage the claims process. Subrogation refers to the process by which we are reimbursed by other insurers for claims costs we incur due to the fault of their insureds. The use of this application has reduced the time it takes for us to respond to and settle claims, which we believe helps reduce the total amount of our claims expense.
The automated adjuster assignment system categorizes our new claims by severity and assigns them to the appropriate adjuster responsible for investigation. Once assigned, the integrated workload management tools facilitate the work of promptly assigning appraisers, investigating liability, issuing checks and receiving subrogation receipts.
We currently operate two VIP Claims Centers which use a network of rental car centers and auto body repair shops to provide a higher level of service to the clients of the independent insurance agents while reducing costs, such as rental expense, through reduced cycle times.
Billing. Proprietary and vendor supplied billing systems, integrated with the systems of our print and lock-box vendors, expedite the processing and collection of premium receipts and finance charges from agents and policyholders. We believe the sophistication of our direct bill systems help us to limit our bad debt expense. Our bad debt expense as a percentage of direct written premiums was 0.1% in 2021 compared to 0.4% in 2020.
External Applications
Our agent technology offerings are centralized within our agency portal and feature PowerDesk and Safety Express. PowerDesk is a web-based application that allows for billing inquiry, agent payments on behalf of their policyholders, policy inquiry and claims inquiry. Safety Express provides agents with new business and endorsement entry, real-time policy issuance for personal lines, immediate printing of declarations pages in agents' offices, policy downloads to most major agency management systems and data imports from Boston Software's SinglePoint (Massachusetts) and Vertafore's PL Rater (Massachusetts, New Hampshire and Maine). In addition, we provide our
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agents with commission and claims download for all lines of business, Transformation Station and Transact Now Inquires, e-Claims online claims reporting, e-View daily transaction reports and e-Docs online electronic document file cabinet.
We also provide electronic billing (“eBill”), online bill pay (including credit and debit cards), online declarations pages, billing inquiry, claims inquiry, auto and homeowners claims first notice of loss, online auto insurance cards, and bill pay reminder alerts to our agents’ policyholders through our public website, SafetyInsurance.com. We have also updated our telephone system to provide a voice activated phone directory, automated billing inquiry and payments, and call center screen pop-up technology.
We additionally provide policyholders mobile technology through our Safety Mobile App for iPhone and Android devices. Safety Mobile provides consumers with access to their agent information, bill pay capabilities, the ability to report an automobile or homeowners claim and access to their insurance card, among other features.
Claims
On casualty claims we utilize stringent claims settlement procedures, which include guidelines that establish settlement ranges for soft tissue injuries, which constituted approximately 65% of our bodily injury claims in 2021. If we are unable to settle these claims within our pricing guidelines, we explore other cost-effective options including alternative dispute resolutions and/or litigation. We believe that these procedures result in providing our adjusting staff with a uniform approach to negotiation.
We believe an important component of handling claims efficiently is prompt investigation and settlement. We find that faster claims settlements often result in less expensive claims settlements. Our E-Claim reporting system is an online product that reduces the time it takes for agents to notify our adjusters about claims, thereby enabling us to contact third-party claimants and other witnesses quickly. Our insureds can report claims directly by phone, web, or mobile application. In addition, we utilize an after-hours reporting vendor to ensure that new claims can be reported 24 hours per day and 365 days per year.
We believe that early notification results in our adjusters conducting prompt investigations of claims and compiling more accurate information about those claims. Our claims workload management software also assists our adjusters in handling claims quickly.
We believe the structure of our claims department allows us to respond quickly to claimants. The department is organized into distinct claim units that contain loss costs on injury claims. Field adjusters are located geographically for prompt response to claims, with our litigation unit focused on managing loss costs and litigation expenses for serious injury claims.
Additionally, we utilize a special investigation unit to investigate potential fraud in connection with claims presented. In cases where adjusters suspect fraud in connection with a claim, we deploy this special unit to conduct investigations. We deny payment in cases in which we have succeeded in accumulating sufficient evidence of fraud.
Our auto physical damage claims units handle physical damage claims arising in our private passenger and commercial automobile lines. Process automation has streamlined our claims function and in combination with established policy and procedures newly reported claims are handling in a proactive manner to ensure that coverages are verified, damages are appraised and claim payments are issued in a timely and efficient manner. This ensures the highest level of customer service to our insureds while reducing claim cycle times and mitigating claim handling expenses. We continue to vet and implement new methods of appraisal for vehicle damage, including vehicle photo only appraisals within the regulatory established guidelines. Once we receive this information, an automated system redirects the claim to the appropriate internal adjuster responsible for investigating the claim to determine liability. Upon determination of liability, the system automatically begins the process of seeking a subrogation recovery from another insurer, if liable. We believe this process results in a shorter time period from when the claimant first contacts the agent to when the
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claimant receives a claim payment, while enabling our agents to build credibility with their clients by responding to claims in a timely and efficient manner.
Our property claims division handles physical damage claims arising in our homeowners and other than auto insurance lines. Property Field Adjusters are located remotely across our service areas to handle larger more complex property losses. In 2020 and 2021, we implemented a new claim handling software system that enables more efficient handling of the claim process from first notice of loss through settlement and potential subrogation. We also utilize house counsel on subrogation recoveries to reduce collection expenses and maximize damage recoveries.
Reserves
Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer's payment of that loss. To recognize liabilities for unpaid losses, insurers establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the expenses associated with investigating and paying the losses, or loss adjustment expenses. Every quarter, we review and establish our reserves. Regulations promulgated by the Commissioner require us to annually obtain a certification from either a qualified actuary or an approved loss reserve specialist, who may be one of our employees, that our loss and loss adjustment expenses reserves are reasonable.
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 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.
In accordance with industry practice, we also maintain reserves for estimated losses incurred but not yet reported. Incurred but not yet reported reserves are determined in accordance with commonly accepted actuarial reserving techniques on the basis of our historical information and experience. We make adjustments to incurred but not yet reported reserves quarterly to take into account changes in the volume of business written, claims frequency and severity, our mix of business, claims processing and other items that can be expected to affect our liability for losses and loss adjustment expenses over time.
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, legislative enactments, judicial decisions, legal developments in imposition of damages, and changes and trends in general economic conditions, including the effects of inflation. 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. After taking into account all relevant factors, management believes that our provision for unpaid losses and loss adjustment expenses at December 31, 2021 is adequate to cover the ultimate cost of losses and claims incurred as of that date.
Management determines its loss and loss adjustment expense ("LAE") reserve estimates based upon the analysis of the Company's actuaries. Management has established a process for the Company's actuaries to follow in establishing reasonable reserves. The process consists of meeting with our claims department, establishing ultimate incurred losses by using development models accepted by the actuarial community, and reviewing the analysis with management. The Company's estimate for loss and LAE reserves, net of the effect of ceded reinsurance, ranges from a low of $445,511 to a high of $504,580 as of December 31, 2021. The Company's net loss and LAE reserves, based on our actuaries' best estimate, were set at $479,984 as of December 31, 2021. The ultimate liability may be greater or less than reserves carried at the balance sheet date. Establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves 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
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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. We do not discount any of our reserves.
The following table presents development information on changes in the reserves for losses and LAE of our Insurance Subsidiaries for each year in the three year period ended December 31, 2021, 2020 and 2019.
Year Ended
Reserves for losses and LAE at beginning of year
567,581
610,566
584,719
Less receivable from reinsurers related to unpaid losses and LAE
(106,311)
(122,372)
(108,398)
Net reserves for losses and LAE at beginning of year
461,270
488,194
476,321
Incurred losses and LAE, related to:
Current year
515,400
459,400
551,895
Prior years
(53,673)
(54,844)
(42,049)
Total incurred losses and LAE
461,727
404,556
509,846
Paid losses and LAE related to:
310,116
277,754
333,377
132,897
153,726
164,596
Total paid losses and LAE
443,013
431,480
497,973
Net reserves for losses and LAE at end of period
479,984
Plus receivable from reinsurers related to unpaid losses and LAE
90,667
106,311
122,372
Reserves for losses and LAE at end of period
570,651
The following table represents the development of reserves, net of reinsurance, for calendar years 2011 through 2021. The top line of the table shows the reserves at the balance sheet date for each of the indicated years. This represents the estimated amounts of losses and loss adjustment expenses for claims arising in all years that were unpaid at the balance sheet date, including losses that had been incurred but not yet reported to us. The upper portion of the table shows the cumulative amounts paid as of the end of each successive year with respect to those claims. The lower portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year, including cumulative payments made since the end of the respective year. The estimate changes as more information becomes known about the payments, frequency and severity of claims for individual years. Favorable loss development, shown as a cumulative redundancy in the table, exists when the original reserve estimate is greater than the re-estimated reserves at December 31, 2021.
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Information with respect to the cumulative development of gross reserves (that is, without deduction for reinsurance ceded) also appears at the bottom portion of the table.
As of and for the Year Ended December 31,
2018
2017
2016
2015
2014
2013
2012
2011
Reserves for losses and
LAE originally estimated:
$ 479,984
$ 461,270
$ 488,194
$ 476,321
$ 490,969
$ 476,597
$ 485,716
$ 420,767
$ 394,668
$ 371,657
$ 352,098
Cumulative amounts paid as of:
One year later
153,727
164,595
159,234
164,466
174,506
132,364
133,288
124,855
130,204
Two years later
216,822
230,294
241,032
231,473
250,306
189,367
178,411
175,822
181,739
Three years later
269,065
282,242
283,812
290,287
223,465
207,626
199,741
211,578
Four years later
304,009
305,024
310,140
241,589
223,743
213,847
223,941
Five years later
318,149
319,817
252,714
231,346
221,363
231,433
Six years later
325,669
255,581
234,480
223,829
233,137
Seven years later
256,733
235,562
225,169
233,905
Eight years later
235,807
225,320
233,880
Nine years later
225,354
233,922
Ten years later
233,936
Reserves re-estimated as of:
$ 407,597
$ 433,350
$ 434,273
$ 434,481
$ 434,813
$ 440,268
$ 390,452
$ 357,300
$ 342,767
$ 334,788
395,578
393,948
400,312
391,630
406,253
348,660
328,182
308,028
309,096
372,282
376,584
372,379
376,201
313,100
295,788
283,592
282,441
365,267
359,549
361,335
287,131
274,214
263,787
268,759
352,330
353,983
276,309
255,368
250,064
255,925
347,373
272,178
248,746
236,373
248,353
268,514
245,071
232,657
239,476
243,000
229,932
237,497
228,184
236,440
235,769
Cumulative
(redundancy) deficiency 2021
(92,616)
(104,039)
(125,702)
(124,267)
(138,343)
(152,253)
(151,668)
(143,473)
(116,329)
Gross liability-end of year
$ 570,651
$ 567,581
$ 610,566
$ 584,719
$ 574,054
$ 560,321
$ 553,977
$ 482,012
$ 455,014
$ 423,842
$ 403,872
Reinsurance recoverables
108,398
83,085
83,724
68,261
61,245
60,346
52,185
51,774
Net liability-end of year
490,969
476,597
485,716
420,767
394,668
371,657
352,098
Gross estimated liability-latest
506,800
508,655
474,121
448,047
412,410
377,470
307,087
275,429
254,894
261,593
Reinsurance recoverables-latest
99,203
113,077
101,839
82,780
60,080
30,097
38,573
32,429
26,710
25,824
Net estimated liability-latest
407,597
In evaluating the information in the table, it should be noted that each amount entered incorporates the effects of all changes in amounts entered for prior periods. Thus, if the 2021 estimate for a previously incurred loss was $150 and the loss was reserved at $100 in 2017, the $50 deficiency (later estimate minus original estimate) would be included in the cumulative (redundancy) deficiency in each of the years 2017-2021 shown in the table. It should further be noted that the table does not present accident or policy year development data. In addition, conditions and trends that have affected the development of liability in the past may not necessarily recur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies from the table.
The table shows that we have substantially benefited in the current and prior years from releasing redundant reserves. In the years ended December 31, 2021, 2020, and 2019, we decreased loss reserves related to prior years by $53,673, $54,844 and $42,049, respectively. Reserves and development are discussed further in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations, Executive Summary and Overview.
As a result of our focus on core business lines since our founding in 1979, we believe we have no specific exposure to asbestos or environmental pollution liabilities.
Reinsurance
Reinsurance involves an insurance company transferring (ceding) a portion of its exposure on insurance underwritten by it to another insurer (reinsurer). The reinsurer assumes a portion of the exposure in return for a share of the premium. Reinsurance does not legally discharge an insurance company from its primary liability for the full amount of the policies, but it does make the reinsurer liable to the company for the reinsured portion of any loss realized.
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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 that during 2021 protected 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"). In 2021, we 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.
For 2022, we have purchased three layers of excess catastrophe reinsurance providing $590,000 of coverage for property losses in excess of $75,000 up to a maximum of $665,000. Our reinsurers’ co-participation is 80.0% of $75,000 for the 1st layer, 80.0% of 250,000 for the 2nd layer and 80.0% of $265,000 for the 3rd layer.
We also have casualty excess of loss reinsurance for large casualty losses occurring in our automobile, homeowners, dwelling fire, business owner, 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 with Hartford 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.
Our reinsurance program excludes coverage for acts of terrorism. The Terrorism Risk Insurance Program Reauthorization Act of 2019 was signed into law on December 20, 2019 which extended the Terrorism Risk Insurance Act (“TRIA”) through the year 2027. The intent of this legislation is to provide federal assistance to the insurance industry for the needs of commercial insurance policyholders with the potential exposure for losses due to acts of terrorism. TRIA provides reinsurance for certified acts of terrorism.
In addition to the above mentioned reinsurance programs and as described in more detail above under The Massachusetts Property and Casualty Insurance Market, we are a participant in CAR, a state-established body that, in part, 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 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’s exposure to catastrophe losses increased and as a result, the FAIR Plan decided to buy reinsurance to reduce their exposure to catastrophe losses. On July 1, 2021, the FAIR Plan purchased $1,800,000 of catastrophe reinsurance for property losses with retention of $100,000.
At December 31, 2021, we also had $119,122 due from CAR comprising of loss and loss adjustment expense reserves, unearned premiums and reinsurance recoverables.
On March 10, 2005, our Board of Directors (the “Board”) adopted a resolution that prohibits Safety from purchasing finite reinsurance (reinsurance that transfers only a relatively finite or limited amount of risk to the reinsurer) without approval by the Board. To date, the Company has never purchased a finite reinsurance contract.
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Competition
The property and casualty insurance business is highly competitive and many of our competitors have substantially greater financial and other resources than we do. We compete with both large national writers and smaller regional companies. Our competitors include companies which, like us, serve the independent agency market, as well as companies which sell insurance directly to customers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of the customer base to the insurer rather than to an independent agency, and potentially, lower cost structures. A material reduction in the amount of business independent agents sell would adversely affect us. Further, we and others compete on the basis of the commissions and other cash and non-cash incentives provided to agents.
Although, historically, a number of national insurers that are much larger than we are have chosen not to compete in a material way in the Massachusetts private passenger automobile market, since 2008, several new companies have entered the market. These companies include some that would be able to sustain significant losses in order to acquire market share, as well as others which use distribution methods that compete with the independent agent channel. There can be no assurance that we will be able to compete effectively against these companies in the future.
Our principal competitors within the Massachusetts private passenger automobile insurance market are MAPFRE SA, Government Employees Insurance Company and Liberty Mutual Insurance Company, which held 21.5%, 15.8% and 8.1% market shares based on premiums, respectively, in 2021 according to CAR.
We are the second largest writer of commercial automobile insurance in Massachusetts with a market share of 12.0% in 2021. Other principal competitors in the Massachusetts commercial automobile insurance market are MAPFRE SA, Arbella Mutual Insurance Company and The Travelers Indemnity Insurance Company, which held 14.7%, 10.6% and 7.6% market shares based on premium, respectively, according to CAR. This includes our share of residual market business as one of four servicing carriers in CAR’s Commercial Automobile Program.
We are the third largest writer of homeowners insurance business 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 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).
Human Capital
At December 31, 2021, we employed 552 employees who all work in the New England region. The management team establishes hiring and compensation practices for our Company. The Board is periodically updated on key employee engagement and employee relations measures. In addition, the Board’s Compensation Committee is responsible for reviewing performance and approving compensation paid to senior leaders. Our Human Resources team, led by our Chief Financial Officer, supports the Compensation Committee in the execution of its responsibilities. In addition to the day-to-day support, they provide to our management team, the Human Resources team monitors the pulse of our employee population.
We create a workplace where all employees are treated with dignity and respect, and individual differences are valued, all with the goal of securing the trust and satisfaction of our employees. The Company is committed to a policy of inclusiveness and is committed to actively seeking out highly-qualified candidates with diverse gender, race, color, religion, ethnicity, age, marital status, handicap, sexual orientation, gender identity or expression, and backgrounds. The Company prioritizes an environment where employees are respected, inspired to perform at their best, and are recognized for their contributions. We persistently work to improve the employee experience in support of our continuing strategic objective to attract, retain and develop talent in the insurance industry. Our commitment to a robust talent pool starts at the top. The Board engages with the Compensation Committee annually to review executive level compensation, consider key pipeline talent and conduct succession planning. In addition, our leadership team conducts a comprehensive annual review process across our organization each year. We have a history of promotion from within as over 20% of our organization has 25 years of experience at Safety.
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We offer competitive pay and benefits to our employees. In addition to competitive salaries, all management level employees are included in our long-term incentive compensation program where they can receive a combination of time and performance-based awards. The Company also engages in a number of additional practices to ensure pay fairness, including:
We are committed to our extensive, long-standing policies and practices to ensure fair pay across the organization, while also staying attuned to external best practices and insights, and leveraging input from our pay consultants.
We further foster our culture through our robust learning and development program and our competitive benefit programs. Our extensive benefits include a variety of items, not limited to the following:
Prior to COVID-19, approximately half of our employees participated in a work from home program that helps contribute to a flexible work-life balance and allows the Company to minimize the real estate rented at our home office. In response to the pandemic, we quickly transitioned all other employees to a work from home environment and have the capacity for 100% of our workforce to work in a remote setting. Our employees are not covered by any collective bargaining agreement.
Our employees give both their time and their financial resources to charities of all types, and the company promotes corporate citizenship through charitable donations and company-sponsored volunteer activities. Safety is committed to making a positive impact on the communities where our employees live and work through our matching gift program, corporate giving and employee volunteerism. We help employees amplify their community impact by providing our employees with a 1:1 match on their donations to recognized charitable organizations. The Safety Insurance Charitable Foundation was established in 2005 and has provided financial support for a wide array of charities in areas such as community service, education, job training, homelessness, arts/culture, food banks, youth programs, healthcare, medical research and disaster relief.
The reputation of the Company depends on the conduct of its Board, officers, and employees. Every employee who is associated with Safety must play a part in maintaining our corporate reputation for the highest ethical standards. Management considers our relationship with our employees to be strong.
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Investments
Investment income is an important source of revenue for us and the return on our investment portfolio has a material effect on our net earnings. Our investment objective is to focus on maximizing total returns while investing conservatively. We maintain a high-quality investment portfolio consistent with our established investment policy. As of December 31, 2021, our portfolio of fixed maturity investments was comprised principally of investment grade corporate fixed maturity securities, U.S. government and agency securities, and asset-backed securities. The portion of our non-investment grade portfolio of fixed maturity investments is primarily comprised of variable rate secured and senior bank loans and high yield bonds.
According to our investment guidelines, no more than 2.0% of our portfolio may be invested in the securities of any one issuer (excluding U.S. government-backed securities). In addition, no more than 0.5% of our portfolio may be invested in securities of any one issuer rated "Baa," or the lowest investment grade assigned by Moody's. Of the less than 15.0% of our portfolio invested in senior bank loans and high yield bonds at December 31, 2021, no more than 5.0% may be invested in the securities of any one issuer, no more than 10.0% may be invested in any issuers total outstanding debt issue, and a maximum of 10.0% may be invested in securities unrated or rated "B-" or below by Moody's. We continually monitor the mix of taxable and tax-exempt securities in an attempt to maximize our total after-tax return. We utilize the services of third-party investment managers.
We believe that the incorporation of material, non-financial factors into investment selection and risk management has the potential to enhance long-term investment returns. We incorporate Environmental, Social & Governance (“ESG”) factors managed for us by third-party investment managers. We measure our exposure to ESG risks at both individual asset classes and total portfolio levels.
The following table reflects the composition of our investment portfolio as of December 31, 2021 and 2020.
As of December 31,
Estimated
% of
Fair Value
Portfolio
U.S. Treasury Securities
324
0.0
1,865
Obligations of states and political subdivisions
116,302
7.4
222,389
14.8
Residential mortgage-backed securities (1)
241,464
15.4
241,597
16.0
Commercial mortgage-backed securities
150,883
9.6
126,035
8.4
Other asset-backed securities
83,596
5.3
73,124
4.9
Corporate and other securities
625,710
39.8
591,643
39.2
Subtotal, fixed maturity securities
1,218,279
77.5
1,256,653
83.4
Short term investments
-
441
Equity securities (2)
264,945
16.9
205,254
13.6
Other invested assets (3)
87,911
5.6
45,239
3.0
1,571,135
1,507,587
(1) Residential mortgage-backed securities consists primarily of obligations of U.S. Government agencies including collateralized mortgage obligations and mortgage-backed securities guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB).
(2) 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) Other invested assets are accounted for under the equity method which approximates fair value.
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The principal risks inherent in holding mortgage-backed securities and other pass-through securities are prepayment and extension risks, which affect the timing of when cash flows will be received. When interest rates decline, mortgages underlying mortgage-backed securities tend to be prepaid more rapidly than anticipated, causing early repayments. When interest rates rise, the underlying mortgages tend to be prepaid at a slower rate than anticipated, causing the principal repayments to be extended. Although early prepayments may result in acceleration of income from recognition of any unamortized discount, the proceeds could be reinvested at a lower current yield, resulting in a net reduction of future investment income. In addition, in the current market environment, such investments can also contain liquidity risks.
The Company invests in bank loans which are primarily investments in senior secured floating rate loans that banks have made to corporations. The loans are generally priced at an interest rate spread over the floating rate feature; this asset class provides protection against rising interest rates. However, this asset class is subject to default risk since these investments are typically below investment grade.
Equity risk is the risk that we will incur economic losses due to adverse changes in equity prices. Our exposure to changes in equity prices results from our holdings of common stock, preferred stock, mutual funds and interests in mutual funds held to fund the executive deferred compensation plan. We continuously evaluate market conditions and we expect in the future to purchase additional equity securities. We principally manage equity price risk through industry and issuer diversification and asset allocation techniques.
The following table reflects our investment results for each of the three-year period ended December 31, 2021, 2020 and 2019.
Average cash and invested securities (at cost)
1,466,133
1,401,881
1,365,830
Net investment income (1)
44,135
41,045
46,665
Net effective yield (2)
3.4
(1) After investment expenses, excluding realized investment gains or losses.
(2) Net investment income for the period divided by average invested securities and cash for the same period.
As of December 31, 2021, our portfolio of fixed maturity investments was comprised principally of investment grade corporate fixed maturity securities, U.S. government and agency securities, and asset-backed securities. The portion of our non-investment grade portfolio of fixed maturity investments is primarily comprised of variable rate secured, senior bank loans and high yield bonds.
The composition of our fixed income security portfolio by rating is presented in the following table.
Percent
U.S. Treasury securities and obligations of U.S. Government agencies
242,911
19.9
256,683
20.4
Aaa/Aa
276,059
22.7
327,775
26.1
A
279,187
22.9
260,048
20.7
Baa
231,267
19.0
220,171
17.5
Ba
60,822
5.0
68,135
B
103,086
8.5
93,824
7.5
Caa/Ca
4,284
5,067
Not rated
20,663
1.6
24,950
2.0
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Ratings are generally assigned upon the issuance of the securities and are subject to revision on the basis of ongoing evaluations. Ratings in the table are as of the date indicated.
The Securities Valuation Office of the National Association of Insurance Commissioners (the "SVO") evaluates all public and private bonds purchased as investments by insurance companies. The SVO assigns one of six investment categories to each security it reviews. Category 1 is the highest quality rating and Category 6 is the lowest. Categories 1 and 2 are the equivalent of investment grade debt as defined by rating agencies such as Standard & Poor's Ratings Services and Moody's, while Categories 3-6 are the equivalent of below investment grade securities. SVO ratings are reviewed at least annually. At December 31, 2021, 64.1% of our available for sale fixed maturity investments were rated Category 1 and 17.9% were rated Category 2, the two highest ratings assigned by the SVO.
The following table indicates the composition of our fixed income security portfolio (at carrying value) by time to maturity as of December 31, 2021.
As of December 31, 2021
Due in one year or less
45,844
3.8
Due after one year through five years
253,781
20.8
Due after five years through ten years
385,569
31.6
Due after ten years through twenty years
55,341
4.5
Due after twenty years
1,800
Asset-backed securities (1)
475,944
Totals
(1) Actual maturities of asset-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of the underlying mortgages or other collateral to changes in interest rates; a variety of economic, geographic and other factors; and the repayment priority of the securities in the overall securitization structures.
Ratings
A.M. Best, which rates insurance companies based on factors of concern to policyholders, currently assigns the Company an "A (Excellent)" rating. Our "A" rating was reaffirmed by A.M. Best on May 12, 2021. Such rating is the third highest rating of 13 ratings that A.M. Best assigns to solvent insurance companies, which currently range from "A++ (Superior)" to "D (Poor)." Publications of A.M. Best indicate that the "A" rating is assigned to those companies that in A.M. Best's opinion have an excellent ability to meet their ongoing obligations to policyholders over a long period of time. In evaluating a company's financial and operating performance, A.M. Best reviews the Company's profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated fair value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. A.M. Best's ratings reflect its opinion of an insurance company's financial strength, operating performance and ability to meet its obligations to policyholders and are not evaluations directed to purchasers of an insurance company's securities.
In assigning the Company’s rating, A.M. Best recognized its solid risk-adjusted capitalization, conservative operating strategy, and long-standing agency relationships. A.M. Best also noted among our positive attributes our favorable investment leverage, our disciplined underwriting approach, and our expertise in the closely managed Massachusetts automobile insurance market. A.M. Best cited other factors that partially offset these positive attributes, including our concentration of business in the Massachusetts private passenger automobile market which exposes our business to regulatory actions.
Supervision and Regulation
Introduction. Our principal operations are conducted through the Insurance Subsidiaries which are subject to comprehensive regulation by state insurance departments, primarily through our domestic regulator, the Division, of
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which the Commissioner is the senior official. The Commissioner is appointed by the Governor. We are subject to the authority of the Commissioner in many areas of our business under Massachusetts law, including:
In addition, the Commissioner periodically conducts financial and market conduct examinations of all licensees domiciled in Massachusetts. Our most recent financial condition examination was for the five-year period ending December 31, 2018. The Division had no material findings as a result of this examination.
We are also required to be licensed by the insurance department in each state in which we do business, as well as to comply with the various laws and regulations of those jurisdictions, including those governing our use of rates and policy forms in those states.
Insurance Holding Company Regulation. Our principal operating subsidiaries are insurance companies, and therefore we are subject to certain laws in Massachusetts regulating insurance holding company systems. These laws require that we file a registration statement with the Commissioner that discloses the identity, financial condition, capital structure and ownership of each entity within our corporate structure and any transactions among the members of our holding company system. In some instances, we must provide prior notice to the Commissioner for material transactions between our insurance company subsidiaries and other affiliates in our holding company system. These holding company statutes also require, among other things, prior approval of the payment of extraordinary dividends or distributions and any acquisition of a domestic insurer and that we file an annual Enterprise Risk Management report with the Commissioner.
Insurance Regulation Concerning Dividends. We rely on dividends from the Insurance Subsidiaries for our cash requirements. The insurance holding company law of Massachusetts requires notice to the Commissioner of any dividend to the shareholders of an insurance company. The Insurance Subsidiaries may not make an "extraordinary dividend" until thirty days after the Commissioner has received notice of the intended dividend and has not objected in such time. As historically administered by the Commissioner, this provision requires the prior approval by the Commissioner of an extraordinary dividend. An extraordinary dividend is defined as any dividend or distribution that, together with other distributions made within the preceding twelve months exceeds the greater of 10.0% of the insurer's surplus as of the preceding December 31, or the insurer's net income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as its 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 December 31, 2021, the statutory surplus of Safety Insurance was $826,979 and its net income for 2021 was $97,169. A maximum of $97,169 will be available during 2022 for such dividends without prior approval of the Commissioner.
Acquisition of Control of a Massachusetts Domiciled Insurance Company. Massachusetts law requires advance approval by the Commissioner of any change in control of an insurance company that is domiciled in Massachusetts. That law presumes that control exists where any person, directly or indirectly, owns, controls, holds the power to vote or holds proxies representing 10.0% or more of our outstanding voting stock. Even persons who do not acquire beneficial ownership of more than 10.0% of the outstanding shares of our common stock may be deemed to have acquired control if the Commissioner determines that control exists in fact. Any purchaser of shares of common stock representing 10.0% or more of the voting power of our capital stock will be presumed to have acquired control of the Insurance Subsidiaries
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unless, following application by that purchaser the Commissioner determines that the acquisition does not constitute a change of control or is otherwise not subject to regulatory review. These requirements may deter, delay or prevent transactions affecting the control of or the ownership of our common stock, including transactions that could be advantageous to our stockholders.
Protection Against Insurer Insolvency. Massachusetts law requires that insurers licensed to do business in Massachusetts participate in the Massachusetts Insurers Insolvency Fund ("Insolvency Fund"). The Insolvency Fund must pay any claim up to $300 of a policyholder of an insolvent insurer if the claim existed prior to the declaration of insolvency or arose within sixty days after the declaration of insolvency. Members of the Insolvency Fund are assessed the amount the Insolvency Fund deems necessary to pay its obligations and expenses in connection with handling covered claims. Subject to certain exceptions, assessments are made in the proportion that each member's net written premiums for the prior calendar year for all property and casualty lines bore to the corresponding net written premiums for Insolvency Fund members for the same period. As a matter of Massachusetts law, insurance rates and premiums include amounts to recoup any amounts paid by insurers for the costs of the Insolvency Fund. By statute, no insurer in Massachusetts may be assessed in any year an amount greater than two percent of that insurer's direct written premium for the calendar year prior to the assessment. We account for allocations from the Insolvency Fund as underwriting expenses. CAR also assesses its members as a result of insurer insolvencies. Because CAR is not able to recover an insolvent company's share of the net CAR losses from the Insolvency Fund, CAR must increase each of its member's shares of the deficit in order to compensate for the insolvent carrier's inability to pay its deficit assessment. It is anticipated that there will be future assessments from time to time relating to various insolvencies.
The Insurance Regulatory Information System. The Insurance Regulatory Information System ("IRIS") was developed to help state insurance regulators identify companies that may require special financial attention. IRIS consists of a statistical phase and an analytical phase whereby financial examiners review annual statements and financial ratios. The statistical phase consists of 13 key financial ratios based on year-end data that are generated annually from the database of the National Association of Insurance Commissioners ("NAIC"). Each ratio has an established "usual range" of results. These ratios assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies.
A ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios. In 2021, 2020, and 2019 all our ratios for all our Insurance Subsidiaries were within the normal range.
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. The risk-based capital formula for property and casualty insurance companies measures three major areas of risk facing property and casualty insurers:
Under Massachusetts 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. The first level, the company action
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level, as defined by the NAIC, requires an insurer to submit a plan of corrective actions to the Commissioner if total adjusted capital falls below 200% of the risk-based capital amount. The regulatory action level, as defined by the NAIC requires an insurer to submit a plan containing corrective actions and requires the Commissioner to perform an examination or other analysis and issue a corrective order if total adjusted capital falls below 150.0% of the risk-based capital amount. The authorized control level, as defined by the NAIC, authorizes the Commissioner to take whatever regulatory actions he or she considers necessary to protect the best interest of the policyholders and creditors of the insurer which may include the actions necessary to cause the insurer to be placed under regulatory control, i.e., rehabilitation or liquidation, if total adjusted capital falls below 100.0% of the risk-based capital amount. The fourth action level is the mandatory control level, as defined by the NAIC, which requires the Commissioner to place the insurer under regulatory control if total adjusted capital falls below 70.0% of the risk-based capital amount.
The formulas have not been designed to differentiate among adequately capitalized companies that operate with higher levels of capital. Therefore, it is inappropriate and ineffective to use the formulas to rate or to rank these companies. At December 31, 2021, our Insurance Subsidiaries had total adjusted capital in excess of amounts requiring company or regulatory action at any prescribed risk-based capital action level.
Own Risk Solvency Assessment. On January 11, 2017, the Division adopted the National Association of Insurance Commissioners’ Own Risk Solvency Assessment (“ORSA”) Act requiring the Company to file its assessment on an annual basis. ORSA is an internal process undertaken by an insurer or insurance group to assess the adequacy of its risk management and current and prospective solvency positions under normal and severe stress scenarios. We have completed this filing for the 2021 period.
Executive Officers and Directors
The table below sets forth certain information concerning our directors and executive officers as of the date of this annual report.
Years
Employed
Name
Age (1)
Position
by Safety
George M. Murphy
55
President, Chief Executive Officer
Christopher T. Whitford
39
Vice President, Chief Financial Officer and Secretary
James D. Berry
62
Vice President - Underwriting
John P. Drago
Vice President - Marketing
27
Ann M. McKeown
54
Vice President - Insurance Operations
Paul J. Narciso
Vice President - Claims
31
Stephen A. Varga
Vice President - Management Information Systems
29
Glenn R. Hiltpold
51
Vice President - Actuarial Services
22
David F. Brussard
70
Chairman of the Board, Director
Frederic H. Lindeberg
81
Director
Peter J. Manning
83
Thalia M. Meehan
60
Lead Independent Director
Mary C. Moran
66
___________________
(1) As of February 16, 2022
George M. Murphy, CPCU, was appointed President and Chief Executive Officer of the Company effective April 1, 2016. He previously was the Vice President of Marketing since October 1, 2005. Mr. Murphy was appointed to the Board of Directors and to the Investment Committee in February 2016. Mr. Murphy has been employed by the Insurance Subsidiaries for over 33 years. Mr. Murphy is also on the Board of Trustees of the Insurance Library Association of Boston.
Christopher T. Whitford, was appointed Chief Financial Officer, Vice President and Secretary of the Company on March 2, 2020. Mr. Whitford, a Certified Public Accountant in Massachusetts, has been employed by the Insurance Subsidiaries for over 9 years, previously serving as the Company’s Controller since 2012, and began his career at PricewaterhouseCoopers in 2005. Mr. Whitford serves on the Audit Committee of Guaranty Fund Management Services and also serves on the Audit Committee of the Massachusetts Property Insurance Underwriting Association (“FAIR Plan”).
James D. Berry, CPCU, was appointed Vice President of Underwriting of the Company in July 2015, and was named as Secretary of the Insurance Subsidiaries at that time. Prior to that, he served as the Vice President of Insurance Operations since October 2005. Mr. Berry has been employed by the Insurance Subsidiaries for over 39 years and has directed the Company's Massachusetts Private Passenger line of business since 2001. Mr. Berry is the Chairman of the Board of Directors of the FAIR Plan and previously served as the Chairman of that organizations Executive Committee. He has served on several committees of CAR including Market Review and Defaulted Brokers and also served on Computer Sciences Corporation Series II and Exceed advisory councils. He also serves on the Executive Committee of the In Control Family Foundation, and is the Chairman of that organization’s Finance Committee.
John P. Drago was appointed Vice President of Marketing on February 1, 2016. Mr. Drago has been employed by the Insurance Subsidiaries for over 27 years and most recently served as Director of Marketing.
Ann M. McKeown was appointed Vice President of Insurance Operations of the Company on July 1, 2015. Ms. McKeown has been employed by the Insurance Subsidiaries for over 32 years wherein she has held management positions in the Underwriting, Information Technology, and Insurance Operations departments. Ms. McKeown has served on the MAIP Steering and Operations Committees of CAR.
Paul J. Narciso was appointed Vice President of Claims of the Company on August 5, 2013. Mr. Narciso has held various adjusting and claims management positions with the Company since 1990. Mr. Narciso has 35 years of claim experience having worked at two national carriers prior to joining Safety. He currently serves on the Governing Board of the Massachusetts Insurance Fraud Bureau and the Claims Subcommittee at Commonwealth Automobile Reinsurers.
Stephen A. Varga was appointed Vice President of Management Information Systems of the Company on August 6, 2014. Mr. Varga has held various information technology positions with the Company since 1992 and most recently served as Senior Director of MIS.
Glenn R. Hiltpold was appointed Vice President of Actuarial Services of the Company on March 1, 2021. Mr. Hiltpold, a Fellow of the Casualty Actuarial Society, has held the Director of Actuarial Services position with the Company since 2004 and has been an employee of the Insurance Subsidiaries for 22 years.
David F. Brussard was appointed Chairman of the Board in March 2004 and has served as a director of the Company since October 2001. Mr. Brussard served as President and Chief Executive Officer of the Company from June 2001 until March 31, 2016. Mr. Brussard was also appointed Chairman of the Investment Committee on February 22, 2017.
Frederic H. Lindeberg has served as a director of the Company since August 2004. Mr. Lindeberg has had a consulting practice providing taxation, management and investment counsel since 1991, focusing on finance, real estate, manufacturing and retail industries. Mr. Lindeberg retired in 1991 as Partner-In-Charge of various KPMG tax offices, after 24 years of service where he provided both accounting and tax counsel to various clients. Mr. Lindeberg is an attorney and certified public accountant. Mr. Lindeberg was formerly a director of Provident Senior Living Trust (PSLT) and TAL International (TAL) and formerly an adjunct professor at Penn State Graduate School of Business. Mr. Lindeberg qualifies as an “Audit Committee Financial Expert” as defined by the U.S. Securities and Exchange Commission rules. Mr. Lindeberg serves as a member of the Audit, Compensation and Nominating and Governance Committees.
Peter J. Manning has served as a director of the Company since September 2003. Mr. Manning retired in 2003, as Vice Chairman Strategic Business Development of FleetBoston Financial, after 32 years with FleetBoston Financial Corporation (formerly BankBoston) where he also held the positions of Comptroller and Executive Vice President and Chief Financial Officer. Mr. Manning started his career with Coopers & Lybrand in 1962 prior to his 1972 employment with BankBoston. He is a former director of the Blue Hills Bank and a former director of Thermo Fisher Scientific and the Lahey Clinic. Mr. Manning qualifies as an “Audit Committee Financial Expert” as defined by the U.S. Securities and
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Exchange Commission rules. Mr. Manning serves as Chairperson of the Audit Committee and serves as a member of the Compensation and Nominating and Governance Committees.
Thalia M. Meehan was appointed Director of the Company on July 3, 2017 and Lead Independent Director on January 11, 2022. Ms. Meehan has also been appointed to serve as a member of the Audit Committee, the Investment Committee and the Nominating and Governance Committee, as well as Chairperson of the Compensation Committee of the Board. Ms. Meehan, a Chartered Financial Analyst, has over 30 years of experience in the investment sector. Ms. Meehan retired from Putnam Investments in 2016 with 27 years of experience and most recently served as a Team Leader and Portfolio Manager at Putnam Investments. Ms. Meehan currently serves on the Board of Cambridge Bancorp where she is a member of the Trust and Risk Committees and also serves on Nominating and Finance Committees of the Municipal Securities Rulemaking Board and the Advisory Committee of the Board of Boston Women in Public Finance.
Mary C. Moran was appointed Director of the Company on March 27, 2020. Ms. Moran has over 40 years of financial experience in both private industry as well as consulting. Ms. Moran began her career at KPMG, previously Peat Marwick, where she became a Senior Manager before serving as Senior Vice President of Finance and Administration for Boston Sand and Gravel Company from 1990 to 2001. Since 2002 she has served as CEO of MCM Financial Consulting, focusing on projects within in the banking, construction, higher education, manufacturing, not-for-profit and professional services industries. Ms. Moran is currently a director of Care Dimensions where she serves on the finance and audit committee and is a former director and audit committee member of Danvers Bankcorp, the College of the Holy Cross and Catholic Memorial School. Ms. Moran graduated from Northeastern University with a M.B.A. and MS in Accounting and from the College of the Holy Cross with a degree in Economics. Ms. Moran qualifies as an “Audit Committee Financial Expert” as defined by the U.S. Securities and Exchange Commission rules. Ms. Moran serves as Chairperson of the Nominating and Governance Committee and serves as a member of the Audit and Compensation Committees.
The Company has adopted a Code of Business Conduct and Ethics (“Code of Ethics”) that applies to all employees, including executive officers, and to directors. The Code of Ethics is available on the About Us, Investor Information page of the Company’s website at www.safetyinsurance.com. If the Company ever were to amend or waive any provision of its Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or any person performing similar functions, the Company intends to satisfy its disclosure obligations, if any, with respect to any such waiver or amendment by posting such information on its website set forth above rather than by filing a Current Report on Form 8-K.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a number of risks. Any of the risks described below could result in a significant or material adverse effect on our results of operations or financial condition, and a corresponding decline in the market price of our common stock.
We operate in a heavily regulated industry and are subject to regulations and laws in various jurisdictions:
We are subject to comprehensive government regulation and our ability to earn profits may be restricted by these regulations.
General Regulation. We are subject to regulation by the state insurance department of each state in which we do business. In each jurisdiction, we must comply with various laws and regulations, including those involving:
We also are subject to enhanced regulation by our domestic regulator, the Division, from which we must obtain prior approval for certain corporate actions. Among other things, we must comply with laws and regulations governing:
In addition, insurance department examiners from Massachusetts perform periodic financial and market conduct examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than security holders.
Massachusetts, New Hampshire and Maine require that all licensed property and casualty insurers bear a portion of the losses suffered by some insureds as a result of impaired or insolvent insurance companies by participating in each state’s insolvency fund. Members of the state’s insolvency fund are assessed a proportionate share of the obligations and expenses of the fund in connection with an insolvent insurer. These assessments are made by the fund to cover the cost of paying eligible claims of policyholders of these insolvent insurers. Similarly, assessments are made by each state’s commercial automobile insurance residual market mechanism to recover the shares of net losses that would have been assessed to the insolvent companies but for their insolvencies. In addition, Massachusetts has established an underwriting association in order to ensure that property insurance is available for owners of high risk property who are not able to obtain insurance from private insurers. The losses of this underwriting association, the Massachusetts Property Insurance Underwriting Association, are shared by all insurers that write property and casualty insurance in Massachusetts. We are assessed from time to time to pay these losses. The effect of these assessments could reduce our profitability in any given period and limit our ability to grow our business.
Because we are unable to predict with certainty changes in the political, economic or regulatory environments of the states in which we operate in the future, there can be no assurance that existing insurance-related laws and regulations will not become more restrictive in the future or that new restrictive laws will not be enacted and, therefore, it is not possible to predict the potential effects of these laws and regulations on us.
There are anti-takeover provisions contained in our organizational documents and in laws of the State of Delaware and the Commonwealth of Massachusetts that could impede an attempt to replace or remove our management or prevent the sale of our company, which could diminish the value of our common stock.
Our certificate of incorporation, bylaws and the laws of Delaware contain provisions that may delay, deter or prevent a takeover attempt that shareholders might consider in their best interests. For example, our organizational
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documents provide for a classified board of directors with staggered terms, prevent shareholders from taking action by written consent, prevent shareholders from calling a special meeting of shareholders, provide for supermajority voting requirements to amend our certificate of incorporation and certain provisions of our bylaws and provide for the filling of vacancies on our board of directors by the vote of a majority of the directors then in office. These provisions will render the removal of the incumbent board of directors or management more difficult. In addition, these provisions may prevent shareholders from receiving the benefit of any premium over the market price of our common stock offered by a bidder in a potential takeover. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.
The Massachusetts insurance law prohibits any person from acquiring control of us, and thus indirect control of the Insurance Subsidiaries, without the prior approval of the Commissioner. That law presumes that control exists where any person, directly or indirectly, owns, controls, holds the power to vote or holds proxies representing 10.0% or more of our outstanding voting stock. Even persons who do not acquire beneficial ownership of more than 10.0% of the outstanding shares of our common stock may be deemed to have acquired such control if the Commissioner determines that such control exists in fact. Therefore, any person seeking to acquire a controlling interest in us would face regulatory obstacles which could delay, deter or prevent an acquisition that shareholders might consider in their best interests.
Section 203 of the General Corporation Law of Delaware, the jurisdiction in which the Company is organized, may affect the ability of an "interested stockholder" to engage in certain business combinations including mergers, consolidations or acquisitions of additional shares, for a period of three years following the time that the stockholder becomes an interested stockholder. An interested stockholder is defined to include persons owning directly or indirectly 15.0% or more of the outstanding voting stock of the corporation.
Our private passenger automobile business is concentrated in in New England:
With a concentration of private passenger automobile insurance, our business may be adversely affected by conditions in this industry.
Approximately 53.6% of our direct written premiums for the year ended December 31, 2021, were generated from private passenger automobile insurance policies. As a result of our focus on that line of business, negative developments in the economic, competitive or regulatory conditions affecting the private passenger automobile insurance industry could have a material adverse effect on our results of operations and financial condition. In addition, these developments would have a disproportionate effect on us, compared to insurers which conduct operations in multiple business lines.
Because we write insurance principally in Massachusetts, our business may be adversely affected by conditions in Massachusetts, including the impact of additional competitors.
Almost all of our direct written premiums are currently generated in Massachusetts. Our revenues and profitability are therefore subject to prevailing regulatory, economic, demographic, competitive and other conditions in Massachusetts. Changes in any of these conditions could make it more costly or difficult for us to conduct our business. The Massachusetts market has seen an increased level of competition, particularly in the private passenger automobile insurance line, due to prior changes in regulatory conditions. To date, we have not had a significant decrease in our private passenger automobile insurance business. However, further competition and adverse results could include loss of market share, decreased revenue, and/or increased costs.
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As writers of property insurance, our Insurance Subsidiaries are exposed to potential losses related to severe weather:
We have exposure to claims related to severe weather conditions, which may result in an increase in claims frequency and severity.
We are subject to claims arising out of severe weather conditions, such as rainstorms, snowstorms and icestorms, that may have a significant effect on our results of operations and financial condition. The incidence and severity of weather conditions are inherently unpredictable. There is generally an increase in claims frequency and severity under the private passenger automobile insurance we write when severe weather occurs because a higher incidence of vehicular accidents and other insured losses tend to occur as a result of severe weather conditions. In addition, we have exposure to an increase in claims frequency and severity under the homeowners and other property insurance we write because property damage may result from severe weather conditions.
Because some of our insureds live near the Massachusetts coastline, we also have a potential exposure to losses from hurricanes and major coastal storms such as Nor'easters. Although we purchase catastrophe reinsurance to limit our exposure to natural catastrophes, in the event of a major catastrophe resulting in property losses to us in excess of $665,000 our losses would exceed the limits of this reinsurance in addition to losses from our co-participation retention of a portion of the risk up to $665,000.
Climate change and increasing climate change regulation may adversely impact our results of operations.
There are concerns that the increase in weather-related catastrophes and other losses incurred by the industry in recent years may be indicative of changing weather patterns. This change in weather patterns could lead to higher overall losses and higher reinsurance costs. Changes in climate conditions may also cause our underlying modeling data to not adequately reflect frequency and severity, limiting our ability to effectively evaluate and manage risks of catastrophes and severe weather events. Among other impacts, this could result in not charging enough premiums or not obtaining timely state approvals for rate increases to cover the risks we insure. Climate change could also have an impact on issuers of securities in which we invest, resulting in realized and unrealized losses in future periods which could have a material adverse impact on our results of operations and/or financial position.
We are also subject to complex and changing laws and regulations relating to climate change which are difficult to predict and quantify and may have an adverse impact on our business. Changes in regulations relating to climate change or our own management decisions implemented as a result of assessing the impact of climate change on our business may result in an increase in the cost of doing business.
We operate in the highly competitive property and casualty insurance industry:
If we are not able to attract and retain independent agents, it could adversely affect our business.
We market our insurance solely through independent agents. We must compete with other insurance carriers for the business of independent agents. Some of our competitors offer a larger variety of products, lower prices for insurance coverage or higher commissions. While we believe that the commissions and services we provide to our agents are competitive with other insurers, changes in commissions, services or products offered by our competitors could make it harder for us to attract and retain independent agents to sell our insurance products.
Established competitors with greater resources may make it difficult for us to market our products effectively and offer our products at a profit.
The property and casualty insurance business is highly competitive and many of our competitors have substantially greater financial and other resources than we do. We compete with both large national writers and smaller regional companies. Further, our competitors include other companies which, like us, serve the independent agency
market, as well as companies which sell insurance directly to customers. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of the customer base to the insurer rather than to an independent agency and, potentially, lower cost structures. A material reduction in the amount of business independent agents sell would directly and negatively affect our profitability and our ability to compete with insurers that do not rely solely on the independent agency market to sell their products. Further, our Company and others compete on the basis of the commissions and other cash and non-cash incentives provided to agents. Although a number of national insurers that are much larger than we are do not currently compete in a material way in the Massachusetts personal auto market, if one or more of these companies decided to aggressively enter the market it could reduce our share of the Massachusetts market and thereby have a material adverse effect on us. These companies include some that would be able to sustain significant losses in order to acquire market share, as well as others which use distribution methods that compete with the independent agent channel. Progressive Corporation, GEICO and Allstate, large insurers that market directly to policyholders rather than through agents, along with other carriers have entered the Massachusetts private passenger automobile insurance market.
We may enter new markets and there can be no assurance that our diversification strategy will be effective.
Although we intend to concentrate on our core businesses in Massachusetts, New Hampshire, and Maine, we also may seek to take advantage of prudent opportunities to expand our core businesses into other states where we believe the independent agent distribution channel is strong. As a result of a number of factors, including the difficulties of finding appropriate expansion opportunities and the challenges of operating in an unfamiliar market, we may not be successful in this diversification. Additionally, in order to carry out any such strategy we would need to obtain the appropriate licenses from the insurance regulatory authority of any such state.
The success of our business is subject to operational risks:
We may not be able to successfully alleviate risk through reinsurance arrangements which could cause us to reduce our premiums written in certain lines or could result in losses.
In order to reduce risk, to increase our underwriting capacity, and mitigate the volatility of losses on our financial condition and operations, we purchase reinsurance. The availability and the cost of reinsurance protection are subject to market conditions, which are outside of our control. As a result, we may not be able to successfully alleviate risk through these arrangements. For example, if reinsurance capacity for homeowner's risks were reduced as a result of terrorist attacks, climate change or other causes, we might seek to reduce the amount of homeowners business we write. As a result, the Company may not be able to successfully purchase reinsurance and transfer a portion of the Company’s risk through reinsurance arrangements. In addition, we are subject to credit risk with respect to our reinsurance because the ceding of risk to reinsurers does not relieve us of our liability to our policyholders. A significant reinsurer's insolvency or inability to make payments under the terms of a reinsurance treaty could have a material adverse effect on our results of operations and financial condition.
As a holding company, Safety Insurance Group, Inc. is dependent on the results of operations of the Safety Insurance Company.
Safety Insurance Group, Inc. is a company and a legal entity separate and distinct from Safety Insurance Company, our principal operating subsidiary. As a holding company without significant operations of its own, the principal sources of Safety Insurance Group, Inc.'s funds are dividends and other distributions from Safety Insurance Company. Our rights to participate in any distribution of assets of Safety Insurance Company are subject to prior claims of policyholders, creditors and preferred shareholders, if any, of Safety Insurance Company (except to the extent that our rights, if any, as a creditor are recognized). Consequently, our ability to pay debts, expenses and cash dividends to our shareholders may be limited. The ability of Safety Insurance Company to pay dividends is subject to limits under Massachusetts insurance law. Further, the ability of Safety Insurance Group, Inc. to pay dividends, and our subsidiaries' ability to incur indebtedness or to use the proceeds of equity offerings, will be subject to limits under our revolving credit facility.
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Our failure to maintain a commercially acceptable financial strength rating would significantly and negatively affect our ability to implement our business strategy successfully.
A.M. Best has currently assigned Safety Insurance an "A (Excellent)" rating. An "A" rating is A.M. Best's third highest rating, out of 13 possible rating classifications for solvent companies. An "A" rating is assigned to insurers that in A.M. Best's opinion have an excellent ability to meet their ongoing obligations to policyholders. Moreover, an "A" rating is assigned to companies that have, on balance, excellent balance sheet strength, operating performance and business profile when compared to the standards established by A.M. Best. A.M. Best bases its ratings on factors that concern policyholders and not upon factors concerning investor protection. Such ratings are subject to change and are not recommendations to buy, sell, or hold securities. An important factor in an insurer's ability to compete effectively is its A.M. Best rating. Our A.M. Best rating is lower than those of some of our competitors. Any future decrease in our rating could affect our competitive position.
Our losses and loss adjustment expenses may exceed our reserves, which could significantly affect our business.
The reserves for losses and loss adjustment expenses that we have established are estimates of amounts needed to pay reported and unreported claims and related expenses based on facts and circumstances known to us as of the time we established the reserves. Reserves are based on historical claims information, industry statistics and other factors. The establishment of appropriate reserves is an inherently uncertain process. If our reserves are inadequate and are strengthened, we would have to treat the amount of such increase as a charge to our earnings in the period that the deficiency is recognized. As a result of these factors, there can be no assurance that our ultimate liability will not materially exceed our reserves and have a negative effect on our results of operations and financial condition.
Due to the inherent uncertainty of estimating reserves, it has been necessary, and may over time continue to be necessary, to revise estimated future liabilities as reflected in our reserves for claims and policy expenses. The historic development of reserves for losses and loss adjustment expenses may not necessarily reflect future trends in the development of these amounts. Accordingly, it is not appropriate to extrapolate redundancies or deficiencies based on historical information.
If we lose key personnel, our ability to implement our business strategy could be delayed or hindered.
The loss of key personnel could prevent us from fully implementing our business strategy and could significantly and negatively affect our financial condition and results of operations. As we continue to grow, we will need to recruit and retain additional qualified management personnel, and our ability to do so will depend upon a number of factors, such as our results of operations and prospects and the level of competition then prevailing in the market for qualified personnel.
Future sales of shares of our common stock by our existing shareholders in the public market, or the possibility or perception of such future sales, could adversely affect the market price of our stock.
Investors currently known to be the beneficial owners of greater than 5.0% of our outstanding common stock hold approximately 41.5% of the common stock of Safety Insurance Group, Inc. on a fully diluted basis. No prediction can be made as to the effect, if any, that future sales of shares by our existing shareholders, or the availability of shares for future sale, will have on the prevailing market price of our common stock from time to time. Sales of substantial amounts of our common stock in the public market by our existing shareholders, or the possibility or perception that such sales could occur, could cause the prevailing market prices for our common stock to decrease. If such sales reduce the market price of our common stock, our ability to raise additional capital in the equity markets may be adversely affected.
A proxy contest with an activist shareholder could cause us to incur significant costs, divert management’s attention and resources, and have an adverse effect on our business
Activist shareholders, for example in our current ongoing engagement, may engage in proxy solicitations, advance shareholder proposals or director nominations or otherwise attempt to affect changes or acquire control over us. Responding to these actions can be costly and time-consuming and divert the attention of our Board and management from the management of our operations and the pursuit of our business strategies, particularly if such activist shareholders advocate for actions that are not supported by other shareholders, our Board or management. In addition, perceived uncertainties as to our future direction may result in the loss of potential business opportunities, damage to our reputation and may make it more difficult to attract and retain qualified directors, personnel and business partners. These actions could also cause our stock price to experience periods of volatility.
We are subject to technology, cybersecurity and privacy risks:
Our business depends on the uninterrupted operation of our systems and business functions, including our information technology, telecommunications and other business systems. Our business continuity and disaster recovery plans may not sufficiently address all contingencies.
Our business is highly dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary business functions, such as processing new and renewal business, providing customer service, and processing and paying claims. A shut-down of or inability to access our facility, a power outage, or a failure of one or more of our information technology, telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis. If sustained or repeated, such a business interruption, systems failure or service denial could result in a deterioration in the level of service we provide to our agents and policyholders. We have established a business continuity plan in an effort to ensure the continuation of core business operations in the event that normal business operations could not be performed due to a catastrophic event. While we continue to test and assess our business continuity plan to ensure it meets the needs of our core business operations and addresses multiple business interruption events, there is no assurance that core business operations could be performed upon the occurrence of such an event, which may result in a material adverse effect on our financial position and results of operations.
We outsource certain business and administrative functions to third parties and may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies or our third-party providers fail to perform as anticipated, we may experience operational difficulties, increased costs and a loss of business that may have a material adverse effect on our results of operations or financial condition.
Our business could be materially and adversely affected by a security breach or other attack involving our computer systems or the systems of one or more of our agents and vendors.
Our highly automated and networked organization is subject to cyber-terrorism and a variety of other cyber-security threats. These threats come in a variety of forms, such as viruses and malicious software. Such threats can be difficult to prevent or detect, and if experienced, could interrupt or damage our operations, harm our reputation or have a material effect on our operations. Our technology and telecommunications systems are highly integrated and connected with other networks. Cyber-attacks involving these systems could be carried out remotely and from multiple sources and could interrupt, damage or otherwise adversely affect the operations of these critical systems. Cyber-attacks could result in the modification or theft of data, the distribution of false information or the denial of service to users. The risks of cyber-attacks could be exacerbated by geopolitical tensions, including hostile actions taken by nation-states and terrorist organizations. We obtain, utilize and maintain data concerning individuals and organizations with which we have a business relationship. Threats to data security can emerge from a variety of sources and change in rapid fashion, resulting in the ongoing need to expend resources to secure our data in accordance with customer expectations and statutory and regulatory requirements.
Our businesses must comply with regulations to control the privacy of customer, employee and third-party data, and state, federal and international regulations regarding data privacy, are becoming increasingly more onerous. A
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misuse or mishandling of confidential or proprietary information could result in legal liability, regulatory action and reputational harm. We could be subject to liability if confidential customer information is misappropriated from our technology systems. Despite the implementation of security measures, these systems may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any well-publicized compromise of security could deter people from entering into transactions that involve transmitting confidential information to our systems, which could have a material adverse effect on our business and reputation. We rely on services and products provided by many vendors. In the event that one or more of our vendors fails to protect personal information of our customers, claimants or employees, we may incur operational impairments, or could be exposed to litigation, compliance costs or reputational damage. We maintain cyber-liability insurance coverage to offset certain potential losses, subject to policy limits, such as liability to others, costs of related crisis management, data extortion, applicable forensics and certain regulatory defense costs, fines and penalties.
While, to date, we are not aware of having experienced a material breach of our cyber security systems, administrative, internal accounting and technical controls as well as other preventive actions may be insufficient to prevent physical and electronic break-ins, denial of service, cyber-attacks, business email compromises, ransomware or other security breaches to our systems or those of third parties with whom we do business.
We believe that we have established and implemented appropriate security measures to provide reasonable assurance that our information technology systems are secure and appropriate controls and procedures to enable us to identify and respond to unauthorized access to such systems. While we have not experienced material cyber-incidents to date, the occurrence and effects of cyber-incidents may remain undetected for an extended period. We periodically engage third parties to evaluate and test the adequacy of our security measures, controls and procedures. Despite these security measures, controls and procedures, disruptions to and breaches of our information technology systems are possible.
The impact of COVID-19 and the related risks could have a material impact on our results of operations:
In March 2020, the World Health Organization declared a worldwide pandemic regarding the outbreak of COVID-19. The pandemic has affected the states where we operate causing significant economic effects including temporary closures of many businesses and reduced consumer activity due to shelter-in-place, stay-at-home and other governmental regulations.
Our premium revenues could be adversely impacted from the economic consequences as consumer behaviors change due to self-isolation, travel limitations and restrictions on non-essential businesses. Furthermore, these restrictions could impair our independent agents’ ability to sell our products and serve our policyholders, which could result in significant declines in premium revenues.
The COVID-19 pandemic could also have a material impact on losses and loss adjustment expenses. Risks to our business include legislation or court decisions that extend business interruption coverage for COVID-19 when there was no direct physical damage or loss to property. These actions would extend coverage beyond the terms and conditions we intended for those policies, meaning we would be forced to pay claims when no coverage was contemplated and for which no premium was collected. These amounts could have a material, adverse impact on our business, financial condition, results of operations or cash flows. There is also the potential of significant litigation brought by policyholders, including but not limited to, class action lawsuits. 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. Frequency and severity could also increase with respect to our auto and property coverages due to, among other things, changes in business practices and individual behaviors resulting from the stay-at-home and social distancing measures.
The COVID-19 pandemic has contributed to volatility in the financial markets. In the event that these conditions recur or result in a prolonged economic downturn, they could adversely impact our financial condition, results of operations or cash flows. Such adverse impacts may be material.
We invest in securities which are subject to market risk:
Market fluctuations and changes in interest rates can have significant and negative effects on our investment portfolio.
Our results of operations depend in part on the performance of our invested assets. As of December 31, 2021, based upon fair value measurement, 77.5% of our investment portfolio was invested in fixed maturity securities, 16.9% in equity securities and 5.6% in other invested assets. Certain risks are inherent in connection with debt securities including loss upon default and price volatility in reaction to changes in interest rates and general market factors.
We have a significant investment portfolio and adverse capital market conditions, including but not limited to volatility and credit spread changes, will impact the liquidity and value of our investments, potentially resulting in higher realized or unrealized losses. Values of our investments can also be impacted by reductions in price transparency and changes in investor confidence and preferences, potentially resulting in higher realized or unrealized losses. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could materially harm our results of operations and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As of the date of this report, the Company had no unresolved comments from the Commission staff regarding its periodic or current reports under the Exchange Act.
ITEM 2. PROPERTIES
We conduct most of our operations in approximately 72 thousand square feet of leased space at 20 Custom House Street in downtown Boston, Massachusetts. Our lease will expire on December 31, 2028. This real estate space was remodeled in 2018 and included capital expenditures to update lighting as well as heating, ventilation and air condition systems with state of the art and environmentally focused technologies.
ITEM 3. LEGAL PROCEEDINGS
Our Insurance Subsidiaries are parties to a number of lawsuits arising in the ordinary course of their insurance business. We believe that the ultimate resolution of these lawsuits will not, individually or in the aggregate, have a material adverse effect on our financial condition.
Safety Insurance has been named in a lawsuit alleging that the Company improperly denied coverage to commercial insureds for loss of business income resulting from the COVID-19 pandemic. Our business owner policies serve eligible small and medium sized commercial accounts including but not limited to apartments and condominiums; mercantile establishments; limited cooking restaurants; offices; and special trade contractors. The majority of these business owner policies do not contain a specific exclusion for viruses. However, as viruses do not produce direct physical damage or loss to property, our position is that no coverage exists for this peril. As a result, the Company accrued a reserve of $6,500 for legal defense costs in 2020. This amount is still accrued as of December 31, 2021.
On October 19, 2021, the Supreme Judicial Court of Massachusetts (the “Court”) unanimously ruled that property and casualty insurers must compensate third-party claimants under property damage coverage, part 4 of the standard Massachusetts automobile insurance policy, 2008 edition (standard policy), for the inherent diminished value (“IDV”) that occurs when their vehicles are damaged in a crash. This ruling overturned a previous decision by the Massachusetts Superior Court, which found that a Massachusetts auto insurance policy did not provide property damage coverage for inherent diminished value damages for third-party claimants. The Court placed the burden of proof on the individual claimant by explicitly specifying that the claimant must establish that the vehicle has suffered IDV damages
and also the amount of IDV damages at issue. The Court further ruled that an insurer’s previous denial of coverage for such damages could not serve as the basis for a claim of unfair business practices. Based on the Court’s rulings, at this time the Company does not expect any claims for IDV damages to be material, and therefore has not accrued for a specific loss contingency
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of February 10, 2022, there were 21 holders of record of the Company's common stock, par value $0.01 per share, and we estimate another 17,435 held in "Street Name."
The closing price of the Company's common stock on February 10, 2022 was $85.53 per share. The Company’s common stock trades on the NASDAQ stock exchange under the symbol SAFT.
During 2021 and 2020, the Company’s Board of Directors declared four quarterly cash dividends to shareholders, which were paid and accrued in the amounts of $53,996 and $54,735, respectively. On February 15, 2022, the Company's Board of Directors declared a quarterly cash dividend of $0.90 per share to shareholders of record on March 1, 2022 payable on March 15, 2022. The Company plans to continue to declare and pay quarterly cash dividends in 2022, depending on the Company's financial position and the regularity of its cash flows.
The Company relies on dividends from its Insurance Subsidiaries for a portion of its cash requirements. The payment by the Company of any cash dividends to the holders of common stock therefore depends on the receipt of dividend payments from its Insurance Subsidiaries. The payment of dividends by the Insurance Subsidiaries is subject to limitations imposed by Massachusetts law, as discussed in Item 1—Business, Supervision and Regulation, Insurance Regulation Concerning Dividends, and also in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.
The information called for by Item 201 (d) of Regulation S-K regarding securities authorized for issuance under equity compensation plans will be contained in the Company's Proxy Statement for its Annual Meeting of Shareholders, which the Company intends to file with the U.S. Securities and Exchange Commission within 120 days after December 31, 2021 (the Company's fiscal year end), and such information is incorporated herein by reference.
For information regarding our share repurchase program, refer to Item 8—Financial Statements and Supplementary Data, Note 14, Share Repurchase Program, of this Form 10-K.
COMMON STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the dollar change in the cumulative total shareholder return on the Company's Common Stock, for the period beginning on December 31, 2016 and ending on December 31, 2021 with the cumulative total return of the NASDAQ Stock Market Index and a peer group comprised of seven selected property & casualty insurance companies over the same period. The peer group consists of Donegal Group, Inc., Erie Indemnity Company, Horace Mann Educators Corporation, The Hanover Insurance Group, Inc., Mercury General Corp., Selective Insurance Group, Inc., and United Fire Group. Note that this peer group has changed from prior years due to acquisition activity. The graph shows the change in value of an initial one hundred dollar investment over the period indicated, assuming re-investment of all dividends.
Comparative Cumulative Total Returns since December 31, 2016 AmongSafety Insurance Group, Inc.,Property & Casualty Insurance Peer Group and the NASDAQ Stock Market Index
The foregoing performance graph and data shall not be deemed "filed" as part of this Form 10-K for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section and should not be deemed incorporated by reference into any other filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates it by reference into such filing.
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ITEM 6. [RESERVED]
ITEM 7. 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.
Recent Trends and Events
Beginning in March 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 of December 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 ended December 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 under U.S. generally accepted accounting principles for the quarter ended December 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 under U.S. generally accepted accounting principles for the year ended December 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.
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Event
Windstorms and hailstorms
11,677
7,291
5,123
Total losses incurred (1)
(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 of Massachusetts and New Hampshire in 2021 and 2020. Our Massachusetts private passenger automobile rates include a 13% commission rate for agents.
Effective Date
Rate Change
New Hampshire Homeowner
May 1, 2021
2.9%
Massachusetts Homeowner
April 1, 2021
1.8%
Massachusetts Private Passenger Automobile
May 1, 2020
-0.6%
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:
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.
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. At December 31, 2021, there were 164,908 shares available for future grant. Grants outstanding under the Plans as of December 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
Granted
Share (1)
Vesting Terms
RS - Service
February 26, 2019
28,778
92.52
3 years, 30%-30%-40%
RS - Performance
23,191
3 years, cliff vesting (3)
RS
5,000
No vesting period (2)
40,256
No vesting period (4)
February 26, 2020
28,799
90.50
24,062
12,587
March 27, 2020
1,000
76.60
February 24, 2021
33,840
79.27
29,422
20,038
(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.
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 $119,122 due from CAR comprising of loss and loss adjustment expense reserves, unearned premiums and reinsurance recoverables.
Effects of Inflation
We do not believe that inflation has had a material effect on our consolidated results of operations, except insofar as inflation may affect interest rates.
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.
Direct written premiums
Net written premiums
764,526
763,537
794,409
Net earned premiums
774,328
771,078
788,777
Net investment income
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
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
3.40
Reconciliation of Net Income to Non-GAAP Operating Income:
Exclusions from net income:
(14,885)
(957)
(2,976)
(16,130)
(10,449)
(21,454)
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
(1.00)
(0.06)
(0.19)
(1.08)
(0.69)
(1.40)
0.06
(0.02)
0.07
0.44
0.14
0.32
Non-GAAP Operating income per diluted share
7.14
8.64
5.25
YEAR ENDED DECEMBER 31, 2021 COMPARED TO YEAR ENDED DECEMBER 31, 2020
Direct Written Premiums. Direct written premiums for the year ended December 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 and June 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.
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Net Written Premiums. Net written premiums for the year ended December 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 ended December 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,
Written Premiums
Direct
Assumed
31,359
26,316
Ceded
(68,972)
(61,491)
Earned Premiums
811,329
815,981
30,583
29,365
(67,584)
(74,268)
Net Investment Income. Net investment income for the year ended December 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 ended December 31, 2021 compared to 2.9% for the year ended December 31, 2020. Our duration was 3.6 years at December 31, 2021, compared to 3.2 years at December 31, 2020.
Earnings from Partnership Investments. Earnings from partnership investments were $19,829 for the year ended December 31, 2021 compared to $6,901 for the year ended December 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 ended December 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
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:
Cost or
Allowance for
Gross Unrealized
Amortized
Expected Credit
Cost
Losses
Gains
Losses (3)
Value
U.S. Treasury securities
318
111,578
4,847
(123)
237,026
5,941
(1,503)
146,318
5,007
(442)
83,376
475
(255)
609,241
(691)
20,647
(3,487)
1,187,857
36,923
(5,810)
211,848
54,861
(1,764)
Other invested assets (4)
1,487,616
91,784
(7,574)
(1) Residential mortgage-backed securities consists of obligations of U.S. Government agencies including collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB).
(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 December 31, 2021.
(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, 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 December 31, 2021.
43
Less than 12 Months
12 Months or More
Unrealized
2,985
85
1,012
3,997
123
Residential mortgage-backed securities
97,116
1,502
97,127
1,503
29,660
442
39,266
255
181,470
3,140
11,436
347
192,906
3,487
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
591
383,442
7,574
The Company’s analysis of its fixed maturity portfolio at December 31, 2021 concluded that $691 of unrealized losses were due to credit factors and were recorded as an allowance for expected credit losses at December 31, 2021, compared to $1,054 at December 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 at December 31, 2021 and December 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 “Watch List,” if any.
Qualitative analysis considered such factors as the financial condition and the near term prospects of the issuer, whether the debtor is current on its contractually obligated interest and principal payments, changes to the rating of the security by a rating agency and the historical volatility of the fair value of the security.
The majority of unrealized losses recorded on the investment portfolio at December 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 ended December 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.
Our GAAP loss ratio for the years ended December 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 ended December 31, 2021 and 2020, respectively. Total prior year favorable development included in the pre-tax results for the year ended December 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 December 31, 2021 decreased by $8,090, or 3.0%, to $258,392 from $266,482 for the comparable 2020 period.
44
Our GAAP expense ratio for the year ended December 31, 2021 decreased to 33.4% 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 ended December 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 ended December 31, 2021 and 2020.
Income Tax Expense Our effective tax rates were 20.4% and 20.9% for the years ended December 31, 2021 and 2020, respectively. The effective rates for the years ended December 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 ended December 31, 2020 compared to the year ended December 31, 2019 can be found in the Company’s 2020 Annual Report on Form 10-K filed with the SEC on February 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, principally Safety Insurance. Safety is the borrower under our credit facility.
Safety Insurance’s sources of funds primarily include premiums received, investment income and proceeds from sales and redemptions of investments. Safety Insurance’s principal uses of cash are the payment of claims, operating expenses and taxes, the purchase of investments and payment of dividends to Safety.
Net cash provided by operating activities was $141,394, $109,460, and $112,456 during the years ended December 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 ended December 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 ended December 31, 2021, 2020 and 2019, respectively. Net cash used for financing activities during the year ended December 31, 2021 is comprised of dividend payments to shareholders and share buybacks. Net cash used for financing activities during the year ended December 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 on March 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 of March 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 ended December 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
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. The Massachusetts statute limits the dividends an insurer may pay in any twelve-month period, without the prior permission of the Commissioner, to the greater of (i) 10% of the insurer’s surplus as of the preceding December 31 or (ii) the insurer’s net income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. Our Insurance Subsidiaries may not declare an “extraordinary dividend” (defined as any dividend or distribution that, together with other distributions made within the preceding twelve months, exceeds the limits established by Massachusetts statute) until thirty days after the Commissioner has received notice of the intended dividend and has not objected. As historically administered by the Commissioner, this provision requires the Commissioner’s prior approval of an extraordinary dividend. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as earned surplus, and the insurer’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At year-end 2021, the statutory surplus of Safety 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 this Massachusetts statute, the Insurance Subsidiaries had restricted net assets in the amount of $729,810 at December 31, 2021. During the twelve months ended December 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 November 2002, the Company has paid regular quarterly dividends to shareholders of its common stock. Quarterly dividends paid during 2021 and 2020 were as follows:
Declaration
Record
Payment
Dividend per
Dividends Paid
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
13,836
August 5, 2020
September 1, 2020
September 15, 2020
13,622
November 4, 2020
December 1, 2020
December 15, 2020
13,405
February 16, 2021
March 5, 2021
March 15, 2021
13,459
May 5, 2021
June 1, 2021
June 15, 2021
13,490
August 4, 2021
September 1, 2021
September 15, 2021
13,493
November 3, 2021
December 1, 2021
December 15, 2021
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.
46
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 of December 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 $145,000 to investments in limited partnerships. The Company has contributed $94,269 to these commitments as of December 31, 2021. As of December 31, 2021, the remaining committed capital that could be called is $54,516, which includes potential recallable capital distributions.
47
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:
48
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 of December 31, 2021 compared to a range of $424,437 to $478,251 as of December 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 of December 31, 2021 compared to $461,270 as of December 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 of December 31, 2021 and December 31, 2020.
Low
Recorded
High
182,390
194,940
198,675
99,798
108,158
109,853
87,639
93,065
97,390
All other
75,684
83,821
98,662
445,511
504,580
As of December 31, 2020
167,218
182,494
184,373
93,395
102,313
104,495
97,063
99,724
102,356
66,761
76,739
87,027
424,437
478,251
The following table presents our total net reserves and the corresponding case reserves and IBNR reserves for each line of business as of December 31, 2021 and December 31, 2020.
Case
IBNR
237,808
(42,876)
194,932
CAR assumed private passenger auto
67,017
8,858
75,875
CAR assumed commercial automobile
18,465
13,818
32,283
82,977
(200)
82,777
FAIR Plan assumed homeowners
3,493
6,795
10,288
45,871
37,950
Total net reserves for losses and LAE
455,632
24,352
49
211,893
(29,407)
182,486
57,008
11,559
68,567
18,824
14,923
33,747
86,362
3,371
89,733
3,405
6,586
9,991
44,128
32,610
76,738
421,621
39,649
At December 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 of December 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 at December 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 of December 31, 2021 and 2020.
Retained
Net
CAR assumed private passenger automobile
Net private passenger automobile
Net commercial automobile
Net homeowners
437,405
42,579
102,314
417,524
43,746
50
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 ended December 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 ended December 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.
-1 Percent
No
+1 Percent
Change in
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
Estimated increase (decrease) in net income
(1,540)
+1 Percent Change in Severity
Estimated increase in reserves
3,899
Estimated decrease in net income
(3,080)
Commercial automobile retained loss and LAE reserves
(1,518)
(759)
1,199
600
759
(600)
1,518
(1,199)
Homeowners retained loss and LAE reserves
(1,656)
(828)
1,308
654
828
(654)
1,656
(1,308)
All other retained loss and LAE reserves
(1,676)
(838)
1,324
662
838
(662)
1,676
(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 ended December 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.
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Estimation
(323)
323
(103)
103
(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 $53,673, $54,844 and $42,049 during the years ended December 31, 2021, 2020, and 2019, respectively.
The following table presents a comparison of prior year development of our net reserves for losses and LAE for the years ended December 31, 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.
Accident Year
2011 & prior
(647)
(1,170)
(2,380)
(962)
(1,553)
(1,359)
(194)
(822)
(2,689)
(1,534)
(452)
(4,525)
(2,757)
(3,265)
(3,557)
(1,096)
(5,496)
(4,531)
(4,682)
(10,726)
(15,119)
(10,190)
(16,697)
(7,889)
(16,810)
(14,663)
(14,801)
All prior years
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.
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The following table presents information by line of business for prior year development of our net reserves for losses and LAE for the year ended December 31, 2021.
Private Passenger
Commercial
Automobile
All Other
(143)
(8)
(7)
(489)
(176)
(11)
(775)
(376)
(88)
253
(92)
(210)
(1,238)
(189)
(97)
(1,140)
(1,331)
(386)
(197)
(125)
(388)
(584)
(876)
(1,926)
(1,296)
(2,787)
(1,645)
(3,098)
(2,660)
(6,583)
(2,489)
(6,947)
(791)
(6,695)
(2,957)
(4,871)
(278)
(17,913)
(8,460)
(18,307)
(8,993)
To further clarify the effects of changes in our reserve estimates for CAR and other residual markets, the next two tables break out the information in the table above by source of the business (i.e., non-residual market vs. residual market).
The following table presents information by line of business for prior year development of retained reserves for losses and LAE for the year ended December 31, 2021 that is, all our reserves except for business ceded or assumed from CAR and other residual markets.
(54)
(1,496)
(18)
(1,138)
(2,676)
(137)
(102)
(1,013)
(608)
(1,831)
(4,319)
(1,174)
(2,956)
(9,577)
(1,295)
(6,522)
(15,191)
(1,007)
(4,478)
(12,458)
(4,400)
(17,227)
(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 December 31, 2021.
CAR Assumed
FAIR Plan
(38)
(79)
(2)
(60)
(23)
(83)
(268)
(95)
(471)
(142)
(613)
(1,194)
(425)
(1,619)
(1,950)
(393)
(2,343)
(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
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, Financial Services-Insurance.
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:
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:
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.
56
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk. Market risk is the risk that we will incur losses due to adverse changes in market rates and prices. We have exposure to market risk through our investment activities and our financing activities. Our primary market risk exposure is to changes in interest rates. We use both fixed and variable rate debt as sources of financing. We have not entered, and do not plan to enter, into any derivative financial instruments for trading or speculative purposes.
Interest Rate Risk. Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our exposure to interest rate changes primarily results from our significant holdings of fixed rate investments and from our financing activities. Our fixed maturity investments include U.S. and foreign government bonds, securities issued by government agencies, obligations of state and local governments and governmental authorities, corporate bonds and asset-backed securities, most of which are exposed to changes in prevailing interest rates.
We manage our exposure to risks associated with interest rate fluctuations through active review of our investment portfolio by our management and Board and consultation with third-party financial advisors. As a general matter, we do not attempt to match the durations of our assets with the durations of our liabilities, and the majority of our liabilities are “short tail.” Our goal is to maximize the total after-tax return on all of our investments. An important strategy that we employ to achieve this goal is to try to hold enough in cash and short-term investments in order to avoid liquidating longer-term investments to pay claims.
Based upon the results of interest rate sensitivity analysis, the following table shows the interest rate risk of our investments in fixed maturities, measured in terms of fair value (which is equal to the carrying value for all our fixed maturity securities).
-100 Basis
+100 Basis
Point Change
No Change
Estimated fair value
1,261,399
1,174,068
Estimated increase (decrease) in fair value
43,120
(44,211)
1,298,384
1,216,947
41,731
(39,706)
With respect to floating rate debt, we are exposed to the effects of changes in prevailing interest rates. At December 31, 2021, we had no debt outstanding under our credit facility. Assuming the full utilization of our current available credit facility, a 2.0% increase in the prevailing interest rate on our variable rate debt would result in interest expense increasing approximately $600 for 2021, assuming that all of such debt is outstanding for the entire year.
In addition, in the current market environment, our investments can also contain liquidity risks.
Equity Risk. Equity risk is the risk that we will incur economic losses due to adverse changes in equity prices. Our exposure to changes in equity prices results from our holdings of common stock and mutual funds held to fund the executive deferred compensation plan. We continuously evaluate market conditions and we expect in the future to purchase additional equity securities. We principally manage equity price risk through industry and issuer diversification and asset allocation techniques.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
59
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 238)
Balance Sheets
63
Statements of Operations
64
Statements of Comprehensive Income
65
Statements of Changes in Shareholders’ Equity
Statements of Cash Flows
67
Notes to Consolidated Financial Statements
68
Report of Independent Registered Public Accounting Firm
To the shareholders and the Board of Directors of Safety Insurance Group, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of Safety Insurance Group, Inc. and subsidiaries (the "Company") as of December 31, 2021, the related consolidated statements of operations, comprehensive income, changes in shareholders' equity, and cash flows, for the year ended December 31, 2021, the related notes, and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Losses and Loss Adjustment Expense Reserves – Refer to Notes 2 and 12 to the financial statements
Critical Audit Matter Description
The Company establishes loss and loss adjustment expense reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the expenses associated with investigating and paying the losses, or loss adjustment expenses. The loss and loss adjustment expense reserves are determined in accordance with generally accepted actuarial reserving techniques on the basis of the Company’s historical information and experience. In determining the loss and loss adjustment expense reserves, the Company analyzes historical data and estimates the impact of various loss development factors, such as the Company’s historical loss experience and that of the industry, trends in claims frequency and severity, the Company’s mix of business, the Company’s 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.
Given the subjectivity of estimating the ultimate cost to settle the liabilities for reported and unreported losses due to uncertainties caused by various factors including frequency and severity of claims, as well as future legislative, judicial, and legal uncertainties, performing audit procedures to evaluate whether the ultimate cost of loss and loss adjustment expense reserves were appropriately recorded as of December 31, 2021 required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to loss and loss adjustment expense reserves included the following, among others:
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 28, 2022
We have served as the Company’s auditor since 2021.
61
To the Board of Directors and Shareholders of Safety Insurance Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Safety Insurance Group, Inc. and its subsidiaries (the "Company") as of December 31, 2020, and the related consolidated statements of operations, of comprehensive income, of changes in shareholders’ equity and of cash flows for each of the two years in the period ended December 31, 2020, including the related notes and financial statement schedules listed in the index appearing under Item 15 (collectively referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
February 26, 2021
We served as the Company’s auditor from 1983 to 2020.
Safety Insurance Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)
December 31,
Assets
Investments:
Fixed maturities, available for sale, at fair value (amortized cost: $1,187,857 and $1,189,951, allowance for expected credit losses of $691 and $1,054)
Short term investments, at fair value (cost: $0 and $441)
Equity securities, at fair value (cost: $211,848 and $168,289)
Other invested assets
Total investments
Cash and cash equivalents
63,603
53,769
Accounts receivable, net of allowance for expected credit losses of $1,808 and $1,754
170,953
179,147
Receivable for securities sold
9,256
1,311
Accrued investment income
7,401
8,045
Taxes recoverable
1,508
279
Receivable from reinsurers related to paid loss and loss adjustment expenses
18,234
13,432
Receivable from reinsurers related to unpaid loss and loss adjustment expenses
Ceded unearned premiums
23,795
22,406
Deferred policy acquisition costs
73,024
74,962
Equity and deposits in pools
33,592
30,429
Operating lease right-of-use-assets
27,115
31,000
Other assets
27,108
25,595
Total assets
2,117,391
2,054,273
Liabilities
Loss and loss adjustment expense reserves
Unearned premium reserves
413,487
421,901
Accounts payable and accrued liabilities
76,598
79,486
Payable for securities purchased
16,477
7,144
Payable to reinsurers
9,192
8,236
Deferred income taxes
15,240
17,611
Debt
30,000
Operating lease liabilities
Other liabilities
31,458
6,635
Total liabilities
1,190,218
1,169,594
Commitments and contingencies (Note 8)
Shareholders’ equity
Common stock: $0.01 par value; 30,000,000 shares authorized; 17,813,370 and 17,724,866 shares issued
178
Additional paid-in capital
216,070
209,779
Accumulated other comprehensive income, net of taxes
24,579
53,527
Retained earnings
821,743
745,029
Treasury stock, at cost: 2,970,573 and 2,831,168 shares
(135,397)
(123,834)
Total shareholders’ equity
927,173
884,679
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Change in unrealized gains on equity securities
Net impairment losses on investments (a)
Losses and loss adjustment expenses
Number of shares used in computing earnings per share:
14,828,736
15,002,755
15,201,132
14,925,726
15,119,027
15,337,807
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Other comprehensive (loss) income, net of tax:
Unrealized holding (losses) gains during the period, net of income tax (benefit) expense of ($4,569), $6,936, and $10,964 .
(17,189)
26,093
41,247
Reclassification adjustment for net realized gains on investments included in net income, net of income tax expense of ($3,126), ($201), and ($625).
(11,759)
(756)
(2,351)
(28,948)
25,337
38,896
Comprehensive income
101,762
163,548
138,497
Consolidated Statements of Changes in Shareholders’ Equity
Accumulated
Other
Additional
Comprehensive
Common
Paid-in
(Loss) Income,
Treasury
Shareholders’
Stock
Capital
Net of Taxes
Earnings
Balance at December 31, 2018
176
196,292
(10,706)
616,717
(83,835)
718,644
Cumulative effect of adoption of updated accounting guidance for callable debt securities at January 1, 2019, net of taxes
(2,373)
Unrealized gains on securities available for sale, net of deferred federal income taxes
Restricted share awards issued
462
463
Recognition of employee share-based compensation
5,567
Dividends paid and accrued
(52,392)
Balance at December 31, 2019
177
202,321
28,190
661,553
808,406
528
529
6,930
(54,735)
Acquisition of treasury stock
(39,999)
Balance at December 31, 2020
Unrealized losses on securities available for sale, net of deferred federal income taxes
5,816
(53,996)
(11,563)
Balance at December 31, 2021
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Investment amortization, net
4,234
6,541
4,922
Fixed asset depreciation, net
6,896
7,527
5,485
Stock based compensation
6,292
7,459
6,030
Credit for deferred income taxes
5,323
5,159
4,757
Credit loss (benefit) expense
(13,896)
(1,932)
(904)
Changes in assets and liabilities:
Accounts receivable, net
8,194
14,222
(3,307)
644
359
Receivable from reinsurers
10,842
13,948
(11,602)
(1,389)
12,776
(1,208)
1,938
(675)
(932)
Taxes recoverable/payable
(1,229)
724
(1,003)
(3,346)
(15)
(1,864)
3,070
(42,985)
25,847
(8,414)
(20,318)
6,839
Taxes payable
(6,090)
(2,876)
4,310
3,395
956
(4,675)
691
24,823
(20,824)
5,324
Net cash provided by operating activities
141,394
109,460
112,456
Cash flows from investing activities:
Fixed maturities purchased
(355,561)
(217,269)
(219,875)
Short term investments purchased
(441)
Equity securities purchased
(59,296)
(49,326)
(28,586)
Other invested assets purchased
(32,814)
(11,868)
(14,794)
Proceeds from sales and paydowns of fixed maturities
213,665
126,555
135,119
Proceeds from maturities, redemptions, and calls of fixed maturities
144,910
86,390
58,676
Proceed from sales of equity securities
26,724
34,542
23,966
Proceeds from other invested assets redeemed
4,608
5,839
2,124
Fixed assets purchased
(8,225)
(9,946)
(9,594)
Net cash used for investing activities
(65,989)
(35,524)
(52,964)
Cash flows from financing activities:
Proceeds from FHLB loan
Dividends paid to shareholders
(54,008)
(54,575)
(52,667)
Net cash used for financing activities
(65,571)
(64,574)
Net increase in cash and cash equivalents
9,834
9,362
6,825
Cash and cash equivalents at beginning of year
44,407
37,582
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal and state income taxes
29,190
31,080
26,780
Interest
507
388
75
1.
Basis of Presentation
The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include Safety Insurance Group, Inc. and its subsidiaries (the “Company”). The subsidiaries consist of Safety Insurance Company, Safety Indemnity Insurance Company, Safety Property and Casualty Insurance Company, Safety Northeast Insurance Company, Safety Asset Management Corporation (“SAMC”), and Safety Management Corporation, which is SAMC’s holding company. All intercompany transactions have been eliminated.
The Company was incorporated on June 25, 2001 in the State of Delaware. On October 16, 2001, the Company acquired all of the issued and outstanding common stock of Thomas Black Corporation (“TBC”) and its property and casualty subsidiaries. TBC subsequently merged with and into Safety Insurance Group, Inc. with Safety Insurance Group, Inc. being the corporation surviving the merger.
The Company is a leading provider of property and casualty insurance focused primarily on the Massachusetts market. The Company’s principal product line is private passenger automobile insurance, which accounted for 53.6% of its direct written premiums in 2021. The Company operates through its insurance company subsidiaries, Safety Insurance Company, Safety Indemnity Insurance Company, Safety Property and Casualty Insurance Company, and Safety Northeast Insurance Company (together referred to as the “Insurance Subsidiaries”).
The Insurance Subsidiaries began writing private passenger automobile and homeowners insurance in New Hampshire during 2008, personal umbrella insurance in New Hampshire during 2009, and commercial automobile insurance in New Hampshire during 2011. The Insurance Subsidiaries began writing all of these lines of business in Maine during 2016.
Management has assessed and concluded that there were no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements were issued.
2.
Summary of Significant Accounting Policies
Investments in fixed maturities, which include taxable and non-taxable bonds and redeemable preferred stocks, are reported at fair value. Fair values for fixed maturity securities are based on estimates obtained from independent pricing services. Unrealized gains or losses on fixed maturity securities reported at fair value are excluded from earnings and reported in a separate component of shareholder’s equity known as “accumulated other comprehensive income net of taxes” until realized. 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 credit loss component of the impairment from the amount related to all other factors and reports the credit loss component as credit loss expense. The impairment related to all other factors (non-credit factors) is reported in accumulated other comprehensive income. The allowance is adjusted for any additional credit losses and subsequent recoveries. Upon recognizing a credit loss, the cost basis is not adjusted. See Note 3 for further details of the Company’s accounting for impairments of available-for-sale investments.
Short-term investments, which consist of securities with original maturities greater than three months but less than one year, are reported at fair value.
Investments in equity securities, which include interests in common stocks, mutual funds and a real estate investment trust (“REIT”), are reported at fair value. Fair values for equity securities are derived from external market quotations, with the exception of the REIT whose fair value was determined using the trust’s net asset value obtained from its audited financial statements. Changes in unrealized gains or losses on equity securities are recognized in earnings.
Other invested assets consist of investments in limited partnerships. The partnership interest is accounted for using the equity method of accounting and recorded in earnings from partnership investments. The carrying value of these investments are written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary. In applying the equity method (including assessment for other-than-temporary impairment), the Company uses financial information provided by the investee, generally on a three month lag.
Realized gains or losses on the sale or maturity of investments are determined based on the specific cost identification method.
Investment income is recognized on an accrual basis of accounting. Bonds not backed by other loans are amortized using the interest method. Loan-backed bonds and structured securities are amortized using the interest method and significant changes in estimated cash flows from the original purchase assumptions are accounted for using the retrospective method.
Cash and Cash Equivalents
Cash and cash equivalents includes money market accounts and United States (“U.S.”) Treasury bills with original maturities of three months or less from the date of purchase. U.S. Treasury bills are stated at amortized cost, which approximates fair value.
Accounts Receivable
Amounts included in accounts receivable represent premiums as well as finance charges, the majority of which are billed on a monthly installment basis. Accounts receivable are stated net of allowances for doubtful accounts. At December 31, 2021 and 2020, these allowances were $1,808 and $1,754, respectively. Uncollected premium balances over ninety days past due are written off.
Deferred Policy Acquisition Costs
Amounts that vary with and are primarily related to the successful acquisition of a new or renewal insurance contract, principally commissions and premium taxes, are deferred and amortized ratably over the effective period of the policy. All other acquisition expenses are expensed as incurred. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, and if not, are charged to expense. Future investment income attributable to related premiums is not taken into account in measuring the recoverability of the carrying value of this asset. Amortization of acquisition costs in the amount of $146,573, $146,955 and $147,945 were charged to underwriting, operating and other expenses for the years ended 2021, 2020 and 2019, respectively.
Equity and Deposits in Pools
Equity and deposits in pools represents the net receivable amounts from the residual market mechanisms, Commonwealth Automobile Reinsurers (“CAR”) for automobile and Massachusetts Property Insurance Underwriting Association (“FAIR Plan”) for homeowners insurance in Massachusetts. See Note 11 for a discussion of the Company’s accounting for amounts assumed from residual markets.
Equipment and Leasehold Improvements
Property, equipment, leasehold improvements, and software which are included in other assets are carried at cost less accumulated depreciation. Depreciation is provided using the straight- line or accelerated method over the estimated useful lives of the related assets, which range from 3 to 10 years. Amortization of leasehold improvements is provided using the straight-line method over the term of the lease. The costs of computer software developed or obtained for internal use are capitalized and amortized over the estimated life of the business system, beginning when the software is ready for its intended use. Maintenance and repairs are charged to expense as incurred.
69
Losses and Loss Adjustment Expenses
Liabilities for losses and loss adjustment expenses (“LAE”) include case basis estimates for open claims reported prior to year-end and estimates of unreported claims and claim adjustment expenses, net of salvage and subrogation. The estimates are continually reviewed and modified to reflect current conditions, and any resulting adjustments are reflected in current operating results. Adjustments for anticipated salvage and subrogation are recorded on incurred and reported and incurred but not reported losses.
The Company determines its 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 reported to us to calculate our share of the residual market. For each accident year and each coverage within a line of business our actuaries calculate the ultimate losses incurred.
Premiums and Unearned Premiums
Premiums are earned over the terms of the respective policies, which are generally one year. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of the policies.
Ceded premiums are charged to income over the terms of the respective policies and the applicable term of the reinsurance contracts with third-party reinsurers. Ceded unearned premiums represent the unexpired portion of premiums ceded to CAR and other reinsurers.
Premiums received in advance of the policy effective date are recorded as a liability and not recognized as income until earned. Such amounts are included in accounts payable and accrued liabilities and totaled $10,630 and $10,441 at December 31, 2021 and 2020, respectively.
Liabilities for unearned premiums and unpaid losses are stated before deductions for ceded reinsurance. The ceded amounts are carried as receivables. Earned premiums are stated net of deductions for ceded reinsurance.
The Company, as primary insurer, will be required to pay losses in their entirety in the event that the reinsurers are unable to discharge their obligations under the reinsurance agreements.
Advertising Costs
Advertising costs are charged to expense when they are incurred. Total advertising costs were $2,232, $2,311 and $2,182 for the years ended December 31, 2021, 2020, and 2019, respectively.
Finance and Other Service Income
Finance and other service income primarily include revenues from premium installment charges, which are recognized when earned.
Income Taxes
The Company and its subsidiaries file a consolidated U.S. federal income tax return. The method of allocation among members of the consolidated group is subject to a written agreement approved by the Board of Directors (the “Board”). The consolidated tax liability is allocated on the basis of the members’ proportionate contribution to consolidated taxable income.
Deferred income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes, and for other temporary taxable and deductible differences as defined by Accounting Standards Codification (“ASC”) 740, Income Taxes. A valuation allowance is established where management has assessed that it is more likely than not that the Company will not be able to utilize the full deferred tax asset.
Earnings per Weighted Average Common share
Basic earnings per weighted average common share (“EPS”) are calculated by dividing net income by the weighted average number of basic common shares outstanding during the period. Diluted earnings per share amounts are based on the weighted average number of common shares including non-vested performance stock grants.
The following table sets forth the computation of basic and diluted EPS for the periods indicated.
Earnings attributable to common shareholders - basic and diluted:
Net income from continuing operations
Allocation of income for participating shares
575
636
(523)
Net income from continuing operations attributed to common shareholders
131,285
138,847
99,078
Earnings per share denominator - basic and diluted
Total weighted average common shares outstanding, including participating shares
14,894,532
15,071,955
15,281,363
Less: weighted average participating shares
(65,796)
(69,200)
(80,231)
Basic earnings per share denominator
Common equivalent shares- non-vested performance stock grants
96,990
116,272
136,675
Diluted earnings per share denominator
Basic earnings per share
Diluted earnings per share
Undistributed earnings attributable to common shareholders - basic and diluted:
Net income from continuing operations attributable to common shareholders -basic
Dividends declared
(3.60)
(3.40)
Undistributed earnings
5.65
3.12
Net income from continuing operations attributable to common shareholders -diluted
5.20
5.58
3.06
Diluted EPS excludes non vested performance stock grants with exercise prices and exercise tax benefits greater than the average market price of the Company’s common stock during the period because their inclusion would be anti-dilutive. There were no anti-dilutive non-vested performance stock grants for the years ended December 31, 2021 2020 and 2019.
ASC 718, Compensation —Stock Compensation requires the Company to measure and recognize the cost of employee services received in exchange for an award of equity instruments. Under the provisions of ASC 718, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant).
See Note 7 for further information regarding share-based compensation.
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Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles of ASC 740, including exceptions to intra-period tax allocation where there is a loss from continuing operations, foreign subsidiary treatment and for calculating interim income taxes when the year-to-date loss exceeds the anticipated loss. The update also clarifies and amends existing guidance related to changes in tax laws, business combinations, employee stock plans, among others. The Company adopted the ASU effective January 1, 2021. As a result of adoption, there was no impact on the Company’s financial position, results of operations, cash flows, or disclosures.
On March 20, 2019, the SEC adopted amendments to Regulation S-K and related rules and forms to modernize and simplify certain disclosure requirements for public companies. The amendments are intended to reduce the costs and burdens of the disclosure process and while continuing to require disclosure of all material information. The amended rules generally were effective on May 2, 2019 and reduced disclosures but some provisions added new requirements. On August 26, 2020, the SEC adopted additional amendments to Regulation S-K to modernize certain disclosure requirements relating to the description of business, legal proceedings and risk factors which are required to be disclosed in the Form 10-K. The amended rules are effective for filings on or after November 9, 2020. The adoption of the new rules did not and will not have a material impact on the Company’s financial position, results of operations, cash flows, or disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value measurement disclosure requirements under ASC 820. The Company’s adoption of ASU 2018-13 on January 1, 2020 did not have an impact on the fair value disclosures included in Note 16 – Fair Value of Financial Instruments.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which requires certain premiums on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount will not be impacted. The Company adopted ASU 2017-08 effective January 1, 2019 which resulted in the recognition of $2,373 of additional amortization, net of tax, as a cumulative effect adjustment which decreased retained earnings by that amount.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements, which amends the guidance for the impairment of financial instruments and is expected to result in more timely recognition of impairment losses. The update introduces an impairment model referred to as the current expected credit loss (“CECL”) model. The impairment model is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The ASU is also intended to reduce the complexity of the current guidance by decreasing the number of credit impairment models that entities use to account for debt instruments. For public business entities that are SEC filers, the amendments in ASU No. 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the updated guidance on January 1, 2020 using the modified retrospective approach. The updated guidance did not have a material impact on the opening balance of retained earnings. The Company has elected not to measure expected credit losses for accrued interest receivables related to its finance receivables and fixed maturity securities. At March 31, 2020, the Company recognized an allowance for expected credit losses related to its available-for-sale (“AFS”) debt securities of $2,510. The Company has not restated comparative
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information for 2019 and, therefore, the comparative information for 2019 is reported under the prior model and is not comparable to the information presented for 2020.
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard was effective for fiscal years beginning after December 15, 2018. In 2018, the FASB issued two additional updates, ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements, both of which have the same effective date and transition requirements as ASU 2016-02. ASU 2018-10 makes sixteen technical corrections to alleviate unintended consequences from applying the new standard and does not make any substantive changes to the core provisions or principals of the new standard. ASU 2019-11 creates an additional transition method which allows companies to elect to not adjust their comparative period financial information and disclosures for the effects of the new lease standard and also creates a practical expedient for lessors to not separate lease and non-lease components. The Company adopted ASU 2016-02, ASU 2018-10 and ASU 2018-11 effective January 1, 2019 (“the application date”) using the required modified retrospective transition approach. In accordance with the guidance, the Company has elected not to adjust comparative periods. As such, ASC 842 will be applied to each lease that had commenced as of the application date with a cumulative effect adjustment as of that date. As of January 1, 2019, a right of use asset and lease liability of $35,984 were recorded in the Consolidated Balance Sheets. All periods prior to the application date presented in the financial statements will not change and the guidance in ASC 840, Leases, will apply. There was no impact on retained earnings or other components of equity in the Consolidated Balance Sheets upon implementation.
Segments
The Company comprises one business segment: property and casualty insurance operations. Management organizes the business around private passenger automobile insurance in Massachusetts sold exclusively through independent agents and offers other personal and commercial insurance as complementary products. In accordance with ASC 280, Segment Reporting, the financial information of the segment is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
3.
The gross unrealized gains and losses on investments in fixed maturity securities, including redeemable preferred stocks that have characteristics of fixed maturities, and equity securities, including interests in mutual funds, and other invested assets, were as follows for the periods indicated.
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1,821
214,647
7,745
(3)
229,910
11,701
(14)
115,575
10,460
72,756
531
(163)
555,242
38,415
(960)
1,189,951
68,896
168,289
38,676
(1,711)
1,403,920
107,572
(2,851)
The amortized cost and the estimated fair value of fixed maturity securities, by maturity, are shown below for the period indicated. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
45,874
246,621
374,788
52,592
1,262
Asset-backed securities
466,720
The gross realized gains and losses on sales of investments were as follows for the periods indicated.
Gross realized gains
Fixed maturity securities
3,666
1,645
1,294
12,275
6,864
4,536
Gross realized losses
(1,036)
(2,166)
(1,805)
(20)
(5,386)
(1,049)
In the normal course of business, the Company enters into transactions involving various types of financial instruments, including investments in fixed maturities and equity securities. Investment transactions have credit exposure to the extent that a counter party may default on an obligation to the Company. Credit risk is a consequence of carrying, trading and investing in securities. To manage credit risk, the Company focuses on higher quality fixed income securities, reviews the credit strength of all companies in which it invests, limits its exposure in any one investment and monitors the portfolio quality, taking into account credit ratings assigned by recognized statistical rating organizations.
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The following tables as of December 31, 2021 and 2020 present the gross unrealized losses included in the Company’s investment portfolio and the fair value of those securities aggregated by investment category. The tables also present the length of time that they have been in a continuous unrealized loss position.
1,047
8,569
8,578
26,959
84
9,004
79
35,963
163
62,882
863
6,774
97
69,656
960
99,457
964
15,787
115,244
1,140
10,708
986
2,293
725
13,001
1,711
110,165
1,950
18,080
901
128,245
2,851
At December 31, 2021, U.S. Government residential mortgage backed securities with a fair value of $40,398 are pledged as collateral for a borrowing with the Federal Home Loan Bank of Boston (“FHLB-Boston”) as described in Note 10 – Debt. These securities are included in fixed maturity securities on the Company’s Consolidated Balance Sheets.
Impairments
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 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 fixed maturities where the Company records a credit loss, a determination is made as to the cause of the impairment and whether the Company expects a recovery in the value. For fixed maturities where the Company expects a recovery in value, the constant effective yield method is utilized, and the investment is amortized to par.
For fixed maturity investments the Company intends to sell or for which it is more likely than not that the Company will be required to sell before an anticipated recovery in value, the full amount of the impairment is included in credit loss expense. The new cost basis of the investment is the previous amortized cost basis less the impairment recognized in credit loss expense. The new cost basis is not adjusted for any subsequent recoveries in fair value.
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.
As of December 31, 2021, the Company concluded that $691 of unrealized losses were due to credit factors and were recorded as an allowance for expected credit losses, compared to $1,054 as of December 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 at December 31, 2021 and 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.
The following tables represent a reconciliation of the beginning and ending balances of the allowance for expected credit losses on fixed maturities classified as available for sale.
Beginning of period
Credit losses on securities with no previously recorded credit losses
Net increases (decreases) in allowance on previously impaired securities
Reduction due to sales
(235)
Writeoffs charged against allowance
Recoveries of amounts previously written off
Ending balance of period
The Company holds no subprime mortgage debt securities. All of the Company’s holdings in mortgage-backed securities are either U.S. Government or Agency guaranteed or are rated investment grade by either Moody’s or Standard & Poor’s.
Net Investment Income
The components of net investment income were as follows for the periods indicated.
Interest on fixed maturity securities
36,160
37,727
42,892
Dividends on equity securities
6,421
5,044
5,268
Equity in earnings of other invested assets
4,895
1,378
1,552
Interest on other assets
Total Investment Income
47,498
44,176
49,744
Investment expenses
3,363
3,131
3,079
4.Allowance for Expected Credit Losses
The Company’s financial instruments include premiums and accounts receivable, and reinsurance recoverables.
Premiums and accounts receivable are reported net of an allowance for expected credit losses. The allowance is based upon the Company’s ongoing review of amounts outstanding, historical loss data, including delinquencies and write-offs, current and forecasted economic conditions and other relevant factors. Credit risk is partially mitigated by the
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Company’s ability to cancel the policy if the policyholder does not pay the premium and the Company writes off premiums receivable balances that are more than 90 days overdue.
The following tables present the balances of premiums receivable, net of the allowance for expected credit losses, for the years ended December 31, 2021 and 2020, and changes in the allowance for expected credit losses for the years ended December 31, 2021 and 2020.
At and For the
Year Ended December 31, 2021
Year Ended December 31, 2020
Accounts Receivable Net of Allowance for Expected Credit Losses
Allowance for Expected Credit Losses
Balance, beginning of period
1,754
193,369
578
Current period change for expected credit losses
2,339
3,294
Writeoffs of uncollectable accounts receivable
(2,285)
(2,118)
Balance, end of period
1,808
Reinsurance recoverables include amounts due from reinsurers for both paid and unpaid losses. The Company cedes insurance to CAR and to other reinsurers. The Company has a property catastrophe excess of loss agreement and a casualty excess of loss agreement that qualify as reinsurance treaties and are designed to protect against large or unusual loss and LAE activity. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company reports its reinsurance recoverables net of an allowance for estimated uncollectable reinsurance. A probability-of-default methodology which reflects current and forecasted economic conditions is used to estimate the amount of uncollectible reinsurance due to credit-related factors and the estimate is reported in an allowance for estimated uncollectible reinsurance. Amounts deemed to be uncollectible, including amounts due from known insolvent reinsurers, are written off against the allowance. Changes in the allowance, as well as any subsequent collections of amounts previously written off, are reported as part of claims and claim adjustment expenses.
The majority of the Company’s reinsurance recoverable on paid and unpaid losses is a result of our participation as a servicing carrier in the CAR Commercial Automobile Program, which represents 98% of the total reinsurance recoverable on paid and unpaid losses at December 31, 2021 and 2020, respectively. The remaining 2% of amounts due from reinsurers are related to our other excess of loss and quota share contracts. For amounts due under these contracts, the Company utilizes updated A.M. Best credit ratings on a quarterly basis to determine the allowance for expected credit losses. As of December 31, 2021 and 2020, all reinsurers under these programs are rated “A” or better by A.M. Best. Certain of the Company's reinsurance recoverables are collateralized by letters of credit, funds held or trust agreements. The Company’s analysis concludes that there are no expected credit losses at December 31, 2021 or 2020.
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5.
The carrying value of equipment and leasehold improvements by classification was as follows for the periods indicated. Equipment and leasehold improvements are included in other assets in the consolidated balance sheets.
Software
57,463
50,988
Computer equipment
15,425
13,734
Leasehold improvements
8,264
Other equipment
3,132
Furniture and fixtures
4,346
4,286
Total cost
88,630
80,404
Less accumulated depreciation and amortization
65,188
58,293
Equipment and leasehold improvements, net
23,442
22,111
Depreciation and amortization expense for the years ended December 31, 2021, 2020, and 2019 was $6,896, $7,526 and $5,166, respectively and is included in underwriting, operating and related expenses.
6.
Employee Benefit Plan
The Company sponsors the Safety Insurance Company 401(k) qualified defined contribution retirement plan (the “Retirement Plan”). The Retirement Plan is available to all eligible employees of the Company. An employee must be 21 years of age to be eligible to participate in the Retirement Plan and is allowed to contribute on a pre-tax basis up to the maximum allowed under federal law. The Retirement Plan is administered by the Company and is subject to the provisions of the Employee Retirement Income Security Act of 1974. At the close of each Retirement Plan year, the Company makes a matching contribution equal to 100% of the amount each participant contributed during the plan year from their total pay, up to a maximum amount of 8% of the participant’s base salary, to those participants who have contributed to the Retirement Plan and were employed on the last day of the Retirement Plan year. Compensation expense related to the Retirement Plan was $3,433, $3,388, and $3,365 for the years ended December 31, 2021, 2020, and 2019, respectively.
7.
2018 Long Term 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 Board of Directors and the Compensation Committee intend to issue awards under the 2018 Plan in the future.
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. At December 31, 2021, there were 164,908 shares available for future grant.
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Restricted Stock
Service-based restricted stock awarded in the form of unvested shares is recorded at the market value of the Company’s common stock on the grant date and amortized ratably as compensation expense over the requisite service period. Service-based restricted stock awards generally vest over a three-year period and vest 30% on the first and second anniversaries of the grant date and 40% on the third anniversary of the grant date, except for non-executive employees’ restricted stock awards granted prior to 2018 which vest ratably over a five-year service period and independent directors’ stock awards which vest immediately. Our independent directors are subject to stock ownership guidelines, which require them to have a value equal to four times their annual cash retainer.
In addition to service-based awards, the Company grants performance-based restricted shares to certain employees. These performance shares cliff vest after a three-year performance period provided certain performance measures are attained. A portion of these awards, which contain a market condition, vest according to the level of total shareholder return achieved by the Company compared to its property-casualty insurance peers over a three-year period. The remainder, which contain a performance condition, vest according to the level of Company’s combined ratio results compared to a target based on its property-casualty insurance peers.
Actual payouts can range from 0% to 200% of target shares awarded depending upon the level of achievement of the respective market and performance conditions during a three calendar-year performance period. Compensation expense for share awards with a performance condition is based on the probable number of awards expected to vest using the performance level most likely to be achieved at the end of the performance period.
Performance-based awards with market conditions are accounted for and measured differently from awards that have a performance or service condition. The effect of a market condition is reflected in the award’s fair value on the grant date. That fair value is recognized as compensation cost over the requisite service period regardless of whether the market-based performance objective has been satisfied.
All of the Company’s restricted stock awards are issued as incentive compensation and are equity classified.
The following table summarizes restricted stock activity under the Incentive Plan assuming a target payout for the performance-based shares.
Shares
Weighted
Under
Average
Restriction
Outstanding at beginning of year
66,550
85.16
78,202
79.09
89,135
68.70
39,840
34,799
90.10
33,778
Vested and unrestricted
(40,763)
80.82
(43,757)
78.10
(44,085)
68.41
Forfeited
(456)
81.17
(2,694)
87.70
(626)
75.50
Outstanding at end of period
65,171
84.30
Performance-based
Shares Under
71,964
84.94
84,105
79.34
105,170
66.79
Granted (1)
49,460
77.56
36,649
84.68
63,447
69.61
(48,666)
75.05
(42,123)
73.55
(84,512)
56.42
(340)
87.43
(6,667)
84.86
72,418
86.53
(1) Includes 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.
As of December 31, 2021, there was $6,164 of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 1.5 years. The total fair value of the shares that were vested and unrestricted during the years ended December 31, 2021, 2020, and 2019 was $6,947, $6,516 and $7,784, respectively. For the years ended December 31, 2021, 2020, and 2019, the Company recorded compensation expense related to awards under the Incentive Plan of $4,971, $5,893, and $4,764, net of income tax benefit of $1,321, $1,566, and $1,266, respectively.
8.
Commitments and Contingencies
Commitments
Contingencies
Various claims, generally incidental to the conduct of normal business, are pending or alleged against the Company from time to time. In the opinion of management, based in part on the advice of legal counsel, the ultimate resolution of such claims will not have a material adverse effect on the Company’s consolidated financial statements. However, if estimates of the ultimate resolutions of those proceedings are revised, liabilities related to those proceedings could be adjusted in the near term.
The Company has been named in a lawsuit alleging that the Company improperly denied coverage to commercial insureds for loss of business income resulting from the COVID-19 pandemic. Our business owner policies serve eligible small and medium sized commercial accounts including but not limited to apartments and condominiums; mercantile establishments; limited cooking restaurants; offices; and special trade contractors. The majority of these business owner policies do not contain a specific exclusion for viruses. However, as viruses do not produce direct physical damage or loss to property, our position is that no coverage exists for this peril. As a result, the Company accrued a reserve of $6,500 for legal defense costs during the year ended December 31, 2020. This amount is still accrued as of December 31, 2021 and is included in loss and loss adjustment expenses.
On October 19, 2021, the Supreme Judicial Court of Massachusetts (the “Court”) unanimously ruled that property and casualty insurers must compensate third-party claimants under property damage coverage, part 4 of the standard Massachusetts automobile insurance policy, 2008 edition (standard policy), for the inherent diminished value (“IDV”) that occurs when their vehicles are damaged in a crash. This ruling overturned a previous decision by the Massachusetts Superior Court, which found that a Massachusetts auto insurance policy did not provide property damage coverage for inherent diminished value damages for third-party claimants. The Court placed the burden of proof on the individual claimant by explicitly specifying that the claimant must establish that the vehicle has suffered IDV damages and also the amount of IDV damages at issue. The Court further ruled that an insurer’s previous denial of coverage for such damages could not serve as the basis for a claim of unfair business practices. Based on the Court’s rulings, at this time the Company does not expect any claims for IDV damages to be material, and therefore has not accrued for a specific loss contingency.
Massachusetts law requires that insurers licensed to do business in Massachusetts participate in the Massachusetts Insurers Insolvency Fund (“Insolvency Fund”). Members of the Insolvency Fund are assessed a proportionate share of the obligations and expenses of the Insolvency Fund in connection with an insolvent insurer. It is anticipated that there will be additional assessments from time to time relating to various insolvencies. Although the timing and amounts of any future assessments are not known, based upon existing knowledge, management’s opinion is that such future assessments will not have a material effect upon the financial position of the Company.
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9. Leases
The Company has various non-cancelable, long-term operating leases, the largest of which are for office space including the corporate headquarters, VIP claims centers and law offices. Other operating leases consist of auto leases and various office equipment. The Company has no finance leases. Our leases have remaining lease terms of one year to eight years, some of which include options to extend the leases for up to five years.
Certain lease agreements contain renewal options and, in addition to the minimum annual rentals, generally provide for payment of a share of the real estate taxes and operating expenses in excess of a base amount. Rental expense for our office space, law offices and VIP claims centers was $3,852, $3,477 and $4,573 for the years ended December 31, 2021, 2020, and 2019, respectively. All leases expire prior to 2029. The Company expects that in the normal course of business, leases that expire will be renewed.
The Company adopted ASU 2016-02, ASU 2018-10 and ASU 2018-11 effective January 1, 2019 (“the application date”) using the required modified retrospective transition approach. In accordance with the guidance, the Company has elected not to adjust comparative periods. As such ASC 842 will be applied to each lease that had commenced as of the application date with a cumulative effect adjustment as of that date. All periods before the application date presented in the financial statements will not change and the guidance in ASC 840 will apply. The Company has elected to apply the package of practical expedients provided in ASC 842 to all leases. In addition, the Company has elected not to apply the hindsight practical expedient or the land easement practical expedient.
In calculating lease liabilities the Company uses its incremental borrowing rate as of the application date based on original lease terms. The components of lease expense were as follows:
Operating lease cost
4,464
4,591
Other information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
4,979
5,073
Weighted average remaining lease term
Operating leases
6.65 Years
7.57 Years
Weighted average discount rate
2.34%
2.33%
Maturities of lease liabilities were as follows:
Operating Leases
2022
4,739
2023
4,312
2024
2025
3,835
2026
3,857
Thereafter
7,715
Total lease payments
28,692
Less imputed interest
(1,577)
10.
On August 10, 2018, the Company extended its Revolving Credit Agreement (the “Credit Agreement”) with Citizens Bank, N.A. (formerly known as RBS Citizens, N.A. (“Citizens Bank”)) to a maturity date of August 10, 2023. The Credit Agreement provides a $30,000 revolving credit facility with an accordion feature allowing for future expansion of the committed amount up to $50,000. Loans under the credit facility bear interest at the Company’s option at either (i) the LIBOR rate plus 1.25% per annum or (ii) the higher of Citizens Bank prime rate or 0.5% above the federal funds rate plus 1.25% per annum. The Credit Agreement has additional language to select an alternate benchmark interest rate to replace the LIBOR rate when it is no longer available for use. Interest only is payable prior to maturity.
The Company’s obligations under the credit facility are secured by pledges of its assets and the capital stock of its operating subsidiaries. The credit facility is guaranteed by the Company’s non-insurance company subsidiaries. The credit facility contains covenants including requirements to maintain minimum risk-based capital ratios and statutory surplus of Safety Insurance Company as well as limitations or restrictions on indebtedness, liens, and other matters. As of December 31, 2021, the Company was in compliance with all covenants. In addition, the credit facility includes customary events of default, including a cross-default provision permitting the lenders to accelerate the facility if the Company (i) defaults in any payment obligation under debt having a principal amount in excess of $10,000 or (ii) fails to perform any other covenant permitting acceleration of all such debt.
The Company had no amounts outstanding on its credit facility at December 31, 2021 or 2020. The credit facility commitment fee included in interest expense was computed at a rate of 0.25% per annum on the $30,000 commitment at December 31, 2021 and 2020.
The Company is a member of the FHLB-Boston. Membership in the FHLB-Boston allows the Company to borrow money at competitive interest rates provided the loan is collateralized by specific U.S Government residential mortgage backed securities. At December 31, 2021, the Company has the ability to borrow approximately $211,296 using eligible invested assets that would be used as collateral.
On March 17, 2020, the Company borrowed $30,000 from the FHLB-Boston 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 of March 17, 2025 but may be prepaid in whole or in part by the Company in advance with a minor penalty for prepayment.
The Company estimates the fair value of the FHLB-Boston loan by discounting cash flows using the interest rate stated in the loan agreement, which is an observable input. As such, the loan is categorized as Level 2 within the fair value hierarchy. The fair value of the loan is $31,061 and $31,291 at December 31, 2021 and 2020, respectively. The loan is fully collateralized by specific U.S. Government residential mortgage-backed securities with a fair value of $40,398 and $37,467 at year ended December 31, 2021 and 2020, respectively. The borrowing is outstanding from the FHLB-Boston at year ended December 31, 2021 and 2020.
Interest expense on the FHLB-Boston borrowing was $432 and $439 for the year ended December 31, 2021 and 2020, respectively.
11.
The Company cedes insurance to CAR and to other reinsurers. The Company has various excess of loss and quota share agreements that qualify as reinsurance treaties and are designed to protect against large or unusual loss and LAE activity. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.
The Company is subject to concentration of credit risk with respect to reinsurance ceded. At December 31,
82
2021, reinsurance receivables on paid and unpaid loss and LAE with a carrying value of $106,608 and ceded unearned premiums of $21,841 were associated with CAR. At December 31, 2020, reinsurance receivables on paid and unpaid loss and LAE with a carrying value of $117,681 and ceded unearned premiums of $20,589 were associated with CAR. The Company assumes a proportionate share of the obligations from CAR. The Company makes an estimate of its share of assumed activity from the most recent quarter reported by CAR and records adjustments to the reported activity to reflect its anticipated final assumed obligations. The Company’s participation in CAR resulted in assumed net losses of $5,002, $3,480 and $3,595 for the years ended December 31, 2021, 2020 and 2019, respectively.
CAR has been, with few exceptions, required by law to issue a policy to any applicant who seeks it. As a servicing carrier of CAR, this requirement has applied to the Company.
The effect of assumed and ceded premiums on net written and earned premiums and losses and LAE incurred is as follows.
32,391
(90,386)
845,102
32,853
(89,178)
Loss and LAE Incurred
473,162
428,018
562,192
16,873
18,595
28,529
(28,308)
(42,057)
(80,875)
Net loss and LAE
12.
The following table sets forth a reconciliation of beginning and ending reserves for losses and loss adjustment expenses (“LAE”), as shown in the Company’s consolidated financial statements for the periods indicated.
At the end of each period, the reserves were re-estimated for all prior accident years. The Company’s prior year reserves decreased by $53,673, $54,844, and $42,049, for the years ended December 31, 2021, 2020, and 2019, respectively, and resulted from re-estimations of prior years’ ultimate loss and LAE liabilities. The decrease in prior year
reserves during 2021 was primarily composed of reductions of $22,313 in the Company’s retained automobile and $26,220 in the Company’s retained other than auto and homeowners reserves. The decrease in prior year reserves during 2020 was primarily composed of reductions of $26,902 in the Company’s retained automobile and $21,717 in the Company’s retained other than auto and homeowners reserves. The decrease in prior year reserves during 2019 was primarily composed of reductions of $25,623 in the Company’s retained automobile and $14,182 in the Company’s retained homeowners reserves.
The Company’s private passenger automobile line of business prior year reserves decreased during the years ended December 31, 2021, 2020 and 2019 primarily due to improved retained private passenger results. The improved retained private passenger results were primarily due to fewer incurred but not yet reported claims than previously estimated and better than previously estimated severity on the Company’s established bodily injury and property damage case reserves.
The following is information about incurred and paid claims development as of December 31, 2021, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts for our three largest lines of business. The cumulative number of reported claims include claims closed with payment, claims closed without payment and all open claims. It does not include anticipated IBNR claims. For the Private Passenger Automobile and Commercial Automobile lines of business, claim count is defined on a claimant basis where several claim counts may arise from a single auto accident. For Homeowners and all other lines of business, claim count is defined on an accident basis.
The information about incurred claims and allocated claim adjustment expense, net of reserves and paid ultimate claims development for the years ended December 31, 2012 to 2020 is presented as required supplementary information.
Private Passenger Automobile Liability
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Total of Incurred-but-Not-Reported Liabilities Plus Expected Development of Reported Claims
Cumulative Number of Reported Claims
(Unaudited)
$ 175,262
$ 175,189
$ 174,856
$ 170,379
$ 167,831
$ 166,008
$ 163,350
$ 162,448
$ 162,520
$ 162,364
$ -
53,273
183,367
183,517
183,264
181,492
179,167
176,713
175,684
175,718
175,362
(134)
54,248
187,305
187,104
186,798
183,119
181,312
179,251
179,267
179,268
(813)
52,787
190,036
190,236
188,317
184,477
181,299
179,451
179,248
(417)
52,980
192,912
192,318
185,009
180,486
177,009
176,600
(1,444)
49,383
185,673
184,429
182,068
177,941
177,320
(2,620)
46,253
176,411
175,222
170,447
168,185
(3,675)
43,069
176,171
174,439
170,477
(7,039)
40,500
130,335
125,888
(5,863)
26,040
146,997
(8,397)
27,331
$ 1,661,709
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
$ 74,306
$ 126,553
$ 144,157
$ 152,991
$ 157,443
$ 160,416
$ 161,749
$ 162,014
$ 162,121
$ 162,119
79,049
135,031
152,472
163,694
169,634
172,736
173,890
174,574
174,639
79,151
136,434
156,693
166,815
173,163
176,616
177,360
177,968
76,934
138,255
156,483
168,641
173,816
176,652
177,782
78,862
137,917
154,964
167,458
171,865
174,410
77,519
133,037
153,675
164,467
169,024
72,895
126,456
143,656
154,169
72,219
127,910
143,570
52,962
88,037
56,826
$ 1,478,544
All outstanding liabilities before 2012, net of reinsurance
387
Liabilities for claims and claim adjustment expenses, net of reinsurance
$ 183,552
Private Passenger Automobile Physical Damage
$ 108,376
$ 107,912
$ 104,393
$ 103,679
$ 103,575
$ 103,547
$ 103,510
$ 103,491
$ 103,453
$ 103,434
123,639
114,389
114,239
113,034
112,197
112,096
112,060
112,029
112,003
111,989
131,703
123,421
123,622
122,410
122,327
122,341
122,213
122,188
122,182
(24)
135,006
140,219
136,661
134,101
133,737
133,581
133,530
133,523
(52)
144,276
129,528
124,922
122,116
121,717
121,543
121,570
(64)
126,086
128,340
126,304
124,128
123,715
123,777
(90)
124,025
129,450
130,145
128,426
128,090
(72)
119,758
128,698
126,648
124,332
(220)
116,995
98,546
97,244
(1,726)
81,782
122,943
(24,257)
87,213
$ 1,189,084
$ 111,928
$ 107,017
$ 104,311
$ 103,664
$ 103,573
$ 103,537
$ 103,452
120,843
115,904
112,894
112,162
112,085
111,988
130,732
126,414
122,668
122,402
122,350
122,251
122,216
122,189
143,532
136,760
134,066
133,701
133,639
133,596
133,575
124,298
122,023
121,795
121,660
121,634
132,409
126,822
124,286
123,844
123,839
138,036
132,591
128,624
128,154
134,429
128,173
124,467
102,764
98,819
123,636
$ 1,191,735
($ 2,651)
86
Commercial Automobile Liability
$ 23,704
$ 24,447
$ 24,662
$ 24,723
$ 24,572
$ 23,819
$ 22,859
$ 22,476
$ 22,292
$ 22,170
$ 13
4,566
29,175
29,541
28,377
26,864
26,310
25,986
25,443
25,353
25,140
5,784
34,117
34,105
34,376
33,914
32,948
32,438
32,200
32,052
6,086
35,371
36,150
36,610
37,730
38,015
38,257
37,995
(68)
7,212
37,954
39,416
40,947
40,916
40,679
40,996
6,455
42,865
41,373
41,055
39,369
39,232
(48)
6,132
41,347
40,115
38,589
37,322
712
5,743
51,679
49,163
48,783
1,177
5,669
35,010
31,930
4,501
3,443
41,814
9,044
3,696
$ 357,434
$ 6,503
$ 12,474
$ 15,617
$ 17,804
$ 18,876
$ 20,601
$ 21,021
$ 22,086
$ 22,121
$ 22,154
8,502
17,079
19,625
21,129
22,434
23,867
24,507
24,732
24,789
9,426
17,853
21,968
25,253
27,886
30,420
31,298
31,451
11,181
21,700
26,018
29,804
31,537
33,416
34,976
19,902
25,711
32,274
36,237
38,275
10,407
20,106
24,409
28,721
31,389
9,704
18,499
23,544
26,774
12,113
22,480
28,373
7,025
13,166
7,883
$ 259,230
$ 98,238
87
Commercial Automobile Physical Damage
$ 10,382
$ 10,331
$ 10,249
$ 10,250
$ 10,208
$ 10,209
$ 10,226
$ 10,224
9,913
13,666
13,567
13,298
13,180
13,057
13,047
13,071
12,298
17,426
16,925
15,455
15,419
15,353
15,381
15,373
15,376
13,545
20,223
19,047
19,021
18,974
18,641
18,535
18,525
0
15,468
20,216
18,506
17,909
17,808
17,725
17,713
13,593
19,691
19,200
18,834
18,780
(6)
13,113
21,230
19,937
19,270
19,210
12,907
20,039
19,652
18,956
200
12,751
16,507
16,334
(272)
9,608
20,156
(1,141)
10,860
$ 168,331
$ 9,707
$ 10,553
$ 10,270
$ 10,242
$ 10,239
$ 10,235
$ 10,228
12,665
13,378
13,114
13,074
13,065
13,060
13,066
15,377
15,862
15,424
15,388
17,787
18,910
18,667
18,549
18,541
18,530
17,228
18,143
17,763
17,712
17,709
17,957
19,336
18,915
18,787
18,786
18,842
19,842
19,236
19,208
18,128
19,161
18,752
15,550
16,596
18,610
$ 166,846
$ 1,485
88
Homeowners Liability
$ 7,514
$ 6,464
$ 5,304
$ 4,331
$ 3,824
$ 3,889
$ 3,646
249
9,768
9,337
7,578
5,978
5,312
5,147
5,167
265
11,494
9,738
7,388
7,120
6,984
6,818
261
12,965
12,555
9,908
9,201
8,172
146
288
10,594
9,847
9,491
277
11,276
10,058
9,328
8,585
7,819
104
269
9,951
274
14,130
13,848
11,949
692
14,664
13,708
3,024
210
12,797
3,037
173
$ 89,335
$ 1,389
$ 2,063
$ 2,308
$ 2,731
$ 3,029
$ 3,600
$ 3,606
527
2,337
3,829
4,038
4,209
4,247
4,255
340
1,834
3,212
4,200
4,828
6,315
6,368
6,419
428
3,319
4,267
5,205
6,445
7,022
7,215
647
2,669
4,257
5,387
6,300
7,128
305
2,913
3,593
4,217
551
2,039
3,972
4,597
1,634
3,343
5,183
220
3,254
218
$ 46,132
$ 43,282
89
Homeowners Property Damage
$ 50,351
$ 49,911
$ 47,392
$ 44,380
$ 43,097
$ 42,382
$ 41,895
$ 41,887
$ 148
6,051
56,298
56,199
55,722
52,464
51,077
49,973
49,463
49,456
49,455
126
5,698
59,160
60,213
59,751
57,331
55,127
54,607
54,602
54,560
251
6,077
152,586
152,049
162,377
162,788
162,722
162,354
162,244
365
20,076
67,116
66,442
64,208
61,262
60,019
59,898
258
5,421
80,736
76,560
70,689
68,737
67,530
346
6,011
83,443
82,581
77,970
74,989
849
8,239
77,976
73,697
68,769
1,526
5,444
80,093
76,638
(5,464)
6,087
75,696
(4,845)
6,112
$ 731,666
$ 30,801
$ 40,681
$ 41,960
$ 41,737
$ 41,782
$ 41,789
$ 41,736
38,661
48,456
49,702
49,612
49,653
49,620
49,328
49,327
40,409
52,161
54,088
54,224
54,262
54,274
54,306
54,305
112,563
145,337
160,572
161,745
161,773
161,850
161,783
44,103
57,238
59,155
59,449
59,403
59,428
46,366
64,401
66,181
66,892
66,765
57,704
70,959
72,078
73,119
49,121
61,905
63,536
50,304
65,927
51,390
$ 687,317
884
$ 45,233
The following is unaudited supplementary information about average historical claims duration as of December 31, 2021.
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Unaudited)
43.4%
32.1%
10.4%
6.2%
1.7%
0.6%
0.3%
0.1%
0.0%
107.0%
(4.8)%
(2.5)%
(0.4)%
(0.1)%
25.9%
24.8%
12.4%
10.6%
6.8%
6.1%
3.0%
0.2%
96.1%
5.8%
(2.3)%
7.0%
21.5%
15.8%
10.2%
9.8%
11.0%
0.8%
71.3%
20.9%
4.5%
The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated balance sheets is as follows.
Reconciliation of the Disclosure of Incurred and Paid Claims Development to the Liability for Unpaid claims and Claim Adjustment Expenses
December 31, 2021
Net outstanding liabilities
183,552
(2,651)
98,238
1,485
43,282
45,233
Other Short-Duration Insurance Lines
74,701
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance
443,840
Reinsurance recoverable on unpaid claims
120
87,221
2,398
928
Total reinsurance recoverable on unpaid claims
Unallocated claims adjustment expenses
36,144
Total gross liability for unpaid claims and claim adjustment expenses
Due to the nature of the risks that the Company underwrites and has historically underwritten, management does not believe that it has an exposure to asbestos or environmental pollution liabilities.
91
13.
A summary of the income tax expense in the consolidated statements of operations is shown below.
Current Income Taxes:
Federal
28,222
31,133
19,280
State
267
28,237
31,400
19,323
Deferred Income Taxes:
Total income tax expense
The income tax expense attributable to the consolidated results of operations is different from the amounts determined by multiplying income before federal income taxes by the statutory federal income tax rate. The sources of the difference and the tax effects of each were as follows for the periods indicated.
Federal income tax expense at statutory rate
34,496
36,702
25,973
Investment income, net
(1,060)
(1,394)
(1,626)
State taxes, net
211
Nondeductible expenses
613
697
488
Tax windfall related to share-based stock compensation
(101)
(298)
Other, net
(399)
641
214
The deferred income tax (liability) asset represents the tax effects of temporary differences attributable to the Company’s consolidated federal tax return group. Its components were as shown in the following table for the periods indicated.
Deferred tax assets:
Discounting of loss reserves
5,447
Discounting of unearned premium reserve
16,813
17,217
Bad debt allowance
430
433
Employee benefits
4,364
3,609
Rent incentive
797
912
Total deferred tax assets before valuation allowance
27,851
27,592
Valuation allowance for deferred tax assets
Total deferred tax assets
Deferred tax liabilities:
Deferred acquisition costs
(15,335)
(15,742)
(10,319)
(4,349)
Net unrealized gains on investments
(11,025)
(18,720)
Loss reserve transition adjustment
(1,108)
(1,385)
Software development costs
(3,591)
(3,053)
Premium acquisition expenses
(380)
(379)
Depreciation
(1,333)
(1,575)
Total deferred tax liabilities
(43,091)
(45,203)
Net deferred tax liability
(15,240)
(17,611)
The Company believes that the positions taken on its income tax returns for open tax years will be sustained upon examination by the Internal Revenue Service (“IRS”). Therefore, the Company has not recorded any liability for uncertain tax positions under ASC 740, Income Taxes.
92
During the years ended December 31, 2021 and December 31, 2020 there were no material changes to the amount of the Company’s unrecognized tax benefits or to any assumptions regarding the amount of its ASC 740 liability.
As of December 31, 2021 and December 31, 2020, the Company had no unrecognized tax benefits, and none which if recognized would affect the effective tax rate. The Company does not currently anticipate significant changes in the amount of unrecognized income tax benefits during the next twelve months.
The Company records interest and penalties associated with audits as a component of income before income taxes. Penalties are recorded in underwriting, operating and other expenses, and interest expense is recorded in interest expenses in the consolidated statements of operations. The Company had no interest and penalties related to income taxes accrued as of December 31, 2021 and 2020.
In the Company’s opinion, adequate tax liabilities have been established for all open years. However, the amount of these tax liabilities could be revised in the near term if estimates of the Company’s ultimate liability are revised. All tax years prior to 2018 are closed.
14.
Share Repurchase Program
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 $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 the Company to repurchase any specific number of shares and it may be modified, suspended or terminated at any time without prior notice.
During the year ended December 31, 2021, the Company purchased 139,405 shares on the open market under the program at a cost of $11,563. During the year ended December 31, 2020, the Company purchased 551,598 shares on the open market under the program at a cost of $39,999. No share purchases were made by the Company under the program during the year ended December 31, 2019. As of December 31, 2021, the Company had purchased 2,970,573 shares on the open market at cost of $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.
15.
Statutory Net Income and Surplus
Statutory Accounting Practices
The Company’s insurance company subsidiaries, domiciled in the Commonwealth of Massachusetts, prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the Division. Prescribed statutory accounting practices are those practices that are incorporated directly or by reference in state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in a particular state. Permitted statutory accounting practices include practices not prescribed by the Division, but allowed by the Division. Statutory net income was $97,169, $121,446, and $75,469 for the years ended December 31, 2021, 2020, and 2019, respectively. Statutory capital and surplus of the Company’s insurance subsidiaries was $826,979, and $754,066 at December 31, 2021 and 2020, respectively.
93
Dividends
The 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 Commonwealth of Massachusetts Commissioner of Insurance (the “Commissioner”). Massachusetts statute limits the dividends an insurer may pay in any twelve month period, without the prior permission of the Commissioner, to the greater of (i) 10% of the insurer’s surplus as of the preceding December 31 or (ii) the insurer’s net income for the twelve- month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. Our insurance company subsidiaries may not declare an “extraordinary dividend” (defined as any dividend or distribution that, together with other distributions made within the preceding twelve months, exceeds the limits established by Massachusetts statute) until thirty days after the Commissioner has received notice of the intended dividend and has not objected. As historically administered by the Commissioner, this provision requires the Commissioner’s prior approval of an extraordinary dividend. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as earned surplus, and the insurer’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At December 31, 2021, the statutory capital and surplus of Safety Insurance was $826,979 and its 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. During the year ended December 31, 2021, Safety Insurance recorded dividends of $49,488. As result of this Massachusetts statute, the Insurance Subsidiaries had restricted net assets in the amount of $729,810 at December 31, 2021.
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. Under Massachusetts 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 of December 31, 2021, the Insurance Subsidiaries had total adjusted 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 at December 31, 2021.
16.
Fair Value of Financial Instruments
ASC 820, Fair Value Measurements and Disclosure provides a revised definition of fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value information. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price). ASC 820 establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy in ASC 820 prioritizes fair value measurements into three levels based on the nature of the inputs as follows:
Level 1 — Valuations based on quoted prices in active markets for identical assets and liabilities;
Level 2 — Valuations based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and quoted prices in active markets for similar, but not identical instruments; and
Level 3 — Valuations based on unobservable inputs.
Fair values for the Company’s fixed maturity securities are based on prices provided by its custodian bank and its investment managers. Both the Company’s custodian bank and investment managers use a variety of independent, nationally recognized pricing services to determine market valuations. If the pricing service cannot provide fair value determinations, the Company obtains non-binding price quotes from broker-dealers. A minimum of two quoted prices is
94
obtained for the majority of the Company’s available-for-sale fixed maturity securities in its investment portfolio. The Company uses a third-party pricing service as its primary provider of quoted prices from third-party pricing services and broker-dealers. To provide reasonable assurance of the validity of each price or quote, a secondary third-party pricing service or broker-dealer quote is obtained from the Company’s custodian or investment managers. An examination of the pricing data is then performed for each security. If the variance between the primary and secondary price quotes for a security is within an accepted tolerance level, the quoted price obtained from the Company’s primary source is used for the security. If the variance between the primary and secondary price quotes exceeds an accepted tolerance level, the Company obtains a quote from an alternative source, if possible, and documents and resolves any differences between the pricing sources. In addition, the Company may request that its investment managers and its traders provide input as to which vendor is providing prices that its traders believe are reflective of fair value for the security. Following this process, the Company may decide to value the security in its financial statements using the secondary or alternative source if it believes that pricing is more reflective of the security’s value than the primary pricing provided by its custodian bank. The Company analyzes market valuations received to verify reasonableness, to understand the key assumptions used and their sources, and to determine an appropriate ASC 820 fair value hierarchy level based upon trading activity and the observability of market inputs. Based on this evaluation and investment class analysis, each price is classified into Level 1, 2 or 3.
Fair values of instruments are based on (i) quoted prices in active markets for identical assets (Level 1), (ii) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2) or (iii) valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).
The Company’s Level 1 securities consist of equity securities whose values are based on quoted prices in active markets for identical assets. The Company’s Level 2 securities are comprised of available-for-sale fixed maturity securities whose fair value was determined using observable market inputs. The Company’s Level 3 security consists of an investment in the Federal Home Loan Bank of Boston related to Safety Insurance Company’s membership stock, which is not redeemable in a short-term time frame. Fair values for securities for which quoted market prices were unavailable were estimated based upon reference to observable inputs such as benchmark interest rates, market comparables, and other relevant inputs. Investments valued using these inputs include U.S. Treasury securities, obligations of states and political subdivisions, corporate and other securities, commercial and residential mortgage-backed securities, and other asset-backed securities. Inputs into the fair value application that are utilized by asset class include but are not limited to:
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In order to ensure the fair value determination is representative of an exit price (consistent with ASC 820), the Company’s procedures for validating quotes or prices obtained from third parties include, but are not limited to, obtaining a minimum of two price quotes for each fixed maturity security if possible, as discussed above, the periodic testing of sales activity to determine if there are any significant differences between the market price used to value the security as of the balance sheet date and the sales price of the security for sales that occurred around the balance sheet date, and the periodic review of reports provided by its external investment manager regarding those securities with ratings changes and securities placed on its “Watch List.” In addition, valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by the Company’s external investment manager, whose investment professionals are familiar with the securities being priced and the markets in which they trade, to ensure the fair value determination is representative of an exit price.
All unadjusted estimates of fair value for our fixed maturities priced by the pricing services as described above are included in the amounts disclosed in Level 2. With the exception of the FHLB-Boston security, which is categorized as a Level 3 security, the Company’s entire portfolio was priced based upon quoted market prices or other observable inputs as of December 31, 2021. There were no significant changes to the valuation process during the year ended December 31, 2021. As of December 31, 2021 and December 31, 2020, no quotes or prices obtained were adjusted by management. All broker quotes obtained were non-binding.
At December 31, 2021 and December 31, 2020, investments in fixed maturities classified as available-for-sale had a fair value which equaled carrying value of $1,218,279 and $1,256,653, respectively. At December 31, 2021, the Company held no short-term investments. At December 31, 2020, the Company held $441 of short-term investments. The carrying values of cash and cash equivalents and investment income accrued approximated fair value.
The following tables summarize the Company’s total fair value measurements for investments for the periods indicated.
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
226,375
224,677
1,698
Total investment securities
1,444,654
173,096
171,398
1,430,190
1,257,094
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2021 or 2020.
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The following tables summarize the changes in the Company’s Level 3 fair value securities for the periods indicated.
Balance at beginning of period
516
680
Net gains and losses included in earnings
Net gains included in other comprehensive income
Purchases
1,182
133
Sales
(297)
Transfers into Level 3
Transfers out of Level 3
Balance at end of period
Transfers in and out of Level 3 are attributable to changes in the ability to observe significant inputs in determining fair value exit pricing. As noted in the table above, no transfers were made in or out of Level 3 during 2021, 2020 and 2019. The Company held one Level 3 security at December 31, 2021 and 2020.
As of December 31, 2021 and December 31, 2020, there were approximately $38,570 and $32,158 in a REIT and is included in equity securities in the consolidated balance sheets. The REIT is excluded from the fair value hierarchy because the fair value is recorded using the net asset value per share practical expedient. The net asset value per share of this REIT is derived from member ownership in the capital venture to which a proportionate share of independently appraised net assets is attributed. The fair value was determined using the trust’s net asset value obtained from its audited financial statements. The Company is required to submit a request 45 days before a quarter end to dispose of the security.
17.
Subsequent Events
The Company has evaluated subsequent events for recognition or disclosure in the consolidated financial statements on Form 10-K filed herewith and no events have occurred that require recognition or disclosure.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On June 1, 2021, Deloitte and Touche LLP (“Deloitte”) was engaged as the new independent registered public
accounting firm of Safety to perform independent audit services for the Company for the fiscal year ending December 31, 2021. Deloitte’s engagement was approved by the Audit Committee of the Board. The appointment of Deloitte was a result of a competitive request for proposal process undertaken by the Audit Committee.
PricewaterhouseCoopers LLP’s (“PwC”) audit reports on the Company’s consolidated financial statements for the fiscal years ended December 31, 2020 and 2019 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal years ended December 31, 2020 and 2019, there were (i) no disagreements (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) between the Company and PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of PwC would have caused PwC to make reference thereto in its reports on the consolidated financial statements of the Company for such years, and (ii) no reportable events (as that term is defined in Item 304(a)(1)(v) of Regulation S-K).
During the fiscal years ended December 31, 2020 and 2019, neither the Company, nor any party on behalf of the Company, consulted with Deloitte with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered with respect to the Company’s consolidated financial statements, and no written report or oral advice was provided to the Company by Deloitte that was an important factor considered by the Company in reaching its decision as to any accounting, auditing or financial reporting issue, or (ii) any matter that was subject to any disagreement (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as that term is defined in Item 304(a)(1)(v) of Regulation S-K).
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures [as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)] as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are adequate and effective and ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and that information required to be disclosed in such reports is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control—Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2021.
Deloitte & Touche LLP, the Company's independent registered public accounting firm, has audited the effectiveness of Safety Insurance Group, Inc.'s internal control over financial reporting as of December 31, 2021, as stated in their report which is included herein.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15 and 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
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ITEM 9B. OTHER INFORMATION
The Company had no information required to be disclosed on a Form 8-K during the fourth fiscal quarter of 2021 that has not already been reported.
The following disclosures relate to actions taken by the Board of Directors of the Company (the "Board"), the Compensation Committee of the Board and the Board of Directors of Safety Insurance Company and would otherwise have been filed during the first fiscal quarter of 2022 on a Form 8-K.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
PART III
ITEMS 10-14.
Within 120 days after the close of its fiscal year, the Company intends to file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 as amended, which will include the matters required by these items.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of this report:
1. Financial Statements: The Consolidated Financial Statements for the year ended December 31, 2021 are contained herein as listed in the Index to Consolidated Financial Statements.
2. Financial Statement Schedules: The Financial Statement Schedules are contained herein as listed in the Index to Financial Statement Schedules.
3. Exhibits: The exhibits are contained herein as listed in the Index to Exhibits.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedules
I
Summary of Investments – Other than Investments in Related Parties as of December 31, 2021
II
Condensed Financial Information of the Registrant at December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019
III
Supplementary Insurance Information at December 31, 2021, 2020 and for the years ended December 31, 2021, 2020 and 2019
106
IV
Reinsurance for the years ended December 31, 2021, 2020 and 2019
107
V
Valuation and Qualifying Accounts at December 31, 2021, 2020 and 2019 and for the years ended December 31, 2021, 2020 and 2019
108
VI
Supplemental Information Concerning Property and Casualty Insurance Operations at December 31, 2021, 2020 and 2019 and for the years ended December 31, 2021, 2020 and 2019
109
102
Safety Insurance Group, Inc.
Summary of Investments—Other than Investments in Related Parties
Schedule I
At December 31, 2021
Amount at
which shown
in the Balance
Amortized Cost
Sheet
Fixed maturities:
U.S. government and government agencies and authorities
237,344
241,788
838,935
860,189
Total fixed maturities
Short term securities
Total short term investments
Equity securities:
Common stocks:
Industrial, miscellaneous and all other
Total equity securities
Condensed Financial Information of the Registrant
Condensed Balance Sheets
Schedule II
Investments in consolidated affiliates
929,136
886,662
929,160
886,701
Accounts payable and other liabilities
1,987
2,022
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto.
Condensed Statements of Operations and Comprehensive Income
Revenues
Expenses
1,755
1,833
1,694
Net loss
(1,755)
(1,833)
(1,694)
Earnings from consolidated subsidiaries
132,465
140,044
101,295
Other comprehensive income (loss), net of tax
Condensed Statements of Cash Flows
(132,465)
(140,044)
(101,295)
Dividends received from consolidated subsidiaries(1)
49,488
89,156
47,585
Amortization of restricted stock expense
17,788
7,359
6,514
247
65,571
94,574
52,667
Proceeds from exercise of stock options
Excess tax benefit from stock options exercised
Dividends paid
(94,574)
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
105
Supplementary Insurance Information
Schedule III
Future Policy
Deferred
Benefits,
Policy
Losses,
Acquisition
Claims and Loss
Unearned
Earned
Investment
Segment
Costs
Premiums
Income
Property and Casualty Insurance
74,287
442,219
Amortization of
Claims,
Losses, and
Premium
Settlement
Operating
Revenue
Written
146,573
111,819
146,955
119,527
147,945
96,191
Schedule IV
Percent of
Amount
Property and Casualty
Gross
Ceded to Other
Assumed from
Insurance Earned Premiums
Companies
Other Companies
to Net
Years ended December 31,
67,584
3.9%
74,268
3.8%
89,178
4.2%
Valuation and Qualifying Accounts
Schedule V
Additions
Balance at
Charged to
Beginning
Costs and
End of
of Period
Accounts
Deductions(1)
Period
Allowance for doubtful accounts Years Ended December 31,
2,285
2,118
482
1,358
(1) Deductions represent write-offs of accounts determined to be uncollectible.
Supplemental Information Concerning Property and Casualty Insurance Operations
Schedule VI
Reserves for
Unpaid Claims
and Claims
Adjustment
Affiliation With Registrant
Consolidated Property & Casualty Subsidiaries
Claims and Claims
Amortization
Adjustment Expenses
of Deferred
Paid Claims
Incurred Related to
Current
Prior
Year
INDEX TO EXHIBITS
ExhibitNumber
Description
Form of Amended and Restated Certificate of Incorporation of Safety Insurance Group, Inc.(1)
Form of Amended and Restated Bylaws of Safety Insurance Group, Inc.(1)
Form of Stock Certificate for the Common Stock (1)
4.1
Description of Safety Insurance Group, Inc. Capital Stock (18)
10.1
Lease Agreement between Thomas Black Corporation and Aman, Inc. for the lease of office space located on the 1st through 6th, 11th and 12th floors of 20 Custom House Street, Boston, Massachusetts, dated June 11, 1987, and as amended on October 11, 1988, September 14, 1989, September 19, 1990, February 23, 1994, December 20, 1996, June 24, 2002, July 26, 2004 and April 5, 2007, November 7, 2017 (2) (14)
10.2
Tax Indemnity Agreement by and among Safety Holdings, Inc. and the Management Team, dated October 16, 2001(1)
10.3
2001 Restricted Stock Plan (1)(3)
10.4
Executive Incentive Compensation Plan (1)(3)
10.5
2002 Management Omnibus Incentive Plan, as Amended (5)
10.6
Safety Insurance Company Executive Incentive Compensation Plan—Basic Document(3)(4)(7)
10.7
Safety Insurance Company Executive Incentive Compensation Plan—Adoption Agreement(3)(4)(7)
10.8
Safety Insurance Company Executive Incentive Compensation Plan—Rabbi Trust Agreement(3)(4)(7)
10.9
Form of Restricted Stock Notice and Agreement (with vesting) under the 2002 Management Omnibus Incentive Plan(3)(4)
10.10
Form of Restricted Stock Notice and Agreement (without vesting) under the 2002 Management Omnibus Incentive Plan(3)(4)
10.11
Form of Nonqualified Stock Option Notice and Agreement under the 2002 Management Omnibus Incentive Plan(3)(4)
10.12
Form of Incentive Stock Option Notice and Agreement under the 2002 Management Omnibus Incentive Plan(3)(4)
10.13
Form of Stock Appreciation Right Notice and Agreement under the 2002 Management Omnibus Incentive Plan(3)(4)
10.14
Annual Performance Incentive Plan(3)(5)
10.15
Amendment to Annual Performance Incentive Plan(3)(6)
10.16
Amendment to Management Omnibus Incentive Plan dated December 31, 2008(3)(6)
10.17
Amendment to Management Omnibus Incentive Plan dated August 4, 2010 (3)(8)
10.18
Amendment to Management Omnibus Incentive Plan, as Amended dated March 11, 2013(3)(9)
10.19
Form of Restricted Stock Notice and Agreement (with performance-based vesting) under the 2002 Management Omnibus Plan, as Amended(3)(9)
10.20
Amended and Restated Revolving Credit Agreement with RBS Citizens(10)
110
10.21
Form of Restricted Stock Notice and Agreement (with performance-based vesting) under the 2002 Management Omnibus Plan, As Amended(3) (11)
10.22
Form of Restricted Stock Notice and Agreement (with performance-based vesting) under the 2002 Management Omnibus Plan, As Amended(3) (12)
10.23
Form of Restricted Stock Notice and Agreement under the 2002 Management Omnibus Plan, As Amended(3) (12)
10.24
Employment Agreement by and between Safety Insurance Group, Inc. and John Drago as of April 1, 2016(3)(13)
10.25
Employment Agreement by and between Safety Insurance Group, Inc. and George M. Murphy as of April 1, 2016(3)(13)
10.26
Employment Agreement by and between Safety Insurance Group, Inc. and individual executive member as of January 1, 2021. (3) (17)
10.27
2018 Long-Term Incentive Plan (15)
10.28
Employment Agreement by and between Safety Insurance Group, Inc. and Christopher T. Whitford as of March 2, 2020. (3) (16)
10.29
Employment Agreement by and between Safety Insurance Group, Inc. and Glenn R. Hiltpold as of March 1, 2021. (3) (17)
Subsidiaries of Safety Insurance Group, Inc. (18)
23.1
Consent of Deloitte & Touche LLP (18)
23.2
Consent of PricewaterhouseCoopers LLP (18)
Power of Attorney (contained on the signature page herein)
31.1
CEO Certification Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18)
31.2
CFO Certification Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(18)
32.1
CEO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18)
32.2
CFO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18)
101.INS
Inline XBRL Instance Document (18)
101.SCH
Inline XBRL Taxonomy Extension Schema (18)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase (18)
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase (18)
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase (18)
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase (18)
Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101) (18)
(1)
Incorporated herein by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-87056) filed April 26, 2002, and as amended on Form S-8 (Reg. No. 333-110676) filed on November 21, 2003, as
111
amended on Form S-8 (Reg. No. 333-140423) filed on February 2, 2007, and as amended on Form S-8 (Reg. No. 333-226690) filed on August 8, 2018.
Incorporated herein by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-87056) filed April 26, 2002, and as amended on Form S-8 (Reg. No. 333-110676) filed on November 21, 2003, as amended on Form S-8 (Reg. No. 333-140423) filed on February 2, 2007, and as amended on Form S-8 (Reg. No. 333-226690) filed on August 8, 2018 and as incorporated herein by reference on Form 10-Q for the quarterly period ended March 31, 2007, as filed on May 5, 2007, and as incorporated by reference to the Registrant’s Form 10-K for the year ended December 31, 2017, as filed on February 28, 2018.
Denotes management contract or compensation plan or arrangement.
(4)
Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2004 filed on March 16, 2005.
(5)
Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2006 filed on March 1, 2007.
Incorporated herein by reference to the Registrant’s Form 8-K filed on December 31, 2008.
Incorporated herein by reference to the Registrant’s Form 10-Q for the quarter ended September 30, 2008, as filed on November 7, 2008.
Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2010 filed on March 14, 2011.
(9)
Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2012 filed on March 18, 2013
(10)
Incorporated herein by reference to the Registrant’s Form 8-K filed on August 27, 2013.
Incorporated herein by reference to the Registrant’s Form 10-Q for the quarter ended June 30, 2013, as filed on August 9, 2013.
(12)
Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2014 filed on March 2, 2015
(13)
Incorporated herein by reference to the Registrant’s Form 10-Q for the quarter ended June 30, 2016, as filed on August 5, 2016.
Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2017, as filed on February 28, 2018.
Incorporated herein by reference to the Registrant’s Definitive Proxy Statement filed on April 11, 2018.
(16)
Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2019, as filed on February 28, 2020.
(17)
Incorporated herein by reference to the Registrant’s Form 10-K for the year ended December 31, 2020, as filed on February 26, 2021.
Included herein.
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ITEM 16. FORM 10-K SUMMARY
None
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 28, 2022
By:
/s/ George M. Murphy
George M. Murphy,
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints George M. Murphy and Christopher T. Whitford, and each of them individually, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney-in-fact and agent, or his substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, to all intents and purposes and as fully as he might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed by the following persons in the capacities and on the date indicated:
Signature
Title
/s/ Christopher T. Whitford
Vice President, Chief Financial Officer,
Christoper T. Whitford
Secretary, and Principal Accounting Officer
/s/ David F. Brussard
/s/ Frederic H. Lindeberg
/s/ Peter J. Manning
/s/ Thalia M. Meehan
/s/ Mary C. Moran
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