Our insurance subsidiaries lease 471,642 square feet of office and warehouse space in numerous cities throughout the United States. All of these leases expire within seven years. The most significant leased office spaces are located in Birmingham, Alabama and suburban Los Angeles, California. See Note 14 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for further information about leases. We own a 33,515 square foot building in McAllen, Texas and a 116,433 square foot building in Birmingham, Alabama.
a shift in business mix towards polices offering broader coverage, rate decreases in certain states and competitors' rate increases
in certain states. See Results of Operations - Underwriting - Premium for a more detailed discussion of our gross written
We had a net realized gain on investments of $8.6 million for the year ended December 31, 2011 and a net realized
gain of $10.4 million for 2010. Included in the net realized gain for the year ended December 31, 2011 is $1.4 million of other-than-temporary impairments on fixed income securities compared with $2.9 million of impairments on fixed income and equity securities during 2010.
the 2010 and 2011 accident year combined ratios reflects an increase in new business during 2010 and 2011. Our new business
An increase in severity in Florida personal injury protection coverage related to accident year 2010 was the primary source of the unfavorable development during the twelve months ended December 31, 2011. See Results of Operations - Underwriting - Profitability for a more detailed discussion of our underwriting results.
Paid and incurred frequency and severity methods utilizing paid and incurred claims count development and paid and incurred loss development to predict ultimate average frequency (i.e. claims count per auto insured) or ultimate average severity (cost of claim per claim) and
For each subset of the business evaluated, each test generates a point estimate based on development factors applied to known paid and incurred losses and claim counts to estimate ultimate paid losses and claim counts. We base our selection of factors on historical loss development patterns with adjustment based on professional actuarial judgment where anticipated development patterns vary from those seen historically. This estimation of IBNR requires selection of hundreds of such factors. We then select a single point estimate for the subset evaluated from the results of various tests, based on a combination of simple averages of the point estimates of the various tests and selections based on professional actuarial judgment. During recent years, paid methods have been less reliable because of changes in settlement practices, so we have more heavily relied on incurred methods.
We review loss reserve adequacy quarterly by accident year at a state and coverage level, while we review reserves quarterly for the Assumed Agency Business only at the coverage level. We adjust reserves as additional information becomes known. We reflect such adjustments in current year operations.
Factors that can significantly affect actual frequency include, among others, changes in weather, driving patterns or trends and class of driver. Changes in claims settlement and reserving practices can affect estimates of average frequency. Auto repair and medical cost inflation, jury awards and changes in policy limit profiles can affect loss severity. Estimation of LAE reserves is subject to variation from factors such as the use of outside adjusters, frequency of lawsuits, claims staffing and experience levels.
We believe that our relatively low average policy limit and concentration on the nonstandard auto driver classification help stabilize fluctuations in frequency and severity. For example, approximately 81% of our policies include only the state-mandated minimum policy limits for bodily injury, which somewhat mitigates the challenge of estimating average severity. These low limits tend to reduce the exposure of the loss reserves on this coverage to medical cost inflation on severe injuries since the minimum policy limits will limit the total payout.
The following is a reconciliation of our net liability to the gross liability for unpaid losses and LAE (in millions):
We performed this test as of September 30, 2011 using a variety of methods, including estimates of future discounted cash flows and comparisons of our market value to that of our major competitors. Our cash flow projections rely on assumptions that are subject to uncertainty, including premium growth, loss and LAE ratios, interest rates and capital requirements.
The National Association of Insurance Commissioners’ (“NAIC”) model law for risk-based capital (“RBC”) provides formulas to determine the amount of capital that an insurance company needs to ensure that it has an acceptable expectation of not becoming financially impaired. At December 31, 2011, the capital ratios of all our insurance subsidiaries exceeded the RBC requirements.
Our insurance subsidiaries generate liquidity to satisfy their obligations, primarily by collecting and investing premium in advance of paying claims. Our insurance subsidiaries had positive cash flow from operations of approximately $72.4 million in 2011, $73.3 million in 2010 and $85.0 million in 2009. In addition, to satisfy their obligations, our insurance subsidiaries generate cash from maturing securities from their combined $1.1 billion fixed maturity portfolio.
At December 31, 2011, we had $195 million principal of senior notes due 2014, bearing a fixed 5.5% interest rate (the “Senior Notes”) outstanding. Interest payments on the Senior Notes of $5.4 million are due each February and August through maturity in February 2014. During 2009, we repurchased $5.0 million of the Senior Notes. (See Note 4 - Long-Term Debt of the Notes to Consolidated Financial Statements for more information on the Senior Notes).
In August 2011, we renewed our agreement for a $50 million three-year revolving credit facility (the “Credit Agreement”) that
In August 2010, we filed a “shelf” registration statement with the Securities and Exchange Commission, which will allow us to sell any combination of senior or subordinated debt securities, common stock, preferred stock, warrants, depositary shares and units in one or more offerings should we choose to do so in the future.
In February 2012, we increased our quarterly dividend to $0.225 per share from $0.18 per share. At this current amount, our 2012 annualized dividend payments will be approximately $10.6 million.
In October 2006, the Board of Directors approved a share repurchase program whereby we may repurchase up to an aggregate
amount of $100 million of our outstanding common shares. On August 6, 2009, the Board of Directors increased the authority
third quarter of 2010, we exhausted the remaining repurchase authority under this program. On August 3, 2010, our Board of
In June 2011, we used current funds to complete the $16.1 million purchase of the 116,433 square foot Liberty Park facility that
We believe that cash balances, cash flows generated from operations or borrowings, and maturities and sales of investments are
Our contractual obligations and those of our insurance subsidiaries as of December 31, 2011, were (in thousands):
A third party nationally recognized pricing service provides the fair value of securities in Level 2. We periodically review the third party pricing methodologies and test for significant differences between the market price used to value the security and recent sales activity.
The following table presents the returns of our investment portfolios based on quarterly investment balances as reflected in the financial statements.
Market risk represents the potential economic loss arising from adverse changes in the fair value of financial instruments. Our
exposures to market risk relate primarily to our investment portfolio, which is exposed primarily to interest rate risk and credit risk and, to a lesser extent, equity price risk.
Changes in market interest rates directly affect the fair value of our fixed maturity portfolio. Generally, the fair value of fixed-income investments moves inversely with movements in market interest rates. Our fixed maturity portfolio is comprised of substantially all fixed rate investments with primarily short-term and intermediate-term maturities. This portfolio composition allows flexibility in reacting to fluctuations of interest rates. In addition, higher market rates available for new funds available for investment partially mitigate the risk of loss in fair value. We manage the portfolios of our insurance companies to achieve an adequate risk-adjusted return while maintaining sufficient liquidity to meet policyholder obligations.
We manage credit risk by diversifying our portfolio to avoid concentrations in any single industry group or issuer and by
limiting investments in securities with lower credit ratings. The largest investment in any one fixed income security, excluding U.S. government and agencies securities, is $7.3 million or 0.6% of the fixed income investment portfolio. The top five investments in fixed income securities, excluding those issued by the U.S. government and its agencies, make up 2.5% of the fixed income portfolio. The fair value of non-performing fixed maturities, securities that have not produced their stated rate of investment income during the previous twelve months, was $0.2 million or less than 0.1% of the $1.2 billion portfolio as of December 31, 2011.
Since 2007, the mortgage industry has experienced a rise in mortgage delinquencies and foreclosures, particularly among lower
quality exposures (“sub-prime” and “Alt-A”). As a result, many securities with underlying sub-prime and Alt-A mortgages as
collateral experienced significant drops in market value. We have only modest exposure to these types of investments. At
The following table presents the credit rating and fair value of our residential mortgage-backed securities at December 31, 2011
All of the $236.4 million of residential mortgage-backed securities were issued by government-sponsored enterprises (“GSE”)
The following table presents the credit rating and fair value of our commercial mortgage-backed securities at December 31, 2011 by deal origination year (in thousands):
The following table presents the credit rating and fair value of our collateralized mortgage obligation portfolio at December 31, 2011 by deal origination year (in thousands):
Of the $28.1 million of collateralized mortgage obligations, $23.2 million were issued by GSEs.
The following table presents the credit rating and fair value of our ABS portfolio at December 31, 2011 by deal origination
The following table shows our fixed maturity securities, by NAIC designation and comparable Standard & Poor’s Corporation rating as of December 31, 2011 (in thousands).
Our investment portfolio consists of $409.4 million of state and municipal bonds, of which $175.0 million are insured. Of the
insured bonds, 49.6% are insured with MBIA, 27.6% with Assured Guaranty, 21.9% with AMBAC, 0.7% with Berkshire
The following table presents the fair value of our state and municipal bond portfolio, by state and type of bond, at December 31, 2011 (in thousands):
The following table presents the fair value of the revenue category of our state and municipal bond portfolio, by state and further classification, at December 31, 2011 (in thousands):
Equity price risk is the potential economic loss from adverse changes in equity security prices. Our exposure to equity price risk is limited, as our equity investments comprise only 3.0% of our total investment portfolio. At December 31, 2011, the fair value of our equity portfolio was $36.9 million.
2009 excludes less than $(0.1) million of premium written on behalf of other companies.
Florida gross written premium grew 25.2% during the twelve months ended December 31, 2011. This growth is primarily a result of higher business retention and rate increases in the state. Our rate increases were not as significant as those made by our competitors and therefore did not negatively impact our ability to grow.
Georgia gross written premium grew 24.4% during the twelve months ended December 31, 2011. This growth is
Texas gross written premium grew 15.0% during the twelve months ended December 31, 2011. This growth primarily occurred in the first half of 2011 and related to rate decreases taken in 2010. We raised rates in this state during the second half of 2011 to improve profitability.
Gross written premium in the Maintenance States grew 2.1% during the twelve months ended December 31, 2011 primarily due to growth in Tennessee.
Florida gross written premium grew 50.6% during 2010 compared to 2009. The overall increase in Non-urban Zone premium is a result of growth in Florida. Florida’s gross written premium growth is attributable to increased marketing efforts coupled with underwriting restrictions and rate increases recently implemented by competitors. We took aggressive actions in 2008 and 2009 in advance of competitors to improve profit margins in Florida. We have increased rates 14.9% in the twelve months ended December 31, 2010 and modified certain underwriting rules in the state.
Texas gross written premium grew by 31.0% during 2010 compared to 2009. The growth in premiums in Texas primarily relates to the standard program, which we introduced in late 2009.
Gross written premium in the Maintenance States declined 12.0% during 2010 compared to 2009, primarily due to declines in South Carolina and Colorado. We increased rates in several of the Maintenance States during 2009 in an effort to improve profitability.
Our Commercial Vehicle gross written premium grew 6.7% during 2010 compared to 2009. This growth is primarily due to growth in California resulting from the appointment of new agents.
or net earnings. We measure underwriting profitability by the combined ratio. When the combined ratio is under 100%, we
capitalized as deferred policy acquisition costs and amortized on a pro rata basis over the period in which the related premium
obtained for internal use under GAAP and amortize the costs over the software’s useful life, rather than expense them as
incurred, as required for statutory purposes. Additionally, bad debt charge-offs on agent balances and premium receivables are
NM: Not meaningful due to the low premium for these lines.
The combined ratio in the Focus States increased by 6.1 points for the twelve months ended December 31, 2011, primarily due to increases in the loss and LAE ratio in California. This increase was a result of unfavorable development on prior year loss and LAE reserves in the state versus favorable development in 2010.
The combined ratio in the Maintenance States increased 23.8 points during the twelve months ended December 31, 2011 when compared to 2010, primarily due to increases in the loss and LAE ratios in Alabama and Tennessee. We experienced $0.7 million in catastrophe losses during the year in these states.
The combined ratio in the Maintenance States increased 3.4 points for the year ended December 31, 2010, primarily due to an increase in the underwriting ratio in Tennessee.
The loss and LAE ratio for the Commercial Vehicle business declined by 3.6 points during the year ended December 31, 2010 when compared with 2009, primarily because of favorable development on loss reserves. Additionally, we experienced several large losses in its Commercial Vehicle business during 2009.
Changes in investment income reflect fluctuations in market rates and changes in average invested assets. Net investment income for the year ended December 31, 2011 declined compared to 2010 primarily due to a decline in book yields because of a general decline in market interest rates for high quality bonds.
Net investment income for the year ended December 31, 2010 declined compared to 2009 primarily due to a decline in book yields because of a general decline in market interest rates for high quality bonds.
On December 31, 2011, we completed the sale of two inactive, shell subsidiary companies to an unaffiliated third party for $16.2 million. The total gain recorded on a GAAP basis was $4.1 million. In the future we intend to sell or dissolve other inactive shell companies. The primary reason for the sale of the companies is to reduce the administrative costs associated with maintaining licenses that are no longer needed to support our insurance operations.
Other income of $0.3 million, $0.3 million and $0.4 million for the twelve months ended December 31, 2011, 2010 and 2009, respectively, is made up of items of a non-recurring nature.
The Senior Notes carry a coupon rate of 5.50%, effective yield of 5.55%, and require no principal payment until maturity in February 2014. (See Note 4 - Long-Term Debt of the Notes to Consolidated Financial Statements for additional information on the Senior Notes).
Corporate general and administrative expenses increased by $1.1 million in 2010 compared to 2009. The increase is primarily due to an increase in the accrual for Performance Share Plan expense. Due to premium growth, we accrued expense for a larger share award than was previously anticipated. (See Note 7 - Share-Based Compensation of the Notes to the Consolidated Financial Statements for additional information on the Performance Share Plan.)
Other expenses for the twelve months ended December 31, 2011 declined $1.0 million, primarily due a $2.7 million decline in sublease losses. In 2011, we reversed $1.0 million in sublease losses previously recognized for space that we no longer intend to sublet.
Other expenses for the twelve months ended December 31, 2010 declined $1.4 million, primarily due a $1.0 million decline in corporate litigation expense, which includes the release of approximately $0.4 million in reserves related to class action lawsuits during 2010. This decline was offset partially by a $0.5 million increase in sublease losses.