We conduct almost all of our operations in approximately 89,099 square feet of leased space at 20 Custom House Street in downtown Boston, Massachusetts. Our lease expires in December 2008.
The following table sets forth our selected historical consolidated financial data as of and for each of the five years ended December 31, 2004. Prior to October 16, 2001, Thomas Black Corporation was the ultimate parent company of Safety Insurance. In the Acquisition, on October 16, 2001, Safety Insurance Group, Inc. became the parent company of Thomas Black Corporation.
(2)Our transaction expenses reflect the costs we incurred in connection with our October 16, 2001 acquisition of TBC. Please refer to our 2003 Annual Report on Form 10-K, "Management's Discussion and Analysis of Financial Condition and Results of Operations-The Acquisition" for further information.
We are subject to the extensive regulation of the private passenger automobile insurance industry in Massachusetts, which represented 81.0% of our direct written premiums in 2004. Owners of registered automobiles in Massachusetts are required to maintain minimum automobile insurance coverages. We are required to participate in a state-mandated reinsurance program run by Commonwealth Automobile Reinsurers ("CAR") to which we cede certain unprofitable risks and from which we are allocated a portion of the overall losses. CAR is, with few exceptions, required by law to issue a policy to any applicant who seeks it. As a servicing carrier of CAR, this requirement applies to us. This program operates at an underwriting deficit. This deficit is allocated among every Massachusetts automobile insurance company, including us, based on a complex formula that takes into consideration a company's voluntary market share, the rate at which it cedes business to CAR, and the
On April 29, 2004, the Governor of Massachusetts (the "Governor") announced the formation of a bipartisan task force charged with reviewing potential changes to the Massachusetts personal automobile insurance system that, according to the Governor's announcement, "will open the door to more competition, move to a rate-setting system that is more in line with the rest of the country, examine the costs and benefits of our current "no fault' claims process, crack down on fraud and eliminate the subsidy that good drivers pay for bad drivers." The Governor also announced "that the Division of Insurance has taken the first steps toward reform by pushing for changes in the distribution of losses generated by high-risk drivers." As a result, in a letter to CAR dated April 29, 2004 (attached as Exhibit 99.1 to our March 31, 2004 Form 10-Q filed with the SEC on May 10, 2004) the Massachusetts Insurance Commissioner (the "Commissioner") directed CAR to materially change the operation of the residual market in Massachusetts, including the formula by which CAR's deficit is allocated and the manner in which policies produced by ERPs are assigned to insurers.
•Each company's ERP policies will produce similar loss ratios to ensure equitable financial results of the ERP burden.
•Producers will have real time access to the MAIP for assigning a risk to a company and issuing a policy.
•Beginning January 1, 2007, renewal business will be eligible for the MAIP.
On January 14, 2005, we filed, on Form 8-K, an estimate of the financial impact the Approved Rules may have on us and we stated that a lawsuit had been filed in Suffolk Superior Court by Commerce Insurance Company against the Commissioner that seeks an order permanently enjoining implementation and/or enforcement of the Approved Rules. Certain ERPs, Arbella Mutual Insurance Company and the Center for Insurance Research have intervened as plaintiffs and CAR has intervened as a defendant in this lawsuit. On February 1, 2005 the Court issued an order approving a motion by the ERP plaintiffs that stayed the Approved Rules pending a final decision in this lawsuit. The Massachusetts Supreme Judicial Court has denied a request by the Commissioner to consider this lawsuit on an expedited basis.
Each year, the Commissioner sets maximum premium rates that may be charged and minimum commissions that must be paid to agents for private passenger automobile insurance. The Commissioner announced on December 15, 2004 a 1.7% statewide average private passenger automobile insurance rate decrease for 2005, as compared to a 2.5% increase for 2004 and a 2.7% increase for 2003. Coinciding with the 2005 rate decision, the Commissioner also approved a 10.9% commission rate agents receive for selling private passenger automobile insurance, as a percentage of premiums, as compared to a commission rate of 10.5% in 2004, and 11.0% in 2003.
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. Specifically, under GAAP:
•Fixed maturities securities, which are classified as available-for-sale, are reported at current market values, rather than at amortized cost, or the lower of amortized cost or market, depending on the specific type of security, as required by SAP.
•Equity securities are reported at quoted market values, which may differ from the National Association of Insurance Commissioners market values as required by SAP.
On June 25, 2002, the Board adopted the 2002 Management Omnibus Incentive Plan (the "Incentive Plan"). The Incentive Plan provides for a variety of awards, including nonqualified stock options ("NQSOs"), stock appreciation rights and restricted stock ("RS") awards. The maximum number of shares of common stock with respect to which awards may be granted under the Incentive Plan is 1,250,000. On December 31, 2004, there were 298,529 shares available for future grant. The Board and the Compensation Committee intend to issue more awards under the Incentive Plan in the future. Grants outstanding under the Incentive Plan as of December 31, 2004 were comprised of 70,271
(2)The fair value of the restricted stock grant is equal to the closing price of our common stock on the grant effective date.
The changes we have recorded in our reserves in the past three years illustrate the uncertainty of estimating reserves. Primarily due to an improvement in CAR results, our prior year reserves decreased by $6,778 for the year ended December 31, 2004 as compared to the increase of $181 for 2003 and the decrease of $2,262 for 2002. The $6,778 decrease in our prior year reserves resulted from re-estimations of prior year accident year ultimate loss and LAE liabilities and is composed of a reduction of $2,523 in our homeowners reserves, a reduction of $6,854 in CAR assumed reserves, a reduction of $329 in FAIR Plan assumed reserves and an increase of $2,928 in our automobile reserves. It is not appropriate to extrapolate future favorable or unfavorable development of reserves from this past experience.
For further information, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations: Losses and Loss Adjustment Expenses."
In our determination of whether a decline in market value below amortized cost is an other-than-temporary impairment, we consider and evaluate several factors and circumstances including the issuer's overall financial condition, the issuer's credit and financial strength ratings, a weakening of the general market conditions in the industry or geographic region in which the issuer operates, a prolonged period (typically six months or longer) in which the fair value of an issuer's securities remains below our amortized cost, our ability and intent to hold these investments for a period of time sufficient to allow for recovery of our costs, and any other factors that may raise doubt about the issuer's ability to continue as a going concern.
Direct Written Premiums. Direct written premiums for the year ended December 31, 2004 increased by $56,750, or 9.9%, to $628,295 from $571,545 for 2003. The 2004 increase occurred primarily in our personal automobile line, which experienced a 6.1% increase in average written premium and a 3.5% increase in written exposures. In addition, our commercial automobile line's average written premium increased by 6.0%, while we had a 5.6% increase in written exposures. Our homeowners line average written premium increased by 8.3%, which was partly offset by a 1.7% decrease in written exposures.
Net Written Premiums. Net written premiums for the year ended December 31, 2004 increased by $51,953, or 9.2%, to $618,923 from $566,970 for 2003. This was primarily due to the increase in direct written premiums.
Net Investment Income. Investment income for the year ended December 31, 2004 was $27,259 compared to $26,086 for 2003. Average cash and investment securities (at amortized cost) increased by $95,645, or 15.0%, to $734,576 for the year ended December 31, 2004 from $638,931 for 2003 due to a $53,491 increase in average cash and a $42,154 increase in average securities. Net effective yield on the investment portfolio decreased to 3.7% during the year ended December 31, 2004 from 4.1% during 2003 due to management's investment strategy to shorten the portfolio duration, shift to higher rated securities, and increase tax-exempt holdings. Our duration decreased to 3.4 years at December 31, 2004 from 4.2 years at December 31, 2003.
Net Realized Gains on Investments. Net realized gains on investments decreased to $1,274 for the year ended December 31, 2004 from $10,051 for 2003.
The following table illustrates the gross unrealized losses included in the Company's investment portfolio and the fair value of those securities, aggregated by investment category. The table also illustrates the length of time that they have been in a continuous unrealized loss position as of December 31, 2004.
During the year ended December 31, 2004, there was no significant deterioration in the credit quality of any of the Company's holdings and no other-than-temporary impairment charges were recorded related to the Company's portfolio of investment securities. However, during the year ended December 31, 2003, there was a significant deterioration in the credit quality of one of the Company's holdings, Continental Airlines. Accordingly, during the first quarter of 2003, the Company recorded an other-than-temporary impairment of $837 for this security. During May 2003, this security was sold at a realized gain of $426.
Net Earned Premiums. Net earned premiums for the year ended December 31, 2003 increased by $50,992, or 10.4%, to $540,248 from $489,256 for the comparable 2002 period. This was primarily due to increased rates on private passenger automobile, commercial automobile and homeowners product lines.
Net Realized Gains (Losses) on Investments. Net realized gains (losses) on investments for the year ended December 31, 2003 increased to $10,051 gain from $(277) loss for the comparable 2002 period. This increase was primarily due to the sale of certain securities related to our current investment strategy to shorten portfolio duration as protection against future increases in interest rates.
(1)Obligations of U.S. Government agencies include collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal National Mortgage
The unrealized losses recorded on the fixed maturity investment portfolio at December 31, 2003 resulted primarily from fluctuations in market interest rates as opposed to fundamental changes in the credit quality of the issuers of such securities. Therefore, these decreases in values are viewed as being temporary as we have the intent and ability to retain such investments for a period of time sufficient to allow for recovery in market value.
Underwriting, Operating and Related Expenses. Underwriting, operating and related expense for the year ended December 31, 2003 increased by $1,770, or 1.4%, to $130,636 from $128,866 for the comparable 2002 period.
Other Expenses. Other expenses for the year ended December 31, 2003 decreased to $0 from $6,250 for the comparable 2002 period. Other expenses in 2002 was comprised of $4,000 of TJC management termination fee expense related to services that ceased at the IPO, and $2,250 of unamortized deferred debt issuance costs related to the Acquisition debt which were expensed upon the repayment of this debt, concurrent with the IPO.
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 facilities.
Net cash provided by operating activities was $126,176 and $85,185 during the year ended December 31, 2004 and 2003, respectively. 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.
Net cash provided by investing activities was $7,820 during the year ended December 31, 2004, which resulted primarily from sales and maturities of fixed maturities in excess of purchases of fixed maturities. Net cash used for investing activities was $89,205 during the year ended December 31, 2003, which resulted primarily from purchases of fixed maturities in excess of sales of fixed maturities.
Our insurance subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to their parent without prior approval of the Commissioner. 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 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 Massachusett's 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 2004, the statutory surplus of Safety Insurance was $278,161, and its net income for 2004 was $42,251. As a result, a maximum of $42,251 is available in 2005 for such dividends without prior approval of the Division. During the year ended December 31, 2004, Safety Insurance recorded dividends to Safety of $25,966.
On both February 17, 2005 and November 18, 2004, our Board approved a quarterly cash dividend on our common stock of $0.12 per share, or $1,861 and $1,860, based on 15,504,852 and 15,500,052 common shares outstanding, respectively, paid on March 15, 2005 and December 15, 2004, respectively. On August 12, 2004, the Board of Directors approved an increase to its quarterly cash dividend to $0.12 per share or $1,847, based on 15,391,844 common shares outstanding, which was paid on September 15, 2004. On May 20, 2004, Safety's Board approved a quarterly cash dividend of $0.10 per share, or $1,534, based on 15,338,589 common shares outstanding, which was paid on June 15, 2004. On February 24, 2004 and November 21, 2003, our Board approved a quarterly cash dividend of $0.10 per share, or $1,526, based on 15,259,991 common shares outstanding, which was paid on March 15, 2004 and December 15, 2003, respectively. We plan to continue to declare and pay quarterly cash dividends in 2005, depending on our financial position and the regularity of our cash flows.
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.
from severe weather, the possibility that the Approved Rules are successfully appealed by Commerce or one or more of our other competitors, the possibility that the Commissioner may approve future Rule changes that change the operation of the residual market, our possible need for and availability of additional financing, and our dependence on strategic relationships, among others, and other risks and factors identified from time to time in our reports filed with the SEC, such as those set forth under the caption "Risk Factors" in our prospectus in the registration statement on Form S-1 filed with the SEC on November 22, 2002.
Also, in our opinion, management's assessment, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
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
The Company is a leading provider of personal lines property and casualty insurance focused exclusively on the Massachusetts market. Its principal product line is private passenger automobile insurance, which accounted for 81.0% of its direct written premiums in 2004. The Company operates through its insurance company subsidiaries, Safety Insurance Company and Safety Indemnity Insurance Company (together referred to as the "Insurance Subsidiaries").
The Company was incorporated on June 25, 2001, in the State of Delaware. On October 16, 2001, the Company acquired (the "Acquisition") all of the issued and outstanding common stock of Thomas Black Corporation ("TBC") and its property and casualty subsidiaries. In connection with financing the Acquisition, the Company incurred debt of $99,500 and issued 22,400 shares of Series A senior mandatorily redeemable preferred stock at $1,000 per share.
The Company sold 6,333,334 common shares in its IPO, 350,000 common shares in a direct sale and 900,000 common shares from the exercise of the underwriters' over-allotment option all at $12.00 per share. Net proceeds received were $81,819 from these stock issuances after deducting underwriting discounts and other offering expenses. The Company also received $30,000 from borrowings under its new credit facility. These net proceeds and borrowings were used to repay principal and interest on the outstanding debt as well as dividends on the outstanding mandatorily redeemable preferred stock. In addition, $22,400 of common stock and additional paid in capital was recognized from the issuance of
Amounts included in accounts receivable represent premiums as well as finance charges, which are billed on a monthly installment basis. A majority of the Company's premiums are billed on a monthly installment basis. Accounts receivable are stated net of allowances for doubtful accounts. At December 31, 2004 and 2003, these allowances were $183 and $484, respectively. Uncollected premium balances over 90 days past due are written off.
Deferred debt issuance costs represent those costs incurred by the Company in connection with securing debt financing. These costs include closing and arranger's fees and are amortized over the life of the related loans. Included in other expenses for the years ended December 31, 2004, 2003 and 2002 is $0, $0 and $2,250, respectively, of unamortized deferred debt acquisition costs related to the Acquisition debt which were expensed upon the repayment of this debt, concurrent with the IPO.
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.
In accordance with the provisions of the Financial Accounting Standards Board's Emerging Issues Task Force ("EITF") No. 85-1, "Classifying Notes Received for Capital Stock," all outstanding principal and accrued interest related to these notes are recorded as contra-equity in the consolidated financial statements.
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. The consolidated tax liability is allocated on the basis of the members' proportionate contribution to consolidated taxable income.
Basic earnings per weighted average common share ("EPS") are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding and the net effect of potentially dilutive common shares. At December 31, 2004, 2003 and 2002, the Company's potentially dilutive instruments were common shares under options of 711,410, 771,000 and 379,000, respectively, and common shares under restriction of 70,271, 0 and 0, respectively. In accordance with the provisions
of FAS 128, EPS for the year ended December 31, 2002 is determined based upon $10,461 of net income less $1,219 of after-tax dividends on the mandatorily redeemable preferred stock.
The fair value of stock options used to compute pro forma net income and earnings per share disclosures for the years ended December 31, 2004, 2003 and 2002 is the estimated fair value at grant date using the Black-Scholes option-pricing model with the following assumptions:
Prior period amounts have been reclassified to conform to the current year presentation.
(1)Obligations of U.S. Government agencies includes collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA). The total of these fixed maturity securities was $120,636 and $121,833 at estimated fair value and $120,729 and $120,928 at amortized cost as of December 31, 2004 and 2003, respectively. As such, the asset-backed securities presented exclude such issuers already presented under U.S. Treasury securities and obligations of U.S. Government Agencies.
The amortized cost and the estimated fair value of fixed maturity securities, by maturity, at December 31, 2004 are shown below. Expected maturities will differ from contractual maturities
Gross gains of $1,535, $11,141 and $4,022 and gross losses of $263, $253 and $3,256 were realized on sales of fixed maturities for years ended December 31, 2004, 2003 and 2002, respectively. Gross gains of $2 were realized on the sales of equity securities for the year need December 31, 2004. Proceeds from fixed maturities maturing were $7,520, $0, and $71,750 for the years ended December 31, 2004, 2003 and 2002.
The following tables illustrate 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 illustrates the length of time that they have been in a continuous unrealized loss position.
The Company's investment portfolio included 80 securities in an unrealized loss position at December 31, 2004. The Company's methodology of assessing other-than-temporary impairment is based upon analysis of each security as of the balance sheet date and considers various factors including the length of time and the extent to which fair value has been less than the cost, the financial condition and the near term prospects of the issuer, whether the debtor is current on its contractually obligated interest and principal payments, and the Company's intent to hold the investment for a period of time sufficient to allow for recovery of its costs.
At December 31, 2004 and 2003, the Company held equipment and leasehold improvements with a carrying value of $973 and $1,309, which is net of accumulated depreciation of $1,182 and $415, respectively. Depreciation and amortization expense for the years ended December 31, 2004, 2003 and 2002 was $767, $331 and $84, respectively.
The Company entered into SARs agreements with executive management on October 16, 2001. Under the terms of the agreements, the Company granted 103,488 SARs on October 16, 2001 for past and future services. The agreements designated the number of "covered shares" for each executive and other employees and established the exercise price of $6.88 per share. Prior to the IPO, the SARs were to vest 20% at the end of each year commencing on December 31, 2002. As of the close of the IPO, the SARs became fully vested and were automatically exercised. Soon thereafter, the participants each received a cash payment equal to the excess of the $12.00 IPO price per common share over the exercise price of $6.88 per share. Compensation expense related to the SARs of $0, $0 and $529 was recognized as a charge to earnings for the years ended December 31, 2004, 2003 and 2002, respectively.
On October 16, 2001, the Company entered into a management subscription agreement with certain employees. The management subscription agreement contained certain Company call and employee put options that allowed the employee to put the stock owned by the employee at the time of exercise at a price based upon a formula calculation to the Company under certain circumstances outside of the Company's control and within the employee's control (e.g., employee retirement or resignation). The management subscription agreement was being accounted for as a variable plan in accordance with EITF 00-23, "Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44", whereby employee compensation expenses were being recorded over the period of service of the employee in accordance with FIN 28. Compensation expense related to the management subscription agreement totaled $0, $0 and $4,476 for the years ended December 31, 2004, 2003 and 2002, respectively.
On October 16, 2001, the Company implemented a Restricted Stock Plan and entered into Executive Restricted Stock Award Agreements under this plan with two employees of the Company. Under these agreements, 290,500 restricted shares of common stock, the maximum number that could be granted or sold under the plan, were sold at a cost of $0.43 per share, which approximated the fair value of the shares at the date of the sale. The Restricted Stock Plan permits the Board to grant restricted shares of common stock to select employees of the Company or any of its affiliates. The Board has the right to amend or terminate the Restricted Stock Plan at any time, subject to certain
limitations, but no amendment or termination may alter the rights of a participant under any awards previously granted. The restricted shares were subject to the put and call provisions of the Management Subscription Agreement, which under certain circumstances may have required the Company to purchase the restricted shares at a price based upon a formula calculation. These put and call provisions were accounted for in accordance with EITF 00-23 whereby the employee compensation expense was recorded over the period of service of the employee in accordance with FIN 28. Compensation expense related to these agreements was $0, $0 and $470 for the years ended December 31, 2004, 2003 and 2002, respectively.
The Company also issued $30,000 of senior subordinated notes to obtain funds for the Acquisition. Interest was payable semi-annually on each April 30 and October 31. The senior subordinated notes
During 2003, the Company entered in to a three-year term lease agreement to finance the acquisition of new equipment. Minimum payments due under this capital lease obligation as of December 31, 2004 are as follows:
In connection with the Acquisition (see Note 2), the Company issued 22,400 shares of the 100,000 authorized shares of 6% Series A senior mandatorily redeemable preferred stock at $1,000 per share. The stock had a liquidation preference and entitled its holders to receive dividends of $60 per share per annum. To the extent that the dividends were not paid, they accrued in arrears.
The holders of the preferred stock agreed to amend the terms of the preferred stock to cause it to automatically convert into common stock upon the closing of the IPO at the IPO price. Based upon the $12.00 per share IPO price, 1,866,665 additional common shares were issued in connection with this Preferred Share Exchange upon the close of the IPO. A total of $1,499 of dividends was accrued through the closing of the IPO and paid to the holders of the preferred stock concurrent with the Preferred Share Exchange.
The Company is subject to concentration of credit risk with respect to reinsurance ceded to CAR. At December 31, 2004 and 2003, respectively, reinsurance receivables on paid and unpaid loss and LAE with a carrying value of $90,126 and $106,808 and prepaid reinsurance premiums of $38,229 and $28,859 were associated with CAR. The Company's participation in CAR resulted in assumed net losses of $39,038, $48,367 and $38,589 for the years ended December 31, 2004, 2003 and 2002, respectively.
CAR is, with few exceptions, required by law to issue a policy to any applicant who seeks it. As a servicing carrier of CAR, this request applies to the Company. The Company has entered into service contracts with other insurance carriers under which the Company services the residual market business assigned to the carriers by CAR (the "buyout program"). Business generated through the buyout program is 100% ceded to the applicable carrier and serviced for a fee. Servicing carrier fees amounted to $628, $548 and $499 for the years ended December 31, 2004, 2003 and 2002, respectively.
The following table sets forth a reconciliation of beginning and ending reserves for losses and LAE, as shown, in the Company's consolidated financial statements for the years indicated:
At the end of each period, the reserves were re-estimated for all prior accident years. Primarily due to an improvement in CAR results, prior year reserves decreased by $6,778 for the year ended December 31, 2004. This decrease in prior year reserves resulted from re-estimations of prior accident years ultimate loss and LAE liabilities which resulted in a reduction of $2,523 in homeowner reserves, a reduction of $6,854 in CAR assumed reserves, a reduction of $329 in FAIR Plan assumed reserves, and an increase of $2,928 in the Company's automobile reserves. Prior year reserves increased by $181 for the year ended December 31, 2003 and decreased by $2,262 for the year ended December 31, 2002. Conditions and trends that have affected development of the loss and LAE reserves in the past may not necessarily occur in the future.
•a financial consulting fee of up to 1% of the amount obtained or made available to the Company pursuant to any debt, equity or other financing by the Company with the assistance of TJC; and
Provision for income taxes have been calculated in accordance with the provision of Statement No. 109. A summary of the income tax expense in the Consolidated Statements of Income is shown below:
The Company believes, based upon consideration of objective and verifiable evidence, including its recent earnings history and its future expectations, that the Company's taxable income in future years will be sufficient to realize all federal deferred tax assets. A valuation allowance of $4,210 and $3,551 was established against state deferred tax assets at December 31, 2004 and 2003, respectively. This valuation allowance is based upon management's assessment that it is more likely than not that the Company will not be able to utilize these state deferred tax assets.
The Company's federal income tax returns for the tax periods ended December 31, 2002 and 2001 are currently under examination by the Internal Revenue Service. In the Company's opinion, adequate tax liabilities have been established for all 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. Tax years prior to 2000 are closed.
The Company's Insurance Subsidiaries, domiciled in the Commonwealth of Massachusetts, prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the Division. Statutory net income of the Company's insurance subsidiaries was $44,575, $28,480 and $21,496 for the years ended December 31, 2004, 2003 and 2002, respectively. Statutory capital and surplus of the Company's insurance subsidiaries was $278,160 and $258,551 at December 31, 2004 and 2003, respectively.
At December 31, 2004 and 2003, the carrying value of $19,956 of the secured revolving credit facility approximated its fair value as described in Note 8. This amount is due and payable at the maturity date of November 27, 2005.
An unaudited summary of the Company's 2004 and 2003 quarterly performance, and audited annual performance, is as follows: