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.
The following table sets forth our selected historical consolidated financial data as of and for each of the five years ended December 31, 2020, 2019, 2018, 2017 and 2016.
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.
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 Insurance Company, 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, 2020, 2019, and 2018.
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 for the year ended December 31, 2020. 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.
Direct written premiums for the year ended December 31, 2020 decreased by $53,692, or 6.3%, to $798,712 from $852,404 for the comparable 2019 period. The 2020 decrease 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, 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.
(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 2020 and 2019. Our Massachusetts private passenger automobile rates include a 13% commission rate for agents.
● Fixed maturities securities, which are classified as available-for-sale, are reported at current fair values, rather than at amortized cost, or the lower of amortized cost or market, depending on the specific type of security, as required by SAP.
The 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, 2020, there were 234,170 shares available for future grant. Grants outstanding under the Plans as of December 31, 2020, were comprised of 138,514 restricted shares.
Grants made under the Incentive Plan during the years 2018 through 2020 were as follows.
(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.
We also had $129,766 due from CAR comprising of loss and loss adjustment expense reserves, unearned premiums and reinsurance recoverables.
Net Written Premiums. Net written premiums for the year ended December 31, 2020 decreased by $30,872, or 3.9%, to $763,537 from $794,409 for the comparable 2019 period. The 2020 decrease was primarily due to the factors
Net Earned Premiums. Net earned premiums for the year ended December 31, 2020 decreased by $17,699, or 2.2%, to $771,078 from $788,777 for the comparable 2019 period. The 2020 decrease was primarily due to the Safety Personal Auto Relief Credit as discussed above.
The effect of reinsurance on net written and net earned premiums is presented in the following table.
Earnings from Partnership Investments. Earnings from partnership investments were $6,901 for the year ended December 31, 2020 compared to $1,937 for the year ended December 31, 2019. The 2020 earnings reflects an increase in investment appreciation and cash proceeds received as a return on capital. 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 $957 for the year ended December 31, 2020 compared to $2,976 for the comparable 2019 period.
(3) Our investment portfolio included 270 securities in an unrealized loss position at December 31, 2020.
As of December 31, 2020, 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, 2020.
For the year ended December 31, 2020, the Company concluded that $1,054 of unrealized losses were due to credit factors and were recorded as an allowance for expected credit losses and credit loss expense. 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, 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 majority of unrealized losses recorded on the investment portfolio at 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. 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.
Net Impairment Losses on Investments. Net impairment losses on investments was $889 for the year ended December 31, 2019.
Credit Loss Expense. Credit loss expense on investments was $1,054 for the year ended December 31, 2020.
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 increased by $39, or 0.2%, to $16,872 for the year ended December 31, 2020 from $16,833 for the comparable 2019 period.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred for the year ended December 31, 2020 decreased by $105,290, or 20.7%, to $404,556 from $509,846 for the comparable 2019 period.
and 2019, respectively. Total prior year favorable development included in the pre-tax results for the year ended December 31, 2020 was $54,844, compared to $42,049, for the comparable 2019 period.
Underwriting, Operating and Related Expenses. Underwriting, operating and related expenses for the year ended December 31, 2020 increased by $22,346, or 9.2%, to $266,482 from $244,136 for the comparable 2019 period. Our GAAP expense ratio for the year ended December 31, 2020 increased to 34.6% from 31.0% for the comparable 2019 period. The 2020 increase is driven by an increase in contingent commission expense as well as costs associated with various system modernization in our claims, billing and underwriting areas and a reduction in certain expense allowances offered under the Servicing Carrier program that have decreased with the related written premium as noted above.
Income Tax Expense Our effective tax rates were 20.9% and 19.5% for the years ended December 31, 2020 and 2019, respectively. The effective rates for the years ended December 31, 2020 and 2019 were lower than the statutory rates primarily due to the effects of tax-exempt investment income.
The comparison of results for the year ended December 31, 2019 compared to the year ended December 31, 2018 can be found in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on February 28, 2020.
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 2020, the statutory surplus of Safety Insurance was $754,066, and its net income for 2020 was $121,446. As a result, a maximum of $121,446 is available in 2020 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 $632,620 at December 31, 2020. During the twelve months ended December 31, 2020, Safety Insurance recorded dividends to Safety of $89,156.
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 2020 and 2019 were as follows:
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. As of December 31, 2020, 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 us to repurchase any specific number of shares and may be modified, suspended or terminated at any time without prior notice. At December 31, 2020, the Company had purchased 2,831,168 shares of common stock at a cost $123,834. As of December 31, 2019, the Company had purchased 2,279,570 shares at a cost of $83,835.
As of December 31, 2020, the Company had loss and LAE reserves of $567,581, unpaid reinsurance recoverables of $106,311 and net loss and LAE reserves of $461,270. 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. Nonetheless, based upon our cumulative claims paid over the last ten years, the Company estimates that its loss and LAE reserves will be paid in the period shown above. 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.
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.
● Paid Loss Indications: This method projects ultimate loss estimates based upon extrapolations of historic paid loss trends. This method tends to be used on short tail lines such as automobile physical damage.
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, 2020 and December 31, 2019.
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, 2020 and December 31, 2019.
At December 31, 2020 and 2019, our total IBNR reserves for our private passenger automobile line of business were comprised of $(45,308) and $(66,422) related to estimated ultimate decreases in the case reserves, including anticipated recoveries (i.e. salvage and subrogation), and $15,901 and $21,488 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 44.2% of our total reserves for CAR assumed commercial automobile business as of December 31, 2020 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 65.9% of our total reserves for FAIR Plan assumed homeowners at December 31, 2020 due to similar reporting delays in the information we receive from FAIR Plan.
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.
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, 2020, a 1 percentage-point change in the loss and LAE ratio would result in a change in reserves of $7,710. Each 1 percentage-point change in the loss and loss expense ratio would have had a $6,090 effect on net income, or $0.40 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, 2020. 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.
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, 2020. 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.
The changes we have recorded in our reserves in the past illustrate the uncertainty of estimating reserves. Our prior year reserves decreased by $54,844, $42,049 and $56,488 during the years ended December 31, 2020, 2019, and 2018, 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, 2020, 2019 and 2018, 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.
At the end of each period, the reserves were re-estimated for all prior accident years. Our prior year reserves decreased by $54,844, $42,049, and $56,488 for the years ended 2020, 2019, and 2018, respectively. 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’s reserves. The decreases in prior year reserves in 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 other than auto and homeowner reserves. The decrease in prior year reserves during 2018 is primarily composed of reductions of $36,266 in our retained automobile reserves and $18,947 in our retained
homeowners reserves. It is not appropriate to extrapolate future favorable or unfavorable development of reserves from this past experience.
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, 2020.
● Projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items;
● Our possible need for and availability of additional financing, and our dependence on strategic relationships, among others;
● The effects of emerging claim and coverage issues on the Company’s business are uncertain, and court decisions or legislative or regulatory changes that take place after the Company issues its policies, including those taken in response to COVID-19 (such as requiring insurers to cover business interruption claims irrespective of terms or other conditions included in the policies that would otherwise preclude coverage), can result in an unexpected increase in the number of claims and have a material adverse impact on the Company's results of operations;
● Other risks and factors identified from time to time in our reports filed with the SEC. Refer to Part I, Item 1A - Risk Factors.
We have audited the accompanying consolidated balance sheets of Safety Insurance Group, Inc. and its subsidiaries (the "Company") as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of changes in shareholders’ equity and of cash flows for each of the three 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”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
As described in Notes 2 and 12 to the consolidated financial statements, the Company’s net liabilities for losses and loss adjustment expenses 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 Company’s net loss and loss adjustment expense reserve liability of approximately $461 million as of December 31, 2020 is calculated by management using various actuarial techniques which consider historical data and estimate 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 enhancements, judicial decisions, legal developments in imposition of damages, and changes and trends in general economic conditions, including the effects of inflation. As disclosed by management, these actuarial techniques assume that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting the Company’s ultimate losses, total reserves and resulting incurred but not reported (IBNR) reserves.
developing an independent estimate of the loss and loss adjustment expense reserves, by line of business, on a test basis, and comparison of this independent estimate to management’s actuarial determined reserves. Developing the independent estimate involved testing the completeness and accuracy of data provided by management and evaluating management’s assumptions related to loss development factors, and independently developing the loss development factors. For certain lines of business, procedures also included, among others, testing the completeness and accuracy of data provided by management and the involvement of professionals with specialized skill and knowledge to assist in evaluating the appropriateness of management’s actuarial techniques and evaluating the reasonableness of assumptions related to loss development factors used in those techniques.
(a) No portion of the other-than-temporary impairments recognized in the period indicated were included in Other Comprehensive Income.
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.
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, 2020 and 2019, these allowances were $1,754 and $578, respectively. Uncollected premium balances over ninety days past due are written off.
Advertising costs are charged to expense when they are incurred. Total advertising costs were $2,311, $2,182 and $2,500 for the years ended December 31, 2020, 2019, and 2018, respectively.
Finance and other service income primarily include revenues from premium installment charges, which are recognized when earned.
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.
The following table sets forth the computation of basic and diluted EPS for the periods indicated.
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, 2020 and 2019.
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 15 - Fair Value of Financial Instruments.
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate as a result of the 2017 Tax Cuts and Jobs Act (“TCJA”). The amount of the reclassification is the difference between the historical corporate income tax rate of thirty-five percent and the newly enacted twenty-one percent corporate income tax rate. The Company adopted the updated guidance effective January 1, 2018 and elected to reclassify the income tax effects of the TCJA from accumulated other comprehensive income (“AOCI”) to retained earnings at the beginning of the period of adoption. This reclassification resulted in a decrease of $4,736 in retained earnings as of January 1, 2018 and an increase in AOCI by the same 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
In May 2014, the FASB issued as final, ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes virtually all existing revenue recognition guidance under GAAP. The update's core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update was effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. ASU 2014-09 allows for the use of either the retrospective or modified retrospective approach of adoption. The Company adopted the updated guidance effective January 1, 2018 using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s financial position, results of operations, cash flows, or disclosures.
The gross realized gains and losses on sales of investments were as follows for the periods indicated.
The following tables as of December 31, 2020 and 2019 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.
At December 31, 2020, U.S. Government residential mortgage backed securities with a fair value of $37,467 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.
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.
During the year ended December 31, 2019, the company recognized $889 of other-than-temporarily-impairmnte (“OTTI”) losses which consisted entirely of credit impairments under the previous accounting guidance in ASC 320, Investments - Debt and Equity Securities.
Beginning on January 1, 2020, credit losses are recognized through an allowance account. See Note 2 - Recent Accounting Pronouncements for additional information and Note 3 - Investments for information about the allowance for expected credit losses on AFS debt securities.
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 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 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 and the Taxi/Limo Program, which represents 98% of the total reinsurance recoverable on paid and unpaid losses at December 31, 2020. 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, 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, 2020.
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, 2020, there were 234,170 shares available for future grant.
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
As of December 31, 2020, there was $6,691 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, 2020, 2019, and 2018 was $6,516, $7,784 and $4,413, respectively. For the years ended December 31, 2020, 2019, and 2018, the Company recorded compensation expense related to awards under the Incentive Plan of $5,893, $4,764, and $5,197, net of income tax benefit of $1,566, $1,266, and $1,382, respectively.
As part of the Company’s investment activity, we have committed $110,000 to investments in limited partnerships. The Company has contributed $61,455 to these commitments as of December 31, 2020. As of December 31, 2020, the remaining committed capital that could be called is $51,112, which includes potential recallable capital distributions.
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.
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 $3,477, $4,573 and $3,531 for the years ended December 31, 2020, 2019, and 2018, 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.
The Company had no amounts outstanding on its credit facility at December 31, 2020 or 2019. 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, 2020 and 2019.
Interest expense on the FHLB-Boston borrowing was $439 for the year ended December 31, 2020. There was no interest expense for the year ended December 31, 2019.
The Company’s private passenger automobile line of business prior year reserves decreased during the years ended December 31, 2020, 2019 and 2018 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 unaudited supplementary information about average historical claims duration as of December 31, 2020.
A summary of the income tax expense in the Consolidated Statements of Operations is shown below.
During the years ended December 31, 2020 and December 31, 2019 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.
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, 2020, the statutory capital and surplus of Safety Insurance was $754,066 and its net income for 2020 was $121,446. As a result, a maximum of $121,446 is available in 2021 for such dividends without prior approval of the Commissioner. During the year ended December 31, 2020, Safety Insurance recorded dividends of $89,156. As result of this Massachusetts statute, the Insurance Subsidiaries had restricted net assets in the amount of $632,620 at December 31, 2020.
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, 2020, the Insurance Subsidiaries had total adjusted capital of $754,066, 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 $197,193 at December 31, 2020.
● Commercial mortgage-backed securities: overall credit quality, including assessments of the level and variability of credit support and collateral type such as office, retail, or lodging, predictability of cash flows for the deal structure, prevailing economic market conditions.
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 (consistent with ASC 820).
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, 2020. There were no significant changes to the valuation process during the year ended December 31, 2020. As of December 31, 2020 and December 31, 2019, no quotes or prices obtained were adjusted by management. All broker quotes obtained were non-binding.
At December 31, 2020 and December 31, 2019, investments in fixed maturities classified as available-for-sale had a fair value which equaled carrying value of $1,256,653 and $1,228,040, respectively. At December 31, 2020, the Company’s held $441 of short-term investments. As of December 31, 2019, we held no short-term investments. The carrying values of cash and cash equivalents and investment income accrued approximated fair value.
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2020 or 2019.
An unaudited summary of the Company’s 2020 and 2019 quarterly performance, and audited annual performance, is as follows.