We continued to generate strong premium growth in 2011. The fourth quarter of 2011 marks the ninth consecutive quarter
that we have experienced growth in written premium. This increase is a result of multiple factors, including agency incentives,
Net earnings and diluted earnings per share for the year ended December 31, 2011 were $42.1 million and $3.39, respectively, compared to $91.5 million and $6.95, respectively, for 2010. The decrease in diluted earnings per share for the year ended December 31, 2011 is primarily due to unfavorable development in 2011 versus favorable development in 2010.
combined ratios typically run 20 to 30 points higher than renewal business combined ratios due to higher commission and
Our book value per share increased 6.7% from $53.03 at December 31, 2010 to $56.59 at December 31, 2011. This increase
was primarily due to earnings, net of shareholder dividends, during 2011.
The preparation of financial statements requires management to make estimates and assumptions that can have a significant effect on amounts reported in the financial statements. As more information becomes known, these estimates and assumptions could change and thus impact amounts reported in the future. We believe that the establishment of insurance reserves, the determination of “other-than-temporary” impairment on investments and accruals for litigation are the areas where the degree of judgment required to determine amounts recorded in the financial statements makes the accounting policies critical.
As compared with loss and LAE reserves held at December 31, 2011, the indicated results from utilized estimates of loss and LAE could range from an adequate reserve position to a redundancy of 13% or $62.5 million. These ranges do not present a forecast of future redundancy since actual development of future losses on current loss reserves may vary materially from those estimated in the year-end 2011 reserve tests. Reserves recorded are our best estimate of the ultimate amounts that will be paid.
Calendar year losses incurred for ECO losses, net of reinsurance, over the past five calendar years have ranged from $0.3 million to $18.6 million, averaging $7.1 million per year. Gross of reinsurance, ECO losses have ranged from $0.3 million to $21.1 million, averaging $7.9 million over the past five calendar years. Losses for 2011, 2010 and 2009 have been $0.8 million, $0.3 million and $0.3 million, respectively.
The following tables present the development of our loss reserves, net of reinsurance, on a GAAP basis for the calendar years 2001 through 2011. The Infinity table includes the loss reserves of the NSA Group through December 31, 2002, the addition of the Assumed Agency Business on January 1, 2003, and those of Infinity combined for 2003 and all subsequent years. The top line of each table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for the indicated years. The next line, captioned Liability for unpaid losses and LAE - as re-estimated at December 31, 2011, shows the re-estimated liability as of December 31, 2011. The remainder of the table presents intervening development as percentages of the initially estimated liability. Additional information and experience in subsequent years results in development. The middle line shows a cumulative deficiency (redundancy) which represents the aggregate percentage increase (decrease) in the liability initially estimated. The lower portion of the table indicates the cumulative amounts paid as of successive periods as a percentage of the original loss reserve liability.
2002 includes $126 resulting from the addition of the Assumed Agency Business.
We made a concerted effort to increase claims staff in 2011 in anticipation of an increase in premium volume in order to maintain or improve closing ratios (defined as closed claims as a percentage of opened claims). As a result, for year-end 2010 loss reserves, we saw an increase in the cumulative paid as of one year later to 62.5%.
The following table presents (in millions) the loss reserves for the Assumed Agency Business through December 31, 2002. Development for 2002 for the Assumed Agency Business is included in the Infinity table above. Under the reinsurance agreement entered into with GAI, our insurance subsidiaries assumed the net reserves from GAI. Accordingly, gross reserves and net reserves are the same.
The following table summarizes the effect on each calendar year of reserve re-estimates, net of reinsurance, for each of the accident years presented. The total of each column details the amount of reserve re-estimates made in the indicated calendar year and shows the accident years to which the re-estimates are applicable. The table includes the loss reserves of the NSA Group, the Assumed Agency Business and those of Infinity combined. Favorable reserve re-estimates are in parentheses.
In accordance with the Goodwill topic of the FASB Accounting Standards Codification, we perform impairment test procedures for goodwill on an annual basis. These procedures require us to calculate the fair value of goodwill, compare the result to our carrying value and record the amount of any shortfall as an impairment charge.
impairment charge was required at that date. Additionally, there was no indication of impairment at December 31, 2011.
As of December 31, 2011, the holding company had $158.3 million of cash and investments. In 2011, in order to support the premium growth in our insurance subsidiaries, we contributed net capital in the form of cash of $5.8 million. In 2012, our insurance subsidiaries may pay us up to $53.1 million in ordinary dividends without prior regulatory approval.
Agreement. At December 31, 2011, there were no borrowings outstanding under the Credit Agreement.
by $28.8 million to $50.0 million as of that date and modified the authority to include the repurchase of our debt. During the
Directors approved a new $50.0 million share and debt repurchase program expiring on December 31, 2011. On August 2, 2011, our Board of Directors increased the authority under this program by $50.0 million and extended the date to execute the program to December 31, 2012. During 2011, we repurchased 780,511 shares at an average cost, excluding
commissions, of $52.53. As of December 31, 2011, we had $47.0 million of authority remaining under this program.
We engage two unaffiliated money managers for our fixed income portfolio and internally manage a Vanguard exchange-traded fund designed to track the MSCI U.S. Broad Market Index for our equity portfolio. The investment managers conduct, in accordance with our investment guidelines, all of our investment purchases and sales. Our Chief Financial Officer and the Investment Committee, at least quarterly, review the performance of the money managers and compliance with our investment guidelines. National banks unaffiliated with the money managers maintain physical custody of securities.
Our consolidated investment portfolio at December 31, 2011 contained $1.2 billion in fixed maturity securities and $36.9 million in equity securities, all carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income, a separate component of shareholders' equity on an after-tax basis. At December 31, 2011, we had pre-tax net unrealized gains of $43.3 million on fixed maturities and pre-tax net unrealized gains of $10.5 million on equity securities. Combined, the pre-tax net unrealized gain increased by $16.9 million for the twelve months ended December 31, 2011.
Approximately 94.3% of our fixed maturity portfolio at December 31, 2011 was rated “investment grade” (credit rating of AAA to BBB) by nationally recognized rating agencies. The average credit rating of our fixed maturity portfolio was AA- at December 31, 2011. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated or non-investment grade. We believe that a high quality investment portfolio is more likely to generate stable and predictable investment returns.
Since we carry all of these securities at fair value in the Consolidated Balance Sheets, there is virtually no effect on liquidity or financial condition upon the sale and ultimate realization of unrealized gains and losses. The average duration of our fixed maturity portfolio was 3.0 years at December 31, 2011.
The following table provides information about our fixed maturity investments at December 31, 2011, which are sensitive to interest rate risk. The table shows expected principal cash flows by expected maturity date for each of the five subsequent years and collectively for all years thereafter. Callable bonds and notes are included based on call date or maturity date depending upon which date produces the most conservative yield. MBS and sinking fund issues are included based on maturity year adjusted for expected payment patterns.
December 31, 2011, our fixed maturity portfolio included three securities having a fair value of $1.0 million with exposure to
sub-prime and Alt-A mortgages. Although these securities have sub-prime mortgages as underlying collateral, all are rated AA
None of the $20.4 million of commercial mortgage-backed securities were issued by GSEs.
of Standard and Poor’s, Moody’s or Fitch’s ratings, of the state and municipal bond portfolio at December 31, 2011 (in thousands):
Included in our investments in corporate fixed income securities at December 31, 2011 are $42.7 million of dollar-denominated
During 2011, personal auto insurance gross written premium in our Focus States grew 14.3% when compared with 2010. The increase in gross written premium is primarily due to growth in Arizona, California, Florida, Georgia and Texas.
California gross written premium grew 12.0% during the twelve months ended December 31, 2011. Rate actions taken by competitors and a shift in business mix to policies offering broader coverage have stimulated premium growth in the state.
primarily a result of modest rate decreases coupled with a shift in business mix to policies offering broader coverage.
Our Commercial Vehicle gross written premium grew 12.7% during the twelve months ended December 31, 2011. This growth is primarily due to growth in California resulting from the appointment of new agents.
Gross written premium grew 12.2% during the twelve months ended December 31, 2010 compared with the twelve months ended December 31, 2009. During 2010, we implemented 22 rate revisions in various states with an overall rate increase of 1.3%. Policies in force at December 31, 2010 increased 10.7% compared with the same period in 2009. Gross written premium grew more than policies in force due to a shift in business mix toward policies offering broader coverage. These policies typically generate a higher premium per policy than those with coverage that is more restricted.
commissions, premium taxes and other variable costs incurred in connection with writing new and renewal business are
is earned. On a statutory basis, these items are expensed as incurred. We capitalize costs for computer software developed or
The statutory combined ratio for the twelve months ended December 31, 2011 increased by 7.4 points when compared to the twelve months ended December 31, 2010. The twelve months ended December 31, 2011 included $4.5 million of unfavorable development on prior year loss and LAE reserves. The twelve months ended December 31, 2010 included $73.9 million of favorable development on prior year loss and LAE reserves. 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. Excluding the effect of development from all periods, the statutory combined ratio decreased by 1.2 points for the twelve months ended December 31, 2011 when compared to the twelve months ended December 31, 2010. The GAAP combined ratio for the twelve months ended December 31, 2011 increased by 8.4 points when compared to the twelve months ended December 31, 2010. Excluding the effect of development, the GAAP combined ratio decreased by 0.2 points during the twelve months ended December 31, 2011 when compared to the twelve months ended December 31, 2010. We expect the GAAP combined ratio to be between 97.5% and 98.5% for the year ending December 31, 2012.
The loss and LAE ratio for the Commercial Vehicle product increased by 1.9 points during the twelve months ended December 31, 2011 when compared to 2010. This increase was primarily due to an increase in the loss ratio in California. This increase was more than offset by a decline in the underwriting ratio of 2.6 points. As Commercial Vehicle premium has grown, the ratio of fixed underwriting costs to premium has declined.
Overall, the statutory combined ratio for the year ended December 31, 2010 of 88.4% deteriorated by 1.2 points from 87.2% for 2009. The twelve months ended December 31, 2010 benefited from $73.9 million of favorable development on loss and LAE reserves compared to $65.4 million for 2009. Bodily injury coverage in California, Connecticut, Florida and Pennsylvania as well as the Commercial Vehicle product related to accident years 2009, 2008 and 2007 drove favorable development during 2010. (See Critical Accounting Policies - Insurance Reserves for a more detailed discussion of loss reserving and development.) Excluding the favorable development from both years, the combined ratio increased from 94.9% in 2009 to 96.6% in 2010. The GAAP combined ratio for 2010 increased by 1.1 points from 88.5% at December 31, 2009 to 89.6% in 2010. Excluding the effect of favorable development, the GAAP combined ratio for 2010 was 97.7%, compared to 96.2% for 2009.
Catastrophe related losses were $3.7 million and $1.0 million during 2010 and 2009, respectively.
The 1.3 point increase in the Focus States’ combined ratio for the year ended December 31, 2010 was primarily driven by an increase in the underwriting ratio. The underwriting ratio was up due to growth in new business, on which the Company pays higher commission rates. The Urban Zone loss and LAE ratio declined slightly because of improvement in the California Urban Zones. An increase in the Non-urban Zone loss and LAE ratio, driven by Florida Non-urban Zones, offset this decline. Florida’s Non-urban zone loss ratio rose because of growth in new business in late 2009 and into 2010. Infinity has taken actions, including raising rates and modifying certain underwriting standards, to improve the underperforming segments of the Florida business.
The total realized gain in 2010 was primarily a result of securities sold to utilize a portion of our capital loss carryforward.
The following table reconciles our U.S. statutory rate and effective tax rate for the periods ended December 31, 2011, 2010 and 2009.
We previously recorded a valuation allowance equal to 100% of the available capital loss carryforward. As capital gains are generated, we take credit for the deferred tax asset and reduce the valuation allowance. In 2011, the capital loss carryforward was fully utilized. In addition, we include the tax on losses recorded on other-than-temporarily impaired securities in the valuation allowance.
During 2010, the Financial Accounting Standards Board ("FASB") issued an accounting standards update related to the accounting for the deferral of costs associated with successful acquisition or renewal of insurance contracts. This standard is intended to reduce diversity in practice and is effective for fiscal years beginning after December 15, 2011. We currently estimate that we will have approximately $10.0 million to $12.0 million of deferred acquisition cost that will no longer meet the criteria for deferral as of January 1, 2012. The resulting decrease in book value per share will be approximately $0.55 to $0.66. Pursuant to the guidance, we will elect to adopt this standard on a retrospective basis and, therefore, will recognize the majority of the effect of this accounting change as an adjustment to beginning retained earnings, with the change in the new deferral amount being recognized in income in each year presented.
During 2011, the FASB issued an accounting standards update related to the presentation of comprehensive income. Under the new guidance, an entity can present comprehensive income in a single continuous statement or in two separate but consecutive statements. This standard is effective for reporting periods beginning after December 15, 2011 and is to be applied retrospectively. The new guidance affects presentation only and will have no impact on our results of operations or financial position.