We are a leading provider of private passenger automobile insurance in Massachusetts. In addition to private passenger automobile insurance (which represented 67.2% of our direct written premiums in 2011), we offer a portfolio of other insurance products, including commercial automobile (10.5% of 2011 direct written premiums), homeowners (18.1% of 2011 direct written premiums), dwelling fire, umbrella and business owner policies (totaling 4.2% of 2011 direct written premiums). Operating exclusively in Massachusetts and New Hampshire through our insurance company subsidiaries, Safety Insurance, Safety Indemnity, and Safety P&C (together referred to as the "Insurance Subsidiaries"), we have established strong relationships with independent insurance agents, who numbered 852 in 987 locations throughout Massachusetts and New Hampshire during 2011. We have used these relationships and our extensive knowledge of the Massachusetts market to become the third largest private passenger automobile and the third largest commercial automobile insurance carrier in Massachusetts, capturing an approximate 11.1% and 11.4% share, respectively, of the Massachusetts private passenger and commercial automobile markets in 2011, according to the Commonwealth Automobile Reinsurers ("CAR") Cession Volume Analysis Report of February 29, 2012, based on automobile exposures. These statistics total, for each vehicle insured, the number of months during the year insurance for that vehicle is in effect, to arrive at an aggregate number of car-months for each insurer; this aggregate number, divided by 12, equals the insurer's number of car-years, a measure we refer to in this report as automobile exposures.
The Insurance Subsidiaries began writing private passenger automobile and homeowners insurance in New Hampshire during 2008, personal umbrella business during 2009, and commercial automobile business during 2011. During the years ended December 31, 2011, 2010, and 2009, we wrote $5,750, $2,774, and $978 in direct written premiums, respectively, and approximately 4,500, 3,300, and 1,250 policies, respectively, in New Hampshire.
•The quarter ended December 31, 2011 was marked by two severe weather events in October, the 2011 Halloween snow storm and the Eastern Massachusetts flood event, both of which caused extensive property damage. Similar to the prior three quarters of 2011, we experienced elevated catastrophe claims activity in our personal and commercial property lines for the quarter ended December 31, 2011. As a result, we incurred $9,625 of catastrophe losses for the quarter ended December 31, 2011.
•We increased our Massachusetts private passenger automobile rates 3.9% effective May 15, 2011 and 0.7% effective March 1, 2012.
We define a "catastrophe" as an event that produces pre-tax losses before reinsurance in excess of $1,000 and involves multiple first-party policyholders, or an event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time following the event. Catastrophes are caused by various natural events including high winds, winter storms, tornadoes, hailstorms, and hurricanes. The nature and level of catastrophes in any period cannot be reliably predicted.
(1)Total losses incurred includes losses plus defense and cost containment expenses and excludes adjusting and other claims settlement expenses.
We have been subject to extensive regulation in the private passenger automobile insurance industry in Massachusetts, which represented 67.2% of our direct written premiums in 2011. Private passenger automobile insurance has been heavily regulated in Massachusetts. In any respects, the private passenger automobile insurance market in Massachusetts prior to 2008 was unique, in comparison to other states. This was due to a number of factors, including unusual regulatory conditions, the market dominance of domestic companies, the relative absence of large national companies, and the heavy reliance on independent insurance agents as the market's principal
distribution channel. Perhaps most significantly, prior to 2008, the Massachusetts Commissioner of Insurance fixed and established the premium rates and the rating plan to be used by all insurance companies doing business in the private passenger automobile insurance market and the Massachusetts private passenger automobile insurance residual market mechanism featured a reinsurance program run by CAR in which companies were assigned producers.
In 2008, the Commissioner issued a series of decisions to introduce what she termed "managed competition" to Massachusetts automobile insurance premium rates and in doing so replaced the fixed and established regime with a prior approval rate review process, governed by regulations that set certain terms and conditions that insurers must comply with in establishing their rates. The Commissioner also replaced the former reinsurance program with an assigned risk plan.
During 2011, we increased our rates approximately 3.7%, and on March 1, 2012, we began using 17 rating tiers which resulted in a rate increase of 0.7%. Our rates include a 13.0% commission rate for agents. Our direct automobile written premiums increased by 5.5% in 2011 with increased exposures and average written premium per exposure in our private passenger and commercial automobile lines of business.
assets consist primarily of premium receivables that are outstanding over ninety days, federal deferred tax assets in excess of statutory limitations, furniture, equipment, leasehold improvements and prepaid expenses.
On March 10, 2006, the Board approved amendments to the Incentive Plan, subject to shareholder approval, to (i) increase the number of shares of common stock available for issuance by 1,250,000 shares, (ii) remove obsolete provisions, and (iii) make other non-material changes. A total of 1,250,000 shares of common stock had previously been authorized for issuance under the Incentive Plan. The Incentive Plan, as amended, was approved by the shareholders at the 2006 Annual Meeting of Shareholders which was held on May 19, 2006. Under the Incentive Plan, as amended, the maximum number of shares of common stock with respect to which awards may be granted is 2,500,000. As of December 31, 2011, there were 718,859 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, 2011, were comprised of 254,117 restricted shares and 125,700 nonqualified stock options.
Grants made under the Incentive Plan during the years 2007 through 2011 are as follows:
We are a participant in CAR, a state-established body that runs the residual market reinsurance programs for both private passenger and commercial automobile insurance in Massachusetts under which premiums, expenses, losses and loss adjustment expenses on ceded business are shared by all insurers writing automobile insurance in Massachusetts. We also participate in the FAIR Plan in which premiums, expenses, losses and loss adjustment expenses on homeowners business that cannot be placed in the voluntary market are shared by all insurers writing homeowners insurance in Massachusetts. The FAIR Plan has grown dramatically over the past few years as insurance carriers have reduced their exposure to coastal property. The FAIR Plan's exposure to catastrophe losses increased and as a result, the FAIR Plan decided to buy reinsurance to reduce their exposure to catastrophe losses. On July 1, 2011, the FAIR Plan purchased $1,000,000 of catastrophe reinsurance for property losses in excess of $200,000. At December 31, 2011, we had no material amounts recoverable from any reinsurer, excluding $44,850 recoverable from CAR.
Direct Written Premiums. Direct written premiums for the year ended December 31, 2011 increased by $44,305, or 7.3%, to $649,262 from $604,957 for the comparable 2010 period. The 2011 increases occurred primarily in our personal automobile and homeowners lines, which experienced increases of 3.5% and 3.9%, respectively, in average written premium per exposure and increases of 1.5% and 11.5%, respectively, in written exposures. The increase in homeowners exposures is primarily the result of our pricing strategy of offering account discounts to policyholders who insure both an automobile and home with us. In addition, our commercial automobile line experienced an increase in average written premium per exposure of 2.2% and an increase in written exposures of 6.4%. This increase in exposures is a result of additional business submitted by ERPs through the CAR LSC program as the number of Limited Servicing Carriers was reduced from six to four effective July 1, 2011.
Net Written Premiums. Net written premiums for the year ended December 31, 2011 increased by $43,509, or 7.5%, to $620,316 from $576,807 for 2010. The 2011 increase was primarily due to the factors that increased direct written premiums.
Net Earned Premiums. Net earned premiums for the year ended December 31, 2011 increased by $46,418, or 8.4%, to $598,368 from $551,950 for the comparable 2010 period. The 2011 increase was primarily due to the factors that increased direct written premiums.
Net Realized Gains on Investments. Net realized gains on investments were $4,360 for the year ended December 31, 2011 compared to $863 for the comparable 2010 period.
As of December 31, 2011, our portfolio of fixed maturity investments was comprised entirely of investment grade corporate fixed maturity securities, U.S. government and agency securities, and asset-backed securities, with the exception of two securities which represented 0.2% of our total investment in fixed income securities. All of our securities received a rating assigned by Moody's of Ba or higher, except the few securities not rated by Moody's, all except one of which are rated investment grade by Standard & Poor's. Such ratings are generally assigned upon the issuance of the securities and are subject to revision on the basis of ongoing evaluations. Ratings in the table are as of the date indicated.
As of December 31, 2011, we held insured investment securities of approximately $143,467, which represented approximately 12.9% of our total investments. Approximately $43,562 of these securities are pre-refunded, meaning that funds have been set aside in escrow to satisfy the future interest and principal obligations of the bond.
Interest Expenses. Interest expense for the years ended December 31, 2011 and 2010 was $88. The credit facility commitment fee included in interest expense was $75 for each of the years ended December 31, 2011 and 2010.
Net Income. Net income for the year ended December 31, 2011 was $13,702 compared to $56,342 for the comparable 2010 period. This decrease was primarily attributable to the increase in losses and loss adjustment expenses, as discussed above.
Direct Written Premiums. Direct written premiums for the year ended December 31, 2010 increased by $45,210, or 8.1%, to $604,957 from $559,747 for the comparable 2009 period. The 2010 increase occurred primarily in our personal automobile and homeowners lines, which experienced increases of 3.8% and 3.2%, respectively, in average written premium per exposure and increases of 3.3% and 19.6%, respectively, in written exposures. The increase in homeowners exposures is primarily the result of our pricing strategy of offering account discounts to policyholders who insure both an automobile and home with us. Partially offsetting these increases was a 4.6% decrease in average written premium per exposure and a 2.2% decrease in written exposures in our commercial automobile line. This decrease is primarily a result of reduced exposures from ERPs submitting business through the CAR LSC program and general economic conditions which have reduced the size of the overall commercial automobile insurance market in Massachusetts.
Net Written Premiums. Net written premiums for the year ended December 31, 2010 increased by $44,178, or 8.3%, to $567,807 from $532,629 for the comparable 2009 period. The 2010 increase was primarily due to the factors that increased direct written premiums.
(5)Amounts in this column represent other-than-temporary impairment ("OTTI") recognized in accumulated other comprehensive income.
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 illustrates the length of time that they have been in a continuous unrealized loss position as of December 31, 2010.
The following table shows our insured investment securities that are backed by financial guarantors including pre-refunded securities as of December 31, 2010. We do not have any direct investment holdings in a financial guarantee insurance company.
Of the $5,669 gross unrealized losses as of December 31, 2010, $4,747 relates to obligations of U.S. Treasuries, states and political subdivisions. The remaining $922 of gross unrealized losses relates primarily to holdings of investment grade asset-backed, corporate, other fixed maturity and equity securities.
During the years ended December 31, 2010 and 2009, there was no significant deterioration in the credit quality of any of our holdings and no other-than-temporary impairment ("OTTI") charges were recorded related to our portfolio of investment securities.
Transfers in and out of Level 3 are attributable to changes in the ability to observe significant inputs in determining fair value exit pricing. On January 1, 2010, our Level 3 securities consisted of one asset-backed security whose price was based solely on a single broker quote which was deemed to be obtained through unobservable inputs. This security was sold in October 2010.
Underwriting, Operating and Related Expenses. Underwriting, operating and related expenses for year ended December 31, 2010 increased by $1,699, or 1.0%, to $172,823 from $171,124 for the comparable 2009 period. Our GAAP expense ratios for the year ended December 31, 2010 decreased to 31.3% from 32.2% for the comparable 2009 period.
Interest Expenses. Interest expense for the year ended December 31, 2010 was $88, compared to $135 for the comparable 2009 period. The credit facility commitment fee included in interest expense was $75 for both the years ended December 31, 2010 and 2009.
Net Income. Net income for the year ended December 31, 2010 increased by $2,190, or 4.0%, to $56,342 from $54,152 for the comparable 2009 period. This increase was primarily due to the factors discussed above.
Net cash used for investing activities was $12,879 and $54,420 during the years ended December 31, 2011 and 2010, respectively, as purchases of fixed maturity and equity securities exceeded sales, paydowns, calls and maturities of fixed maturity and equity securities. Net cash provided by investing activities during the year ended December 31, 2009 was $16,091 as sales, paydowns, calls and maturities of fixed maturity and equity securities exceeded purchases of fixed maturity and equity securities.
Net cash used for financing activities was $$29,465, $30,865, and $66,550 during the years ended December 31, 2011, 2010 and 2009, respectively. Net cash used for financing activities is primarily comprised of dividend payments to shareholders and the acquisition of treasury stock.
For information regarding our Credit Facility, please refer to Item 8 - Financial Statements and Supplementary Data, Note 7, Debt, of this Form 10-K.
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
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 2011 and 2010 were as follows:
On February 15, 2012, our Board approved and declared a quarterly cash dividend on our common stock of $0.50 per share to be paid on March 15, 2012 to shareholders of record on March 1, 2012. We plan to continue to declare and pay quarterly cash dividends in 2012, depending on our financial position and the regularity of our cash flows.
On August 3, 2007, our Board approved a share repurchase program of up to $30,000 of the Company's outstanding common shares. On March 19, 2009, our Board increased this existing share repurchase program by authorizing repurchase of up to $60,000 of the Company's outstanding common shares. On August 4, 2010, our Board again increased the existing share repurchase program by authorizing repurchase of up to $90,000 of the Company's outstanding common shares. Under the program, we may repurchase shares of our 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.
As of December 31, 2011, the Company had loss and LAE reserves of $403,872, unpaid reinsurance recoverables of $51,774 and net loss and LAE reserves of $352,098. 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.
Management determines our loss and LAE reserves estimate based upon the analysis of our actuaries. A reasonable estimate is derived by selecting a point estimate within a range of indications as calculated by our actuaries using generally accepted actuarial techniques. The key assumption in most actuarial analysis is that past patterns of frequency and severity will repeat in the future, unless a significant change in the factors described above takes place. Our key factors and resulting assumptions are the ultimate frequency and severity of claims, based upon the most recent ten years of claims reported to the Company, and the data CAR reports to us to calculate our share of the residual market, as of the date of the applicable balance sheet. For each accident year and each coverage within a line of business our actuaries calculate the ultimate losses incurred. Our total reserves are the difference between the ultimate losses incurred and the cumulative loss and loss adjustment payments made to date. Our IBNR reserves are calculated as the difference between our total reserves and the outstanding case reserves at the end of the accounting period. To determine ultimate losses, our
actuaries calculate a range of indications and select a point estimation using such actuarial techniques as:
Such techniques assume that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting our ultimate losses, total reserves and resulting IBNR reserves. It is possible that the final outcome may fall above or below these amounts as a result of a number of factors, including immature data, sparse data, or significant growth in a line of business. Using these methodologies our actuaries established a range of reasonably possible estimations for net reserves of approximately $317,155 to $363,035 as of December 31, 2011 compared to a range of $311,570 to $359,802 as of December 31, 2010. In general, the low and high values of the ranges represent reasonable minimum and maximum values of the indications based on the techniques described above. Our selected point estimate of net loss and LAE reserves based upon the analysis of our actuaries was $352,098 as of December 31, 2011 compared to $351,244 as of December 31, 2010.
The following tables present our total net reserves and the corresponding case reserves and IBNR reserves for each line of business as of December 31, 2011 and 2010.
Our IBNR reserves consist of our estimate of the total loss reserves required less our case reserves. The IBNR reserves for CAR assumed private passenger and commercial automobile business are 22.4% and 36.1%, respectively, of our total reserves for CAR assumed private passenger and
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, 2011, a 1 percentage-point change in the loss and LAE ratio would result in a change in reserves of $5,984. Each 1 percentage-point change in the loss and loss expense ratio would have had a $3,889 effect on net income, or $0.26 per diluted share.
The following table presents a comparison of prior year development of our net reserves for losses and LAE for the years ended December 31, 2011, 2010 and 2009. 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.
The decreases in prior years reserves during the years ended December 31, 2011, 2010 and 2009 resulted from re-estimations of prior year ultimate loss and LAE liabilities. The 2011 decrease is primarily composed of reductions of $28,302, in our retained automobile reserves and $4,921 in our retained homeowners reserves. The 2010 decrease is primarily composed of reductions of $34,248 in our retained automobile reserves, and $7,269 in our retained homeowners reserves and all other reserves and $5,572 in CAR assumed reserves. The 2009 decrease is primarily composed of reductions of $24,979 in our retained automobile reserves and $11,551 in CAR assumed reserves and $6,103 in our retained homeowners and all other reserves.
The following table presents information by line of business for prior year development of our net reserves for losses and LAE for the year ended December 31, 2011.
The following table presents information by line of business for prior year development of retained reserves for losses and LAE for the year ended December 31, 2011; that is, all our reserves except for business ceded or assumed from CAR and other residual markets.
Our private passenger automobile line of business prior year reserves decreased by $24,133 for the year ended December 31, 2011. The decrease was primarily due to improved retained private passenger results of $20,008 for the accident years 2005 through 2009 The improved retained private passenger results were primarily due to fewer IBNR claims than previously estimated and better than previously estimated severity on our established bodily injury and property damage case reserves.
Our commercial automobile line of business prior year reserves decreased by $5,279 for the year ended December 31, 2011 due primarily to fewer IBNR claims than previously estimated.
ASC 320, Investments-Debt and Equity Securities requires entities to separate an OTTI of a debt security into two components when there are credit related losses associated with the impaired debt security for which the Company asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. Under ASC 320, the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other factors is recorded as a component of other comprehensive
income (loss). In instances where no credit loss exists but it is more likely than not that the Company will have to sell the debt security prior to the anticipated recovery, the decline in market value below amortized cost is recognized as an OTTI in earnings. In periods after the recognition of an OTTI on debt securities, the Company accounts for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted or amortized into net investment income.
•Descriptions of assumptions underlying or relating to any of the foregoing; and
The Insurance Subsidiaries began writing private passenger automobile and homeowners insurance in New Hampshire during 2008, personal umbrella insurance in New Hampshire during 2009, and commercial automobile insurance in New Hampshire during 2011. During the years ended 2011, 2010, and 2009, the Company wrote $5,750, $2,774, and $978, respectively, in direct written premiums in New Hampshire.
Investment income is recognized on an accrual basis of accounting. Bonds not backed by other loans are amortized using the interest method. Loan-backed bonds and structured securities are
Cash equivalents, consisting of money market accounts and United States ("U.S.") Treasury bills with original maturities of three months or less, are stated at amortized cost, which approximates fair value.
Amounts included in accounts receivable represent premiums as well as finance charges, the majority of which are both billed on a monthly installment basis. Accounts receivable are stated net of allowances for doubtful accounts. At both December 31, 2011 and 2010, these allowances were $362. Uncollected premium balances over ninety days past due are written off.
Prior to January 1, 2006, the Company accounted for share-based compensation to employees and non-employee directors in accordance with the recognition and measurement principles of ASC 718, Share Based Compensation. Accordingly, no compensation cost related to stock options was reflected in
In May 2011, the FASB issued ASU No. 2011-04 (Topic 820), Fair Value Measurements, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS), which clarifies the application of existing fair value measurement and disclosure requirements and amends certain fair value measurement principles, requirements and disclosures. To improve consistency in global application across jurisdictions, changes in wording were made to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way. The guidance is to be applied prospectively for reporting periods beginning after December 15, 2011. Early adoption is not permitted. The impact of adoption is not expected to be material to the Company's consolidated financial condition and results of operations.
In June 2011, the FASB issued ASU 2011-05 (Topic 220), Presentation of Comprehensive Income, which amends the presentation of comprehensive income and its components. Under the new guidance, an entity has the option to present comprehensive income in a single continuous statement or in two separate but consecutive statements. Both options require an entity to present reclassification adjustments for items reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of comprehensive income are presented. The guidance is effective for reporting periods beginning after December 15, 2011 and is to be applied retrospectively. Early adoption is permitted. The impact of adoption is related to presentation only and will have no impact on the Company's results of operations and financial position
In December 2011, the FASB issued ASU 2011-12 (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05, which indefinitely defers certain provisions of ASU 2011-05 (Topic 220), Presentation of Comprehensive Income that revised the manner in which entities present comprehensive income in financial statements. One of ASU 2011-05 provisions would require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. Accordingly, this requirement is indefinitely deferred and will be further deliberated by the FASB at a future date. The amendment will be effective for fiscal years and interim periods within those years that begin after December 15, 2011. The impact of adoption is not expected to be material to the Company's consolidated financial condition and results of operations.
(1)Residential mortgage-backed securities consists primarily of obligations of U.S. Government agencies including collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB). The total of these fixed maturity securities was $277,885 and $237,335 at amortized cost and $294,926 and $252,592 at fair value as of December 31, 2011 and December 31, 2010, respectively.
(2)Other asset-backed securities includes obligations of the U.S. Small Business Administration which totaled $6,054 and $9,553 at amortized cost and $6,584 and $10,307 at estimated fair value at December 31, 2011 and 2010, respectively.
The Company holds no subprime mortgage debt securities. All of the Company's holdings in mortgage-backed securities are either U.S. Government or Agency guaranteed or are rated investment grade by either Moody's or Standard & Poor's.
During the years ended December 31, 2011 and 2010, there was no significant deterioration in the credit quality of any of the Company's holdings and no OTTI charges were recorded related to the Company's portfolio of investment securities. At December 31, 2011 and December 31, 2010, there were no amounts included in accumulated other comprehensive income related to securities which were considered by the Company to be other-than-temporarily impaired.
Depreciation and amortization expense for the years ended December 31, 2011, 2010, and 2009 was $3,277, $2,526 and $2,698 respectively.
Long-term incentive compensation is provided under the Company's 2002 Management Omnibus Incentive Plan ("the Incentive Plan") which provides for a variety of stock-based compensation awards, including nonqualified stock options, incentive stock options, stock appreciation rights and restricted stock ("RS") awards.
On March 10, 2006, the Board approved amendments to the Incentive Plan, subject to shareholder approval, to (i) increase the number of shares of common stock available for issuance by 1,250,000 shares, (ii) remove obsolete provisions, and (iii) make other non-material changes. A total of 1,250,000 shares of common stock had previously been authorized for issuance under the Incentive Plan. The Incentive Plan, as amended, was approved by the shareholders at the 2006 Annual Meeting of Shareholders which was held on May 19, 2006. The maximum number of shares of common stock with respect to which awards may be granted is 2,500,000. Shares of stock covered by an award under the Incentive Plan that are forfeited will again be available for issuance in connection with future grants of awards under the plan. At December 31, 2011, there were 718,859 shares available for future grant. The Board of Directors and the Compensation Committee intend to issue more awards under the Incentive Plan in the future.
(1)The fair value per share of the restricted stock grant is equal to the closing price of the Company's common stock on the grant date.
At December 31, 2011, 2010, and 2009, the aggregate intrinsic value of outstanding shares under option was $554, $1,573, and $971 with a weighted average remaining contractual term of 3.7, 4.7, and 5.5 years, respectively. Aggregate intrinsic value represents the total pretax intrinsic value, based upon the Company's closing year-end stock price of $40.48, $47.72 and $36.23 at December 31, 2011, 2010, and 2009, respectively, which would have been received by the option holders had all option holders exercised their options as of those dates. The range of exercise prices on stock options outstanding under the Incentive Plan was $13.30 to $42.85 at both December 31, 2011 and 2010, and $12.00 to $42.85 at December 31, 2009. The total intrinsic value of options exercised during the years ended December 31, 2011, 2010, and 2009 was $156, $1,080 and $442, respectively.
As of March 31, 2011, all compensation expense related to non-vested option awards had been recognized. Cash received from options exercised was $902, $1,990 and $367 for the years ended December 31, 2011, 2010, and 2009, respectively.
As a result of adopting ASC 718, Compensation-Stock Compensation on January 1, 2006, the Company's net income for the twelve months ended December 31, 2011 was lowered by $45, net of income tax benefit of $25. The Company's net income for the twelve months ended December 31, 2010 was lowered by $240, net of income tax benefit of $129. The impact on basic and diluted EPS was a reduction of less than $0.01 per share for the twelve months ended December 31, 2011 and a reduction of $0.02 per share for the twelve months ended December 31, 2010.
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 was $4,124, $4,112 and $4,113 for the years ended December 31, 2011, 2010, and 2009, respectively. All leases expire prior to 2019. The Company expects that in the normal course of business, leases that expire will be renewed.
Various claims, generally incidental to the conduct of normal business, are pending or alleged against the Company from time to time. In the opinion of management, based in part on the advice of legal counsel, the ultimate resolution of such claims will not have a material adverse effect on the Company's consolidated financial statements. However, if estimates of the ultimate resolutions of those proceedings are revised, liabilities related to those proceedings could be adjusted in the near term.
The Company has a Revolving Credit Agreement (the "Credit Agreement") with RBS Citizens, NA ("RBS Citizens"). The Credit Agreement provides a $30,000 revolving credit facility with an accordion feature allowing for future expansion of the committed amount up to $50,000. Loans under the credit facility bear interest at the Company's option at either (i) the LIBOR rate plus 1.25% per annum or
The Company's obligations under the credit facility are secured by pledges of its assets and the capital stock of its operating subsidiaries. The credit facility is guaranteed by the Company's non-insurance company subsidiaries. The credit facility contains covenants including requirements to maintain minimum risk-based capital ratios and statutory surplus of Safety Insurance Company as well as limitations or restrictions on indebtedness, liens, and other matters. Among other covenants, the credit facility restricts the Company's payment of dividends (i) if a default under the credit facility is continuing or would result therefrom or (ii) in an amount in excess of 50% of the Company's prior year's net income, as determined in accordance with GAAP. Although the Company paid $30,322 in dividends to shareholders during 2011 which exceeded 50% of its prior year net income by $2,151, prior consent to pay the excess amount was obtained from RBS Citizens. As of December 31, 2011, the Company was in compliance with all other covenants. In addition, the credit facility includes customary events of default, including a cross-default provision permitting the lenders to accelerate the facility if the Company (i) defaults in any payment obligation under debt having a principal amount in excess of $10,000 or (ii) fails to perform any other covenant permitting acceleration of all such debt.
The Company's private passenger automobile line of business prior year reserves decreased by $24,133 for the year ended December 31, 2011. The decrease was primarily due to improved retained private passenger results of $20,008 for the accident years 2005 through 2009. The Company's private passenger automobile line of business prior year reserves decreased by $31,944 for the year ended December 31, 2010. The decrease was primarily due to improved retained private passenger results of $24,326 for accident years 2005 through 2009, and improved assumed CAR results for the private passenger automobile pool of $3,026 for accident years 2008 through 2009. 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 improved CAR results were due primarily to improved CAR private passenger loss ratios as published and reported by the CAR Loss Reserving Committee.
The deferred income tax asset (liability) represents the tax effects of temporary differences attributable to the Company's consolidated federal tax return group. Its components were as shown in the following table for the periods indicated.
As of December 31, 2011, 2010 and 2009, the Company had no unrecognized tax benefits, and none which if recognized would affect the effective tax rate. The Company does not currently anticipate significant changes in the amount of unrecognized income tax benefits during the next twelve months.
The Company records interest and penalties associated with audits as a component of Income before income taxes. Penalties are recorded in Underwriting, operating and other expenses, and interest expense is recorded in Interest expenses in the Consolidated Statement of Operations. The Company had no interest and penalties accrued as of December 31, 2011 and 2010.
The Company's entire available-for-sale portfolio was priced based upon quoted market prices or other observable inputs as of December 31, 2011. There were no significant changes to the valuation process during the twelve months ending December 31, 2011. As of December 31, 2011 and December 31, 2010, no quotes or prices obtained were adjusted by management. All broker quotes obtained were non-binding.
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2011 and 2010.
The following tables summarize the changes in the Company's Level 3 fair value securities for the periods indicated.
On January 1, 2010 and 2009, the Company's Level 3 securities consisted of one asset-backed security whose price was based solely on a single broker quote which was deemed to be obtained through unobservable inputs. This security was sold in October 2010.
In December 2010, the Company entered into a $2,500 five-year Term Loan Facility Agreement with Precision Engineering Products, LLC. Mr. A. Richard Caputo, Jr., a member of the Company's Board of Directors and Chairman of the Investment Committee is a Principal of The Jordan Company, LP which is an equity investor in Precision Engineering Products, LLC. The term loan amortizes in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount of the term loan, with the remainder due on the December 22, 2015, the maturity date of the term loan.
In July 2011, the Company entered into a $2,000 five-year Term Loan Credit Agreement with Pro Mach, Inc. Mr. A. Richard Caputo, Jr., a member of the Company's Board of Directors and Chairman of the Investment Committee is a Principal of The Jordan Company, L.P. which is an equity investor in Pro Mach, Inc. The repayment terms of the loan call for Pro Mach, Inc. to make equal periodic quarterly payments of .25% of the original amount borrowed, beginning on September 30, 2011 with a final payment due on September 30, 2017.