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SAFETY INSURANCE GROUP INC - Quarter Report: 2023 September (Form 10-Q)

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______to ______                 

Commission File Number: 000-50070

SAFETY INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware

13-4181699

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

20 Custom House Street, Boston, Massachusetts 02110

(Address of principal executive offices including zip code)

(617) 951-0600

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.01 per share

SAFT

The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes   No 

As of November 1, 2023 there were 14,791,907 shares of common stock with a par value of $0.01 per share outstanding.

Table of Contents

SAFETY INSURANCE GROUP, INC.

TABLE OF CONTENTS

Page No.

Part I. Financial Information

Item 1.

Consolidated Financial Statements

Consolidated Balance Sheets

3

Consolidated Statements of Operations

4

Consolidated Statements of Comprehensive Loss

5

Consolidated Statements of Changes in Shareholders’ Equity

6

Consolidated Statements of Cash Flows

7

Notes to Unaudited Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Information about Market Risk

41

Item 4.

Controls and Procedures

42

Part II. Other Information

Item 1

Legal Proceedings

43

Item 1A.

Risk Factors

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3.

Defaults upon Senior Securities

43

Item 4.

Mine Safety Disclosures

43

Item 5.

Other Information

43

Item 6.

Exhibits

43

EXHIBIT INDEX

44

SIGNATURE

45

2

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Safety Insurance Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

    

September 30, 

    

December 31, 

2023

2022

(Unaudited)

Assets

Investments:

Fixed maturities, available for sale, at fair value (amortized cost: $1,117,352 and $1,152,779, allowance for expected credit losses of $1,231 and $678)

$

1,005,225

$

1,050,155

Equity securities, at fair value (cost: $216,589 and $231,444)

 

223,152

 

240,155

Other invested assets

 

129,739

 

112,850

Total investments

 

1,358,116

 

1,403,160

Cash and cash equivalents

 

30,894

 

25,300

Accounts receivable, net of allowance for expected credit losses of $867 and $1,446

 

258,267

 

192,542

Receivable for securities sold

 

845

 

877

Accrued investment income

 

7,688

 

8,212

Taxes recoverable

 

7,286

 

Receivable from reinsurers related to paid loss and loss adjustment expenses

 

30,006

 

12,988

Receivable from reinsurers related to unpaid loss and loss adjustment expenses

 

106,708

 

93,394

Ceded unearned premiums

 

29,819

 

28,453

Deferred policy acquisition costs

 

91,613

 

75,582

Deferred income taxes

 

21,307

 

21,074

Equity and deposits in pools

 

37,096

 

33,648

Operating lease right-of-use-assets

20,586

 

23,336

Goodwill

17,093

17,093

Intangible assets

7,242

7,856

Other assets

 

27,539

 

29,054

Total assets

$

2,052,105

$

1,972,569

Liabilities

Loss and loss adjustment expense reserves

$

584,175

$

549,598

Unearned premium reserves

 

525,297

 

433,375

Accounts payable and accrued liabilities

 

61,757

 

73,875

Payable for securities purchased

 

2,059

 

1,359

Payable to reinsurers

 

24,526

 

11,444

Taxes payable

1,729

Debt

30,000

35,000

Operating lease liabilities

20,586

23,336

Other liabilities

 

33,956

 

30,854

Total liabilities

 

1,282,356

 

1,160,570

Commitments and contingencies (Note 8)

Shareholders’ equity

Common stock: $0.01 par value; 30,000,000 shares authorized; 17,949,484 and 17,879,095 shares issued

179

179

Additional paid-in capital

 

225,301

 

222,049

Accumulated other comprehensive (loss) income, net of taxes

 

(87,607)

 

(80,538)

Retained earnings

 

782,169

 

815,309

Treasury stock, at cost: 3,157,577 and 3,083,364 shares

 

(150,293)

 

(145,000)

Total shareholders’ equity

 

769,749

 

811,999

Total liabilities and shareholders’ equity

$

2,052,105

$

1,972,569

The accompanying notes are an integral part of these financial statements.

3

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Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands, except per share data)

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

    

2023

    

2022

 

2023

    

2022

Net earned premiums

$

214,425

$

189,931

$

608,385

$

565,352

Net investment income

 

14,005

 

11,112

 

41,495

 

33,337

Earnings from partnership investments

 

2,427

 

876

 

5,146

 

9,675

Net realized gains on investments

 

270

 

1,251

 

1,111

 

8,613

Change in net unrealized gains on equity securities

(9,184)

(14,364)

(2,148)

(56,283)

Credit loss expense

403

(207)

(554)

(207)

Commission income

1,918

5,159

Finance and other service income

 

5,094

 

3,749

 

13,966

 

10,469

Total revenue

 

229,358

 

192,348

672,560

570,956

Losses and loss adjustment expenses

 

159,521

 

124,069

 

470,197

 

359,950

Underwriting, operating and related expenses

 

65,217

 

60,373

 

187,832

 

182,839

Other expense

 

2,005

 

 

5,198

 

Interest expense

 

139

 

132

 

697

 

392

Total expenses

 

226,882

 

184,574

 

663,924

 

543,181

Income before income taxes

 

2,476

 

7,774

8,636

27,775

Income tax expense

 

527

 

1,582

 

2,023

 

5,844

Net income

$

1,949

$

6,192

$

6,613

$

21,931

Earnings per weighted average common share:

Basic

$

0.13

$

0.42

$

0.45

$

1.49

Diluted

$

0.13

$

0.42

$

0.45

$

1.48

Cash dividends paid per common share

$

0.90

$

0.90

$

2.70

$

2.70

Number of shares used in computing earnings per share:

Basic

 

14,645,988

 

14,599,136

 

14,669,709

 

14,608,591

Diluted

 

14,682,082

 

14,711,737

 

14,721,063

 

14,713,552

The accompanying notes are an integral part of these financial statements.

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Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Loss

(Unaudited)

(Dollars in thousands)

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

    

2023

    

2022

 

2023

    

2022

Net income

$

1,949

$

6,192

$

6,613

$

21,931

Other comprehensive loss, net of tax:

Unrealized holding (losses) gains during the period, net of income tax benefit of ($3,546), ($7,311), ($1,647) and ($28,772).

 

(13,339)

 

(27,505)

 

(6,191)

 

(108,232)

Reclassification adjustment for net realized gains on investments included in net income, net of income tax benefit of ($57), ($263), ($233) and ($1,809).

 

(213)

 

(988)

 

(878)

 

(6,804)

Other comprehensive loss, net of tax:

 

(13,552)

 

(28,493)

 

(7,069)

 

(115,036)

Comprehensive loss

$

(11,603)

$

(22,301)

$

(456)

$

(93,105)

The accompanying notes are an integral part of these financial statements.

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Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

(Dollars in thousands)

    

    

    

    

    

Accumulated

    

    

    

    

    

    

Other

Additional

Comprehensive

Total

Common

Paid-in

Income (loss),

Retained

Treasury

Shareholders’

Stock

Capital

Net of Taxes

Earnings

Stock

Equity

Balance at December 31, 2021

$

178

$

216,070

$

24,579

$

821,743

$

(135,397)

$

927,173

Net income, January 1 to March 31, 2022

 

7,838

 

7,838

Unrealized losses on securities available for sale, net of deferred federal income taxes

 

(47,357)

 

(47,357)

Restricted share awards issued

 

1

 

603

 

604

Recognition of employee share-based compensation, net of deferred federal income taxes

 

1,479

 

1,479

Dividends paid and accrued

 

(13,246)

 

(13,246)

Acquisition of treasury stock

 

(14,603)

 

(14,603)

Balance at March 31, 2022

179

218,152

(22,778)

816,335

(150,000)

861,888

Net income, April 1 to June 30, 2022

 

7,901

 

7,901

Unrealized gains on securities available for sale, net of deferred federal income taxes

 

(39,186)

 

(39,186)

Recognition of employee share-based compensation, net of deferred federal income taxes

 

1,301

 

1,301

Dividends paid and accrued

 

(13,281)

 

(13,281)

Balance at June 30, 2022

179

219,453

(61,964)

810,955

(150,000)

818,623

Net income, July 1 to September 30, 2022

 

6,192

 

6,192

Unrealized gains on securities available for sale, net of deferred federal income taxes

 

(28,493)

 

(28,493)

Recognition of employee share-based compensation, net of deferred federal income taxes

 

1,302

 

1,302

Dividends paid and accrued

 

(13,259)

 

(13,259)

Balance at September 30, 2022

$

179

$

220,755

$

(90,457)

$

803,888

$

(150,000)

$

784,365

    

    

    

    

    

Accumulated

    

    

    

    

    

    

Other

Additional

Comprehensive

Total

Common

Paid-in

Income (loss),

Retained

Treasury

Shareholders’

Stock

Capital

Net of Taxes

Earnings

Stock

Equity

Balance at December 31, 2022

$

179

$

222,049

$

(80,538)

$

815,309

$

(145,000)

$

811,999

Net loss, January 1 to March 31, 2023

 

(12,337)

 

(12,337)

Unrealized gains on securities available for sale, net of deferred federal income taxes

 

15,255

 

15,255

Restricted share awards issued

 

 

522

 

522

Recognition of employee share-based compensation, net of deferred federal income taxes

 

733

 

733

Dividends paid and accrued

 

(13,247)

 

(13,247)

Balance at March 31, 2023

179

223,304

(65,283)

789,725

(145,000)

802,925

Net income, April 1 to June 30, 2023

 

17,001

 

17,001

Unrealized losses on securities available for sale, net of deferred federal income taxes

 

(8,772)

 

(8,772)

Restricted share awards issued

 

 

72

 

72

Recognition of employee share-based compensation, net of deferred federal income taxes

 

1,100

 

1,100

Dividends paid and accrued

 

(13,283)

 

(13,283)

Acquisition of treasury stock

 

(5,293)

 

(5,293)

Balance at June 30, 2023

179

224,476

(74,055)

793,443

(150,293)

793,750

Net income, July 1 to September 30, 2023

 

1,949

 

1,949

Unrealized losses on securities available for sale, net of deferred federal income taxes

 

(13,552)

 

(13,552)

Recognition of employee share-based compensation, net of deferred federal income taxes

 

825

 

825

Dividends paid and accrued

 

(13,223)

 

(13,223)

Balance at September 30, 2023

$

179

$

225,301

$

(87,607)

$

782,169

$

(150,293)

$

769,749

The accompanying notes are an integral part of these financial statements.

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Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

Nine Months Ended September 30, 

    

2023

    

2022

Cash flows from operating activities:

Net income

$

6,613

$

21,931

Adjustments to reconcile net income to net cash provided by operating activities:

Investment amortization, net

 

(219)

 

999

Fixed asset depreciation, net

 

5,104

 

4,990

Stock based compensation

3,252

4,686

Provision for deferred income taxes

 

1,647

 

4,025

Net realized gains on investments

 

(1,111)

 

(8,613)

Credit loss expense

554

207

Earnings from partnership investments

 

(4,830)

 

(5,579)

Change in net unrealized gains on equity securities

2,148

56,283

Changes in assets and liabilities:

Accounts receivable, net

 

(65,725)

 

(17,020)

Accrued investment income

 

524

 

(970)

Receivable from reinsurers

 

(30,332)

 

(1,441)

Ceded unearned premiums

 

(1,366)

 

(2,765)

Deferred policy acquisition costs

 

(16,031)

 

(3,638)

Taxes recoverable/payable

(9,068)

(16,042)

Other assets

 

(5,021)

 

(4,902)

Loss and loss adjustment expense reserves

 

34,577

 

(25,239)

Unearned premium reserves

 

91,922

 

23,617

Accounts payable and accrued liabilities

 

(11,759)

 

(17,194)

Payable to reinsurers

 

13,082

 

13,431

Other liabilities

 

3,102

 

(3,400)

Net cash provided by operating activities

 

17,063

 

23,366

Cash flows from investing activities:

Fixed maturities purchased

 

(59,685)

 

(150,507)

Short term investments purchased

 

 

(5)

Equity securities purchased

 

(34,243)

 

(41,809)

Other invested assets purchased

 

(14,075)

 

(14,863)

Proceeds from sales and paydowns of fixed maturities

 

84,198

 

106,367

Proceeds from maturities, redemptions, and calls of fixed maturities

 

9,879

 

68,474

Proceed from sales of equity securities

 

51,724

 

33,898

Proceeds from other invested assets redeemed

2,487

1,133

Fixed assets purchased

 

(1,402)

 

(1,522)

Net cash provided by investing activities

 

38,883

 

1,166

Cash flows from financing activities:

Proceeds from FHLB loan

 

20,000

 

Payments on FHLB loan

 

(25,000)

 

Dividends paid to shareholders

 

(40,112)

 

(39,897)

Acquisition of treasury stock

(5,240)

(14,603)

Net cash used for financing activities

 

(50,352)

 

(54,500)

Net increase (decrease) in cash and cash equivalents

 

5,594

 

(29,968)

Cash and cash equivalents at beginning of year

 

25,300

 

63,603

Cash and cash equivalents at end of period

$

30,894

$

33,635

The accompanying notes are an integral part of these financial statements.

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In this Form 10-Q, Notes to the Unaudited Consolidated Financial Statements, dollar amounts are presented in thousands, except per share data.

1. Basis of Presentation

The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.

The consolidated financial statements include Safety Insurance Group, Inc. and its subsidiaries (the “Company”). The subsidiaries consist of Safety Insurance Company, Safety Indemnity Insurance Company, Safety Property and Casualty Insurance Company, Safety Northeast Insurance Company, Safety Northeast Insurance Agency, Inc. (“SNIA”), and Safety Management Corporation (“SMC”), which is SNIA’s holding company. All intercompany commission transactions, including commission income and underwriting, operating and related expenses, have been eliminated. Commission income totaled $256 and $695 for the three and nine months ended September 30, 2023, respectively.

The financial information for the three and nine months ended September 30, 2023 and 2022 is unaudited; however, in the opinion of the Company, the information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial condition, results of operations, and cash flows for the periods. The financial information as of December 31, 2022 is derived from the audited consolidated financial statements included in the Company's 2022 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 28, 2023.

These unaudited interim consolidated financial statements may not be indicative of financial results for the full year and should be read in conjunction with the audited consolidated financial statements included in the Company’s 2022 Annual Report on Form 10-K filed with the SEC on February 28, 2023.

The Company is a leading provider of property and casualty insurance focused primarily on the Massachusetts market. The Company’s principal product line is automobile insurance. The Company primarily operates through its insurance company subsidiaries, Safety Insurance Company, Safety Indemnity Insurance Company, Safety Property and Casualty Insurance Company and Safety Northeast Insurance Company (together referred to as the “Insurance Subsidiaries”).

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. The Insurance Subsidiaries began writing all of these lines of business in Maine during 2016.

SNIA was established on December 1, 2022 when the Company acquired the assets and operations of Northeast Metrowest Insurance Agency, Inc. (“Northeast / Metrowest”), an independent insurance agency, through its wholly-owned subsidiary, SMC. SNIA provides personal and commercial property and casualty insurance products to customers on behalf of the Insurance Subsidiaries and third-party insurance carriers. The Company conducted business with Northeast / Metrowest prior to its acquisition. During the eleven months prior to December 1, 2022, all commissions paid to Northeast / Metrowest were reflected as expenses and were conducted at standard market rates. Subsequent to the acquisition date, all business conducted with SNIA was considered an intercompany transaction and have been eliminated. As of September 30, 2023, fiduciary assets held by SNIA were immaterial and less than $200.

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2. Recent Accounting Pronouncements

There are no recent accounting pronouncements that are significant to the Company.

3. Earnings per Weighted Average Common Share

Basic earnings per weighted average common share (“EPS”) are calculated by dividing net income by the weighted average number of basic common shares outstanding during the period. Diluted earnings per share amounts are based on the weighted average number of common shares including non-vested performance stock grants.

The following table sets forth the computation of basic and diluted EPS for the periods indicated.

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

2023

2022

2023

2022

Earnings attributable to common shareholders - basic and diluted:

Net income from continuing operations

$

1,949

$

6,192

$

6,613

$

21,931

Allocation of income for participating shares

(9)

(27)

(30)

(96)

Net income from continuing operations attributed to common shareholders

$

1,940

$

6,165

$

6,583

$

21,835

Earnings per share denominator - basic and diluted

Total weighted average common shares outstanding, including participating shares

14,712,993

14,663,455

14,736,488

14,673,795

Less: weighted average participating shares

(67,005)

(64,319)

(66,779)

(65,204)

Basic earnings per share denominator

14,645,988

14,599,136

14,669,709

14,608,591

Common equivalent shares- non-vested performance stock grants

 

36,094

 

112,601

 

51,354

 

104,961

Diluted earnings per share denominator

 

14,682,082

 

14,711,737

 

14,721,063

 

14,713,552

Basic earnings per share

$

0.13

$

0.42

$

0.45

$

1.49

Diluted earnings per share

$

0.13

$

0.42

$

0.45

$

1.48

Undistributed earnings attributable to common shareholders - basic and diluted:

Net income from continuing operations attributable to common shareholders -Basic

$

0.13

$

0.42

$

0.45

$

1.49

Dividends declared

(0.90)

(0.90)

(2.70)

(2.70)

Undistributed earnings

$

(0.77)

$

(0.48)

$

(2.25)

$

(1.21)

Net income from continuing operations attributable to common shareholders -Diluted

$

0.13

$

0.42

$

0.45

$

1.48

Dividends declared

(0.90)

(0.90)

(2.70)

(2.70)

Undistributed earnings

$

(0.77)

$

(0.48)

$

(2.25)

$

(1.22)

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 403 anti-dilutive shares related to non-vested stock grants for the three months ended September 30, 2023 and no anti-dilutive shares related to non-vested stock grants for the three months ended September 30, 2022. There were no anti-dilutive shares related to non-vested stock grants for the nine months ended September 30, 2023 and 2022.

4.  Share-Based Compensation

2018 Long Term Incentive Plan

On March 24, 2022, the Company’s Board of Directors adopted the Amended and Restated Safety Insurance Group, Inc. 2018 Long-Term Incentive Plan (“the Amended 2018 Plan”), which was subsequently approved by our shareholders at the 2022 Annual Meeting of Shareholders. The Amended 2018 Plan increases the share pool limit by

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adding 350,000 common shares to the previously adopted Safety Insurance Group, Inc, 2018 Long-Term Incentive Plan. The Amended 2018 Plan enables the grant of stock awards, performance shares, cash-based performance units, other stock-based awards, stock options, stock appreciation rights, and stock unit awards, each of which may be granted separately or in tandem with other awards. Eligibility to participate includes officers, directors, employees and other individuals who provide bona fide services to the Company. The Amended 2018 Plan supersedes the Company’s 2002 Management Omnibus Incentive Plan (“the 2002 Incentive Plan”).

The Amended 2018 Plan establishes a pool of 700,000 shares of common stock available for issuance to our employees and other eligible participants. The Board of Directors and the Compensation Committee intend to issue awards under the Amended 2018 Plan in the future.

The maximum number of shares of common stock between both the Amended 2018 Plan and 2002 Incentive Plan with respect to which awards may be granted is 3,200,000. No further grants will be allowed under the 2002 Incentive Plan. At September 30, 2023, there were 373,422 shares available for future grant.

Accounting and Reporting for Stock-Based Awards

Accounting Standards Codification (“ASC”) 718, Compensation — Stock Compensation, requires the Company to measure and recognize the cost of employee services received in exchange for an award of equity instruments. Under the provisions of ASC 718, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant).

Restricted Stock

Service-based restricted stock awarded in the form of unvested shares is recorded at the market value of the Company’s common stock on the grant date and amortized ratably as compensation expense over the requisite service period. Service-based restricted stock awards generally vest over a three-year period and vest 30% on the first and second anniversaries of the grant date and 40% on the third anniversary of the grant date, except for non-executive employees’ restricted stock awards granted prior to 2018 which vest ratably over a five-year service period and independent directors’ stock awards which vest immediately. Our independent directors are subject to stock ownership guidelines, which require them to have a value four times their annual cash retainer.

In addition to service-based awards, the Company grants performance-based restricted shares to certain employees.  These performance shares cliff vest after a three-year performance period provided certain performance measures are attained.  A portion of these awards, which contain a market condition, vest according to the level of total shareholder return achieved by the Company compared to its property-casualty insurance peers over a three-year period. The remainder, which contain a performance condition, vest according to the level of Company’s combined ratio results compared to a target based on its property-casualty insurance peers.

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 expense for share awards with a performance condition is based on the probable number of awards expected to vest using the performance level most likely to be achieved at the end of the performance period.

Performance-based awards with market conditions are accounted for and measured differently from awards that have a performance or service condition.  The effect of a market condition is reflected in the award’s fair value on the grant date.  That fair value is recognized as compensation cost over the requisite service period regardless of whether the market-based performance objective has been satisfied.

All of the Company’s restricted stock awards are issued as incentive compensation and are equity classified.

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The following table summarizes restricted stock activity under the Amended 2018 Plan during the nine months ended September 30, 2023 assuming a target payout for the 2023 performance-based shares.

    

Shares 

    

Weighted

Performance-based

    

Weighted

Under

Average

Shares Under

Average

Restriction

Fair Value

Restriction

Fair Value

Outstanding at beginning of year

 

63,413

$

83.87

75,069

$

84.46

Granted

 

40,101

80.03

30,693

(1)

81.81

Vested and unrestricted

 

(36,352)

83.87

(26,599)

90.50

Forfeited

(233)

81.62

(172)

83.39

Outstanding at end of period

 

66,929

$

81.58

78,991

$

81.40

(1)Includes a true-up of previously awarded performance-based restricted share awards. The updated shares were calculated based on the attainment of pre-established performance objectives and granted under the Amended 2018 Plan.

As of September 30, 2023, there was $5,470 of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 1.4 years.  The total fair value of the shares that were vested and unrestricted during the nine months ended September 30, 2023 and 2022 was $5,456 and $5,749, respectively.  For the nine months ended September 30, 2023 and 2022, the Company recorded compensation expense related to restricted stock of $2,569 and $3,702, net of income tax benefits of $683 and $984, respectively, within Underwriting, operating and related expenses on the Consolidated Statements of Operations.

5.  Investments

The gross unrealized gains and losses on investments in fixed maturity securities, including redeemable preferred stocks that have characteristics of fixed maturities, short term investments, equity securities, including interests in mutual funds, and other invested assets were as follows for the periods indicated.

As of September 30, 2023

    

Cost or

    

Allowance for

    

Gross Unrealized

    

Estimated

Amortized

Expected Credit

Fair

Cost

Losses

Gains

Losses (3)

Value

U.S. Treasury securities

$

2,421

$

$

$

(164)

$

2,257

Obligations of states and political subdivisions

 

38,787

 

 

170

 

(3,810)

 

35,147

Residential mortgage-backed securities (1)

 

259,055

 

 

59

 

(34,717)

 

224,397

Commercial mortgage-backed securities

 

157,421

 

 

 

(18,253)

 

139,168

Other asset-backed securities

 

67,610

 

 

4

 

(3,945)

 

63,669

Corporate and other securities

 

592,058

 

(1,231)

 

758

 

(50,998)

 

540,587

Subtotal, fixed maturity securities 

 

1,117,352

 

(1,231)

 

991

 

(111,887)

 

1,005,225

Equity securities (2)

 

216,589

 

 

23,041

 

(16,478)

 

223,152

Other invested assets (4)

 

129,739

 

 

 

 

129,739

Totals

$

1,463,680

$

(1,231)

$

24,032

$

(128,365)

$

1,358,116

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As of December 31, 2022

    

Cost or

    

Allowance for

    

Gross Unrealized

    

Estimated

Amortized

Expected Credit

Fair

Cost

Losses

Gains

Losses (3)

Value

U.S. Treasury securities

$

1,825

$

$

$

(156)

$

1,669

Obligations of states and political subdivisions

 

57,319

 

 

282

 

(3,532)

 

54,069

Residential mortgage-backed securities (1)

 

259,878

 

 

385

 

(25,761)

 

234,502

Commercial mortgage-backed securities

 

156,303

 

 

107

 

(16,479)

 

139,931

Other asset-backed securities

 

74,160

 

 

 

(5,429)

 

68,731

Corporate and other securities

 

603,294

 

(678)

 

740

 

(52,103)

 

551,253

Subtotal, fixed maturity securities 

 

1,152,779

 

(678)

 

1,514

 

(103,460)

 

1,050,155

Equity securities (2)

 

231,444

 

 

31,857

 

(23,146)

 

240,155

Other invested assets (4)

 

112,850

 

 

 

 

112,850

Totals

$

1,497,073

$

(678)

$

33,371

$

(126,606)

$

1,403,160

(1)Residential mortgage-backed securities consist 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).
(2)Equity securities include common stock, preferred stock, mutual funds and interests in mutual funds held to fund the Company’s executive deferred compensation plan.
(3)The Company’s investment portfolio included 1,119 and 1,195 securities in an unrealized loss position at September 30, 2023 and December 31, 2022, respectively.
(4)Other invested assets are accounted for under the equity method which approximated fair value.

The amortized cost and the estimated fair value of fixed maturity securities, by maturity, are shown below for the period indicated. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

As of September 30, 2023

    

Amortized

    

Estimated

Cost

Fair Value

Due in one year or less

$

25,248

$

24,765

Due after one year through five years

 

324,368

 

302,274

Due after five years through ten years

 

256,445

 

227,508

Due after ten years through twenty years

 

26,589

 

23,160

Due after twenty years

 

616

 

284

Asset-backed securities

 

484,086

 

427,234

Totals

$

1,117,352

$

1,005,225

The gross realized gains and losses on sales of investments were as follows for the periods indicated.

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

    

2023

    

2022

 

2023

    

2022

Gross realized gains

Fixed maturity securities

$

436

$

302

$

1,275

$

1,295

Equity securities

 

1,869

 

2,029

 

5,235

 

9,443

Gross realized losses

Fixed maturity securities

 

(1,338)

 

(1,044)

 

(2,260)

 

(2,040)

Equity securities

 

(697)

 

(36)

 

(3,139)

 

(85)

Net realized gains on investments

$

270

$

1,251

$

1,111

$

8,613

In the normal course of business, the Company enters into transactions involving various types of financial instruments, including investments in fixed maturities and equity securities. Investment transactions have credit exposure to the extent that a counter party may default on an obligation to the Company. Credit risk is a consequence of carrying, trading and investing in securities. To manage credit risk, the Company focuses on higher quality fixed income securities, reviews the credit strength of all companies in which it invests, limits its exposure in any one investment and monitors the portfolio quality, taking into account credit ratings assigned by recognized statistical rating organizations.

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The following tables as of September 30, 2023 and December 31, 2022 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.

As of September 30, 2023

Less than 12 Months

12 Months or More

Total

    

Estimated

    

Unrealized

    

Estimated

    

Unrealized

    

Estimated

    

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

U.S. Treasury securities

$

594

$

4

$

1,663

$

160

$

2,257

$

164

Obligations of states and political subdivisions

 

3,728

 

172

 

27,752

 

3,638

 

31,480

 

3,810

Residential mortgage-backed securities

 

42,077

 

1,844

 

177,655

 

32,873

 

219,732

 

34,717

Commercial mortgage-backed securities

 

8,872

 

399

 

130,296

 

17,854

 

139,168

 

18,253

Other asset-backed securities

 

5,818

390

52,847

3,555

58,665

3,945

Corporate and other securities

 

112,458

 

4,376

 

359,076

 

46,622

 

471,534

 

50,998

Subtotal, fixed maturity securities

 

173,547

 

7,185

 

749,289

 

104,702

 

922,836

 

111,887

Equity securities

 

77,095

 

7,389

 

45,975

 

9,089

 

123,070

 

16,478

Total temporarily impaired securities

$

250,642

$

14,574

$

795,264

$

113,791

$

1,045,906

$

128,365

As of December 31, 2022

Less than 12 Months

12 Months or More

Total

    

Estimated

    

Unrealized

    

Estimated

    

Unrealized

    

Estimated

    

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

U.S. Treasury securities

$

1,669

$

156

$

$

$

1,669

$

156

Obligations of states and political subdivisions

 

34,178

 

2,504

 

3,072

 

1,028

 

37,250

 

3,532

Residential mortgage-backed securities

 

140,855

 

12,254

 

70,956

 

13,507

 

211,811

 

25,761

Commercial mortgage-backed securities

 

110,073

 

11,632

 

24,653

 

4,847

 

134,726

 

16,479

Other asset-backed securities

 

41,113

2,358

27,618

3,071

 

68,731

 

5,429

Corporate and other securities

 

386,401

 

28,048

 

131,046

 

24,055

 

517,447

 

52,103

Subtotal, fixed maturity securities

 

714,289

 

56,952

 

257,345

 

46,508

 

971,634

 

103,460

Equity securities

 

116,881

 

21,198

 

6,209

 

1,948

 

123,090

 

23,146

Total temporarily impaired securities

$

831,170

$

78,150

$

263,554

$

48,456

$

1,094,724

$

126,606

At September 30, 2023, U.S. Government residential mortgage backed securities with a fair value of $51,185 are pledged as collateral for a borrowing with the Federal Home Loan Bank of Boston (“FHLB-Boston”) as described in Note 9 – Debt. These securities are included in fixed maturity securities on the Company’s Consolidated Balance Sheets.

Impairments

For fixed maturities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates the expected credit loss component of the impairment from the amount related to all other factors. The expected credit loss component is recognized as an allowance for expected credit losses. The allowance is adjusted for any additional credit losses and subsequent recoveries, which are booked in income as either credit loss expense or credit loss benefit, respectively. Upon recognizing a credit loss, the cost basis is not adjusted. The impairment related to all other factors (non-credit factors) is reported in other comprehensive income.

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.

For fixed maturity investments the Company intends to sell or for which it is more likely than not that the Company will be required to sell before an anticipated recovery in value, the full amount of the impairment is included in credit loss expense. The new cost basis of the investment is the previous amortized cost basis less the impairment recognized in credit loss expense. The new cost basis is not adjusted for any subsequent recoveries in fair value.

The Company uses a systematic methodology to evaluate declines in fair values below cost or amortized cost of our investments. Some of the factors considered in assessing impairment of fixed maturities due to credit losses include

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the extent to which the fair value is less than amortized cost, the financial condition of and the near and long-term prospects of the issuer, whether the debtor is current on its contractually obligated interest and principal payments, changes to the rating of the security by a rating agency, the historical volatility of the fair value of the security and whether it is more like than not that the Company will be required to sell the investment prior to an anticipated recovery in value.

As of September 30, 2023 and December 31, 2022, the Company concluded that $1,231 and $678, respectively, of unrealized losses were due to credit factors and were recorded as an allowance for expected credit losses 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 September 30, 2023 and December 31, 2022 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 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 following table represents a reconciliation of the beginning and ending balances of the allowance for expected credit losses on fixed maturities classified as available for sale.  

Three Months Ended September 30, 

Nine Months Ended September 30, 

2023

2022

2023

    

2022

Beginning of period

$

1,635

$

691

$

678

$

691

Credit losses on securities with no previously recorded credit losses

195

193

912

193

Net increases (decreases) in allowance on previously impaired securities

 

(77)

98

 

245

 

98

Reduction due to sales

 

(522)

(84)

(604)

(84)

Writeoffs charged against allowance

 

 

 

Recoveries of amounts previously written off

 

 

 

Ending balance of period

$

1,231

$

898

$

1,231

$

898

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.

Net Investment Income

The components of net investment income were as follows:

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

    

2023

    

2022

    

2023

    

2022

Interest on fixed maturity securities

$

12,101

$

10,074

$

35,805

$

28,925

Dividends on equity securities

 

1,562

 

1,442

 

4,656

 

4,198

Equity in earnings of other invested assets

 

1,425

 

379

 

3,705

 

2,644

Interest on other assets

 

69

 

23

 

134

 

38

Total investment income 

 

15,157

 

11,918

 

44,300

 

35,805

Investment expenses

 

1,152

 

806

 

2,805

 

2,468

Net investment income 

$

14,005

$

11,112

$

41,495

$

33,337

Fair Value of Financial Instruments

ASC 820, Fair Value Measurements and Disclosure, provides a revised definition of fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value information.  Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price).  ASC 820 establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or

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unavailable (“unobservable inputs”).  The fair value hierarchy in ASC 820 prioritizes fair value measurements into three levels based on the nature of the inputs as follows:

Level 1 — Valuations based on quoted prices in active markets for identical assets and liabilities;

Level 2 — Valuations based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and quoted prices in active markets for similar, but not identical instruments; and

Level 3 — Valuations based on unobservable inputs.

Fair values for the Company’s fixed maturity securities are based on prices provided by its custodian bank and its investment managers.  Both the Company’s custodian bank and investment managers use a variety of independent, nationally recognized pricing services to determine market valuations.  If the pricing service cannot provide fair value determinations, the Company obtains non-binding price quotes from broker-dealers.  A minimum of two quoted prices is obtained for the majority of the Company’s available-for-sale fixed maturity securities in its investment portfolio.  The Company uses a third-party pricing service as its primary provider of quoted prices from third-party pricing services and broker-dealers.  To provide reasonable assurance of the validity of each price or quote, a secondary third-party pricing service or broker-dealer quote is obtained from the Company’s custodian or investment managers.  An examination of the pricing data is then performed for each security.  If the variance between the primary and secondary price quotes for a security is within an accepted tolerance level, the quoted price obtained from the Company’s primary source is used for the security.  If the variance between the primary and secondary price quotes exceeds an accepted tolerance level, the Company obtains a quote from an alternative source, if possible, and documents and resolves any differences between the pricing sources.  In addition, the Company may request that its investment managers and its traders provide input as to which vendor is providing prices that its traders believe are reflective of fair value for the security.  Following this process, the Company may decide to value the security in its financial statements using the secondary or alternative source if it believes that pricing is more reflective of the security’s value than the primary pricing provided by its custodian bank.  The Company analyzes market valuations received to verify reasonableness, to understand the key assumptions used and their sources, and to determine an appropriate ASC 820 fair value hierarchy level based upon trading activity and the observability of market inputs.  Based on this evaluation and investment class analysis, each price is classified into Level 1, 2 or 3.

Fair values of instruments are based on (i) quoted prices in active markets for identical assets (Level 1), (ii) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2) or (iii) valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).

The Company’s Level 1 securities consist of equity securities whose values are based on quoted prices in active markets for identical assets.  The Company’s Level 2 securities are comprised of available-for-sale fixed maturity securities whose fair value was determined using observable market inputs.  The Company’s Level 3 security consists of an investment in the FHLB-Boston related to Safety Insurance Company’s membership stock, which is not redeemable in a short-term time frame.  Fair values for securities for which quoted market prices were unavailable were estimated based upon reference to observable inputs such as benchmark interest rates, market comparables, and other relevant inputs.  Investments valued using these inputs include U.S. Treasury securities, obligations of states and political subdivisions, corporate and other securities, commercial and residential mortgage-backed securities, and other asset-backed securities.  Inputs into the fair value application that are utilized by asset class include but are not limited to:

Obligations of states and political subdivisions:  overall credit quality, including assessments of market sectors and the level and variability of sources of payment such as general obligation, revenue or lease; credit support such as insurance, state or local economic and political base, prefunded and escrowed to maturity covenants.

Corporate and other securities: overall credit quality, the establishment of a risk adjusted credit spread over the applicable risk-free yield curve for discounted cash flow valuations; assessments of the level of industry economic sensitivity, company financial policies, indenture restrictive covenants, and/or security and collateral.

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Residential mortgage-backed securities, U.S. agency pass-throughs, collateralized mortgage obligations (“CMOs”), non U.S. agency CMOs:  estimates of prepayment speeds based upon historical prepayment rate trends, underlying collateral interest rates, original weighted average maturity, vintage year, borrower credit quality characteristics, interest rate and yield curve forecasts, U.S. government support programs, tax policies, and delinquency/default trends.

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.

Other asset-backed securities:  overall credit quality, estimates of prepayment speeds based upon historical trends and characteristics of underlying loans, including assessments of the level and variability of collateral, revenue generating agreements, area licenses agreements, product sourcing agreements and equipment and property leases.

Federal Home Loan Bank of Boston (“FHLB-Boston”): value is equal to the cost of the member stock purchased, which is expected to be the exit price.

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 September 30, 2023. There were no significant changes to the valuation process during the nine months ended September 30, 2023. As of September 30, 2023 and December 31, 2022, no quotes or prices obtained were adjusted by management. All broker quotes obtained were non-binding.

At September 30, 2023 and December 31, 2022, investments in fixed maturities classified as available-for-sale had a fair value which equaled carrying value of $1,005,225 and $1,050,155, respectively. At September 30, 2023 and December 31, 2022, the Company held no short-term investments, respectively. The carrying values of cash and cash equivalents and investment income accrued approximated fair value.

The following tables summarize the Company’s total fair value measurements for investments for the periods indicated.

As of September 30, 2023

    

Total

    

Level 1 Inputs

    

Level 2 Inputs

    

Level 3 Inputs

U.S. Treasury securities

$

2,257

$

$

2,257

$

Obligations of states and political subdivisions

 

35,147

 

 

35,147

 

Residential mortgage-backed securities

 

224,397

 

 

224,397

 

Commercial mortgage-backed securities

 

139,168

 

 

139,168

 

Other asset-backed securities

 

63,669

 

 

63,669

 

Corporate and other securities

 

540,587

 

 

540,587

 

Equity securities

 

187,498

 

185,412

 

 

2,086

Total investment securities

$

1,192,723

$

185,412

$

1,005,225

$

2,086

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As of December 31, 2022

    

Total

    

Level 1 Inputs

    

Level 2 Inputs

    

Level 3 Inputs

U.S. Treasury securities

$

1,669

$

$

1,669

$

Obligations of states and political subdivisions

 

54,069

 

 

54,069

 

Residential mortgage-backed securities

 

234,502

 

 

234,502

 

Commercial mortgage-backed securities

 

139,931

 

 

139,931

 

Other asset-backed securities

 

68,731

 

 

68,731

 

Corporate and other securities

 

551,253

 

 

551,253

 

Equity securities

 

199,705

 

197,450

 

 

2,255

Total investment securities

$

1,249,860

$

197,450

$

1,050,155

$

2,255

As of September 30, 2023 and December 31, 2022, there were approximately $35,654 and $40,450, respectively, in a real estate investment trust (“REIT”). The REIT is excluded from the fair value hierarchy because the fair value is recorded using the net asset value per share practical expedient. The net asset value per share of this REIT is derived from member ownership in the capital venture to which a proportionate share of independently appraised net assets is attributed. The fair value was determined using the trust’s net asset value obtained from its financial statements. The Company is required to submit a request 45 days before a quarter end to dispose of the security.

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2023 and 2022.

The following table summarizes the changes in the Company’s Level 3 fair value securities for the periods indicated.

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

    

2023

    

2022

    

2023

    

2022

Level 3

Level 3

 

Level 3

Level 3

Fair Value

Fair Value

 

Fair Value

Fair Value

Securities

Securities

 

Securities

Securities

Balance at beginning of period

$

2,292

$

2,055

$

2,255

$

1,698

Net gains and losses included in earnings

 

 

 

 

Net gains included in other comprehensive income

 

 

 

 

Purchases

 

 

 

680

 

357

Sales

(206)

(849)

Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

 

Balance at end of period

$

2,086

$

2,055

$

2,086

$

2,055

Amount of total losses included in earnings attributable to the change in unrealized losses related to assets still held at end of period

$

$

$

$

Transfers in and out of Level 3 are attributable to changes in the ability to observe significant inputs in determining fair value exit pricing. As noted in the table above, no transfers were made in or out of Level 3 during the three and nine months ended September 30, 2023 and 2022. The Company held one Level 3 security at September 30, 2023 and 2022.

6.  Allowance for Expected Credit Losses

The Company’s financial instruments measured at amortized cost include premiums and accounts receivable, and reinsurance recoverables.

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.

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The following tables present the balances of premiums receivable, net of the allowance for expected credit losses and changes in the allowance for expected credit losses for the three and nine months ended September 30, 2023 and 2022.

At and For the

At and For the

Three Months Ended September 30, 2023

Three Months Ended September 30, 2022

    

Accounts Receivable Net of Allowance for Expected Credit Losses

Allowance for Expected Credit Losses

Accounts Receivable Net of Allowance for Expected Credit Losses

Allowance for Expected Credit Losses

Balance, beginning of period

$

238,563

$

996

$

182,835

$

1,677

Current period change for expected credit losses

 

 

713

 

 

312

Writeoffs of uncollectable accounts receivable

 

 

(842)

 

 

(400)

Balance, end of period

$

258,267

$

867

$

187,973

$

1,589

At and For the

At and For the

Nine Months Ended September 30, 2023

Nine months ended September 30, 2022

    

Accounts Receivable Net of Allowance for Expected Credit Losses

Allowance for Expected Credit Losses

Accounts Receivable Net of Allowance for Expected Credit Losses

Allowance for Expected Credit Losses

Balance, beginning of period

$

192,542

$

1,446

$

170,953

$

1,808

Current period change for expected credit losses

 

 

1,480

 

 

1,026

Writeoffs of uncollectable accounts receivable

 

 

(2,059)

 

 

(1,245)

Balance, end of period

$

258,267

$

867

$

187,973

$

1,589

Reinsurance recoverables include amounts due from reinsurers for both paid and unpaid losses. The Company cedes insurance to Commonwealth Automobile Reinsurers (“CAR”) and to other reinsurers. The Company has a property catastrophe excess of loss agreement and a casualty excess of loss agreement that qualify as reinsurance treaties and are designed to protect against large or unusual loss and loss adjustment expenses (“LAE”) activity. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company reports its reinsurance recoverables net of an allowance for estimated uncollectable reinsurance. A probability-of-default methodology which reflects current and forecasted economic conditions is used to estimate the amount of uncollectible reinsurance due to credit-related factors and the estimate is reported in an allowance for estimated uncollectible reinsurance. Amounts deemed to be uncollectible, including amounts due from known insolvent reinsurers, are written off against the allowance. Changes in the allowance, as well as any subsequent collections of amounts previously written off, are reported as part of losses and loss adjustment expenses.

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, which represents 93% of the total reinsurance recoverable on paid and unpaid losses at September 30, 2023 and December 31, 2022. The remaining 7% 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 September 30, 2023 and December 31, 2022, most of the 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 September 30, 2023 or December 31, 2022.

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7.  Loss and Loss Adjustment Expense Reserves

The following table sets forth a reconciliation of beginning and ending reserves for losses and LAE, as shown in the Company’s consolidated financial statements for the periods indicated.

Nine Months Ended September 30, 

    

2023

    

2022

Reserves for losses and LAE at beginning of year

$

549,598

$

570,651

Less receivable from reinsurers related to unpaid losses and LAE

 

(93,394)

 

(90,667)

Net reserves for losses and LAE at beginning of year

 

456,204

 

479,984

Incurred losses and LAE, related to:

Current year

 

505,194

 

403,173

Prior years

 

(34,997)

 

(43,223)

Total incurred losses and LAE

 

470,197

 

359,950

Paid losses and LAE related to:

Current year

 

223,945

 

236,571

Prior years

 

224,989

 

149,977

Total paid losses and LAE

 

448,934

 

386,548

Net reserves for losses and LAE at end of period

 

477,467

 

453,386

Plus receivable from reinsurers related to unpaid losses and LAE

 

106,708

 

92,026

Reserves for losses and LAE at end of period

$

584,175

$

545,412

At the end of each period, the reserves were re-estimated for all prior accident years. The Company’s prior year reserves decreased by $34,997 and $43,223 for the nine months ended September 30, 2023 and 2022, respectively, and resulted from re-estimations of prior year’s ultimate loss and LAE liabilities. The decreases in prior years reserves during the nine months ended September 30, 2023 and 2022 are primarily composed of reductions in our retained automobile and retained homeowners lines reserves.

The Company's automobile lines of business reserves decreased for the nine months ended September 30, 2023 and 2022, 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. Due to the nature of the risks that the Company underwrites and has historically underwritten, management does not believe that it has an exposure to asbestos or environmental pollution liabilities.

8.  Commitments and Contingencies

Commitments

As part of the Company’s investment activity, we have committed $170,000 to investments in limited partnerships. The Company has contributed $128,339 to these commitments as of September 30, 2023. As of September 30, 2023, the remaining committed capital that could be called is $48,919, which includes potential recallable capital contributions.

Contingencies

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 had 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 position is that no coverage existed for this peril. As a result of the lawsuit, the Company accrued a reserve of $6,500 for legal defense costs included in Loss and Losses Adjustment Expenses during the year ended December 31, 2021. During the year ended December 31, 2022, the claim against the Company was closed and the accrual of $6,500 was reversed.

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On October 19, 2021, the Supreme Judicial Court of Massachusetts (the “SJC”) unanimously ruled that property and casualty insurers must compensate third-party claimants under property damage coverage, part 4 of the standard Massachusetts automobile insurance policy, 2008 edition (standard policy), for the inherent diminished value (“IDV”) that occurs when their vehicles are damaged in a crash. This ruling overturned a previous decision by the Massachusetts Superior Court (the “Superior Court”), which found that a Massachusetts auto insurance policy did not provide property damage coverage for inherent diminished value damages for third-party claimants. The SJC placed the burden of proof on the individual claimant by explicitly specifying that the claimant must establish that the vehicle has suffered IDV damages and also the amount of IDV damages at issue. The SJC further ruled that an insurer’s previous denial of coverage for such damages could not serve as the basis for a claim of unfair business practices. On June 20, 2023, the Superior Court denied a motion brought by the plaintiffs seeking class certification. The plaintiffs have since filed a motion to amend the complaint, seeking to address the concerns raised by the Superior Court in denying their motion for class certification; Safety has opposed the motion to amend the complaint, which has yet to be heard or ruled on by the Superior Court. Based on the SJC’s rulings, at this time the Company does not expect any claims for IDV damages to be material, and therefore has not accrued for a specific loss contingency.

Massachusetts law requires that insurers licensed to do business in Massachusetts participate in the Massachusetts Insurers Insolvency Fund (“Insolvency Fund”). Members of the Insolvency Fund are assessed a proportionate share of the obligations and expenses of the Insolvency Fund in connection with an insolvent insurer. It is anticipated that there will be additional assessments from time to time relating to various insolvencies. Although the timing and amounts of any future assessments are not known, based upon existing knowledge, management’s opinion is that such future assessments are not expected to have a material effect upon the financial position of the Company.

9.  Debt

On August 10, 2023, the Company extended its Revolving Credit Agreement (the “Credit Agreement”) with Citizens Bank, N.A. (“Citizens Bank”) to a maturity date of August 10, 2028. 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 the higher of the Citizens Bank prime rate, the daily SOFR rate plus 1.25% per annum, or 0.5% above the federal funds rate. Interest only is payable prior to maturity.

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. As of September 30, 2023, the Company was in compliance with all 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 had no amounts outstanding on its credit facility at September 30, 2023 and December 31, 2022. The credit facility commitment fee included in interest expense was computed at a rate of 0.20% per annum on the $30,000 commitment at September 30, 2023.

The Company is a member of the FHLB-Boston. Membership in the FHLB-Boston allows the Company to borrow money at competitive interest rates provided the loan is collateralized by specific U.S. Government residential mortgage backed securities. At September 30, 2023, the Company has the ability to borrow $177,098 using eligible invested assets that would be used as collateral.

On March 17, 2020, the Company borrowed $30,000 from the FHLB-Boston for a term of five-years, bearing interest at a rate of 1.42%. Interest is payable monthly and the principal is due on the maturity date of March 17, 2025 but may be prepaid in whole or in part by the Company in advance with a minor penalty for prepayment.

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On December 29, 2022, the Company borrowed $5,000 from the FHLB-Boston for a term of one-month, bearing interest at a rate of 4.34%. The interest and principal was paid on the maturity date of January 27, 2023.

On March 7, 2023, the Company borrowed $15,000 from FHLB-Boston for a term of one-month, bearing an interest rate of 4.92%. The interest and principal was paid on the maturity date of April 5, 2023.

On June 29, 2023, the Company borrowed $5,000 from FHLB-Boston for a term of one-week, bearing an interest rate of 5.24%. The interest and principal was paid on the maturity date of July 6, 2023.

The Company estimates the fair value of the FHLB-Boston loans by discounting cash flows using the interest rate stated in the loan agreement, which is an observable input. As such, the loans are categorized as Level 2 within the fair value hierarchy. The fair value of the outstanding loans was $30,555 and $35,807 at September 30, 2023 and December 31, 2022, respectively. The loans are fully collateralized by specific U.S. Government residential mortgage-backed securities with a fair value of $51,185 and $40,195 at September 30, 2023 and December 31, 2022, respectively. The borrowing is outstanding from the FHLB-Boston at September 30, 2023 and December 31, 2022.

Interest expense on the FHLB-Boston borrowing was $119 and $109 for the three months ended September 30, 2023 and 2022, respectively. Interest expense on the FHLB-Boston borrowing was $634 and $325 for the nine months ended September 30, 2023 and 2022, respectively.

10. Income Taxes

Federal income tax expense for the nine months ended September 30, 2023 and 2022 has been computed using estimated effective tax rates.  These rates are revised, if necessary, at the end of each successive interim period to reflect the current estimates of the annual effective tax rates. The effective rate in 2023 was higher than the statutory rate primarily due to effects of the change in unrealized gains on equity securities and the impact of stock-based compensation.

The Company believes that the positions taken on its income tax returns for open tax years will be sustained upon examination by the Internal Revenue Service.  Therefore, the Company has not recorded any liability for uncertain tax positions under ASC 740, Income Taxes.

During the nine months ended September 30, 2023, 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.

All tax years prior to 2020 are closed. There are no current examinations ongoing.

In the Company’s opinion, adequate tax liabilities have been established for all open years. However, the amount of these tax liabilities could be revised in the near term if estimates of the Company’s ultimate liability are revised.

11. Share Repurchase Program

On February 23, 2022, the Board of Directors approved a share repurchase program of up to $50,000 of the Company’s outstanding common shares. The Board of Directors has cumulatively authorized increases to the existing share repurchase program of up to $200,000 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 the Company to repurchase any specific number of shares and it may be modified, suspended or terminated at any time without prior notice.

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No share purchases were made by the Company during the three months ended September 30, 2023 and 2022. The Company purchased 74,213 shares at a cost of $5,240 during the nine months ended September 30, 2023 and purchased 170,904 shares at a cost of $14,603 during the nine months ended September 30, 2022. Included in the cost of treasury stock acquired during 2023 is the one percent excise tax imposed as part of the Inflation Reduction Act, which became effective January 1, 2023. As of September 30, 2023 and December 31, 2022, the Company had purchased 3,215,690 and 3,141,477 shares at a cost of $155,240 and $150,000, respectively.

12. Leases

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.

In calculating lease liabilities the Company uses its incremental borrowing rate as of the application date based on original lease terms. The components of lease expense were as follows:

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2023

2022

    

2023

2022

Operating lease cost

$

1,038

$

1,052

$

3,089

$

3,193

Other information related to leases was as follows:

Three Months Ended September 30, 

Nine Months Ended September 30, 

2023

2022

    

2023

2022

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$

1,171

$

1,188

$

3,489

$

3,601

Weighted average remaining lease term

Operating leases

5.07 Years

6.02 Years

Weighted average discount rate

Operating leases

2.42%

2.36%

Maturities of lease liabilities were as follows:

    

Operating Leases

2023

$

1,156

2024

4,431

2025

4,034

2026

3,980

2027

3,973

Thereafter

3,905

Total lease payments

21,479

Less imputed interest

(893)

Total

$

20,586

13. Subsequent Events

The Company has evaluated subsequent events for recognition or disclosure in the consolidated financial statements filed on Form 10-Q with the SEC and no events have occurred that require recognition or disclosure.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

The following discussion contains forward-looking statements. We intend statements which are not historical in nature to be, and are hereby identified as “forward-looking statements” to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, the Company’s senior management may make forward-looking statements orally to analysts, investors, the media and others. This safe harbor requires that we specify important factors that could cause actual results to differ materially from those contained in forward-looking statements made by or on behalf of us. We cannot promise that our expectations in such forward-looking statements will turn out to be correct. Our actual results could be materially different from and worse than our expectations. See “Forward-Looking Statements” below for specific important factors that could cause actual results to differ materially from those contained in forward-looking statements.

Executive Summary and Overview

In this discussion, “Safety” refers to Safety Insurance Group, Inc. and “our Company,” “the Company,” “we,” “us” and “our” refer to Safety Insurance Group, Inc. and its consolidated subsidiaries. Our subsidiaries consist of Safety Insurance Company (“Safety Insurance”), Safety Indemnity Insurance Company (“Safety Indemnity”), Safety Property and Casualty Insurance Company (“Safety P&C”), Safety Northeast Insurance Company (“Safety Northeast”), Safety Northeast Insurance Agency, Inc. (“SNIA”), and Safety Management Corporation (“SMC”), which is SNIA’s holding company.

We are a leading provider of private passenger automobile, commercial automobile, homeowners and commercial other-than-auto insurance in Massachusetts. In addition to private passenger automobile insurance (which represented 52.0% of our direct written premiums in 2022), we offer a portfolio of other insurance products, including commercial automobile (17.4% of 2022 direct written premiums), homeowners (25.3% of 2022 direct written premiums) and dwelling fire, umbrella and business owner policies (totaling 5.3% of 2022 direct written premiums). Operating exclusively in Massachusetts, New Hampshire, and Maine through our insurance company subsidiaries, Safety Insurance, Safety Indemnity, Safety P&C and Safety Northeast (together referred to as the “Insurance Subsidiaries”), we have established strong relationships with independent insurance agents, who numbered 843 in 1,071 locations throughout these three states at December 31, 2022. We have used these relationships and our extensive knowledge of the Massachusetts market to become the third largest private passenger automobile carrier and the second largest commercial automobile insurance carrier in Massachusetts, capturing an approximate 7.9% and 12.6% share, respectively, of the Massachusetts private passenger and commercial automobile markets in 2022 according to statistics compiled by the Commonwealth Automobile Reinsurers (“CAR”) based on automobile exposures. We are also the third largest homeowners insurance carrier in Massachusetts with a 6.5% share of the Massachusetts homeowners insurance market.

A.M. Best, which rates insurance companies based on factors of concern to policyholders, currently assigns Safety Insurance an "A (Excellent)" rating. Our "A" rating was reaffirmed by A.M. Best on June 15, 2023.

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Our Insurance Subsidiaries began writing insurance in New Hampshire during 2008 and in Maine in 2016. In November 2020, we formed a fourth insurance subsidiary, Safety Northeast, which became licensed to write insurance products in Massachusetts.

The table below shows the amount of direct written premiums written in each state during the three and nine months ended September 30, 2023 and 2022.

Three Months Ended September 30, 

Nine Months Ended September 30, 

Direct Written Premiums

2023

2022

2023

    

2022

Massachusetts

$

253,608

$

206,830

$

709,379

$

592,512

New Hampshire

11,686

9,935

 

30,987

26,608

Maine

1,830

1,113

 

4,767

2,827

Total

$

267,124

$

217,878

$

745,133

$

621,947

Recent Trends and Events

Beginning on February 2, 2023 and through February 5, 2023, the Northeast region experienced a severe winter weather event (“February Winter Freeze”) over a thirty-six hour period, whereby temperatures reached lows of negative 40 degrees Fahrenheit, including windchill. As a result of the February Winter Freeze, the Company received approximately 800 claims totaling $32,100 of losses and loss adjustment expenses for the nine months ended September 30, 2023.

Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred for the three months ended September 30, 2023 increased by $35,452, or 28.6%, to $159,521 from $124,069 for the comparable 2022 period. Losses and loss adjustment expenses incurred for the nine months ended September 30, 2023 increased by $110,247, or 30.6%, to $470,197 from $359,950 for the comparable 2022 period. The increase in losses for the three months ended September 30, 2023 is due to continued inflationary impacts on our Private Passenger Automobile line of business, increased total automobile losses due to multiple flood events, and a high wind event that impacted our Homeowners line of business. The impact these weather events had on losses and loss adjustment expenses was approximately $3,000. The increase in losses for the nine months ended September 30, 2023 also included the February Winter Freeze.

Direct and Net Written Premiums. For the quarter ended September 30, 2023, the Company achieved its fourth consecutive quarter of double-digit growth in direct and net written premiums. For the three months ended September 30, 2023, direct written premium growth and net written premium growth were 22.6% and 22.2%, respectively. The increase in premium is driven by new business production, improved retention, and rate increases. For the nine months ended September 30, 2023, the Company achieved policy count growth across all lines of business, including 14.1%, 5.9% and 9.7% in Private Passenger Automobile, Commercial Automobile and Homeowners lines, respectively, compared to the same period in 2022. Additionally, for the nine months ended September 30, 2023, average written premium per policy increased 10.7%, 4.5% and 4.5% in Private Passenger Automobile, Commercial Automobile and Homeowners lines, respectively, compared to the same period in 2022.

Non-generally accepted accounting principles (“non-GAAP”) operating income, as defined below, was $8,673 for the three months ended September 30, 2023 and $7,870 for the nine months ended September 30, 2023, respectively, compared to operating income of $16,715 and $59,754 for the comparable 2022 periods. The decrease in non-GAAP operating income for the three and nine months ended September 30, 2023 was primarily the result of an increase in losses and loss adjustment expenses compared to the prior period. Non-GAAP operating income was $0.59 per diluted share for the three months ended September 30, 2023 and $0.54 per diluted share, for the nine months ended September 30, 2023, compared to operating income of $1.13 and $4.05 per diluted share, respectively, for the comparable 2022 periods.

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Table of Contents

The following rate changes have been filed and approved by the insurance regulators of Massachusetts, New Hampshire and Maine in 2023 and 2022.

Line of Business

    

Effective Date

    

Rate Change

Massachusetts Private Passenger Automobile

January 1, 2024

3.5%

New Hampshire Commercial Automobile

November 1, 2023

7.9%

New Hampshire Homeowners

October 1, 2023

6.0%

Maine Private Passenger Automobile

October 1, 2023

7.3%

New Hampshire Private Passenger Automobile

September 1, 2023

6.5%

Massachusetts Homeowners

August 1, 2023

3.9%

Massachusetts Private Passenger Automobile

July 1, 2023

4.3%

Massachusetts Commercial Automobile

May 1, 2023

4.0%

Massachusetts Private Passenger Automobile

December 1, 2022

3.5%

New Hampshire Commercial Automobile

September 1, 2022

5.8%

New Hampshire Homeowners

September 1, 2022

3.5%

New Hampshire Private Passenger Automobile

September 1, 2022

2.8%

Massachusetts Homeowners

July 1, 2022

2.6%

Insurance Ratios

The property and casualty insurance industry uses the combined ratio as a measure of underwriting profitability.  The combined ratio is the sum of the loss ratio (losses and loss adjustment expenses incurred as a percent of net earned premiums) plus the expense ratio (underwriting and other expenses as a percent of net earned premiums, calculated on a Generally Accepted Accounting Principles (“GAAP”) basis).  The combined ratio reflects only underwriting results and does not include income from investments or finance and other service income.  Underwriting profitability is subject to significant fluctuations due to competition, catastrophic events, weather, economic and social conditions, and other factors.

Our GAAP insurance ratios are outlined in the following table.

    

Three Months Ended September 30, 

  

Nine Months Ended September 30, 

 

2023

2022

2023

2022

 

GAAP ratios:

Loss ratio

 

74.4

%  

65.3

%  

77.3

%  

63.7

%  

Expense ratio

 

30.4

31.8

30.9

32.3

Combined ratio

 

104.8

%  

97.1

%  

108.2

%  

96.0

%  

Share-Based Compensation

On March 24, 2022, the Company’s Board of Directors adopted the Amended and Restated Safety Insurance Group, Inc. 2018 Long-Term Incentive Plan (the “Amended 2018 Plan”), which was subsequently approved by our shareholders at the 2022 Annual Meeting of Shareholders. The Amended 2018 Plan increases the share pool limit by adding 350,000 common shares to the previously adopted Safety Insurance Group, Inc, 2018 Long-Term Incentive Plan. The Amended 2018 Plan enables the grant of stock awards, performance shares, cash-based performance units, other stock-based awards, stock options, stock appreciation rights, and stock unit awards, each of which may be granted separately or in tandem with other awards. Eligibility to participate includes officers, directors, employees and other individuals who provide bona fide services to the Company. The Amended 2018 Plan supersedes the Company’s 2002 Management Omnibus Incentive Plan (“the 2002 Incentive Plan”).

The Amended 2018 Plan establishes a pool of 700,000 shares of common stock available for issuance to our employees and other eligible participants. The Board of Directors and the Compensation Committee intend to issue awards under the Amended 2018 Plan in the future.

The maximum number of shares of common stock between both the Amended 2018 Plan and 2002 Incentive Plan with respect to which awards may be granted is 3,200,000. No further grants will be allowed under the 2002 Incentive Plan. At September 30, 2023, there were 373,422 shares available for future grant.

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A summary of share based awards granted under the Incentive Plan during the nine months ended September 30, 2023 is as follows:

Type of

    

    

    

Number of

    

Fair

    

    

Equity

Awards

Value per

Awarded

    

Effective Date

    

Granted

    

Share (1)

Vesting Terms

RS - Service

 

February 23, 2023

 

33,101

 

$

80.24

3 years, 30%-30%-40%

RS - Performance

 

February 23, 2023

 

25,990

 

$

80.24

3 years, cliff vesting (3)

RS - Performance

 

February 23, 2023

 

4,703

 

$

80.24

3 years, cliff vesting (4)

RS

 

February 23, 2023

 

6,000

 

$

80.24

No vesting period (2)

RS

 

May 17, 2023

 

1,000

 

$

71.78

No vesting period (2)

(1)The fair value per share of the restricted stock grant is equal to the closing price of our common stock on the grant date.
(2)Board of Director members must maintain stock ownership equal to at least four times their annual retainer. This requirement must be met within five years of becoming a director.
(3)The shares represent performance-based restricted shares award. Vesting of these shares is dependent upon the attainment of pre-established performance objectives, and any difference between shares granted and shares earned at the end of the performance period will be reported at the conclusion of the performance period.
(4)The shares represent a true-up of previously awarded performance-based restricted share awards. The updated shares were calculated based on the attainment of pre-established performance objectives and granted under the Amended 2018 Plan.

Reinsurance

We reinsure with other insurance companies a portion of our potential liability under the policies we have underwritten, thereby protecting us against an unexpectedly large loss or a catastrophic occurrence that could produce large losses, primarily in our homeowners line of business. We are selective in choosing our reinsurers, seeking only those companies that we consider to be financially stable and adequately capitalized. In an effort to minimize exposure to the insolvency of a reinsurer, we continually evaluate and review the financial condition of our reinsurers. Most of our reinsurers have an A.M. Best rating of “A+” (Superior) or “A” (Excellent).

We maintain reinsurance coverage to help lessen the effect of losses from catastrophic events, maintaining coverage during 2023 that protects us in the event of a "129-year storm" (that is, a storm of a severity expected to occur once in a 129-year period). We use various software products to measure our exposure to catastrophe losses and the probable maximum loss to us for catastrophe losses such as hurricanes. The models include estimates for our share of the catastrophe losses generated in the residual market for property insurance by the Massachusetts Property Insurance Underwriting Association ("FAIR Plan").

For 2023, we have purchased three layers of excess catastrophe reinsurance providing $590,000 of coverage for property losses in excess of $75,000 up to a maximum of $665,000. Our reinsurers’ co-participation is 75.0% of $75,000 for the 1st layer, 75.0% of $250,000 for the 2nd layer and 75.0% of $265,000 for the 3rd layer.

We also have casualty excess of loss reinsurance for large casualty losses occurring in our automobile, homeowners, dwelling fire, and business owner lines of business in excess of $2,000 up to a maximum of $10,000. We have property excess of loss reinsurance coverage for large property losses, with coverage in excess of $2,500 up to a maximum of $20,000, for our homeowners, and business owners. In addition, we have liability excess of loss reinsurance for umbrella large losses in excess of $1,000 up to a maximum of $10,000. We also have various reinsurance agreements with Hartford Steam Boiler Inspection and Insurance Company, of which the primary contract is a quota share agreement under which we cede 100% of the premiums and losses for the equipment breakdown coverage under our business owner policies and commercial package policies.

We are a participant in CAR, a state-established body that runs the residual market reinsurance programs for 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.

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As a response to the exposure to catastrophe losses, on July 1, 2023, the FAIR Plan purchased $1,475,000 of catastrophe reinsurance for property losses with retention of $100,000.

At September 30, 2023, we had a $123,833 recoverable from CAR which comprises loss adjustment expense reserves, unearned premiums and reinsurance recoverable.

Non-GAAP Measures

Management has included certain non-GAAP financial measures in presenting the Company’s results. Management believes that these non-GAAP measures better explain the Company’s results of operations and allow for a more complete understanding of the underlying trends in the Company’s business. These measures should not be viewed as a substitute for those determined in accordance with GAAP. In addition, our definitions of these items may not be comparable to the definitions used by other companies.

Non-GAAP operating income and non-GAAP operating income per diluted share consist of our GAAP net income adjusted by the net realized gains (losses) on investments, changes in net unrealized gains on equity securities, credit loss benefit (expense) and taxes related thereto. Net income and earnings per diluted share are the GAAP financial measures that are most directly comparable to non-GAAP operating income and non-GAAP operating income per diluted share, respectively. A reconciliation of the GAAP financial measures to these non-GAAP measures is included in the financial highlights below.

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Table of Contents

Results of Operations

Three and Nine Months Ended September 30, 2023 Compared to Three and Nine Months Ended September 30, 2022

The following table shows certain of our selected financial results.

    

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

    

2023

    

2022

    

2023

    

2022

Direct written premiums

$

267,124

$

217,878

$

745,133

$

621,947

Net written premiums

$

251,087

$

205,428

$

698,940

$

586,204

Net earned premiums

$

214,425

$

189,931

$

608,385

$

565,352

Net investment income

 

14,005

 

11,112

 

41,495

 

33,337

Earnings from partnership investments

 

2,427

 

876

 

5,146

 

9,675

Net realized gains on investments

 

270

 

1,251

 

1,111

 

8,613

Change in net unrealized gains on equity securities

(9,184)

 

(14,364)

 

(2,148)

 

(56,283)

Credit loss expense

 

403

 

(207)

 

(554)

 

(207)

Commission income

 

1,918

 

 

5,159

 

Finance and other service income

 

5,094

 

3,749

 

13,966

 

10,469

Total revenue

 

229,358

 

192,348

 

672,560

 

570,956

Losses and loss adjustment expenses

 

159,521

 

124,069

 

470,197

 

359,950

Underwriting, operating and related expenses

 

65,217

 

60,373

 

187,832

 

182,839

Other expense

 

2,005

 

 

5,198

 

Interest expense

 

139

 

132

 

697

 

392

Total expenses

 

226,882

 

184,574

 

663,924

 

543,181

Income before income taxes

 

2,476

 

7,774

 

8,636

 

27,775

Income tax expense

 

527

 

1,582

 

2,023

 

5,844

Net income

$

1,949

$

6,192

$

6,613

$

21,931

Earnings per weighted average common share:

Basic

$

0.13

$

0.42

$

0.45

$

1.49

Diluted

$

0.13

$

0.42

$

0.45

$

1.48

Cash dividends paid per common share

$

0.90

$

0.90

$

2.70

$

2.70

Reconciliation of Net Income to Non-GAAP Operating Income

Net income

$

1,949

$

6,192

$

6,613

$

21,931

Exclusions from net income:

Net realized gains on investments

(270)

(1,251)

(1,111)

(8,613)

Change in net unrealized gains on equity securities

9,184

14,364

2,148

56,283

Credit loss expense

(403)

207

554

207

Income tax expense on exclusions from net income

(1,787)

(2,797)

(334)

(10,054)

Non-GAAP Operating income (loss)

$

8,673

$

16,715

$

7,870

$

59,754

Net income per diluted share

$

0.13

$

0.42

$

0.45

$

1.48

Exclusions from net income:

Net realized gains on investments

(0.02)

(0.09)

(0.08)

(0.59)

Change in net unrealized gains on equity securities

0.63

0.98

0.15

3.83

Credit loss expense

(0.03)

0.01

0.04

0.01

Income tax benefit expense on exclusions from net income

(0.12)

(0.19)

(0.02)

(0.68)

Non-GAAP Operating income per diluted share

$

0.59

$

1.13

$

0.54

$

4.05

Direct Written Premiums. Direct written premiums for the three months ended September 30, 2023 increased by $49,246, or 22.6%, to $267,124 from $217,878 for the comparable 2022 period. Direct written premiums for the nine months ended September 30, 2023 increased by $123,186, or 19.8%, to $745,133 from $621,947 for the comparable 2022 period. The increases in direct written premium and net written premium are a result of new business production, improved retention, and rate increases. For the nine months ended September 30, 2023, the Company achieved policy count growth across all lines of business, including 14.1%, 5.9% and 9.7% in Private Passenger Automobile, Commercial Automobile and Homeowners lines, respectively, compared to the same period in 2022. Additionally, for the nine months ended September 30, 2023, average written premium per policy increased 10.7%, 4.5% and 4.5% in Private Passenger Automobile, Commercial Automobile and Homeowners lines, respectively, compared to the same period in 2022.

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Table of Contents

Net Written Premiums. Net written premiums for the three months ended September 30, 2023 increased by $45,659, or 22.2%, to $251,087 from $205,428 for the comparable 2022 period. Net written premiums for the nine months ended September 30, 2023 increased by $112,736, or 19.2%, to $698,940 from $586,204 for the comparable 2022 period. The increase was primarily due to the factors that increased direct written premiums.

Net Earned Premiums.  Net earned premiums for the three months ended September 30, 2023 increased by $24,494, or 12.9%, to $214,425 from $189,931 for the comparable 2022 period. Net earned premiums for the nine months ended September 30, 2023 increased by $43,033, or 7.6%, to $608,385 from $565,352 for the comparable 2022 period.

The effect of reinsurance on net written and net earned premiums is presented in the following table.

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2023

    

2022

    

2023

    

2022

Written Premiums

Direct

$

267,124

$

217,878

$

745,133

$

621,947

Assumed

 

7,472

 

6,460

 

23,230

 

21,168

Ceded

 

(23,509)

 

(18,910)

 

(69,423)

 

(56,911)

Net written premiums

$

251,087

$

205,428

$

698,940

$

586,204

Earned Premiums

Direct

$

231,249

$

202,190

$

654,085

$

597,662

Assumed

 

6,839

 

6,497

 

22,357

 

21,835

Ceded

 

(23,663)

 

(18,756)

 

(68,057)

 

(54,145)

Net earned premiums

$

214,425

$

189,931

$

608,385

$

565,352

Net Investment Income.  Net investment income for the three months ended September 30, 2023 increased $2,893, or 26.0%, to $14,005 from $11,112 for the comparable 2022 period. Net investment income for the nine months ended September 30, 2023 increased by $8,158, or 24.5%, to $41,495 from $33,337 for the comparable 2022 period. The increase is a result of increases in interest rates on our fixed maturity portfolio as compared to the prior year. Net effective annualized yield on the investment portfolio was 4.0% for the three months September 30, 2023 compared to 3.0% for the comparable 2022 period. Net effective annualized yield on the investment portfolio was 3.9% for the nine months ended September 30, 2023 compared to 3.1% for the comparable 2022 period. The investment portfolio’s duration on fixed maturities was 3.6 years at September 30, 2023 compared to 3.8 years at December 31, 2022.

Earnings from Partnership Investments. Earnings from partnership investments were $2,427 for the three months ended September 30, 2023 compared to $876 for the comparable 2022 period. Earnings from partnership investments were $5,146 for the nine months ended September 30, 2023 compared to $9,675 for the comparable 2022 period. The nine month 2023 earnings reflect a decrease in investment appreciation and timing of cash proceeds received compared to the prior year. 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 was $270 for the three months ended September 30, 2023 compared to $1,251 for the comparable 2022 period. Net realized gains on investments was $1,111 for the nine months ended September 30, 2023 compared to $8,613 for the comparable 2022 period. The decrease in net realized gains is driven by an increase in realized losses.

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The gross unrealized gains and losses on investments in fixed maturity securities, including redeemable preferred stocks that have characteristics of fixed maturities, short term investments, equity securities, including interests in mutual funds, and other invested assets were as follows for the periods indicated:

As of September 30, 2023

    

Cost or

    

Allowance for

    

Gross Unrealized

    

Estimated

Amortized

Expected Credit

Fair

Cost

Losses

Gains

Losses (3)

Value

U.S. Treasury securities

$

2,421

$

$

$

(164)

$

2,257

Obligations of states and political subdivisions

 

38,787

 

 

170

 

(3,810)

 

35,147

Residential mortgage-backed securities (1)

 

259,055

 

 

59

 

(34,717)

 

224,397

Commercial mortgage-backed securities

 

157,421

 

 

 

(18,253)

 

139,168

Other asset-backed securities

 

67,610

 

 

4

 

(3,945)

 

63,669

Corporate and other securities

 

592,058

 

(1,231)

 

758

 

(50,998)

 

540,587

Subtotal, fixed maturity securities 

 

1,117,352

 

(1,231)

 

991

 

(111,887)

 

1,005,225

Equity securities (2)

 

216,589

 

 

23,041

 

(16,478)

 

223,152

Other invested assets (4)

 

129,739

 

 

 

 

129,739

Totals

$

1,463,680

$

(1,231)

$

24,032

$

(128,365)

$

1,358,116

(1)Residential mortgage-backed securities consist 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).
(2)Equity securities include common stock, preferred stock, mutual funds and interests in mutual funds held to fund the Company’s executive

deferred compensation plan.

(3)Our investment portfolio included 1,119 securities in an unrealized loss position at September 30, 2023.
(4)Other invested assets accounted for under the equity method which approximated fair value.

The composition of our fixed income security portfolio by Moody’s rating was as follows:

As of September 30, 2023

    

Estimated

    

    

Fair Value

Percent

U.S. Treasury securities and obligations of U.S. Government agencies

 

$

224,395

 

22.3

%

Aaa/Aa

215,401

 

21.4

A

202,891

 

20.2

Baa

196,976

 

19.6

Ba

45,850

 

4.6

B

83,561

 

8.3

Caa/Ca

3,849

 

0.4

Not rated

32,302

 

3.2

Total 

$

1,005,225

 

100.0

%

 

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 September 30, 2023, our portfolio of fixed maturity investments was comprised principally 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.

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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 September 30, 2023.

As of September 30, 2023

Less than 12 Months

12 Months or More

Total

    

Estimated

    

Unrealized

    

Estimated

    

Unrealized

    

Estimated

    

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

U.S. Treasury securities

$

594

$

4

$

1,663

$

160

$

2,257

$

164

Obligations of states and political subdivisions

 

3,728

 

172

 

27,752

 

3,638

 

31,480

 

3,810

Residential mortgage-backed securities

 

42,077

 

1,844

 

177,655

 

32,873

 

219,732

 

34,717

Commercial mortgage-backed securities

 

8,872

 

399

 

130,296

 

17,854

 

139,168

 

18,253

Other asset-backed securities

 

5,818

390

52,847

3,555

58,665

3,945

Corporate and other securities

 

112,458

 

4,376

 

359,076

 

46,622

 

471,534

 

50,998

Subtotal, fixed maturity securities

 

173,547

 

7,185

 

749,289

 

104,702

 

922,836

 

111,887

Equity securities

 

77,095

 

7,389

 

45,975

 

9,089

 

123,070

 

16,478

Total temporarily impaired securities

$

250,642

$

14,574

$

795,264

$

113,791

$

1,045,906

$

128,365

As of September 30, 2023 and December 31, 2022, the Company concluded that $1,231 and $678, respectively, of unrealized losses were due to credit factors and were recorded as an allowance for expected credit losses 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 September 30, 2023 and December 31, 2022 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 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.

Specific qualitative analysis was also performed for securities appearing on our “Watch List,” if any.  Qualitative analysis considered such factors as the financial condition and the near term prospects of the issuer, whether the debtor is current on its contractually obligated interest and principal payments, changes to the rating of the security by a rating agency and the historical volatility of the fair value of the security.

For information regarding fair value measurements of our investment portfolio, refer to Item 1-Financial Statements, Note 5, Investments, of this Form 10-Q.  

Commission Income: Commission income includes revenues from new and renewal commissions paid by insurance carriers, which we recognize when earned. Commission income for the three and nine months ended September 30, 2023 was $1,918 and $5,159, respectively.

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 for the three months ended September 30, 2023 increased by $1,345, or 35.9%, to $5,094 from $3,749 for the comparable 2022 period. Finance and other service income for the nine months ended September 30, 2023, increased by $3,497, or 33.4%, to $13,966 from $10,469 for the comparable 2022 period. The increase is primarily driven by the increase in policy counts and changes to our fee assessment policies.

Losses and Loss Adjustment Expenses.  Losses and loss adjustment expenses incurred for the three months ended September 30, 2023 increased by $35,452, or 28.6%, to $159,521 from $124,069 for the comparable 2022 period. Losses and loss adjustment expenses incurred for the nine months ended September 30, 2023 increased by $110,247, or 30.6%, to $470,197 from $359,950 for the comparable 2022 period. The increase in losses for the three months ended September 30, 2023 is due to continued inflationary impacts on our Private Passenger Automobile line of business, increased total automobile losses due to multiple flood events, and a high wind event that impacted our Homeowners line of business. The increase in losses for the nine months ended September 30, 2023 also included the February Winter Freeze.

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Our GAAP loss ratio for the three months ended September 30, 2023 increased to 74.4% from 65.3% for the comparable 2022 period.  Our GAAP loss ratio for the nine months ended September 30, 2023 increased to 77.3% from 63.7% for the comparable 2022 period. Our GAAP loss ratio excluding loss adjustment expenses for the three months ended September 30, 2023 was 65.7% compared to 53.5% for the comparable 2022 period. Our GAAP loss ratio excluding loss adjustment expenses for the nine months ended September 30, 2023 was 67.8% compared to 54.6% for the comparable 2022 period. Total prior year favorable development included in the pre-tax results for the three months ended September 30, 2023 was $13,476 compared to $13,950 for the comparable 2022 period. Total prior year favorable development included in the pre-tax results for the nine months ended September 30, 2023 was $34,997 compared to $43,223 for the comparable 2022 period. The decrease in the prior year favorable development in 2023 is primarily related to the reversal of $6,500 legal expense reserve during the second quarter of 2022.

Underwriting, Operating and Related Expenses.  Underwriting, operating and related expenses for the three months ended September 30, 2023 increased by $4,844, or 8.0%, to $65,217 from $60,373 for the comparable 2022 period. Underwriting, operating and related expenses for the nine months ended September 30, 2023 increased by $4,993, or 2.7%, to $187,832 from $182,839 for the comparable 2022 period. The increase in the three months and nine months ended September 30, 2023 is driven by an increase in base commissions resulting from the increase in written premiums, offset by a decrease in contingent commission expenses. Our GAAP expense ratio for the three months ended September 30, 2023 decreased to 30.4% from 31.8% for the comparable 2022 period. Our GAAP expense ratio for the nine months ended September 30, 2023 decreased to 30.9% from 32.3% for the comparable 2022 period.

Interest Expense.  Interest expense was $139 and $132 for the three months ended September 30, 2023 and 2022, respectively. Interest expense was $697 for the nine months ended September 30, 2023 compared to $392 for the comparable 2022 period. The credit facility commitment fee included in interest expense was $37 for the nine months ended September 30, 2023 and 2022. The increase in interest expense is due to higher interest rates on outstanding debt in 2023.

Income Tax Expense.  Our effective tax rate was 21.3% and 20.3% for the three months ended September 30, 2023 and 2022, respectively. The effective tax rate was 23.4% and 21.0% for the nine months ended September 30, 2023 and 2022, respectively. The effective tax rate in 2023 was higher primarily due to the effects of the change in unrealized gains on equity securities and the impact of stock-based compensation.

Net Income. Net income for the three months ended September 30, 2023 was $1,949 compared to net income of $6,192 for the comparable 2022 period. Net income for the nine months ended September 30, 2023 was $6,613 compared to net income of $21,931 for the comparable 2022 period.

Non-GAAP Operating Income. Non-GAAP operating income, as defined above, was $8,673 for the three months ended September 30, 2023 compared to $16,715 for the comparable 2022 period. Non-GAAP operating income was $7,870 for the nine months ended September 30, 2023 compared to $59,754 for the comparable 2022 period.

Liquidity and Capital Resources

As a holding company, Safety’s assets consist primarily of the stock of our direct and indirect subsidiaries. Our principal source of funds to meet our obligations and pay dividends to shareholders, therefore, is dividends and other permitted payments from our subsidiaries, principally Safety Insurance. Safety is the borrower under our credit facility.

Safety Insurance’s sources of funds primarily include premiums received, investment income, and proceeds from sales and redemptions of investments. Safety Insurance’s principal uses of cash are the payment of claims, operating expenses and taxes, the purchase of investments, and the payment of dividends to Safety.

Net cash provided by operating activities was $17,063 and $23,366 during the nine months ended 2023 and 2022, respectively. Our operations typically generate positive cash flows from operations as most premiums are received in advance of the time when claim and benefit payments are required. Positive operating cash flows are expected in the future to meet our liquidity requirements.

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Net cash provided by investing activities was $38,883 and $1,166 during the nine months ended September 30, 2023 and 2022, respectively. Fixed maturities, equity securities, and other invested assets purchased were $108,003 for the nine months ended September 30, 2023 compared to $207,179 for the comparable prior year period. Proceeds from maturities, redemptions, calls and sales, of securities were $148,288 during the nine months ended September 30, 2023 compared to $209,872 for the comparable prior year period.

Net cash used for financing activities was $50,352 and $54,500 during the nine months ended September 30, 2023 and 2022, respectively. Net cash used for financing activities during the nine months ended September 30, 2023 consisted of dividend payments to shareholders and the acquisition of treasury stock.

The Insurance Subsidiaries maintain a high degree of liquidity within their respective investment portfolios in fixed maturity and equity securities. We do not anticipate the need to sell these securities to meet the Insurance Subsidiaries cash requirements. We expect the Insurance Subsidiaries to generate sufficient operating cash to meet all short-term and long-term cash requirements. However, there can be no assurance that unforeseen business needs or other items will not occur causing us to have to sell securities before their values fully recover; thereby causing us to recognize additional impairment charges in that time period.

Credit Facility

For information regarding our Credit Facility, please refer to Item 1- Financial Statements, Note 9, Debt, of this Form 10-Q.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that are applicable to the Company.

Regulatory Matters

Our Insurance Subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to their parent without prior approval of the Commissioner of the Division of Insurance of Massachusetts (the “Commissioner”). The Massachusetts statute limits the dividends an insurer may pay in any twelve-month period, without the prior permission of the Commissioner, to the greater of (i) 10% of the insurer’s surplus as of the preceding December 31 or (ii) the insurer’s net income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. Our insurance company subsidiaries may not declare an “extraordinary dividend” (defined as any dividend or distribution that, together with other distributions made within the preceding twelve months, exceeds the limits established by Massachusetts statute) until thirty days after the Commissioner has received notice of the intended dividend and has not objected. As historically administered by the Commissioner, this provision requires the Commissioner’s prior approval of an extraordinary dividend. Under 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, 2022, the statutory surplus of Safety Insurance was $782,200, and its statutory net income for 2022 was $66,197. As a result, a maximum of $78,220 is available in 2023 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 $703,980 at December 31, 2022. During the nine months ended September 30, 2023, Safety Insurance paid dividends to Safety of $43,606.

The maximum dividend permitted by law is not indicative of an insurer’s actual ability to pay dividends, which may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer’s ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends.

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Table of Contents

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 2023 were as follows:

    

    

    

    

    

    

    

Total

Declaration

Record

Payment

Dividend per

Dividends Paid

Date

Date

Date

Common Share

and Accrued

February 15, 2023

 

March 1, 2023

 

March 15, 2023

 

$

0.90

 

$

13,247

May 3, 2023

June 1, 2023

June 15, 2023

$

0.90

$

13,283

August 2, 2023

September 1, 2023

September 15, 2023

$

0.90

$

13,223

On November 1, 2023, our Board approved and declared a quarterly cash dividend of $0.90 per share which will be paid on December 15, 2023 to shareholders of record on December 1, 2023. We plan to continue to declare and pay quarterly cash dividends, depending on our financial position and the regularity of our cash flows.

On February 23, 2022, the Board of Directors approved a share repurchase program of up to $50,000 of the Company’s outstanding common shares. As of September 30, 2023, the Board of Directors has cumulatively authorized increases to the existing share repurchase program of up to $200,000 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.

No shares were purchased by the Company during the three months ended September 30, 2023. During the nine months ended September 30, 2023, the Company purchased 74,213 shares at a cost of $5,240. As of September 30, 2023, the Company had purchased 3,215,690 shares of common stock at a cost of $155,240. As of December 31, 2022, the Company had purchased 3,141,477 shares of common stock at a cost of $150,000.

Management believes that the current level of cash flow from operations provides us with sufficient liquidity to meet our operating needs over the next 12 months. We expect to be able to continue to meet our operating needs after the next 12 months from internally generated funds. Since our ability to meet our obligations in the long term (beyond such twelve-month period) is dependent upon such factors as market changes, insurance regulatory changes and economic conditions, no assurance can be given that the available net cash flow will be sufficient to meet our operating needs. We expect that we would need to borrow or issue capital stock if we needed additional funds, for example, to pay for an acquisition or a significant expansion of our operations. There can be no assurance that sufficient funds for any of the foregoing purposes would be available to us at such time.

Risk-Based Capital Requirements

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, 2022, the Insurance Subsidiaries had total capital of $782,200, 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 $200,196 at December 31, 2022.

Off-Balance Sheet Arrangements

We have no material obligations under a guarantee contract meeting the characteristics identified in Accounting Standards Codification (“ASC”) 460, Guarantees.  We have no material retained or contingent interests in assets transferred to an unconsolidated entity. We have no material obligations, including contingent obligations, under contracts that would be accounted for as derivative instruments. We have no obligations, including contingent

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obligations, arising out of a variable interest in an unconsolidated entity held by, and material to, us, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us. We have no direct investments in real estate and no holdings of mortgages secured by commercial real estate. Accordingly, we have no material off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Loss and Loss Adjustment Expense Reserves

Significant periods of time can elapse between the occurrence of an insured loss, the reporting to us of that loss and our final payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities. Our reserves represent estimates of amounts needed to pay reported and estimated losses incurred but not yet reported (“IBNR”) and the expenses of investigating and paying those losses, or loss adjustment expenses. Every quarter, we review our previously established reserves and adjust them, if necessary.

When a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. The amount of the reserve is primarily based upon an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss. The estimate reflects the informed judgment of such personnel based on general insurance reserving practices and on the experience and knowledge of the claims person. During the loss adjustment period, these estimates are revised as deemed necessary by our claims department based on subsequent developments and periodic reviews of the cases. When a claim is closed with or without a payment, the difference between the case reserve and the settlement amount creates a reserve deficiency if the payment exceeds the case reserve or a reserve redundancy if the payment is less than the case reserve.

In accordance with industry practice, we also maintain reserves for IBNR. IBNR reserves are determined in accordance with commonly accepted actuarial reserving techniques on the basis of our historical information and experience. We review and make adjustments to incurred but not yet reported reserves quarterly. In addition, IBNR reserves can also be expressed as the total loss reserves required less the case reserves on reported claims.

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.

In estimating all our loss reserves, we follow the guidance prescribed by ASC 944, Financial Services – Insurance.

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

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determine ultimate losses, our actuaries calculate a range of indications and select a point estimation using such actuarial techniques as:

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.
Incurred Loss Indications: This method projects ultimate loss estimates based upon extrapolations of historic incurred loss trends. This method tends to be used on long tail lines of business such as automobile liability and homeowner’s liability.
Bornhuetter-Ferguson Indications: This method projects ultimate loss estimates based upon extrapolations of an expected amount of IBNR, which is added to current incurred losses or paid losses.  This method tends to be used on small, immature, or volatile lines of business, such as our BOP and umbrella lines of business.
Bodily Injury Code Indications: This method projects ultimate loss estimates for our private passenger and commercial automobile bodily injury coverage based upon extrapolations of the historic number of accidents and the historic number of bodily injury claims per accident. Projected ultimate bodily injury claims are then segregated into expected claims by type of injury (e.g. soft tissue injury vs. hard tissue injury) based on past experience.  An ultimate severity, or average paid loss amounts, is estimated based upon extrapolating historic trends. Projected ultimate loss estimates using this method are the aggregate of estimated losses by injury type.

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 $445,388 to $506,966 as of September 30, 2023. 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 $477,467 as of September 30, 2023.

The following table presents the point estimation of the recorded reserves and the range of estimations by line of business for net loss and LAE reserves as of September 30, 2023.

As of September 30, 2023

Line of Business

    

Low

    

Recorded

    

High

Private passenger automobile

 

$

189,123

 

$

201,167

 

$

213,986

Commercial automobile

100,673

105,280

111,955

Homeowners

88,915

96,364

99,814

All other

66,677

74,656

81,211

Total

 

$

445,388

 

$

477,467

 

$

506,966

The following table presents our total net reserves and the corresponding case reserves and IBNR reserves for each line of business as of September 30, 2023.

As of September 30, 2023

Line of Business

    

Case

    

IBNR

    

Total

Private passenger automobile

 

$

257,577

 

$

(56,418)

 

$

201,159

CAR assumed private passenger auto

-

8

8

Commercial automobile

70,221

5,094

75,315

CAR assumed commercial automobile

17,772

12,193

29,965

Homeowners

91,771

(5,665)

86,106

FAIR Plan assumed homeowners

4,917

5,341

10,258

All other

42,587

32,069

74,656

Total net reserves for losses and LAE

 

$

484,845

 

$

(7,378)

 

$

477,467

At September 30, 2023, our total IBNR reserves for our private passenger automobile line of business was comprised of ($88,712) related to estimated ultimate decreases in the case reserves, including anticipated recoveries (i.e. salvage and subrogation), and $32,294 related to our estimation for not yet reported losses.

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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 40.7% of our total reserves for CAR assumed commercial automobile business as of September 30, 2023, 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 52.1% of our total reserves for FAIR Plan assumed homeowners at September 30, 2023, due to similar reporting delays in the information we receive from FAIR Plan.

The following table presents information by line of business for our total net reserves and the corresponding retained (i.e. direct less ceded) reserves and assumed reserves as of September 30, 2023.

As of September 30, 2023

Line of Business

    

Retained

    

Assumed

    

Net

Private passenger automobile

 

$

201,159

CAR assumed private passenger automobile

 

$

8

Net private passenger automobile

 

$

201,167

Commercial automobile

75,315

CAR assumed commercial automobile

29,965

Net commercial automobile

105,280

Homeowners

86,106

FAIR Plan assumed homeowners

10,258

Net homeowners

96,364

All other

74,656

74,656

Total net reserves for losses and LAE

 

$

437,236

 

$

40,231

 

$

477,467

Residual Market Loss and Loss Adjustment Expense Reserves

We are a participant in CAR, the FAIR Plan and other various residual markets and assume a portion of losses and LAE on business ceded by the industry participants to the residual markets.  We estimate reserves for assumed losses and LAE that have not yet been reported to us by the residual markets.  Our estimations are based upon the same factors we use for our own reserves, plus additional factors due to the nature of and the information we receive.

Residual market deficits, consists 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 takes into consideration a company’s voluntary market share.

Because of the lag in the various residual market estimations, and in order to try to validate to the extent possible the information provided, we must try to estimate the effects of the actions of our competitors in order to establish our Participation Ratio.

Although we rely to a significant extent in setting our reserves on the information the various residual markets provide, we are cautious in our use of that information, because of the delays in receiving data from the various residual markets.  As a result, we have to estimate our Participation Ratio and these reserves are subject to significant judgments and estimates.

Sensitivity Analysis

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 nine months ended September 30, 2023, a 1 percentage-point change in the loss and LAE ratio would result in a change in reserves of $6,084. Each 1 percentage-point change in the loss and loss expense ratio would have had a $4,806 effect on net income, or $0.33 per diluted share.

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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 nine months ended September 30, 2023. 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.

    

-1 Percent

    

No

    

+1 Percent

Change in

Change in

Change in

Frequency

Frequency

Frequency

Private passenger automobile retained loss and LAE reserves

-1 Percent Change in Severity

Estimated decrease in reserves

 

$

(4,023)

 

$

(2,012)

 

$

Estimated increase in net income

3,178

1,589

No Change in Severity

Estimated (decrease) increase in reserves

(2,012)

2,012

Estimated increase (decrease) in net income

1,589

(1,589)

+1 Percent Change in Severity

Estimated increase in reserves

2,012

4,023

Estimated decrease in net income

(1,589)

(3,178)

Commercial automobile retained loss and LAE reserves

-1 Percent Change in Severity

Estimated decrease in reserves

(1,506)

(753)

Estimated increase in net income

1,190

595

No Change in Severity

Estimated (decrease) increase in reserves

(753)

753

Estimated increase (decrease) in net income

595

(595)

+1 Percent Change in Severity

Estimated increase in reserves

753

1,506

Estimated decrease in net income

(595)

(1,190)

Homeowners retained loss and LAE reserves

-1 Percent Change in Severity

Estimated decrease in reserves

(1,722)

(861)

Estimated increase in net income

1,360

680

No Change in Severity

Estimated (decrease) increase in reserves

(861)

861

Estimated increase (decrease) in net income

680

(680)

+1 Percent Change in Severity

Estimated increase in reserves

861

1,722

Estimated decrease in net income

(680)

(1,360)

All other retained loss and LAE reserves

-1 Percent Change in Severity

Estimated decrease in reserves

(1,493)

(747)

Estimated increase in net income

1,179

590

No Change in Severity

Estimated (decrease) increase in reserves

(747)

747

Estimated increase (decrease) in net income

590

(590)

+1 Percent Change in Severity

Estimated increase in reserves

747

1,493

Estimated decrease in net income

(590)

(1,179)

Our estimated share of CAR loss and LAE reserves is based on assumptions about our Participation Ratio, the size of CAR, and the resulting deficit (similar assumptions apply with respect to the FAIR Plan).  Our assumptions consider that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate

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basis for establishing our CAR reserves. Each of our assumptions could have a reasonably possible range of plus or minus 5 percentage-points for each estimation.

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 nine months ended September 30, 2023. 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.

    

-1 Percent

    

+1 Percent

Change in

Change in

Estimation

Estimation

CAR assumed commercial automobile

Estimated (decrease) increase in reserves

$

(300)

$

300

Estimated increase (decrease) in net income

237

(237)

FAIR Plan assumed homeowners

Estimated (decrease) increase in reserves

(103)

103

Estimated increase (decrease) in net income

81

(81)

Reserve Development Summary

The changes we have recorded in our reserves in the past illustrate the uncertainty of estimating reserves. Our prior year reserves decreased by $34,997 and $43,223 during the nine months ended September 30, 2023 and 2022, respectively.

The following table presents a comparison of prior year development of our net reserves for losses and LAE for the nine months ended September 30, 2023 and 2022. 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.

Nine Months Ended September 30, 

Accident Year

    

2023

    

2022

2013 & prior

$

(649)

$

(857)

2014

(608)

(667)

2015

(1,868)

(1,777)

2016

(815)

(1,307)

2017

(3,178)

(2,259)

2018

(2,798)

(5,617)

2019

(6,638)

(8,033)

2020

(8,345)

(13,890)

2021

(4,466)

(8,816)

2022

(5,632)

All prior years

 

$

(34,997)

 

$

(43,223)

The decreases in prior years’ reserves during the nine months ended September 30, 2023 and 2022 resulted from re-estimations of prior year ultimate loss and LAE liabilities. The 2023 decrease is composed of reductions of $8,028 in our private passenger automobile reserves, $5,898 in our commercial automobile reserves, $9,070 in our homeowners reserves and $12,001 in our other lines reserves. The 2022 decrease is primarily composed of reductions of $10,668 in our retained private passenger automobile reserves, $6,432 in our retained commercial automobile reserves, $11,717 in our retained homeowners reserves and $14,406 in our retained other lines reserves.

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The following table presents information by line of business for prior year development of our net reserves for losses September 30, 2023.

    

Private Passenger

    

Commercial

    

    

    

    

    

    

Accident Year

Automobile

Automobile

Homeowners

All Other

Total

2013 & prior

$

(110)

$

$

(145)

$

(394)

$

(649)

2014

(47)

(24)

(537)

(608)

2015

(111)

(582)

(412)

(763)

(1,868)

2016

(103)

(318)

(373)

(21)

(815)

2017

(1,010)

(344)

(516)

(1,308)

(3,178)

2018

(31)

(627)

(486)

(1,654)

(2,798)

2019

(1,108)

(1,432)

(2,484)

(1,614)

(6,638)

2020

(2,203)

(1,107)

(3,484)

(1,551)

(8,345)

2021

(957)

(678)

(209)

(2,622)

(4,466)

2022

(2,348)

(786)

(961)

(1,537)

(5,632)

All prior years

 

$

(8,028)

 

$

(5,898)

 

$

(9,070)

 

$

(12,001)

 

$

(34,997)

The improved private passenger and commercial automobile results were primarily due to fewer claims than previously estimated and better than previously estimated severity on our established bodily injury and property damage case reserves. Our retained other than auto and homeowners lines of business prior year reserves decreased, due primarily to fewer claims than previously estimated.

For further information, see “Results of Operations: Losses and Loss Adjustment Expenses.”

Investment Impairments

The Company uses a systematic methodology to evaluate declines in fair values below cost or amortized cost of our investments. Some of the factors considered in assessing impairment of fixed maturities due to credit losses include the extent to which the fair value is less than amortized cost, the financial condition of and the near and long-term prospects of the issuer, whether the debtor is current on its contractually obligated interest and principal payments, changes to the rating of the security by a rating agency, the historical volatility of the fair value of the security and whether it is more like than not that the Company will be required to sell the investment prior to an anticipated recovery in value. This methodology ensures that we evaluate available evidence concerning any declines in a disciplined manner.

For fixed maturities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates the expected credit loss component of the impairment from the amount related to all other factors. The expected credit loss component is recognized as an allowance for expected credit losses. The allowance is adjusted for any additional credit losses and subsequent recoveries, which are booked in income as either credit loss expense or credit loss benefit, respectively. Upon recognizing a credit loss, the cost basis is not adjusted. The impairment related to all other factors (non-credit factors) is reported in other comprehensive income.

For further information, see “Results of Operations.”

Forward-Looking Statements

Forward-looking statements might include one or more of the following, among others:

Projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items;
Descriptions of plans or objectives of management for future operations, products or services;
Forecasts of future economic performance, liquidity, need for funding and income;
Legal and regulatory commentary
Descriptions of assumptions underlying or relating to any of the foregoing; and
Future performance of credit markets.

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Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “aim,” “projects,” or words of similar meaning and expressions that indicate future events and trends, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” All statements that address expectations or projections about the future, including statements about the Company’s strategy for growth, product development, market position, expenditures and financial results, are forward-looking statements.

Forward-looking statements are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. There are a number of factors, many of which are beyond our control, that could cause actual future conditions, events, results or trends to differ significantly and/or materially from historical results or those projected in the forward-looking statements. These factors include but are not limited to:

The competitive nature of our industry and the possible adverse effects of such competition;
Conditions for business operations and restrictive regulations in Massachusetts;
The possibility of losses due to claims resulting from severe weather;
The impact of inflation and supply chain delays on loss severity;
The possibility that the Commissioner may approve future rule changes that change the operation of the residual market;
The possibility that existing insurance-related laws and regulations will become further restrictive in the future;
The impact of investment, economic and underwriting market conditions, including interest rates and inflation;
Our possible need for and availability of additional financing, and our dependence on strategic relationships, among others; and
Other risks and factors identified from time to time in our reports filed with the SEC.  Refer to Part I, Item 1A — Risk Factors of our 2022 Annual Report on Form 10-K for the year ended December 31, 2022.

Some other factors, such as market, operational, liquidity, interest rate, equity and other risks, are described elsewhere in this Quarterly Report on Form 10-Q. Factors relating to the regulation and supervision of our Company are also described or incorporated in this report. There are other factors besides those described or incorporated in this report that could cause actual conditions, events or results to differ from those in the forward-looking statements.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We do not undertake any obligation to update publicly or revise any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

Item 3.     Quantitative and Qualitative Information about Market Risk (Dollars in thousands)

Market Risk.  Market risk is the risk that we will incur losses due to adverse changes in market rates and prices. We have exposure to market risk through our investment activities and our financing activities. Our primary market risk exposure is to changes in interest rates. We use both fixed and variable rate debt as sources of financing. We have not entered, and do not plan to enter, into any derivative financial instruments for trading or speculative purposes.

Interest Rate Risk.  Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our exposure to interest rate changes primarily results from our significant holdings of fixed rate investments and from our financing activities. Our fixed maturity investments include U.S. and foreign government bonds, securities issued by government agencies, obligations of state and local governments and governmental authorities, corporate bonds and asset-backed securities, most of which are exposed to changes in prevailing interest rates.

We manage our exposure to risks associated with interest rate fluctuations through active review of our investment portfolio by our management and Board of Directors and consultation with third-party financial advisors. As

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a general matter, we do not attempt to match the durations of our assets with the durations of our liabilities, and the majority of our liabilities are “short tail.”  Our goal is to maximize the total after-tax return on all of our investments. An important strategy that we employ to achieve this goal is to try to hold enough in cash and short-term investments in order to avoid liquidating longer-term investments to pay claims.

Based upon the results of interest rate sensitivity analysis, the following table shows the interest rate risk of our investments in fixed maturities, measured in terms of fair value (which is equal to the carrying value for all our fixed maturity securities).

    

-100 Basis

    

    

    

+100 Basis

Point Change

No Change

Point Change

As of September 30, 2023

Estimated fair value

 

$

1,043,858

 

$

1,005,225

 

$

966,616

Estimated increase (decrease) in fair value

 

$

38,633

 

$

 

$

(38,609)

With respect to floating rate debt, we are exposed to the effects of changes in prevailing interest rates. At September 30, 2023, we had no debt outstanding under our credit facility. Assuming the full utilization of our current available credit facility, a 2.0% increase in the prevailing interest rate on our variable rate debt would result in interest expense increasing approximately $600 for 2023, assuming that all of such debt is outstanding for the entire year.

In addition, in the current market environment, our investments can also contain liquidity risks.

Equity Risk.  Equity risk is the risk that we will incur economic losses due to adverse changes in equity prices. Our exposure to changes in equity prices results from our holdings of common stock and mutual funds held to fund the executive deferred compensation plan. We continuously evaluate market conditions and we expect in the future to purchase additional equity securities. We principally manage equity price risk through industry and issuer diversification and asset allocation techniques.

Item 4.     Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures [as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)] as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are adequate and effective and ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and that information required to be disclosed in such reports is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1.     Legal Proceedings

Please see “Item 1 — Financial Statements - Note 8, Commitments and Contingencies.”

Item 1A.  Risk Factors

There have been no subsequent material changes from the risk factors previously disclosed in the Company’s 2022 Annual Report on Form 10-K.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds (Dollars in thousands)

On February 23, 2022, the Board of Directors approved an additional share repurchase of up to $50,000 of the Company’s outstanding common shares.  The Board of Directors has cumulatively authorized increases to the existing share repurchase program of up to $200,000 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 the Company to repurchase any specific number of shares and it may be modified, suspended or terminated at any time without prior notice. No shares were repurchased during the three months ended September 30, 2023.

    

Total number

    

Average

Total number of shares purchased as part of

    

Maximum number of

of Shares

price paid

publicly announced

shares that may yet be purchased under the

Period

purchase

per share

plans or programs

plans or programs

July 1-31, 2023

 

703,971

August 1-31, 2023

 

$

703,971

September 1-30, 2023

 

703,971

Total

 

$

Item 3.   Defaults Upon Senior Securities

None.

Item 4.   Mine Safety Disclosures

None.

Item 5.  Other Information

During the three months ended September 30, 2023, none of the officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) or directors of the Company adopted, terminated or modified any contract, instruction or written plan for the purchase and sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as such term is defined in Item 408(a) of Regulation S-K.

Item 6.  Exhibits

The exhibits are contained herein as listed in the Exhibit Index.

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SAFETY INSURANCE GROUP, INC.

EXHIBIT INDEX

Exhibit

Number

Description

10.1

11.0

Amendment No. 5 to Amended and Restated Credit Agreement, dated August 10, 2023, between the Registrant and Citizens Bank, N.A. (2)

Statement re: Computation of Per Share Earnings (1)

31.1

CEO Certification Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002(2)

31.2

CFO Certification Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002(2)

32.1

CEO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002(2)

32.2

CFO Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002(2)

101.INS

Inline XBRL Instance Document(2)

101.SCH

Inline XBRL Taxonomy Extension Schema(2)

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase(2)

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase(2)

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase(2)

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase(2)

104

The cover page from this Current Report on form 10-Q, formatted in Inline XBRL(2)

(1)Not included herein as the information is included as part of this Form 10-Q, Item 1 – Financial Statements, Note 3, Earnings per Weighted Average Common Share.
(2)Included herein.

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Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

November 3, 2023

SAFETY INSURANCE GROUP, INC.  (Registrant)

By:

/s/ CHRISTOPHER T. WHITFORD

 

 

Christopher T. Whitford

 

 

Vice President, Chief Financial Officer, Secretary and Principal Accounting Officer

45