Attached files
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EXCEL - IDEA: XBRL DOCUMENT - SAFETY INSURANCE GROUP INC | Financial_Report.xls |
EX-31.1 - EX-31.1 - SAFETY INSURANCE GROUP INC | saft-20140930ex3110fe764.htm |
EX-31.2 - EX-31.2 - SAFETY INSURANCE GROUP INC | saft-20140930ex312238cfb.htm |
EX-32.1 - EX-32.1 - SAFETY INSURANCE GROUP INC | saft-20140930ex321565ede.htm |
EX-32.2 - EX-32.2 - SAFETY INSURANCE GROUP INC | saft-20140930ex32274158f.htm |
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, 2014
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)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ |
|
Accelerated filer ☒ |
|
|
|
Non-accelerated filer ☐ |
|
Smaller reporting company ☐ |
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 5, 2014 there were 15,009,158 shares of common stock with a par value of $0.01 per share outstanding.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
Safety Insurance Group, Inc. and Subsidiaries
(Dollars in thousands, except share data)
September 30, |
December 31, |
||||||
2014 |
2013 |
||||||
(Unaudited) |
|||||||
Assets |
|||||||
Investments: |
|||||||
Securities available for sale: |
|||||||
Fixed maturities, at fair value (amortized cost: $1,098,252 and $1,087,232) |
$ |
1,129,860 |
$ |
1,104,957 | |||
Equity securities, at fair value (cost: $96,308 and $83,134) |
106,730 | 91,871 | |||||
Other invested assets |
8,650 | 5,748 | |||||
Total investments |
1,245,240 | 1,202,576 | |||||
Cash and cash equivalents |
28,373 | 55,877 | |||||
Accounts receivable, net of allowance for doubtful accounts |
191,127 | 169,304 | |||||
Receivable for securities sold |
886 | 1,320 | |||||
Accrued investment income |
9,977 | 10,329 | |||||
Taxes recoverable |
2,009 | 709 | |||||
Receivable from reinsurers related to paid loss and loss adjustment expenses |
7,178 | 4,588 | |||||
Receivable from reinsurers related to unpaid loss and loss adjustment expenses |
59,879 | 60,346 | |||||
Ceded unearned premiums |
18,441 | 17,900 | |||||
Deferred policy acquisition costs |
71,179 | 63,388 | |||||
Deferred income taxes |
- |
3,984 | |||||
Equity and deposits in pools |
25,859 | 18,733 | |||||
Other assets |
14,466 | 16,403 | |||||
Total assets |
$ |
1,674,614 |
$ |
1,625,457 | |||
Liabilities |
|||||||
Loss and loss adjustment expense reserves |
$ |
467,773 |
$ |
455,014 | |||
Unearned premium reserves |
411,904 | 370,583 | |||||
Accounts payable and accrued liabilities |
52,623 | 66,508 | |||||
Payable for securities purchased |
3,249 | 13,327 | |||||
Payable to reinsurers |
18,979 | 7,094 | |||||
Deferred income taxes |
1,603 |
— |
|||||
Other liabilities |
12,716 | 17,744 | |||||
Total liabilities |
968,847 | 930,270 | |||||
Commitments and contingencies (Note 7) |
|||||||
Shareholders’ equity |
|||||||
Common stock: $0.01 par value; 30,000,000 shares authorized; 17,285,228 and 17,207,929 shares issued |
173 | 172 | |||||
Additional paid-in capital |
174,302 | 170,391 | |||||
Accumulated other comprehensive income, net of taxes |
27,320 | 17,200 | |||||
Retained earnings |
587,807 | 567,792 | |||||
Treasury stock, at cost: 2,279,570 and 1,819,547 shares |
(83,835) | (60,368) | |||||
Total shareholders’ equity |
705,767 | 695,187 | |||||
Total liabilities and shareholders’ equity |
$ |
1,674,614 |
$ |
1,625,457 |
The accompanying notes are an integral part of these financial statements.
3
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, |
||||||||||||
2014 |
2013 |
2014 |
2013 |
||||||||||
Net earned premiums |
$ |
180,277 |
$ |
172,246 |
$ |
534,397 |
$ |
508,235 | |||||
Net investment income |
10,809 | 10,023 | 31,291 | 30,137 | |||||||||
Net realized gains on investments |
284 | 657 | 683 | 1,199 | |||||||||
Finance and other service income |
4,749 | 4,768 | 13,781 | 13,920 | |||||||||
Total revenue |
196,119 | 187,694 | 580,152 | 553,491 | |||||||||
Losses and loss adjustment expenses |
119,742 | 109,183 | 349,180 | 328,304 | |||||||||
Underwriting, operating and related expenses |
54,378 | 52,940 | 162,203 | 154,505 | |||||||||
Interest expense |
22 | 23 | 67 | 66 | |||||||||
Total expenses |
174,142 | 162,146 | 511,450 | 482,875 | |||||||||
Income before income taxes |
21,977 | 25,548 | 68,702 | 70,616 | |||||||||
Income tax expense |
6,541 | 7,892 | 19,718 | 20,917 | |||||||||
Net income |
$ |
15,436 |
$ |
17,656 |
$ |
48,984 |
$ |
49,699 | |||||
Earnings per weighted average common share: |
|||||||||||||
Basic |
$ |
1.03 |
$ |
1.15 |
$ |
3.23 |
$ |
3.24 | |||||
Diluted |
$ |
1.03 |
$ |
1.14 |
$ |
3.21 |
$ |
3.23 | |||||
Cash dividends paid per common share |
$ |
0.70 |
$ |
0.60 |
$ |
1.90 |
$ |
1.80 | |||||
Number of shares used in computing earnings per share: |
|||||||||||||
Basic |
14,941,685 | 15,369,285 | 15,173,415 | 15,355,623 | |||||||||
Diluted |
15,047,044 | 15,429,809 | 15,238,891 | 15,395,434 |
The accompanying notes are an integral part of these financial statements.
4
Safety Insurance Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
2014 |
2013 |
2014 |
2013 |
||||||||||
Net income |
$ |
15,436 |
$ |
17,656 |
$ |
48,984 |
$ |
49,699 | |||||
Other comprehensive income, net of tax: |
|||||||||||||
Unrealized holding (losses) gains during the period, net of tax (benefit) expense of ($2,047), ($170), $5,688 and ($12,640). |
(3,801) | (315) | 10,564 | (23,474) | |||||||||
Reclassification adjustment for gains included in net income, net of tax expense of ($100), ($230), ($239) and ($419). |
(185) | (427) | (444) | (779) | |||||||||
Unrealized gains (losses) on securities available for sale |
(3,986) | (742) | 10,120 | (24,253) | |||||||||
Comprehensive income |
$ |
11,450 |
$ |
16,914 |
$ |
59,104 |
$ |
25,446 |
The accompanying notes are an integral part of these financial statements.
5
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, |
Retained |
Treasury |
Shareholders’ |
||||||||||||||
Stock |
Capital |
Net of Taxes |
Earnings |
Stock |
Equity |
||||||||||||||
Balance at December 31, 2012 |
$ |
170 |
$ |
163,041 |
$ |
43,356 |
$ |
543,361 |
$ |
(55,569) |
$ |
694,359 | |||||||
Net income, January 1 to September 30, 2013 |
49,699 | 49,699 | |||||||||||||||||
Other comprehensive income, net of deferred federal income taxes |
(24,253) | (24,253) | |||||||||||||||||
Restricted share awards issued |
1 | 187 | 188 | ||||||||||||||||
Recognition of employee share-based compensation, net of deferred federal income taxes |
3,517 | 3,517 | |||||||||||||||||
Exercise of options, net of federal income taxes |
1 | 2,409 | 2,410 | ||||||||||||||||
Dividends paid and accrued |
(27,680) | (27,680) | |||||||||||||||||
Acquisition of treasury stock |
(4,799) | (4,799) | |||||||||||||||||
Balance at September 30, 2013 |
$ |
172 |
$ |
169,154 |
$ |
19,103 |
$ |
565,380 |
$ |
(60,368) |
$ |
693,441 |
Accumulated |
|||||||||||||||||||
Other |
|||||||||||||||||||
Additional |
Comprehensive |
Total |
|||||||||||||||||
Common |
Paid-in |
Income, |
Retained |
Treasury |
Shareholders’ |
||||||||||||||
Stock |
Capital |
Net of Taxes |
Earnings |
Stock |
Equity |
||||||||||||||
Balance at December 31, 2013 |
$ |
172 |
$ |
170,391 |
$ |
17,200 |
$ |
567,792 |
$ |
(60,368) |
$ |
695,187 | |||||||
Net income, January 1 to September 30, 2014 |
48,984 | 48,984 | |||||||||||||||||
Other comprehensive loss, net of deferred federal income taxes |
10,120 | 10,120 | |||||||||||||||||
Restricted share awards issued |
1 | 217 | 218 | ||||||||||||||||
Recognition of employee share-based compensation, net of deferred federal income taxes |
3,543 | 3,543 | |||||||||||||||||
Exercise of options, net of federal income taxes |
151 | 151 | |||||||||||||||||
Dividends paid and accrued |
(28,969) | (28,969) | |||||||||||||||||
Acquisition of treasury stock |
(23,467) | (23,467) | |||||||||||||||||
Balance at September 30, 2014 |
$ |
173 |
$ |
174,302 |
$ |
27,320 |
$ |
587,807 |
$ |
(83,835) |
$ |
705,767 |
The accompanying notes are an integral part of these financial statements.
6
Safety Insurance Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine Months Ended September 30, |
|||||||
2014 |
2013 |
||||||
Cash flows from operating activities: |
|||||||
Net income |
$ |
48,984 |
$ |
49,699 | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
|||||||
Depreciation and amortization, net |
9,804 | 11,085 | |||||
Provision for deferred income taxes |
138 | 650 | |||||
Net realized gains on investments |
(683) | (1,199) | |||||
Changes in assets and liabilities: |
|||||||
Accounts receivable |
(21,823) | (19,796) | |||||
Accrued investment income |
352 | 336 | |||||
Receivable from reinsurers |
(2,123) | (11,865) | |||||
Ceded unearned premiums |
(541) | (1,020) | |||||
Deferred policy acquisition costs |
(7,791) | (6,423) | |||||
Other assets |
(7,630) | 3,529 | |||||
Loss and loss adjustment expense reserves |
12,759 | 14,654 | |||||
Unearned premium reserves |
41,321 | 39,046 | |||||
Accounts payable and accrued liabilities |
(14,014) | (14,212) | |||||
Payable to reinsurers |
11,885 | 10,618 | |||||
Other liabilities |
(5,028) | (9,997) | |||||
Net cash provided by operating activities |
65,610 | 65,105 | |||||
Cash flows from investing activities: |
|||||||
Fixed maturities purchased |
(168,135) | (171,967) | |||||
Equity securities purchased |
(20,840) | (39,631) | |||||
Other invested assets purchase |
(2,900) |
— |
|||||
Proceeds from sales and paydowns of fixed maturities |
119,351 | 139,970 | |||||
Proceeds from maturities, redemptions, and calls of fixed maturities |
24,500 | 34,264 | |||||
Proceed from sales of equity securities |
8,656 | 8,588 | |||||
Fixed assets purchased |
(1,590) | (3,462) | |||||
Net cash used for investing activities |
(40,958) | (32,238) | |||||
Cash flows from financing activities: |
|||||||
Proceeds from stock options exercised |
147 | 2,479 | |||||
Excess tax benefit from stock options exercised |
4 |
— |
|||||
Dividends paid to shareholders |
(28,840) | (27,625) | |||||
Acquisition of treasury stock |
(23,467) | (4,799) | |||||
Net cash used for financing activities |
(52,156) | (29,945) | |||||
Net (decrease) increase in cash and cash equivalents |
(27,504) | 2,922 | |||||
Cash and cash equivalents at beginning of year |
55,877 | 35,383 | |||||
Cash and cash equivalents at end of period |
$ |
28,373 |
$ |
38,305 |
The accompanying notes are an integral part of these financial statements.
7
Safety Insurance Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands except per share and share data)
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, Whiteshirts Asset Management Corporation (“WAMC”), and Whiteshirts Management Corporation, which is WAMC’s holding company. All intercompany transactions have been eliminated.
The financial information as of September 30, 2014 and 2013 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. 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 financial statements included in the Company’s annual report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 17, 2014.
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 operates through its insurance company subsidiaries, Safety Insurance Company, Safety Indemnity Insurance Company, and Safety Property and Casualty 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.
2. Recent Accounting Pronouncements
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosures of Uncertainties about an Entity’s Ability as a Going Concern” (“ASU 2014-15”). ASU 2014-15 provides guidance on determining when and how to disclose going concern uncertainties in the financial statements, and requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its financial position or results of operations.
In June 2014, the FASB issued ASU No. 2014-12, "Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period" ("ASU 2014-12”), which revises the accounting treatment for stock compensation tied to performance targets. ASU 2014-12 is effective for calendar years beginning after December 15, 2015. The impact of adoption to the Company’s consolidated financial condition and results of operations is currently being evaluated.
On May 28, 2014, the FASB issued as final, ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” which supersedes virtually all existing revenue recognition guidance under GAAP. The update's core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
8
Safety Insurance Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands except per share and share data)
update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016 and prohibits early adoption. The update allows for the use of either the retrospective or modified retrospective approach of adoption. The impact of adoption to the Company’s consolidated financial condition and results of operations is currently being evaluated.
In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires entities to present in either a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. Items not required to be reclassified to net income in their entirety are cross referenced to a related footnote for additional information. ASU 2013-02 was effective for interim and annual periods beginning after December 15, 2012. The impact of adoption was not material to the Company’s consolidated financial condition and results of operations.
3. Earnings per Weighted Average Common Share
Basic earnings per weighted average common share (“EPS”) is calculated by dividing net income by the weighted average number of basic common shares outstanding during the period including unvested restricted shares which are considered participating securities. Diluted earnings per share amounts are based on the weighted average number of common shares including non-vested performance stock grants and the net effect of potentially dilutive common stock options.
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, |
||||||||||||
2014 |
2013 |
2014 |
2013 |
||||||||||
Net income available to common shareholders for basic and diluted earnings per share |
$ |
15,436 |
$ |
17,656 |
$ |
48,984 |
$ |
49,699 | |||||
Weighted average common and common equivalent shares outstanding used to calculate basic earnings per share |
14,941,685 | 15,369,285 | 15,173,415 | 15,355,623 | |||||||||
Common equivalent shares- stock options |
2,013 | 4,051 | 2,352 | 6,244 | |||||||||
Common equivalent shares- non-vested performance stock grants |
103,346 | 56,473 | 63,124 | 33,567 | |||||||||
Weighted average common and common equivalent shares outstanding used to calculate diluted earnings per share |
15,047,044 | 15,429,809 | 15,238,891 | 15,395,434 | |||||||||
Basic earnings per share |
$ |
1.03 |
$ |
1.15 |
$ |
3.23 |
$ |
3.24 | |||||
Diluted earnings per share |
$ |
1.03 |
$ |
1.14 |
$ |
3.21 |
$ |
3.23 |
Diluted EPS excludes stock options with exercise prices and exercise tax benefits greater than the average market price of the Company’s common stock during the period because their inclusion would be anti-dilutive. There were no anti-dilutive stock options for both the three and nine months ended September 30, 2014 and 2013.
9
Safety Insurance Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands except per share and share data)
4. Share-Based Compensation
Management Omnibus Incentive Plan
Long-term incentive compensation is provided under the Company’s 2002 Management Omnibus Incentive Plan (“the Incentive Plan”) which provides for a variety of share-based compensation awards, including nonqualified stock options, incentive stock options, stock appreciation rights and restricted stock (“RS”) awards.
The maximum number of shares of common stock with respect to which awards may be granted is 2,500,000. The Incentive Plan was amended in March of 2013 to remove "share recycling" plan provisions. Hence, shares of stock covered by an award under the Incentive Plan that are forfeited are no longer available for issuance in connection with 2013 and future grants of awards. At September 30, 2014, there were 453,930 shares available for future grant. The Board of Directors and the Compensation Committee intend to issue more awards under the Incentive Plan in the future.
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).
The following table summarizes stock option activity under the Incentive Plan for nine months ended September 30, 2014.
Weighted |
||||||||||||
Shares |
Weighted |
Average |
Aggregate |
|||||||||
Under |
Average |
Remaining |
Intrinsic |
|||||||||
Option |
Exercise Price |
Contractual Term |
Value |
|||||||||
Outstanding at beginning of year |
20,200 |
$ |
41.64 | |||||||||
Exercised |
(4,000) |
$ |
36.76 | |||||||||
Outstanding at end of period |
16,200 |
$ |
42.85 | 1.4 |
years |
$ |
179 | |||||
Exercisable at end of period |
16,200 |
$ |
42.85 | 1.4 |
years |
$ |
179 |
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, which is the difference between the fair value based upon the Company’s closing stock price on September 30, 2014 and the exercise price which would have been received by the option holders had all option holders exercised their options as of that date. The exercise price on stock options outstanding under the Incentive Plan at September 30, 2014 was $42.85. The range of exercise prices on stock options outstanding under the Incentive Plan at September 30, 2013 was $18.50 to $42.85. The total intrinsic value of options exercised during the nine months ended September 30, 2014 and 2013 was $69 and $882, respectively.
As of March 31, 2011, all compensation expense related to non-vested option awards had been recognized. Cash received from options exercised was $147 and $2,479 for the nine months ended September 30, 2014 and 2013, respectively.
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
10
Safety Insurance Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands except per share and share data)
second anniversaries of the grant date and 40% on the third anniversary of the grant date, except for non-executive employees’ restricted stock awards which vest ratably over a five-year service period and independent directors’ stock awards which vest immediately. Independent directors’ stock awards cannot be sold, assigned, pledged, or otherwise transferred, encumbered or disposed of until the recipient is no longer a member of the Board of Directors.
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 fiscal-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.
The following table summarizes restricted stock activity under the Incentive Plan during the nine months ended September 30, 2014, assuming a target payout for the 2014 performance-based shares.
Shares |
Weighted |
Performance-based |
Weighted |
||||||||
Under |
Average |
Shares Under |
Average |
||||||||
Restriction |
Fair Value |
Restriction |
Fair Value |
||||||||
Outstanding at beginning of year |
211,234 |
$ |
43.51 | 37,456 |
$ |
44.13 | |||||
Granted |
50,781 |
$ |
53.94 | 29,903 |
$ |
57.94 | |||||
Vested and unrestricted |
(81,149) |
$ |
43.80 |
— |
$ |
— |
|||||
Forfeited |
(4,750) |
$ |
44.46 | (2,635) |
$ |
46.96 | |||||
Outstanding at end of period |
176,116 |
$ |
46.38 | 64,724 |
$ |
50.40 |
As of September 30, 2014, there was $7,593 of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 1.9 years. The total fair value of the shares that were vested and unrestricted during the nine months ended September 30, 2014 and 2013 was $3,554 and $4,230, respectively. For 2014 and 2013, the Company recorded compensation expense related to restricted stock of $2,245 and $2,239, net of income tax benefits of $1,209 and $1,205, respectively.
5. Investments
The gross unrealized gains and losses on investments in fixed maturity securities, including redeemable preferred stocks that have characteristics of fixed maturities, and equity securities, including interests in mutual funds, and other invested assets were as follows for the periods indicated.
11
Safety Insurance Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands except per share and share data)
As of September 30, 2014 |
||||||||||||||||
Gross Unrealized Losses (3) |
||||||||||||||||
Cost or |
Gross |
Non-OTTI |
OTTI |
Estimated |
||||||||||||
Amortized |
Unrealized |
Unrealized |
Unrealized |
Fair |
||||||||||||
Cost |
Gains |
Losses |
Losses (4) |
Value |
||||||||||||
U.S. Treasury securities |
$ |
1,508 |
$ |
— |
$ |
(4) |
$ |
— |
$ |
1,504 | ||||||
Obligations of states and political subdivisions |
444,830 | 21,445 | (590) |
— |
465,685 | |||||||||||
Residential mortgage-backed securities (1) |
199,438 | 6,891 | (2,084) |
— |
204,245 | |||||||||||
Commercial mortgage-backed securities |
32,970 | 152 | (119) |
— |
33,003 | |||||||||||
Other asset-backed securities |
14,921 | 45 | (26) |
— |
14,940 | |||||||||||
Corporate and other securities |
404,585 | 7,928 | (2,030) |
— |
410,483 | |||||||||||
Subtotal, fixed maturity securities |
1,098,252 | 36,461 | (4,853) |
— |
1,129,860 | |||||||||||
Equity securities (2) |
96,308 | 11,453 | (1,031) |
— |
106,730 | |||||||||||
Other invested assets (5) |
8,650 |
— |
— |
— |
8,650 | |||||||||||
Totals |
$ |
1,203,210 |
$ |
47,914 |
$ |
(5,884) |
$ |
— |
$ |
1,245,240 |
As of December 31, 2013 |
||||||||||||||||
Gross Unrealized Losses (3) |
||||||||||||||||
Cost or |
Gross |
Non-OTTI |
OTTI |
Estimated |
||||||||||||
Amortized |
Unrealized |
Unrealized |
Unrealized |
Fair |
||||||||||||
Cost |
Gains |
Losses |
Losses (4) |
Value |
||||||||||||
U.S. Treasury securities |
$ |
1,510 |
$ |
— |
$ |
(7) |
$ |
— |
$ |
1,503 | ||||||
Obligations of states and political subdivisions |
461,256 | 10,248 | (4,179) |
— |
467,325 | |||||||||||
Residential mortgage-backed securities (1) |
205,053 | 6,879 | (3,230) |
— |
208,702 | |||||||||||
Commercial mortgage-backed securities |
31,885 | 342 | (8) |
— |
32,219 | |||||||||||
Other asset-backed securities |
13,357 |