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EX-32.2 - EX-32.2 - SAFETY INSURANCE GROUP INCsaft-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

 

 

 

 

 

 

 

 

 

 

    

Page No.

 

Part I. Financial Information 

 

Item 1.

 

Consolidated Financial Statements

 

3

 

 

 

Consolidated Balance Sheets

 

3

 

 

 

Consolidated Statements of Operations

 

4

 

 

 

Consolidated Statements of Comprehensive Income

 

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

 

22

 

Item 3.

 

Quantitative and Qualitative Information about Market Risk

 

41

 

Item 4.

 

Controls and Procedures

 

41

 

Part II. Other Information 

 

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

 

 

 

 

2


 

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

 —

 

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


 

Table of Contents

 

Safety Insurance Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands except per share and 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, 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

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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.

 

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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

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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.

 

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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