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EX-31.1 - EX-31.1 - SAFETY INSURANCE GROUP INCsaft-20150331ex311e89e3b.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 March 31, 2015

 

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 May 5, 2015 there were 15,091,639 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

 

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Operations

4

 

Consolidated Statements of Comprehensive (Loss) 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

SIGNATURE 

44

EXHIBIT INDEX 

45

 

 

2


 

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2015

 

2014

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

Fixed maturities, at fair value (amortized cost: $1,094,470 and $1,102,517)

 

$

1,132,872 

 

$

1,135,451 

 

Equity securities, at fair value (cost: $98,985 and $97,910)

 

 

109,756 

 

 

109,153 

 

Other invested assets

 

 

11,794 

 

 

11,657 

 

Total investments

 

 

1,254,422 

 

 

1,256,261 

 

Cash and cash equivalents

 

 

25,272 

 

 

42,455 

 

Accounts receivable, net of allowance for doubtful accounts

 

 

177,168 

 

 

175,532 

 

Receivable for securities sold

 

 

806 

 

 

— 

 

Accrued investment income

 

 

10,060 

 

 

10,295 

 

Taxes recoverable

 

 

25,815 

 

 

— 

 

Receivable from reinsurers related to paid loss and loss adjustment expenses

 

 

6,764 

 

 

6,267 

 

Receivable from reinsurers related to unpaid loss and loss adjustment expenses

 

 

111,472 

 

 

61,245 

 

Ceded unearned premiums

 

 

21,388 

 

 

19,638 

 

Deferred policy acquisition costs

 

 

67,275 

 

 

67,329 

 

Deferred income taxes

 

 

2,128 

 

 

— 

 

Equity and deposits in pools

 

 

25,775 

 

 

23,159 

 

Other assets

 

 

13,963 

 

 

13,538 

 

Total assets

 

$

1,742,308 

 

$

1,675,719 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$

570,013 

 

$

482,012 

 

Unearned premium reserves

 

 

394,836 

 

 

390,361 

 

Accounts payable and accrued liabilities

 

 

44,945 

 

 

65,863 

 

Payable for securities purchased

 

 

3,242 

 

 

4,591 

 

Payable to reinsurers

 

 

9,711 

 

 

7,653 

 

Deferred income taxes

 

 

— 

 

 

1,614 

 

Taxes payable

 

 

— 

 

 

265 

 

Other liabilities

 

 

52,554 

 

 

15,077 

 

Total liabilities

 

 

1,075,301 

 

 

967,436 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Common stock:  $0.01 par value; 30,000,000 shares authorized; 17,371,994 and 17,288,728 shares issued

 

 

174 

 

 

173 

 

Additional paid-in capital

 

 

176,597 

 

 

175,583 

 

Accumulated other comprehensive income, net of taxes

 

 

31,963 

 

 

28,715 

 

Retained earnings

 

 

542,108 

 

 

587,647 

 

Treasury stock, at cost: 2,279,570 shares

 

 

(83,835)

 

 

(83,835)

 

Total shareholders’ equity

 

 

667,007 

 

 

708,283 

 

Total liabilities and shareholders’ equity

 

$

1,742,308 

 

$

1,675,719 

 

 

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  March 31, 

 

    

2015

    

2014

 

 

 

 

 

 

 

Net earned premiums

 

$

182,564 

 

$

175,970 

Net investment income

 

 

10,557 

 

 

10,573 

Net realized gains on investments

 

 

411 

 

 

20 

Finance and other service income

 

 

4,507 

 

 

4,524 

Total revenue

 

 

198,039 

 

 

191,087 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

208,324 

 

 

120,888 

Underwriting, operating and related expenses

 

 

52,097 

 

 

53,407 

Interest expense

 

 

22 

 

 

22 

Total expenses

 

 

260,443 

 

 

174,317 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

(62,404)

 

 

16,770 

Income tax (credit) expense

 

 

(27,333)

 

 

4,645 

Net (loss) income

 

$

(35,071)

 

$

12,125 

 

 

 

 

 

 

 

(Loss) earnings per weighted average common share:

 

 

 

 

 

 

Basic

 

$

(2.37)

 

$

0.79 

Diluted

 

$

(2.37)

 

$

0.79 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.70 

 

$

0.60 

 

 

 

 

 

 

 

Number of shares used in computing (loss) earnings per share:

 

 

 

 

 

 

Basic

 

 

14,824,132 

 

 

15,194,391 

Diluted

 

 

14,824,132 

 

 

15,255,561 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

4


 

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  March 31, 

 

 

    

2015

    

2014

 

Net (loss) income

 

$

(35,071)

 

$

12,125 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

Unrealized holding gains during the period, net of tax expense of $1,893 and $3,854  .

 

 

3,515 

 

 

7,158 

 

Reclassification adjustment for gains included in net income, net of tax expense of ($144) and ($7).

 

 

(267)

 

 

(13)

 

Unrealized gains on securities available for sale

 

 

3,248 

 

 

7,145 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income

 

$

(31,823)

 

$

19,270 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2013

 

$

172 

 

$

170,391 

 

$

17,200 

 

$

567,792 

 

$

(60,368)

 

$

695,187 

 

Net income, January 1 to March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

12,125 

 

 

 

 

 

12,125 

 

Other comprehensive income, net of deferred federal income taxes

 

 

 

 

 

 

 

 

7,145 

 

 

 

 

 

 

 

 

7,145 

 

Restricted share awards issued

 

 

 

 

217 

 

 

 

 

 

 

 

 

 

 

 

218 

 

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

 

 

 

 

 

1,311 

 

 

 

 

 

 

 

 

 

 

 

1,311 

 

Exercise of options, net of federal income taxes

 

 

 

 

 

70 

 

 

 

 

 

 

 

 

 

 

 

70 

 

Dividends paid and accrued

 

 

 

 

 

 

 

 

 

 

 

(9,241)

 

 

 

 

 

(9,241)

 

Balance at March 31, 2014

 

$

173 

 

$

171,989 

 

$

24,345 

 

$

570,676 

 

$

(60,368)

 

$

706,815 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

    

 

    

Accumulated

    

    

 

    

    

 

    

    

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Comprehensive

 

 

 

 

 

 

 

Total

 

 

 

Common

 

Paid-in

 

Income,

 

Retained

 

Treasury

 

Shareholders’

 

 

 

Stock

 

Capital

 

Net of Taxes

 

Earnings

 

Stock

 

Equity

 

Balance at December 31, 2014

 

$

173 

 

$

175,583 

 

$

28,715 

 

$

587,647 

 

$

(83,835)

 

$

708,283 

 

Net loss, January 1 to March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

(35,071)

 

 

 

 

 

(35,071)

 

Other comprehensive income, net of deferred federal income taxes

 

 

 

 

 

 

 

 

3,248 

 

 

 

 

 

 

 

 

3,248 

 

Restricted share awards issued

 

 

 

 

246 

 

 

 

 

 

 

 

 

 

 

 

247 

 

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

 

 

 

 

 

659 

 

 

 

 

 

 

 

 

 

 

 

659 

 

Exercise of options, net of federal income taxes

 

 

 

 

 

109 

 

 

 

 

 

 

 

 

 

 

 

109 

 

Dividends paid and accrued

 

 

 

 

 

 

 

 

 

 

 

(10,468)

 

 

 

 

 

(10,468)

 

Balance at March 31, 2015

 

$

174 

 

$

176,597 

 

$

31,963 

 

$

542,108 

 

$

(83,835)

 

$

667,007 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2015

    

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net (loss) income

 

$

(35,071)

 

$

12,125 

 

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

 

 

 

 

 

 

 

Depreciation and amortization, net

 

 

2,608 

 

 

3,345 

 

Provision for deferred income taxes

 

 

(5,492)

 

 

67 

 

Net realized gains on investments

 

 

(411)

 

 

(20)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,636)

 

 

(5,816)

 

Accrued investment income

 

 

235 

 

 

54 

 

Receivable from reinsurers

 

 

(50,724)

 

 

(1,458)

 

Ceded unearned premiums

 

 

(1,750)

 

 

(775)

 

Deferred policy acquisition costs

 

 

54 

 

 

(1,424)

 

Taxes recoverable

 

 

(25,815)

 

 

(4,765)

 

Other assets

 

 

(2,928)

 

 

(3,101)

 

Loss and loss adjustment expense reserves

 

 

88,001 

 

 

6,008 

 

Unearned premium reserves

 

 

4,475 

 

 

10,829 

 

Accounts payable and accrued liabilities

 

 

(21,154)

 

 

(19,455)

 

Payable to reinsurers

 

 

2,058 

 

 

347 

 

Other liabilities

 

 

37,477 

 

 

(4,056)

 

Net cash used for operating activities

 

 

(10,073)

 

 

(8,095)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Fixed maturities purchased

 

 

(64,505)

 

 

(65,549)

 

Equity securities purchased

 

 

(16,353)

 

 

(4,302)

 

Other invested assets purchased

 

 

(7)

 

 

(750)

 

Proceeds from sales and paydowns of fixed maturities

 

 

18,478 

 

 

28,201 

 

Proceeds from maturities, redemptions, and calls of fixed maturities

 

 

50,480 

 

 

16,116 

 

Proceed from sales of equity securities

 

 

15,996 

 

 

3,928 

 

Fixed assets purchased

 

 

(815)

 

 

(615)

 

Net cash provided by (used for) investing activities

 

 

3,274 

 

 

(22,971)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from stock options exercised

 

 

107 

 

 

61 

 

Excess tax benefit from stock options exercised

 

 

 

 

 

Dividends paid to shareholders

 

 

(10,493)

 

 

(9,211)

 

Net cash used for financing activities

 

 

(10,384)

 

 

(9,141)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(17,183)

 

 

(40,207)

 

Cash and cash equivalents at beginning of year

 

 

42,455 

 

 

55,877 

 

Cash and cash equivalents at end of period

 

$

25,272 

 

$

15,670 

 

 

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 March 31, 2015 and 2014 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, 2014 is derived from the audited financial statements included in the Company's  2014 annual report on Form 10-K filed with the SEC on March 2, 2015.

 

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 2, 2015.    

 

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 April 2015, the FASB issued ASU No. 2015-03, Imputation of Interest. This ASU simplifies the presentation of debt issuance costs as the amendments in this update require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. ASU 2015-03 is effective for annual and interim reporting periods beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The standard requires a retrospective approach where the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The standard also requires compliance with applicable disclosures for a change in an accounting principle. The Company does not expect the adoption of ASU 2015-03 to have a material impact on its financial position and results of operations.

 

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

8


 

Table of Contents

 

Safety Insurance Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands except per share and share data)

 

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 Company does not expect the adoption of ASU 2014-12 to have a material impact on its financial position or results of operations.

 

In May 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 update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016 and prohibits early adoption. ASU 2014-09 allows for the use of either the retrospective or modified retrospective approach of adoption. The Company does not expect the adoption of ASU 2014-09 to have a material impact on its financial position or results of operations.

 

3.  (Loss) Earnings per Weighted Average Common Share

 

Basic (loss) earnings per weighted average common share (“EPS”) is calculated by dividing net (loss) income by the weighted average number of basic common shares outstanding during the period.  Diluted (loss) 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.

 

9


 

Table of Contents

 

Safety Insurance Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands except per share and share data)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  March 31, 

 

 

 

2015

 

2014

 

Earnings attributable to Safety's common shareholders - basic and diluted (in millions):

 

 

 

 

 

 

 

Net (loss) income from continuing operations

 

$

(35,071)

 

$

12,125 

 

Allocation of income for participating shares

 

 

 —

 

 

(131)

(1)

Net (loss) income from continuing operations attributed to Safety's common shareholders

 

 

(35,071)

 

 

11,994 

(1)

Earnings per share denominator - basis and diluted

 

 

 

 

 

 

 

Total weighted average common shares outstanding, including participating shares

 

 

14,963,369 

 

 

15,359,989 

 

Less: weighted average participating shares

 

 

(139,237)

 

 

(165,598)

 

Basic earnings per share denominator

 

 

14,824,132 

 

 

15,194,391 

(1)

Common equivalent shares- stock options

 

 

 —

(2)

 

2,929 

 

Common equivalent shares- non-vested performance stock grants

 

 

 —

(3)

 

58,241 

 

Diluted earnings per share denominator

 

 

14,824,132 

 

 

15,255,561 

(1)

 

 

 

 

 

 

 

 

Basic (loss) earnings per share

 

$

(2.37)

 

$

0.79 

 

Diluted (loss) earnings per share

 

$

(2.37)

 

$

0.79 

 

 

 

 

 

 

 

 

 

Undistributed (loss) earnings attributable to Safety's common shareholders - basic and diluted:

 

 

 

 

 

 

 

Net (loss) income from continuing operations attributable to Safety's common shareholders -Basic

 

$

(2.37)

 

$

0.79 

 

Dividends declared

 

 

(0.70)

 

 

(0.60)

 

Undistributed (loss) earnings

 

$

(3.07)

 

$

0.19 

 

 

 

 

 

 

 

 

 

Net (loss) income from continuing operations attributable to Safety's common shareholders -Diluted

 

$

(2.37)

 

$

0.79 

 

Dividends declared

 

 

(0.70)

 

 

(0.60)

 

Undistributed (loss) earnings

 

$

(3.07)

 

$

0.19 

 


(1)

The 2014 basic and diluted earnings per share numerators and denominators were revised to correct the allocation of net income to participating securities under the two-class method.    The revision did not result in a change to basic or diluted earnings per share.  The Company evaluated the materiality of these revisions in accordance with SEC Staff Accounting Bulletin No. 99, Materiality, and SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, and concluded that these revisions, individually and in the aggregate, were immaterial to all prior periods.   The 2014 basic earnings per share numerator and denominator as originally reported were $12,125 and 15,359,989, respectively.  The 2014 diluted earnings per share numerator and denominator as originally reported were $12,125 and 15,421,159, respectively.

(2)

This excludes 2,228 of common equivalent shares related to stock options because their inclusion would be anti dilutive due to the net loss of the Company.

(3)

This excludes 96,959 of common equivalent shares related to non-vested performance stock grants because their inclusion would be anti dilutive due to the net loss of the Company.

 

 

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 or non-vested performance stock grants for the three months ended March 31, 2014.

 

 

10


 

Table of Contents

 

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 March 31,  2015, there were 372,910 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 the three months ended  March 31, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Weighted

    

    

 

 

 

 

Shares

 

Weighted

 

Average

 

Aggregate

 

 

 

Under

 

Average

 

Remaining

 

Intrinsic

 

 

 

Option

 

Exercise Price

 

Contractual Term

 

Value

 

Outstanding at beginning of year

 

12,700 

 

$

42.85 

 

 

 

 

 

 

 

Exercised

 

(2,500)

 

$

42.85 

 

 

 

 

 

 

 

Outstanding at end of period

 

10,200 

 

$

42.85 

 

0.9 

years

 

$

172 

 

Exercisable at end of period

 

10,200 

 

$

42.85 

 

0.9 

years

 

$

172 

 

 

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 March 31,  2015 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 March 31,  2015 and March 31,  2014 was $42.85. The total intrinsic value of options exercised during the three months ended March 31,  2015 and 2014 was $53 and $46, respectively.

 

As of March 31, 2011, all compensation expense related to non-vested option awards had been recognized. Cash received from options exercised was $107 and $61 for the three months ended March 31,  2015 and 2014, 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 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

11


 

Table of Contents

 

Safety Insurance Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands except per share and share data)

 

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.

 

The following table summarizes restricted stock activity under the Incentive Plan during the three months ended March 31,  2015, assuming a target payout for the 2015 performance-based shares.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Shares 

    

Weighted

    

Performance-based

    

Weighted

 

 

 

Under

 

Average

 

Shares Under

 

Average

 

 

 

Restriction

 

Fair Value

 

Restriction

 

Fair Value

 

Outstanding at beginning of year

 

176,116 

 

$

46.38 

 

64,724 

 

$

50.40 

 

Granted

 

45,397 

 

$

61.68 

 

35,932 

 

$

63.73 

 

Vested and unrestricted

 

(64,130)

 

$

45.17 

 

 

$

 

Forfeited

 

(563)

 

$

46.35 

 

 

$

 

Outstanding at end of period

 

156,820 

 

$

51.29 

 

100,656 

 

$

55.16 

 

 

As of March 31,  2015, there was $9,202 of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 2.0 years.  The total fair value of the shares that were vested and unrestricted during the three months ended March 31,  2015 and 2014 was $2,897 and $3,554, respectively.  For the three months ended March 31, 2015 and 2014, the Company recorded compensation expense related to restricted stock of $389 and $794, net of income tax benefits of $210 and $428, respectively.

 

12


 

Table of Contents

 

Safety Insurance Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands except per share and share data)

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2015

 

 

 

 

 

 

 

 

 

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

 

$

1,808 

 

$

 

$

 —

 

$

 —

 

$

1,817 

 

Obligations of states and political subdivisions

 

 

425,880 

 

 

23,476 

 

 

(867)

 

 

 —

 

 

448,489 

 

Residential mortgage-backed securities (1)

 

 

215,582 

 

 

8,061 

 

 

(716)

 

 

 —

 

 

222,927 

 

Commercial mortgage-backed securities

 

 

35,968 

 

 

647 

 

 

(1)

 

 

 —

 

 

36,614 

 

Other asset-backed securities

 

 

11,966 

 

 

133 

 

 

 —

 

 

 —

 

 

12,099 

 

Corporate and other securities

 

 

403,266 

 

 

10,217 

 

 

(2,557)

 

 

 —

 

 

410,926 

 

Subtotal, fixed maturity securities 

 

 

1,094,470 

 

 

42,543 

 

 

(4,141)

 

 

 —

 

 

1,132,872 

 

Equity securities (2)

 

 

98,985 

 

 

12,990 

 

 

(2,219)

 

 

 —

 

 

109,756 

 

Other invested assets (5)

 

 

11,794 

 

 

 —

 

 

 —

 

 

 —

 

 

11,794 

 

Totals

 

$

1,205,249 

 

$

55,533 

 

$

(6,360)

 

$

 —

 

$

1,254,422 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 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

 

$

1,507 

 

$

 —

 

$

(1)

 

$

 —

 

$

1,506 

 

Obligations of states and political subdivisions

 

 

437,299 

 

 

23,562 

 

 

(536)

 

 

 —

 

 

460,325 

 

Residential mortgage-backed securities (1)

 

 

201,950 

 

 

7,015 

 

 

(1,282)

 

 

 —

 

 

207,683 

 

Commercial mortgage-backed securities

 

 

34,216 

 

 

256 

 

 

(34)

 

 

 —

 

 

34,438 

 

Other asset-backed securities

 

 

10,204 

 

 

48 

 

 

(2)

 

 

 —

 

 

10,250 

 

Corporate and other securities

 

 

417,341 

 

 

7,536 

 

 

(3,628)

 

 

 —

 

 

421,249 

 

Subtotal, fixed maturity securities 

 

 

1,102,517 

 

 

38,417 

 

 

(5,483)

 

 

 —

 

 

1,135,451 

 

Equity securities (2)

 

 

97,910 

 

 

13,332 

 

 

(2,089)

 

 

 —

 

 

109,153 

 

Other invested assets (5)

 

 

11,657 

 

 

 —

 

 

 —

 

 

 

 

 

11,657 

 

Totals

 

$

1,212,084 

 

$

51,749 

 

$

(7,572)

 

$

 —

 

$

1,256,261 

 

 


(1)

Residential mortgage-backed securities consists primarily of obligations of U.S. Government agencies including collateralized mortgage obligations issued, guaranteed and/or insured by the following issuers: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB).

(2)

Equity securities included interests in mutual funds held to fund the Company’s executive deferred compensation plan.

(3)

Our investment portfolio included 221 and 366 securities in an unrealized loss position at March 31,  2015 and December 31,  2014, respectively.

(4)

Amounts in this column represent other-than-temporary impairment (“OTTI”) recognized in accumulated other comprehensive income.

(5)

Other invested assets are accounted for under the equity method which approximated fair value.

 

13


 

Table of Contents

 

Safety Insurance Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands except per share and share data)

 

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 March 31, 2015

 

    

Amortized

    

Estimated

 

 

Cost

 

Fair Value

Due in one year or less

 

$

51,662 

 

$

52,494 

Due after one year through five years

 

 

274,503 

 

 

278,982 

Due after five years through ten years

 

 

217,048 

 

 

222,286 

Due after ten years

 

 

287,740 

 

 

307,468 

Asset-backed securities

 

 

263,517 

 

 

271,642 

Totals

 

$

1,094,470 

 

$

1,132,872 

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  March 31, 

 

    

2015

    

2014

Gross realized gains

 

 

 

 

 

 

Fixed maturity securities

 

$

183 

 

$

174 

Equity securities

 

 

937 

 

 

411 

Gross realized losses

 

 

 

 

 

 

Fixed maturity securities

 

 

(491)

 

 

(530)

Equity securities

 

 

(218)

 

 

(35)

Net realized gains on investments

 

$

411 

 

$

20 

 

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.

 

The following tables as of March 31,  2015 and December 31,  2014 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 March 31, 2015

 

 

 

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

 

$

— 

 

$

— 

 

$

— 

 

$

— 

 

$

— 

 

$

— 

 

Obligations of states and political subdivisions

 

 

60,894 

 

 

860 

 

 

1,799 

 

 

 

 

62,693 

 

 

867 

 

Residential mortgage-backed securities

 

 

24,222 

 

 

135