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EX-32.2 - EX-32.2 - SAFETY INSURANCE GROUP INCsaft-20150930ex322af615c.htm
EX-31.1 - EX-31.1 - SAFETY INSURANCE GROUP INCsaft-20150930ex311018146.htm
EX-31.2 - EX-31.2 - SAFETY INSURANCE GROUP INCsaft-20150930ex3129dbdf8.htm
EX-32.1 - EX-32.1 - SAFETY INSURANCE GROUP INCsaft-20150930ex321b694f7.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, 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 November 4, 2015 there were 15,093,073 shares of common stock with a par value of $0.01 per share outstanding.

 

 

 

 


 

SAFETY INSURANCE GROUP, INC.

TABLE OF CONTENTS

 

 

Page No.

  Part I.       Financial Information

Item 1.

Consolidated Financial Statements

 

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Operations

4

 

Consolidated Statements of Comprehensive (Loss) 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

23 

Item 3. 

Quantitative and Qualitative Information about Market Risk

42

Item 4. 

Controls and Procedures

42

Part II.     Other Information

Item 1A. 

Risk Factors

44

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 3. 

Defaults upon Senior Securities

44

Item 4. 

Mine Safety Disclosures

44

Item 5. 

Other Information

44

Item 6. 

Exhibits 

44

SIGNATURE 

45

EXHIBIT INDEX 

46

 

 

2


 

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2015

 

2014

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

Fixed maturities, at fair value (amortized cost: $1,046,663 and $1,102,517)

 

$

1,071,167

 

$

1,135,451

 

Equity securities, at fair value (cost: $100,704 and $97,910)

 

 

103,672

 

 

109,153

 

Other invested assets

 

 

15,319

 

 

11,657

 

Total investments

 

 

1,190,158

 

 

1,256,261

 

Cash and cash equivalents

 

 

43,243

 

 

42,455

 

Accounts receivable, net of allowance for doubtful accounts

 

 

193,768

 

 

175,532

 

Receivable for securities sold

 

 

795

 

 

— 

 

Accrued investment income

 

 

9,394

 

 

10,295

 

Taxes recoverable

 

 

23,929

 

 

— 

 

Receivable from reinsurers related to paid loss and loss adjustment expenses

 

 

42,092

 

 

6,267

 

Receivable from reinsurers related to unpaid loss and loss adjustment expenses

 

 

74,078

 

 

61,245

 

Ceded unearned premiums

 

 

22,214

 

 

19,638

 

Deferred policy acquisition costs

 

 

72,976

 

 

67,329

 

Deferred income taxes

 

 

4,298

 

 

— 

 

Equity and deposits in pools

 

 

28,993

 

 

23,159

 

Other assets

 

 

13,717

 

 

13,538

 

Total assets

 

$

1,719,655

 

$

1,675,719

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$

553,329

 

$

482,012

 

Unearned premium reserves

 

 

425,009

 

 

390,361

 

Accounts payable and accrued liabilities

 

 

43,073

 

 

65,863

 

Payable for securities purchased

 

 

4,296

 

 

4,591

 

Payable to reinsurers

 

 

26,280

 

 

7,653

 

Deferred income taxes

 

 

— 

 

 

1,614

 

Taxes payable

 

 

— 

 

 

265

 

Other liabilities

 

 

23,226

 

 

15,077

 

Total liabilities

 

 

1,075,213

 

 

967,436

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Common stock:  $0.01 par value; 30,000,000 shares authorized; 17,371,903 and 17,288,728 shares issued

 

 

174

 

 

173

 

Additional paid-in capital

 

 

178,716

 

 

175,583

 

Accumulated other comprehensive income, net of taxes

 

 

17,425

 

 

28,715

 

Retained earnings

 

 

531,962

 

 

587,647

 

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

 

 

(83,835)

 

 

(83,835)

 

Total shareholders’ equity

 

 

644,442

 

 

708,283

 

Total liabilities and shareholders’ equity

 

$

1,719,655

 

$

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 September 30, 

    

Nine Months Ended September 30, 

 

 

    

2015

    

2014

 

2015

    

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

186,582

 

$

180,277

 

$

551,593

 

$

534,397

 

Net investment income

 

 

9,950

 

 

10,809

 

 

30,824

 

 

31,291

 

Earnings from partnership investments

 

 

859

 

 

 —

 

 

1,436

 

 

 —

 

Net realized (losses) gains on investments

 

 

(310)

 

 

284

 

 

(72)

 

 

683

 

Net impairment losses on investments (a)

 

 

(434)

 

 

 —

 

 

(434)

 

 

 —

 

Finance and other service income

 

 

4,623

 

 

4,749

 

 

13,564

 

 

13,781

 

Total revenue

 

 

201,270

 

 

196,119

 

 

596,911

 

 

580,152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

128,931

 

 

119,742

 

 

484,281

 

 

349,180

 

Underwriting, operating and related expenses

 

 

53,624

 

 

54,378

 

 

157,919

 

 

162,203

 

Interest expense

 

 

22

 

 

22

 

 

67

 

 

67

 

Total expenses

 

 

182,577

 

 

174,142

 

 

642,267

 

 

511,450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

18,693

 

 

21,977

 

 

(45,356)

 

 

68,702

 

Income tax (credit) expense

 

 

6,712

 

 

6,541

 

 

(21,213)

 

 

19,718

 

Net income (loss)

 

$

11,981

 

$

15,436

 

$

(24,143)

 

$

48,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per weighted average common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.80

 

$

1.03

 

$

(1.62)

 

$

3.23

 

Diluted

 

$

0.80

 

$

1.03

 

$

(1.62)

 

$

3.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.70

 

$

0.70

 

$

2.10

 

$

1.90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,880,796

 

 

14,804,818

 

 

14,861,533

 

 

15,026,368

 

Diluted

 

 

14,907,672

 

 

14,910,177

 

 

14,861,533

 

 

15,091,844

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(a) No portion of the other-than-temporary impairments recognized in the periods were included in other comprehensive income.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 

 

Nine Months Ended September 30, 

 

 

    

2015

    

2014

 

2015

    

2014

 

Net income (loss)

 

$

11,981

 

$

15,436

 

$

(24,143)

 

$

48,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains during the period, net of income tax expense of ($2,489),  ($2,047),  ($6,105) and $5,688.

 

 

(4,622)

 

 

(3,801)

 

 

(11,337)

 

 

10,564

 

Reclassification adjustment for losses or gains included in net income, net of income tax benefit (expense) of $109,  ($100),  $25 and ($239).

 

 

202

 

 

(185)

 

 

47

 

 

(444)

 

Unrealized (losses) gains on securities available for sale

 

 

(4,420)

 

 

(3,986)

 

 

(11,290)

 

 

10,120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income

 

$

7,561

 

$

11,450

 

$

(35,433)

 

$

59,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

48,984

 

 

 

 

 

48,984

 

Other comprehensive income, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

    

 

    

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 September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

(24,143)

 

 

 

 

 

(24,143)

 

Other comprehensive income, net of deferred federal income taxes

 

 

 

 

 

 

 

 

(11,290)

 

 

 

 

 

 

 

 

(11,290)

 

Restricted share awards issued

 

 

1

 

 

246

 

 

 

 

 

 

 

 

 

 

 

247

 

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

 

 

 

 

 

2,691

 

 

 

 

 

 

 

 

 

 

 

2,691

 

Exercise of options, net of federal income taxes

 

 

 

 

 

196

 

 

 

 

 

 

 

 

 

 

 

196

 

Dividends paid and accrued

 

 

 

 

 

 

 

 

 

 

 

(31,542)

 

 

 

 

 

(31,542)

 

Balance at September 30, 2015

 

$

174

 

$

178,716

 

$

17,425

 

$

531,962

 

$

(83,835)

 

$

644,442

 

 

 

 

 

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, 

 

 

    

2015

    

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net (loss) income

 

$

(24,143)

 

$

48,984

 

Adjustments to reconcile net (loss) income to net cash (used for) provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization, net

 

 

8,829

 

 

9,804

 

(Credit) provision for deferred income taxes

 

 

(497)

 

 

138

 

Net realized losses / (gains) on investments

 

 

72

 

 

(683)

 

Net impairment losses on investments

 

 

434

 

 

 —

 

Earnings from partnership investments

 

 

(1,436)

 

 

 —

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(18,236)

 

 

(21,823)

 

Accrued investment income

 

 

901

 

 

352

 

Receivable from reinsurers

 

 

(48,658)

 

 

(2,123)

 

Ceded unearned premiums

 

 

(2,576)

 

 

(541)

 

Deferred policy acquisition costs

 

 

(5,647)

 

 

(7,791)

 

Taxes recoverable

 

 

(23,929)

 

 

 —

 

Other assets

 

 

(5,527)

 

 

(7,630)

 

Loss and loss adjustment expense reserves

 

 

71,317

 

 

12,759

 

Unearned premium reserves

 

 

34,648

 

 

41,321

 

Accounts payable and accrued liabilities

 

 

(23,110)

 

 

(14,014)

 

Payable to reinsurers

 

 

18,627

 

 

11,885

 

Other liabilities

 

 

8,149

 

 

(5,028)

 

Net cash (used for) provided by  operating activities

 

 

(10,782)

 

 

65,610

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Fixed maturities purchased

 

 

(157,820)

 

 

(168,135)

 

Equity securities purchased

 

 

(23,725)

 

 

(20,840)

 

Other invested assets purchased

 

 

(3,434)

 

 

(2,900)

 

Proceeds from sales and paydowns of fixed maturities

 

 

109,346

 

 

119,351

 

Proceeds from maturities, redemptions, and calls of fixed maturities

 

 

97,403

 

 

24,500

 

Proceeds from sales of equity securities

 

 

23,032

 

 

8,656

 

Proceeds from other invested assets redeemed

 

 

1,195

 

 

 —

 

Fixed assets purchased

 

 

(3,140)

 

 

(1,590)

 

Net cash provided by (used for) investing activities

 

 

42,857

 

 

(40,958)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from stock options exercised

 

 

193

 

 

147

 

Excess tax benefit from stock options exercised

 

 

2

 

 

4

 

Dividends paid to shareholders

 

 

(31,482)

 

 

(28,840)

 

Acquisition of treasury stock

 

 

 —

 

 

(23,467)

 

Net cash used for financing activities

 

 

(31,287)

 

 

(52,156)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

788

 

 

(27,504)

 

Cash and cash equivalents at beginning of year

 

 

42,455

 

 

55,877

 

Cash and cash equivalents at end of period

 

$

43,243

 

$

28,373

 

 

 

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, 2015 and for the three and nine months ended September 30,  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 May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts (“ASU 2015-09”). ASU 2015-09 requires companies that issue short duration contracts to disclose additional information, including: (i) incurred and paid claims development tables; (ii) frequency and severity of claims; and (iii) information about material changes in judgments made in calculating the liability for unpaid claim adjustment expenses, including reasons for the change and the effects on the financial statements. ASU 2015-09 is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. The amendments in ASU 2015-09 should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. As the requirements of this literature are disclosure only, the application of this guidance will not impact our financial condition, results of operations or cash flows.

 

In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”).  ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient.  The reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the

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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands except per share and share data)

 

nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value.  ASU 2015-07 is effective for fiscal years beginning after December 31, 2015.  Early adoption is allowed and the reporting entity should apply ASU 2015-07 retrospectively to all periods presented.  The Company does not expect the adoption of ASU 2015-07 to have a material impact on its financial position, results of operations or cash flows.

 

In April 2015, the FASB issued ASU No. 2015-03, Imputation of Interest (“ASU 2015-03”).  ASU 2015-03 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 2014-15 to have a material impact on its financial position, results of operations or cash flows.

 

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, 2015 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, results of operations, or cash flows.

 

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 was not material to the Company’s financial position, results of operations or cash flows.

 

 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, 2017 and allows 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, results of operations, or cash flows.

 

3.  (Loss) Earnings per Weighted Average Common Share

 

Basic (loss) earnings per weighted average common share (“EPS”) are 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.

 

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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 September 30, 

 

Nine Months Ended September 30, 

 

 

 

2015

 

2014

 

 

2015

 

2014

Earnings attributable to common shareholders - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income from continuing operations

 

$

11,981

 

$

15,436

 

$

(24,143)

 

$

48,984

 

Allocation of income for participating shares

 

 

(90)

 

 

(142)

(1)

 

 —

 

 

(475)

(1)

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

 

$

11,891

 

$

15,294

(1)

$

(24,143)

 

$

48,509

(1)

Earnings per share denominator - basis and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

Total weighted average common shares outstanding, including participating shares

 

 

14,993,162

 

 

14,941,685

 

 

14,982,697

 

 

15,173,415

 

Less: weighted average participating shares

 

 

(112,366)

 

 

(136,867)

 

 

(121,164)

 

 

(147,047)

 

Basic earnings per share denominator

 

 

14,880,796

 

 

14,804,818

(1)

 

14,861,533

 

 

15,026,368

(1)

Common equivalent shares- stock options

 

 

1,292

 

 

2,013

 

 

 —

(2)

 

2,352

 

Common equivalent shares- non-vested performance stock grants

 

 

25,584

 

 

103,346

 

 

 —

(3)

 

63,124

 

Diluted earnings per share denominator

 

 

14,907,672

 

 

14,910,177

(1)

 

14,861,533

 

 

15,091,844

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per share

 

$

0.80

 

$

1.03

 

$

(1.62)

 

$

3.23

 

Diluted (loss) earnings per share

 

$

0.80

 

$

1.03

 

$

(1.62)

 

$

3.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.80

 

$

1.03

 

$

(1.62)

 

$

3.23

 

Dividends declared

 

 

(0.70)

 

 

(0.70)

 

 

(2.10)

 

 

(1.90)

 

Undistributed (loss) earnings

 

$

0.10

 

$

0.33

 

$

(3.72)

 

$

1.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.80

 

$

1.03

 

$

(1.62)

 

$

3.21

 

Dividends declared

 

 

(0.70)

 

 

(0.70)

 

 

(2.10)

 

 

(1.90)

 

Undistributed (loss) earnings

 

$

0.10

 

$

0.33

 

$

(3.72)

 

$

1.31

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

The 2014 basic and diluted earnings per share denominators were revised to correct the allocation of net income to participating securities under the two-class method.    The revision did not yield 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 denominator for the nine months ended September 30,  2014, as originally reported was 15,173,415 and the 2014 diluted earnings per share denominator as originally reported was 15,238,891.   The 2014 basic earnings per share denominator for the three months ended September 30,  2014, as originally reported was 14,941,685 and the 2014 diluted earnings per share denominator as originally reported was 15,047,044.  

(2)

Excludes 1,735 of common equivalent shares related to stock options because their inclusion would be anti dilutive due to the net loss of the Company.

(3)

Excludes 55,912 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 and nine months ended September 30, 2015 and 2014.

 

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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 September 30,  2015, there were 369,755 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 nine months ended  September 30, 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

 

(4,500)

 

$

42.85 

 

 

 

 

 

 

 

Outstanding at end of period

 

8,200 

 

$

42.85 

 

0.4

years

 

$

93

 

Exercisable at end of period

 

8,200 

 

$

42.85 

 

0.4

years

 

$

93

 

 

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,  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 September 30,  2015 and September 30,  2014 was $42.85. The total intrinsic value of options exercised during the nine months ended September 30,  2015 and 2014 was $95 and $69, respectively.

 

As of March 31, 2011, all compensation expense related to non-vested option awards had been recognized. Cash received from options exercised was $193 and $147 for the nine months ended September 30,  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

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Table of Contents

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.  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 remainders, 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 nine months ended September 30,  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

 

46,943

 

$

61.57

 

37,722

 

$

63.62

 

Vested and unrestricted

 

(64,130)

 

$

45.17

 

 -

 

$

 -

 

Forfeited

 

(2,645)

 

$

49.39

 

(3,345)

 

$

46.91

 

Outstanding at end of period

 

156,284

 

$

51.37

 

99,101

 

$

55.55

 

 

 As of September 30,  2015, there was $6,784 of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 1.8 years.  The total fair value of the shares that were vested and unrestricted during the nine months ended September 30,  2015 and 2014 was $2,897 and $3,554, respectively.  For the nine months ended September 30, 2015 and 2014, the Company recorded compensation expense related to restricted stock of $1,710 and $2,245, net of income tax benefits of $921 and $1,209, respectively.

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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 September 30, 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

 

$

15,941

 

$

114

 

$

 —

 

$

 —

 

$

16,055

 

Obligations of states and political subdivisions

 

 

366,006

 

 

19,571

 

 

(632)

 

 

 —

 

 

384,945

 

Residential mortgage-backed securities (1)

 

 

216,613