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EX-32.1 - EX-32.1 - SAFETY INSURANCE GROUP INCsaft-20160331ex32107846b.htm
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EX-32.2 - EX-32.2 - SAFETY INSURANCE GROUP INCsaft-20160331ex322156cdf.htm
EX-31.2 - EX-31.2 - SAFETY INSURANCE GROUP INCsaft-20160331ex3124729ea.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, 2016

 

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 3, 2016 there were 15,158,327 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 Income (Loss)

5

 

Consolidated Statements of Changes in Shareholders’ Equity

6

 

Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Consolidated Financial Statements

8

Item 2. 

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

23 

Item 3. 

Quantitative and Qualitative Information about Market Risk

41

Item 4. 

Controls and Procedures

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, 

 

 

2016

 

2015

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

Fixed maturities, at fair value (amortized cost: $1,059,661 and $1,063,971)

 

$

1,091,263

 

$

1,081,637

Equity securities, at fair value (cost: $101,335 and $102,541)

 

 

111,122

 

 

110,204

Other invested assets

 

 

17,572

 

 

17,602

Total investments

 

 

1,219,957

 

 

1,209,443

Cash and cash equivalents

 

 

35,940

 

 

47,494

Accounts receivable, net of allowance for doubtful accounts

 

 

178,671

 

 

178,567

Receivable for securities sold

 

 

89

 

 

260

Accrued investment income

 

 

9,374

 

 

8,922

Taxes recoverable

 

 

14,182

 

 

15,497

Receivable from reinsurers related to paid loss and loss adjustment expenses

 

 

27,807

 

 

40,972

Receivable from reinsurers related to unpaid loss and loss adjustment expenses

 

 

77,075

 

 

68,261

Ceded unearned premiums

 

 

24,345

 

 

23,222

Deferred policy acquisition costs

 

 

68,404

 

 

68,937

Deferred income taxes

 

 

 —

 

 

4,430

Equity and deposits in pools

 

 

23,373

 

 

23,558

Other assets

 

 

15,013

 

 

14,306

Total assets

 

$

1,694,230

 

$

1,703,869

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$

549,901

 

$

553,977

Unearned premium reserves

 

 

403,083

 

 

401,961

Accounts payable and accrued liabilities

 

 

46,593

 

 

53,722

Payable for securities purchased

 

 

2,181

 

 

8,607

Payable to reinsurers

 

 

11,586

 

 

11,547

Deferred income taxes

 

 

1,298

 

 

 —

Taxes payable

 

 

 —

 

 

 —

Other liabilities

 

 

21,257

 

 

29,556

Total liabilities

 

 

1,035,899

 

 

1,059,370

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

Common stock:  $0.01 par value; 30,000,000 shares authorized; 17,427,897 and 17,373,643 shares issued

 

 

174

 

 

174

Additional paid-in capital

 

 

181,173

 

 

179,896

Accumulated other comprehensive income, net of taxes

 

 

26,903

 

 

16,464

Retained earnings

 

 

533,916

 

 

531,800

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

 

 

(83,835)

 

 

(83,835)

Total shareholders’ equity

 

 

658,331

 

 

644,499

Total liabilities and shareholders’ equity

 

$

1,694,230

 

$

1,703,869

 

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, 

 

    

2016

    

2015

 

 

 

 

 

 

 

Net earned premiums

 

$

185,654

 

$

182,564

Net investment income

 

 

9,627

 

 

10,557

Earnings from partnership investments

 

 

878

 

 

 —

Net realized (losses) gains on investments

 

 

(323)

 

 

411

Net impairment losses on investments (a)

 

 

(292)

 

 

 —

Finance and other service income

 

 

4,285

 

 

4,507

Total revenue

 

 

199,829

 

 

198,039

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

125,979

 

 

208,324

Underwriting, operating and related expenses

 

 

55,957

 

 

52,097

Interest expense

 

 

22

 

 

22

Total expenses

 

 

181,958

 

 

260,443

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

17,871

 

 

(62,404)

Income tax expense (credit)

 

 

5,201

 

 

(27,333)

Net income (loss)

 

$

12,670

 

$

(35,071)

 

 

 

 

 

 

 

Earnings (loss) per weighted average common share:

 

 

 

 

 

 

Basic

 

$

0.84

 

$

(2.37)

Diluted

 

$

0.84

 

$

(2.37)

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.70

 

$

0.70

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Basic

 

 

14,903,958

 

 

14,824,132

Diluted

 

 

14,936,017

 

 

14,824,132

 

(a)

No portion of the other-than-temporary impairments recognized in the period indicated were included in comprehensive income

 

 

 

 

 

 

 

 

 

 

 

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

4


 

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  March 31, 

 

    

2016

    

2015

Net income (loss)

 

$

12,670

 

$

(35,071)

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

Unrealized holding gains during the period, net of income tax expense of $5,508 and $1,893 .

 

 

10,229

 

 

3,515

Reclassification adjustment for losses or gains included in net income, net of income tax benefit (expense) of $113 and ($144).

 

 

210

 

 

(267)

Unrealized gains on securities available for sale

 

 

10,439

 

 

3,248

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

23,109

 

$

(31,823)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2014

 

$

173

 

$

175,583

 

$

28,715

 

$

587,647

 

$

(83,835)

 

$

708,283

Net loss, January 1 to March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

(35,071)

 

 

 

 

 

(35,071)

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

 

 

 

 

 

 

 

 

3,248

 

 

 

 

 

 

 

 

3,248

Restricted share awards issued

 

 

1

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

    

 

    

Accumulated

    

    

 

    

    

 

    

    

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Comprehensive

 

 

 

 

 

 

 

Total

 

 

Common

 

Paid-in

 

Income,

 

Retained

 

Treasury

 

Shareholders’

 

 

Stock

 

Capital

 

Net of Taxes

 

Earnings

 

Stock

 

Equity

Balance at December 31, 2015

 

$

174

 

$

179,896

 

$

16,464

 

$

531,800

 

$

(83,835)

 

$

644,499

Net income, January 1 to March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

12,670

 

 

 

 

 

12,670

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

 

 

 

 

 

 

 

 

10,439

 

 

 

 

 

 

 

 

10,439

Restricted share awards issued

 

 

 

 

 

280

 

 

 

 

 

 

 

 

 

 

 

280

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

 

 

 

 

 

746

 

 

 

 

 

 

 

 

 

 

 

746

Exercise of options, net of federal income taxes

 

 

 

 

 

251

 

 

 

 

 

 

 

 

 

 

 

251

Dividends paid and accrued

 

 

 

 

 

 

 

 

 

 

 

(10,554)

 

 

 

 

 

(10,554)

Balance at March 31, 2016

 

$

174

 

$

181,173

 

$

26,903

 

$

533,916

 

$

(83,835)

 

$

658,331

 

 

 

 

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, 

 

    

2016

    

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

12,670

 

$

(35,071)

 

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

 

 

 

 

 

 

 

Depreciation and amortization, net

 

 

3,041

 

 

2,608

 

Provision (credit) for deferred income taxes

 

 

107

 

 

(5,492)

 

Net realized losses (gains) on investments

 

 

323

 

 

(411)

 

Net impairment losses on investments

 

 

292

 

 

 —

 

Earnings from partnership investments

 

 

(878)

 

 

 —

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(104)

 

 

(1,636)

 

Accrued investment income

 

 

(452)

 

 

235

 

Receivable from reinsurers

 

 

4,351

 

 

(50,724)

 

Ceded unearned premiums

 

 

(1,123)

 

 

(1,750)

 

Deferred policy acquisition costs

 

 

533

 

 

54

 

Taxes recoverable

 

 

1,315

 

 

(25,815)

 

Other assets

 

 

327

 

 

(2,928)

 

Loss and loss adjustment expense reserves

 

 

(4,076)

 

 

88,001

 

Unearned premium reserves

 

 

1,122

 

 

4,475

 

Accounts payable and accrued liabilities

 

 

(7,035)

 

 

(21,154)

 

Payable to reinsurers

 

 

39

 

 

2,058

 

Other liabilities

 

 

(8,299)

 

 

37,477

 

Net cash  provided by (used for) operating activities

 

 

2,153

 

 

(10,073)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Fixed maturities purchased

 

 

(60,517)

 

 

(64,505)

 

Equity securities purchased

 

 

(3,925)

 

 

(16,353)

 

Other invested assets purchased

 

 

(1,730)

 

 

(7)

 

Proceeds from sales and paydowns of fixed maturities

 

 

15,489

 

 

18,478

 

Proceeds from maturities, redemptions, and calls of fixed maturities

 

 

41,043

 

 

50,480

 

Proceed from sales of equity securities

 

 

5,337

 

 

15,996

 

Proceeds from other invested assets redeemed

 

 

2,656

 

 

 —

 

Fixed assets purchased

 

 

(1,664)

 

 

(815)

 

Net cash (used for)  provided by investing activities

 

 

(3,311)

 

 

3,274

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from stock options exercised

 

 

257

 

 

107

 

Excess tax (expense) benefit from stock options exercised

 

 

(6)

 

 

2

 

Dividends paid to shareholders

 

 

(10,647)

 

 

(10,493)

 

Net cash used for financing activities

 

 

(10,396)

 

 

(10,384)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(11,554)

 

 

(17,183)

 

Cash and cash equivalents at beginning of year

 

 

47,494

 

 

42,455

 

Cash and cash equivalents at end of period

 

$

35,940

 

$

25,272

 

 

 

 

 

 

 

 

 

 

 

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, Safety Asset Management Corporation (“SAMC”), and Safety Management Corporation, which is SAMC’s holding company.  All intercompany transactions have been eliminated.

 

The financial information as of  March 31, 2016 and 2015 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, 2015 is derived from the audited financial statements included in the Company's  2015 annual report on Form 10-K filed with the SEC on February 26, 2016.

 

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 February 26, 2016. 

 

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

 

 

2.  Recent Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.  This ASC update requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement, and be treated as discreet items in the reporting period in which they occur. Additionally, excess tax benefits will be classified with other income tax cash flows as an operating activity and cash paid by an employer when directly withholding shares for tax withholding purposes will be classified as a financing activity. Awards that are used to settle employee tax liabilities will be allowed to qualify for equity classification for withholdings up to the maximum statutory tax rates in applicable jurisdictions. Regarding forfeitures, a company can make an entity-wide accounting policy election to either continue estimating the number of awards that are expected to vest or account for forfeitures when they occur. The updated guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. The impact of the adoption of ASU 2016-01 to the Company’s financial position and results of operations is currently being evaluated.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The amendments in this

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)

 

ASU update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01: (1) requires equity investments (except those accounted for under the equity method or those that result in the consolidation of the investee) to be measured at fair value with changes in the fair value recognized in net income; (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and (4) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the notes to the financial statements. These amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The impact of the adoption of ASU 2016-01 to the Company’s financial position and results of operations is currently being evaluated.

 

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 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. The Company’s adoption of ASU 2015-07 did not have a material impact on the Company’s 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. 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’s adoption of ASU 2015-03 had no impact on the Company’s 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, 2016 and interim periods thereafter. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have any impact on its financial position, results of operations, or cash flows.

 

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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)

 

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.  Earnings (loss) per Weighted Average Common Share

 

Basic earnings (loss) per weighted average common share (“EPS”) are calculated by dividing net income (loss) by the weighted average number of basic common shares outstanding during the period.  Diluted earnings (loss) 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  March 31, 

 

 

 

2016

 

2015

 

Earnings attributable to common shareholders - basic and diluted:

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

12,670

 

$

(35,071)

 

Allocation of income for participating shares

 

 

(156)

 

 

 —

 

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

 

$

12,514

 

$

(35,071)

 

Earnings per share denominator - basis and diluted

 

 

 

 

 

 

 

Total weighted average common shares outstanding, including participating shares

 

 

15,089,522

 

 

14,963,369

 

Less: weighted average participating shares

 

 

(185,564)

 

 

(139,237)

 

Basic earnings per share denominator

 

 

14,903,958

 

 

14,824,132

 

Common equivalent shares- stock options

 

 

539

 

 

 —

(1)

Common equivalent shares- non-vested performance stock grants

 

 

31,520

 

 

 —

(2)

Diluted earnings per share denominator

 

 

14,936,017

 

 

14,824,132

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

0.84

 

$

(2.37)

 

Diluted earnings (loss) per share

 

$

0.84

 

$

(2.37)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

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

 

$

0.84

 

$

(2.37)

 

Dividends declared

 

 

(0.70)

 

 

(0.70)

 

Undistributed earnings (loss)

 

$

0.14

 

$

(3.07)

 

 

 

 

 

 

 

 

 

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

 

$

0.84

 

$

(2.37)

 

Dividends declared

 

 

(0.70)

 

 

(0.70)

 

Undistributed earnings (loss)

 

$

0.14

 

$

(3.07)

 


(1)

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.

(2)

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 for the three months ended March 31, 2016. There were 3,456 anti dilutive shares related to non vested performance stock for the three months ended March 31, 2016.

 

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, 2016, there were 289,067 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.

 

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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)

 

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, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Weighted

    

    

 

 

 

Shares

 

Weighted

 

Average

 

Aggregate

 

 

Under

 

Average

 

Remaining

 

Intrinsic

 

 

Option

 

Exercise Price

 

Contractual Term

 

Value

Outstanding at beginning of year

 

6,200

 

$

42.85

 

 

 

 

 

 

Exercised

 

(6,000)

 

$

42.85

 

 

 

 

 

 

Forfeitures

 

(200)

 

$

42.85

 

 

 

 

 

 

Outstanding at end of period

 

 —

 

$

 —

 

none

 

$

 —

 

Exercisable at end of period

 

 —

 

$

 —

 

none

 

$

 —

 

 

As of March 31, 2016, all stock option awards have expired and all compensation expense related to stock option awards has been recognized. The total intrinsic value of options exercised during the three months ended March 31, 2016 and 2015 was $85 and $53, respectively. Cash received from stock options exercised was $257 and $107 for the three months ended March 31, 2016 and 2015, 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 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

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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)

 

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, 2016, assuming a target payout for the 2016 performance-based shares.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Shares 

    

Weighted

 

Performance-based

    

Weighted

 

 

 

Under

 

Average

 

Shares Under

 

Average

 

 

 

Restriction

 

Fair Value

 

Restriction

 

Fair Value

 

Outstanding at beginning of year

 

112,024

 

$

54.44

 

99,101

 

$

55.55

 

Granted

 

46,556

 

 

56.09

 

34,626

 

 

60.72

 

Vested and unrestricted

 

(56,279)

 

 

53.43

 

(15,289)

 

 

47.42

 

Forfeited

 

(5,267)

 

 

48.44

 

(27,661)

 

 

49.93

 

Outstanding at end of period

 

97,034

 

$

55.85

 

90,777

 

$

57.88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 As of March 31, 2016, there was $8,961 of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 2.2 years.  The total fair value of the shares that were vested and unrestricted during the three months ended March 31, 2016 and 2015 was $3,732 and $2,897, respectively.  For the three months ended March 31, 2016 and 2015, the Company recorded compensation expense related to restricted stock of $603 and $389, net of income tax benefits of $324 and $210, 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2016

 

 

 

 

 

 

 

 

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

 

$

6,878

 

$

5

 

$

(5)

 

$

 —

 

$

6,878

Obligations of states and political subdivisions

 

 

358,068

 

 

23,783

 

 

(207)

 

 

 —

 

 

381,644

Residential mortgage-backed securities (1)

 

 

264,314

 

 

6,929

 

 

(248)

 

 

 —

 

 

270,995

Commercial mortgage-backed securities

 

 

29,847

 

 

765

 

 

(5)

 

 

 —

 

 

30,607

Other asset-backed securities

 

 

26,411

 

 

176

 

 

(3)

 

 

 —

 

 

26,584

Corporate and other securities

 

 

374,143

 

 

7,489

 

 

(7,077)

 

 

 —

 

 

374,555

Subtotal, fixed maturity securities 

 

 

1,059,661

 

 

39,147

 

 

(7,545)

 

 

 —

 

 

1,091,263

Equity securities (2)

 

 

101,335

 

 

14,365

 

 

(4,578)

 

 

 —

 

 

111,122

Other invested assets (5)

 

 

17,572

 

 

 —

 

 

 —

 

 

 —

 

 

17,572

Totals

 

$

1,178,568

 

$

53,512

 

$

(12,123)

 

$

 —

 

$

1,219,957

 

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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 December 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

 

$

1,805

 

$

 —

 

$

(4)

 

$

 —

 

$

1,801

 

Obligations of states and political subdivisions

 

 

377,188

 

 

21,160

 

 

(426)

 

 

 —

 

 

397,922

 

Residential mortgage-backed securities (1)

 

 

237,896

 

 

5,188

 

 

(1,628)

 

 

 —

 

 

241,456

 

Commercial mortgage-backed securities

 

 

28,851

 

 

30

 

 

(218)

 

 

 —

 

 

28,663

 

Other asset-backed securities

 

 

24,037

 

 

39

 

 

(145)

 

 

 —

 

 

23,931

 

Corporate and other securities

 

 

394,194

 

 

4,191

 

 

(10,521)

 

 

 —

 

 

387,864

 

Subtotal, fixed maturity securities 

 

 

1,063,971

 

 

30,608

 

 

(12,942)

 

 

 —

 

 

1,081,637

 

Equity securities (2)

 

 

102,541

 

 

13,498

 

 

(5,835)

 

 

 —

 

 

110,204

 

Other invested assets (5)

 

 

17,602

 

 

 —

 

 

 —

 

 

 —

 

 

17,602

 

Totals

 

$

1,184,114

 

$

44,106

 

$

(18,777)

 

$

 —

 

$

1,209,443

 


(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 328 and 514 securities in an unrealized loss position at March 31, 2016 and December 31, 2015, 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.

 

 

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, 2016

 

    

Amortized

    

Estimated

 

 

Cost

 

Fair Value

Due in one year or less

 

$

36,154

 

$

36,352

Due after one year through five years

 

 

260,663

 

 

262,472

Due after five years through ten years

 

 

165,483

 

 

166,785

Due after ten years through twenty years

 

 

272,545

 

 

293,077

Due after twenty years

 

 

4,244

 

 

4,391

Asset-backed securities

 

 

320,572

 

 

328,186

Totals

 

$

1,059,661

 

$

1,091,263

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  March 31, 

    

 

    

2016

    

2015

 

Gross realized gains

 

 

 

 

 

 

 

Fixed maturity securities

 

$

52

 

$

183

 

Equity securities

 

 

426

 

 

937

 

Gross realized losses

 

 

 

 

 

 

 

Fixed maturity securities

 

 

(582)

 

 

(491)

 

Equity securities

 

 

(219)

 

 

(218)

 

Net realized (losses) gains on investments

 

$

(323)

 

$

411

 

 

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

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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)

 

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, 2016 and December 31, 2015 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, 2016