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EX-32.2 - EX-32.2 - SAFETY INSURANCE GROUP INCsaft-20170630ex322aa77c8.htm
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EX-31.1 - EX-31.1 - SAFETY INSURANCE GROUP INCsaft-20170630ex311d0fb2e.htm

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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 June 30, 2017

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 a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     

 

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 July 31, 2017 there were 15,219,974 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

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 1 

Legal Proceedings

44

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)

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

2017

 

2016

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

Fixed maturities, at fair value (amortized cost: $1,128,379 and $1,142,663)

 

$

1,148,659

 

$

1,154,269

Equity securities, at fair value (cost: $94,078 and $92,326)

 

 

111,413

 

 

105,095

Other invested assets

 

 

27,492

 

 

21,142

Total investments

 

 

1,287,564

 

 

1,280,506

Cash and cash equivalents

 

 

34,297

 

 

20,052

Accounts receivable, net of allowance for doubtful accounts

 

 

201,881

 

 

187,696

Receivable for securities sold

 

 

834

 

 

7,098

Accrued investment income

 

 

8,471

 

 

8,858

Taxes recoverable

 

 

4,082

 

 

 —

Receivable from reinsurers related to paid loss and loss adjustment expenses

 

 

42,337

 

 

29,504

Receivable from reinsurers related to unpaid loss and loss adjustment expenses

 

 

88,637

 

 

83,724

Ceded unearned premiums

 

 

30,432

 

 

28,585

Deferred policy acquisition costs

 

 

74,410

 

 

70,996

Deferred income taxes

 

 

 —

 

 

3,083

Equity and deposits in pools

 

 

26,510

 

 

24,675

Other assets

 

 

15,594

 

 

13,469

Total assets

 

$

1,815,049

 

$

1,758,246

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$

562,709

 

$

560,321

Unearned premium reserves

 

 

442,031

 

 

418,033

Accounts payable and accrued liabilities

 

 

54,078

 

 

66,805

Payable for securities purchased

 

 

14,763

 

 

5,564

Payable to reinsurers

 

 

17,401

 

 

13,502

Deferred income taxes

 

 

4,503

 

 

 —

Taxes payable

 

 

 —

 

 

1,110

Other liabilities

 

 

25,730

 

 

22,185

Total liabilities

 

 

1,121,215

 

 

1,087,520

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

Common stock:  $0.01 par value; 30,000,000 shares authorized; 17,498,644 and 17,430,189 shares issued

 

 

175

 

 

174

Additional paid-in capital

 

 

187,262

 

 

184,549

Accumulated other comprehensive income, net of taxes

 

 

24,450

 

 

15,843

Retained earnings

 

 

565,782

 

 

553,995

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

 

 

(83,835)

 

 

(83,835)

Total shareholders’ equity

 

 

693,834

 

 

670,726

Total liabilities and shareholders’ equity

 

$

1,815,049

 

$

1,758,246

 

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  June 30, 

    

Six Months Ended June 30, 

 

    

2017

    

2016

 

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

192,824

 

$

187,393

 

$

382,535

 

$

373,047

Net investment income

 

 

9,715

 

 

9,641

 

 

18,810

 

 

19,268

Earnings from partnership investments

 

 

769

 

 

1,409

 

 

882

 

 

2,287

Net realized gains on investments

 

 

567

 

 

360

 

 

2,109

 

 

37

Net impairment losses on investments (a)

 

 

 —

 

 

(137)

 

 

 —

 

 

(429)

Finance and other service income

 

 

4,374

 

 

4,284

 

 

8,683

 

 

8,569

Total revenue

 

 

208,249

 

 

202,950

 

 

413,019

 

 

402,779

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

117,049

 

 

115,144

 

 

245,479

 

 

241,123

Underwriting, operating and related expenses

 

 

60,979

 

 

57,513

 

 

120,649

 

 

113,470

Interest expense

 

 

23

 

 

23

 

 

45

 

 

45

Total expenses

 

 

178,051

 

 

172,680

 

 

366,173

 

 

354,638

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

30,198

 

 

30,270

 

 

46,846

 

 

48,141

Income tax expense

 

 

9,093

 

 

8,905

 

 

13,722

 

 

14,106

Net income

 

$

21,105

 

$

21,365

 

$

33,124

 

$

34,035

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per weighted average common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.40

 

$

1.42

 

$

2.19

 

$

2.26

Diluted

 

$

1.39

 

$

1.41

 

$

2.18

 

$

2.25

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.70

 

$

0.70

 

$

1.40

 

$

1.40

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares used in computing earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

15,020,028

 

 

14,960,516

 

 

15,000,127

 

 

14,932,237

Diluted

 

 

15,114,284

 

 

15,041,077

 

 

15,105,554

 

 

14,988,546

 

(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

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  June 30, 

 

Six Months Ended June 30, 

 

 

    

2017

    

2016

 

2017

    

2016

 

Net income

 

$

21,105

 

$

21,365

 

$

33,124

 

$

 34,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains during the period, net of income tax expense of $2,542, $5,426,  $5,373 and $10,934.

 

 

4,721

 

 

10,077

 

 

9,978

 

 

20,306

 

Reclassification adjustment for losses included in net income, net of income tax expense of ($199),  ($126), ($738) and ($13).

 

 

(369)

 

 

(234)

 

 

 (1,371)

 

 

(24)

 

Unrealized gains on securities available for sale

 

 

4,352

 

 

9,843

 

 

8,607

 

 

 20,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

25,457

 

$

31,208

 

$

41,731

 

$

 54,317

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2015

 

$

174

 

$

179,896

 

$

16,464

 

$

531,800

 

$

(83,835)

 

$

644,499

Net income, January 1 to June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

34,035

 

 

 

 

 

34,035

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

 

 

 

 

 

 

 

 

20,282

 

 

 

 

 

 

 

 

20,282

Restricted share awards issued

 

 

 

 

 

280

 

 

 

 

 

 

 

 

 

 

 

280

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

 

 

 

 

 

1,851

 

 

 

 

 

 

 

 

 

 

 

1,851

Exercise of options, net of federal income taxes

 

 

 

 

 

251

 

 

 

 

 

 

 

 

 

 

 

251

Dividends paid and accrued

 

 

 

 

 

 

 

 

 

 

 

(21,163)

 

 

 

 

 

(21,163)

Balance at June 30, 2016

 

$

174

 

$

182,278

 

$

36,746

 

$

544,672

 

$

(83,835)

 

$

680,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

    

 

    

Accumulated

    

    

 

    

    

 

    

    

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Comprehensive

 

 

 

 

 

 

 

Total

 

 

Common

 

Paid-in

 

Income,

 

Retained

 

Treasury

 

Shareholders’

 

 

Stock

 

Capital

 

Net of Taxes

 

Earnings

 

Stock

 

Equity

Balance at December 31, 2016

 

$

174

 

$

184,549

 

$

15,843

 

$

553,995

 

$

(83,835)

 

$

670,726

Net income, January 1 to June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 33,124

 

 

 

 

 

 33,124

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

 

 

 

 

 

 

 

 

 8,607

 

 

 

 

 

 

 

 

 8,607

Restricted share awards issued

 

 

 1

 

 

 294

 

 

 

 

 

 

 

 

 

 

 

 295

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

 

 

 

 

 

 2,419

 

 

 

 

 

 

 

 

 

 

 

 2,419

Dividends paid and accrued

 

 

 

 

 

 

 

 

 

 

 

 (21,337)

 

 

 

 

 

 (21,337)

Balance at June 30, 2017

 

$

175

 

$

187,262

 

$

24,450

 

$

565,782

 

$

(83,835)

 

$

693,834

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

    

2017

    

2016

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

33,124

 

$

34,035

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

 

 

 

 

 

 

Depreciation and amortization, net

 

 

8,393

 

 

6,356

Provision for deferred income taxes

 

 

2,951

 

 

626

Net realized (gains) on investments

 

 

(2,109)

 

 

(37)

Net impairment losses on investments

 

 

 —

 

 

429

Earnings from partnership investments

 

 

(882)

 

 

(2,287)

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(14,185)

 

 

(16,942)

Accrued investment income

 

 

387

 

 

453

Receivable from reinsurers

 

 

(17,746)

 

 

4,746

Ceded unearned premiums

 

 

(1,847)

 

 

(5,664)

Deferred policy acquisition costs

 

 

(3,414)

 

 

(3,449)

Taxes recoverable

 

 

(4,082)

 

 

(1,540)

Other assets

 

 

(3,340)

 

 

(6,328)

Loss and loss adjustment expense reserves

 

 

2,388

 

 

(9,895)

Unearned premium reserves

 

 

23,998

 

 

26,174

Taxes payable

 

 

(1,110)

 

 

 —

Accounts payable and accrued liabilities

 

 

(12,789)

 

 

(1,936)

Payable to reinsurers

 

 

3,899

 

 

11,630

Other liabilities

 

 

3,545

 

 

(6,458)

Net cash provided by operating activities

 

 

17,181

 

 

29,913

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Fixed maturities purchased

 

 

(83,014)

 

 

(117,678)

Equity securities purchased

 

 

(12,031)

 

 

(10,705)

Other invested assets purchased

 

 

(5,681)

 

 

(2,013)

Proceeds from sales and paydowns of fixed maturities

 

 

91,089

 

 

43,085

Proceeds from maturities, redemptions, and calls of fixed maturities

 

 

18,966

 

 

64,462

Proceed from sales of equity securities

 

 

11,652

 

 

10,150

Proceeds from other invested assets redeemed

 

 

203

 

 

2,656

Fixed assets purchased

 

 

(2,845)

 

 

(2,375)

Net cash provided by (used for) investing activities

 

 

18,339

 

 

(12,418)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from stock options exercised

 

 

 —

 

 

257

Excess tax expense from stock options exercised

 

 

 —

 

 

(6)

Dividends paid to shareholders

 

 

(21,275)

 

 

(21,187)

Net cash used for financing activities

 

 

(21,275)

 

 

(20,936)

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

14,245

 

 

(3,441)

Cash and cash equivalents at beginning of year

 

 

20,052

 

 

47,494

Cash and cash equivalents at end of period

 

$

34,297

 

$

44,053

 

 

 

 

 

 

 

 

 

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 for the three and six months ended June 30, 2017 and 2016 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, 2016 is derived from the audited financial statements included in the Company's 2016 annual report on Form 10-K filed with the SEC on February 24, 2017.

 

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 24, 2017. 

 

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 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which requires certain premiums on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount will not be impacted. For public business entities with calendar year ends, the amendments in ASU No. 2017-08 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If early adopted in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period.  The Company is evaluating the impact of ASU 2017-08 on its financial position and results of operations. The extent of the impact will depend upon the nature and characteristics of the Company’s portfolio at the adoption date.

 

In December 2016, the FASB issued ASU 2016-19 - Technical Corrections and Improvements, which covers a wide range of Topics in the Accounting Standards Codification (ASC). The amendments in this Update represent changes to clarify, correct errors, or make minor improvements to the ASC, making it easier to understand and apply by

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)

 

eliminating inconsistencies and providing clarifications. The amendments generally fall into one of the following categories: amendments related to differences between original guidance and the ASC, guidance clarification and reference corrections, simplification, or minor improvements. Most of the amendments in ASU 2016-19 do not require transition guidance and are effective upon issuance of ASU 2016-19.

 

In October 2016, the FASB issued ASU 2016-17 - Consolidation (Topic 810): Interests Held through Related Parties that are Under Common Control, which amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (“VIE”) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The Update requires the reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include its indirect variable interests in a VIE held through related parties that are under common control on a proportionate basis as opposed to in their entirety. The amendments in this Update will be applied retrospectively and are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The impact of the adoption of ASU 2016-17 was not material to the Company’s financial position, results of operations or cash flows.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU 2016-15 provide guidance on specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. The impact of the adoption of ASU 2016-15 to the Company’s financial position and results of operations is currently being evaluated.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements, which amends the guidance for the impairment of financial instruments and is expected to result in more timely recognition of impairment losses. The update introduces an impairment model referred to as the current expected credit loss (“CECL”) model. The impairment model is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The ASU is also intended to reduce the complexity of the current guidance by decreasing the number of credit impairment models that entities use to account for debt instruments. For public business entities that are SEC filers, the amendments in ASU No. 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities may adopt the amendments in this update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the impact of ASU 2016-13 on its financial position and results of operations with regards to potential credit losses on its Available For Sale investment portfolio.  The extent of the increase of credit losses is under evaluation, but will depend upon the nature and characteristics of the Company’s portfolio at the adoption date, and the macroeconomic conditions and forecasts at the date.

 

In March 2016, the FASB issued 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 discrete 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

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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)

 

for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The impact of the adoption of ASU 2016-09 was not material to the Company’s financial position, results of operations or cash flows.

 

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of ASU 2016-02 by reviewing its existing lease contracts.  The Company expects a gross-up of its Consolidated Balance Sheets as a result of recognizing lease liabilities and right of use assets.  The extent of such gross-up is under evaluation.  The Company does not expect material changes to the Consolidated Statements of Operations.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASC 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 extent of the impact will depend upon the nature and characteristics of the Company’s portfolio at the adoption date.

 

In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts. 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.  The adoption of ASU 2015-09 is disclosure only and has been reflected in the Loss and Loss Adjustment Expense footnote.

 

In August 2014, the FASB issued ASU 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 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.  Management has assessed and concluded that there were no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements were issued.

 

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

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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)

 

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 per Weighted Average Common Share

 

Basic earnings per weighted average common share (“EPS”) are calculated by dividing net income by the weighted average number of basic common shares outstanding during the period.  Diluted earnings per share amounts are based on the weighted average number of common shares including non-vested performance stock grants and the net effect of potentially dilutive common stock options.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  June 30, 

 

Six Months Ended June 30, 

 

 

2017

 

2016

 

2017

 

2016

Earnings attributable to common shareholders - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

21,105

 

$

21,365

 

$

33,124

 

$

34,035

Allocation of income for participating shares

 

 

(130)

 

 

(138)

 

 

(212)

 

 

(319)

Net income from continuing operations attributed to common shareholders

 

$

20,975

 

$

21,227

 

$

32,912

 

$

33,716

Earnings per share denominator - basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

Total weighted average common shares outstanding, including participating shares

 

 

15,113,414

 

 

15,057,436

 

 

15,096,642

 

 

15,073,479

Less: weighted average participating shares

 

 

(93,386)

 

 

(96,920)

 

 

(96,515)

 

 

(141,242)

Basic earnings per share denominator

 

 

15,020,028

 

 

14,960,516

 

 

15,000,127

 

 

14,932,237

Common equivalent shares- stock options

 

 

 —

 

 

 —

 

 

 —

 

 

269

Common equivalent shares- non-vested performance stock grants

 

 

94,256

 

 

80,561

 

 

105,427

 

 

56,040

Diluted earnings per share denominator

 

 

15,114,284

 

 

15,041,077

 

 

15,105,554

 

 

14,988,546

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.40

 

$

1.42

 

$

2.19

 

$

2.26

Diluted earnings per share

 

$

1.39

 

$

1.41

 

$

2.18

 

$

2.25

 

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed earnings attributable to common shareholders - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to common shareholders -Basic

 

$

1.40

 

$

1.42

 

$

2.19

 

$

2.26

Dividends declared

 

 

(0.70)

 

 

(0.70)

 

 

(1.40)

 

 

(1.40)

Undistributed earnings

 

$

0.70

 

$

0.72

 

$

0.79

 

$

0.86

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to common shareholders -Diluted

 

$

1.39

 

$

1.41

 

$

2.18

 

$

2.25

Dividends declared

 

 

(0.70)

 

 

(0.70)

 

 

(1.40)

 

 

(1.40)

Undistributed earnings

 

$

0.69

 

$

0.71

 

$

0.78

 

$

0.85

 

 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 zero and 53 anti-dilutive shares related to non vested performance stock grants for the three months ended June 30, 2017 and 2016, respectively. There were 38 and 1,271 anti-dilutive shares related to non vested performance stock grants for the six months ended June 30, 2017 and 2016, respectively.

 

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Safety Insurance Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands except per share and share data)

 

4.  Share-Based Compensation

 

Management Omnibus Incentive Plan

 

Long-term incentive compensation is provided under the Company’s 2002 Management Omnibus Incentive Plan (“the Incentive Plan”) which provides for a variety of share-based compensation awards, including nonqualified stock options, incentive stock options, stock appreciation rights and restricted stock (“RS”) awards.

 

The maximum number of shares of common stock with respect to which awards may be granted is 2,500,000.  The Incentive Plan was amended in March of 2013 to remove "share recycling" plan provisions.  Hence, shares of stock covered by an award under the Incentive Plan that are forfeited are no longer available for issuance in connection with 2013 and future grants of awards.  At June 30, 2017, there were 210,087 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).

 

As of June 30, 2017, 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 six months ended June 30, 2016  was $85.  Cash received from stock options exercised was $257 for the six months ended June 30, 2016.

 

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 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

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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)

 

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 six months ended June 30, 2017 assuming a target payout for the 2017 performance-based shares.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Shares 

    

Weighted

 

Performance-based

    

Weighted

 

 

 

Under

 

Average

 

Shares Under

 

Average

 

 

 

Restriction

 

Fair Value

 

Restriction

 

Fair Value

 

Outstanding at beginning of year

 

95,493

 

$

55.86

 

94,610

 

$

57.60

 

Granted

 

39,226

 

 

73.55

 

29,829

 

 

74.96

 

Vested and unrestricted

 

(41,253)

 

 

56.28

 

(18,259)

 

 

53.99

 

Forfeited

 

(80)

 

 

51.77

 

(520)

 

 

53.99

 

Outstanding at end of period

 

93,386

 

$

63.11

 

105,660

 

$

62.75

 

 

 As of June 30, 2017, there was $8,990 of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 1.9 years.  The total fair value of the shares that were vested and unrestricted during the six months ended June 30, 2017 and 2016 was $3,308 and $3,732, respectively.  For the six months ended June 30, 2017 and 2016, the Company recorded compensation expense related to restricted stock of $1,764 and $1,321, net of income tax benefits of $950 and $711, 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 June 30, 2017

 

 

 

 

 

 

 

 

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

 

$

1,810

 

$

 2

 

$

 —

 

$

 —

 

$

1,812

Obligations of states and political subdivisions

 

 

379,280

 

 

15,451

 

 

(2,215)

 

 

 —

 

 

392,516

Residential mortgage-backed securities (1)

 

 

227,485

 

 

3,127

 

 

(1,545)

 

 

 —

 

 

229,067

Commercial mortgage-backed securities

 

 

37,255

 

 

413

 

 

(345)

 

 

 —

 

 

37,323

Other asset-backed securities

 

 

73,608

 

 

201

 

 

(102)

 

 

 —

 

 

73,707

Corporate and other securities

 

 

408,941

 

 

7,790

 

 

(2,497)

 

 

 —

 

 

414,234

Subtotal, fixed maturity securities 

 

 

1,128,379

 

 

26,984

 

 

(6,704)

 

 

 —

 

 

1,148,659

Equity securities (2)

 

 

94,078

 

 

18,835

 

 

(1,500)

 

 

 —

 

 

111,413

Other invested assets (5)

 

 

27,492

 

 

 —

 

 

 —

 

 

 —

 

 

27,492

Totals

 

$

1,249,949

 

$

45,819

 

$

(8,204)

 

$

 —

 

$

1,287,564

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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)