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EX-31.1 - EX-31.1 - SAFETY INSURANCE GROUP INCc052-20180930ex311170082.htm

the 

 

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, 2018

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 every Interactive Data File required to be submitted 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 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 November 1, 2018 there were 15,286,610 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

24

Item 3. 

Quantitative and Qualitative Information about Market Risk

43

Item 4. 

Controls and Procedures

43

Part II.     Other Information

Item 1 

Legal Proceedings

45

Item 1A. 

Risk Factors

45

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3. 

Defaults upon Senior Securities

45

Item 4. 

Mine Safety Disclosures

45

Item 5. 

Other Information

45

Item 6. 

Exhibits 

45

EXHIBIT INDEX 

46

SIGNATURE 

47

 

 

2


 

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2018

 

2017

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

Fixed maturities, available for sale, at fair value (amortized cost: $1,142,816 and $1,156,697)

 

$

1,131,133

 

$

1,172,026

Equity securities, at fair value (cost: $140,796 and $90,481)

 

 

158,434

 

 

111,867

Other invested assets

 

 

25,961

 

 

23,162

Total investments

 

 

1,315,528

 

 

1,307,055

Cash and cash equivalents

 

 

51,317

 

 

41,708

Accounts receivable, net of allowance for doubtful accounts

 

 

209,470

 

 

190,649

Receivable for securities sold

 

 

984

 

 

1,380

Accrued investment income

 

 

9,137

 

 

8,876

Taxes recoverable

 

 

170

 

 

908

Receivable from reinsurers related to paid loss and loss adjustment expenses

 

 

24,340

 

 

24,776

Receivable from reinsurers related to unpaid loss and loss adjustment expenses

 

 

100,565

 

 

83,085

Ceded unearned premiums

 

 

34,414

 

 

32,175

Deferred policy acquisition costs

 

 

77,533

 

 

72,202

Deferred income taxes

 

 

3,423

 

 

 —

Equity and deposits in pools

 

 

31,469

 

 

28,246

Other assets

 

 

20,280

 

 

16,219

Total assets

 

$

1,878,630

 

$

1,807,279

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$

582,957

 

$

574,054

Unearned premium reserves

 

 

460,405

 

 

428,257

Accounts payable and accrued liabilities

 

 

57,857

 

 

60,701

Payable for securities purchased

 

 

7,385

 

 

4,188

Payable to reinsurers

 

 

33,814

 

 

13,801

Deferred income taxes

 

 

 —

 

 

2,917

Other liabilities

 

 

24,341

 

 

22,345

Total liabilities

 

 

1,166,759

 

 

1,106,263

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

Common stock:  $0.01 par value; 30,000,000 shares authorized; 17,566,180 and 17,499,544 shares issued

 

 

176

 

 

175

Additional paid-in capital

 

 

193,991

 

 

189,714

Accumulated other comprehensive (loss) income, net of taxes

 

 

(9,229)

 

 

24,269

Retained earnings

 

 

610,768

 

 

570,693

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

 

 

(83,835)

 

 

(83,835)

Total shareholders’ equity

 

 

711,871

 

 

701,016

Total liabilities and shareholders’ equity

 

$

1,878,630

 

$

1,807,279

 

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, 

 

    

2018

    

2017

 

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

196,968

 

$

195,524

 

$

583,126

 

$

578,059

Net investment income

 

 

11,120

 

 

9,503

 

 

31,839

 

 

28,313

Earnings from partnership investments

 

 

1,188

 

 

351

 

 

6,539

 

 

1,233

Net realized gains on investments

 

 

53

 

 

2,717

 

 

2,948

 

 

4,826

Change in net unrealized gains on equity investments

 

 

2,444

 

 

 —

 

 

(3,749)

 

 

 —

Net impairment losses on investments (a)

 

 

(228)

 

 

(256)

 

 

(228)

 

 

(256)

Finance and other service income

 

 

4,362

 

 

4,690

 

 

13,121

 

 

13,373

Total revenue

 

 

215,907

 

 

212,529

 

 

633,596

 

 

625,548

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

116,693

 

 

123,792

 

 

367,564

 

 

369,271

Underwriting, operating and related expenses

 

 

62,496

 

 

62,994

 

 

184,925

 

 

183,643

Interest expense

 

 

22

 

 

22

 

 

67

 

 

67

Total expenses

 

 

179,211

 

 

186,808

 

 

552,556

 

 

552,981

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

36,696

 

 

25,721

 

 

81,040

 

 

72,567

Income tax expense

 

 

7,788

 

 

7,767

 

 

16,191

 

 

21,489

Net income

 

$

28,908

 

$

17,954

 

$

64,849

 

$

51,078

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per weighted average common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.90

 

$

1.19

 

$

4.28

 

$

3.38

Diluted

 

$

1.88

 

$

1.18

 

$

4.24

 

$

3.36

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.80

 

$

0.80

 

$

2.40

 

$

2.20

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares used in computing earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

15,091,754

 

 

15,021,189

 

 

15,076,214

 

 

15,007,221

Diluted

 

 

15,250,332

 

 

15,161,962

 

 

15,217,927

 

 

15,124,044

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) No portion of the other-than-temporary impairments recognized in the period indicated 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 Income

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  September 30, 

 

Nine Months Ended September 30, 

 

    

2018

    

2017

 

2018

    

2017

Net income

 

$

28,908

 

$

17,954

 

$

64,849

 

$

51,078

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains during the period, net of income tax (benefit) expense of ($704),  $1,985,  ($5,053) and $7,358.

 

 

(2,647)

 

 

3,687

 

 

(19,010)

 

 

13,665

Reclassification adjustment for net realized gains on investments included in net income, net of income tax expense of ($11),  ($951),  ($619) and ($1,689).

 

 

(42)

 

 

(1,766)

 

 

(2,329)

 

 

(3,137)

Other comprehensive (loss) income, net of tax:

 

 

(2,689)

 

 

1,921

 

 

(21,339)

 

 

10,528

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

26,219

 

$

19,875

 

$

43,510

 

$

61,606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2016

 

$

174

 

$

184,549

 

$

15,843

 

$

553,995

 

$

(83,835)

 

$

670,726

Net Income, January 1 to March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

12,019

 

 

 

 

 

12,019

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

 

 

 

 

 

 

 

 

4,255

 

 

 

 

 

 

 

 

4,255

Restricted share awards issued

 

 

 1

 

 

294

 

 

 

 

 

 

 

 

 

 

 

295

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

 

 

 

 

 

1,228

 

 

 

 

 

 

 

 

 

 

 

1,228

Dividends paid and accrued

 

 

 

 

 

 

 

 

 

 

 

(10,674)

 

 

 

 

 

(10,674)

Balance March 31, 2017

 

 

175

 

 

186,071

 

 

20,098

 

 

555,340

 

 

(83,835)

 

 

677,849

Net Income, April 1 to June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

21,105

 

 

 

 

 

21,105

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

 

 

 

 

 

 

 

 

4,352

 

 

 

 

 

 

 

 

4,352

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

 

 

 

 

 

1,191

 

 

 

 

 

 

 

 

 

 

 

1,191

Dividends paid and accrued

 

 

 

 

 

 

 

 

 

 

 

(10,663)

 

 

 

 

 

(10,663)

Balance June 30, 2017

 

 

175

 

 

187,262

 

 

24,450

 

 

565,782

 

 

(83,835)

 

 

693,834

Net Income, July 1 to September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

17,954

 

 

 

 

 

17,954

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

 

 

 

 

 

 

 

 

1,921

 

 

 

 

 

 

 

 

1,921

Restricted share awards issued

 

 

 —

 

 

68

 

 

 

 

 

 

 

 

 

 

 

68

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

 

 

 

 

 

1,246

 

 

 

 

 

 

 

 

 

 

 

1,246

Dividends paid and accrued

 

 

 

 

 

 

 

 

 

 

 

(12,184)

 

 

 

 

 

(12,184)

Balance September 30, 2017

 

$

175

 

$

188,576

 

$

26,371

 

$

571,552

 

$

(83,835)

 

$

702,839

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

    

 

    

Accumulated

    

    

 

    

    

 

    

    

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Comprehensive

 

 

 

 

 

 

 

Total

 

 

Common

 

Paid-in

 

Income (Loss),

 

Retained

 

Treasury

 

Shareholders’

 

 

Stock

 

Capital

 

Net of Taxes

 

Earnings

 

Stock

 

Equity

Balance at December 31, 2017

 

$

175

 

$

189,714

 

$

24,269

 

$

570,693

 

$

(83,835)

 

$

701,016

Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018

 

 

 

 

 

 

 

 

(16,895)

 

 

16,895

 

 

 

 

 

 —

Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018

 

 

 

 

 

 

 

 

4,736

 

 

(4,736)

 

 

 

 

 

 —

Net income, January 1 to March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

9,125

 

 

 

 

 

9,125

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

 

 

 

 

 

 

 

 

(13,785)

 

 

 

 

 

 

 

 

(13,785)

Restricted share awards issued

 

 

 1

 

 

375

 

 

 

 

 

 

 

 

 

 

 

376

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

 

 

 

 

 

1,239

 

 

 

 

 

 

 

 

 

 

 

1,239

Dividends paid and accrued

 

 

 

 

 

 

 

 

 

 

 

(12,326)

 

 

 

 

 

(12,326)

Balance at March 31, 2018

 

 

176

 

 

191,328

 

 

(1,675)

 

 

579,651

 

 

(83,835)

 

 

685,645

Net income, April 1 to June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

26,816

 

 

 

 

 

26,816

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

 

 

 

 

 

 

 

 

(4,865)

 

 

 

 

 

 

 

 

(4,865)

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

 

 

 

 

 

1,167

 

 

 

 

 

 

 

 

 

 

 

1,167

Dividends paid and accrued

 

 

 

 

 

 

 

 

 

 

 

(12,295)

 

 

 

 

 

(12,295)

Balance at June 30, 2018

 

 

176

 

 

192,495

 

 

(6,540)

 

 

594,172

 

 

(83,835)

 

 

696,468

Net income, July 1 to September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

28,908

 

 

 

 

 

28,908

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

 

 

 

 

 

 

 

 

(2,689)

 

 

 

 

 

 

 

 

(2,689)

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

 

 

 

 

 

1,496

 

 

 

 

 

 

 

 

 

 

 

1,496

Dividends paid and accrued

 

 

 

 

 

 

 

 

 

 

 

(12,312)

 

 

 

 

 

(12,312)

Balance at September 30, 2018

 

$

176

 

$

193,991

 

$

(9,229)

 

$

610,768

 

$

(83,835)

 

$

711,871

 

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, 

 

    

2018

    

2017

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

64,849

 

$

51,078

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

 

 

 

 

 

 

Investment amortization, net

 

 

3,943

 

 

5,069

Fixed Asset depreciation, net

 

 

3,839

 

 

3,591

Stock based compensation

 

 

4,277

 

 

4,027

Provision for deferred income taxes

 

 

(668)

 

 

3,826

Net realized (gains) on investments

 

 

(2,948)

 

 

(4,826)

Net impairment losses on investments

 

 

228

 

 

256

Earnings from partnership investments

 

 

(3,254)

 

 

(1,233)

Change in net unrealized gains on equity investments

 

 

3,749

 

 

 —

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(18,821)

 

 

(18,139)

Accrued investment income

 

 

(261)

 

 

(816)

Receivable from reinsurers

 

 

(17,044)

 

 

(22,579)

Ceded unearned premiums

 

 

(2,239)

 

 

(1,993)

Deferred policy acquisition costs

 

 

(5,331)

 

 

(5,462)

Taxes recoverable

 

 

738

 

 

(3,849)

Other assets

 

 

(610)

 

 

(7,254)

Loss and loss adjustment expense reserves

 

 

8,903

 

 

17,316

Unearned premium reserves

 

 

32,148

 

 

33,086

Taxes payable

 

 

 —

 

 

(1,110)

Accounts payable and accrued liabilities

 

 

(3,110)

 

 

(15,669)

Payable to reinsurers

 

 

20,013

 

 

15,511

Other liabilities

 

 

1,996

 

 

(745)

Net cash provided by operating activities

 

 

90,397

 

 

50,085

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Fixed maturities purchased

 

 

(236,117)

 

 

(142,052)

Equity securities purchased

 

 

(61,573)

 

 

(20,650)

Other invested assets purchased

 

 

(3,333)

 

 

(5,681)

Proceeds from sales and paydowns of fixed maturities

 

 

197,147

 

 

114,040

Proceeds from maturities, redemptions, and calls of fixed maturities

 

 

51,155

 

 

24,638

Proceed from sales of equity securities

 

 

15,299

 

 

29,328

Proceeds from other invested assets redeemed

 

 

3,814

 

 

203

Fixed assets purchased

 

 

(10,513)

 

 

(4,662)

Net cash used for investing activities

 

 

(44,121)

 

 

(4,836)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Dividends paid to shareholders

 

 

(36,667)

 

 

(33,367)

Net cash used for financing activities

 

 

(36,667)

 

 

(33,367)

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

9,609

 

 

11,882

Cash and cash equivalents at beginning of year

 

 

41,708

 

 

20,052

Cash and cash equivalents at end of period

 

$

51,317

 

$

31,934

 

 

 

 

 

 

 

 

 

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 nine months ended September 30, 2018 and 2017 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, 2017 is derived from the audited financial statements included in the Company's 2017 annual report on Form 10-K filed with the U.S. Securities and Exchange Commissions (“SEC”) on February 28, 2018.

 

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 SEC on February 28, 2018. 

 

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

 

On August 17, 2018, the SEC adopted amendments to eliminate, integrate, update or modify certain of its disclosure requirements. The amendments which are focused on disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded,  are intended to facilitate the disclosure of information to investors and simplify compliance without significantly altering the total mix of information provided to investors. The amended rules generally reduce disclosures but some provisions added new disclosure requirements. The amendment is effective November 5, 2018 and the Company has elected to early adopt the amendment in this filing.  The adoption of the new rules did not have a material impact on the Company’s financial position, results of operations, cash flows, or disclosures.

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted

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)

 

federal corporate income tax rate as a result of the 2017 Tax Cuts and Jobs Act (“TCJA”). The amount of the reclassification is the difference between the historical corporate income tax rate of thirty-five percent and the newly enacted twenty-one percent corporate income tax rate. The ASU is effective for fiscal years beginning after December 15, 2018.  Early adoption is permitted. The Company adopted the updated guidance effective January 1, 2018 and elected to reclassify the income tax effects of the TCJA from accumulated other comprehensive income (“AOCI”) to retained earnings at the beginning of the period of adoption. This reclassification resulted in a decrease of $4,736 in retained earnings as of January 1, 2018 and an increase in AOCI by the same amount.

In March 2017, the FASB issued 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 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 was not material to the Company’s Consolidated Statements of Cash Flows.

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.

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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)

 

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 was effective 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. In 2018, the FASB issued two additional updates, ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements, both of which have the same effective date and transition requirements as ASU 2016-02. ASU 2018-10 makes sixteen technical corrections to alleviate unintended consequences from applying the new standard and does not make any substantive changes to the core provisions or principals of the new standard. ASU 2019-11 creates an additional transition method which allows companies to elect to not adjust their comparative period financial information and disclosures for the effects of the new lease standard and also creates a practical expedient for lessors to not separate lease and non-lease components. The Company is currently evaluating the impact of ASU 2016-02, ASU 2018-10 and ASU 2018-11 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 were effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted the updated guidance effective January 1, 2018 which resulted in the recognition of $16,895 of net after-tax unrealized gains on equity investments as a cumulative effect adjustment that increased retained earnings as of January 1, 2018 and decreased AOCI by the same amount. At December 31, 2017, equity investments were classified as available-for-sale on the Company’s Consolidated Balance Sheets; however, upon adoption, the updated guidance eliminated the available-for-sale balance sheet classification for equity investments

 

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 was 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.

 

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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 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 was 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 adopted the updated guidance effective January 1, 2018 using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s financial position, results of operations, cash flows, or disclosures.

 

 

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.

 

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, 

 

 

2018

 

2017

 

2018

 

2017

Earnings attributable to common shareholders - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

28,908

 

$

17,954

 

$

64,849

 

$

51,078

Allocation of income for participating shares

 

 

(170)

 

 

(111)

 

 

(389)

 

 

(323)

Net income from continuing operations attributed to common shareholders

 

$

28,738

 

$

17,843

 

$

64,460

 

$

50,755

Earnings per share denominator - basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

Total weighted average common shares outstanding, including participating shares

 

 

15,181,196

 

 

15,114,355

 

 

15,167,153

 

 

15,102,608

Less: weighted average participating shares

 

 

(89,442)

 

 

(93,166)

 

 

(90,939)

 

 

(95,387)

Basic earnings per share denominator

 

 

15,091,754

 

 

15,021,189

 

 

15,076,214

 

 

15,007,221

Common equivalent shares- non-vested performance stock grants

 

 

158,578

 

 

140,773

 

 

141,713

 

 

116,823

Diluted earnings per share denominator

 

 

15,250,332

 

 

15,161,962

 

 

15,217,927

 

 

15,124,044

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.90

 

$

1.19

 

$

4.28

 

$

3.38

Diluted earnings per share

 

$

1.88

 

$

1.18

 

$

4.24

 

$

3.36

 

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed earnings attributable to common shareholders - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to common shareholders -Basic

 

$

1.90

 

$

1.19

 

$

4.28

 

$

3.38

Dividends declared

 

 

(0.80)

 

 

(0.80)

 

 

(2.40)

 

 

(2.20)

Undistributed earnings

 

$

1.10

 

$

0.39

 

$

1.88

 

$

1.18

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to common shareholders -Diluted

 

$

1.88

 

$

1.18

 

$

4.24

 

$

3.36

Dividends declared

 

 

(0.80)

 

 

(0.80)

 

 

(2.40)

 

 

(2.20)

Undistributed earnings

 

$

1.08

 

$

0.38