Quarterly Report (10-q)

Date : 05/03/2019 @ 8:56PM
Source : Edgar (US Regulatory)
Stock : Safety Insurance Group Inc (SAFT)
Quote : 100.64  0.0 (0.00%) @ 1:53PM

Quarterly Report (10-q)

th 

 

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, 2019

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 ☒

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common

SAFT

NASDAQ

 

As of May 1, 2019 there were 15,383,794 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

25 

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)

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2019

 

2018

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

Fixed maturities, available for sale, at fair value (amortized cost: $1,161,552 and  $1,175,413) 

 

$

1,173,384

 

$

1,161,862

Equity securities, at fair value (cost: $143,608 and  $142,948) 

 

 

160,471

 

 

148,011

Other invested assets

 

 

26,238

 

 

23,481

Total investments

 

 

1,360,093

 

 

1,333,354

Cash and cash equivalents

 

 

22,892

 

 

37,582

Accounts receivable, net of allowance for doubtful accounts

 

 

188,654

 

 

190,062

Receivable for securities sold

 

 

1,079

 

 

1,039

Accrued investment income

 

 

9,450

 

 

8,420

Receivable from reinsurers related to paid loss and loss adjustment expenses

 

 

29,881

 

 

13,691

Receivable from reinsurers related to unpaid loss and loss adjustment expenses

 

 

109,200

 

 

108,398

Ceded unearned premiums

 

 

33,537

 

 

33,974

Deferred policy acquisition costs

 

 

71,905

 

 

73,355

Deferred income taxes

 

 

2,949

 

 

8,749

Equity and deposits in pools

 

 

28,505

 

 

28,094

Operating lease right-of-use-assets

 

 

36,992

 

 

 —

Other assets

 

 

22,881

 

 

19,522

Total assets

 

$

1,918,018

 

$

1,856,240

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Loss and loss adjustment expense reserves

 

$

581,762

 

$

584,719

Unearned premium reserves

 

 

430,389

 

 

435,380

Accounts payable and accrued liabilities

 

 

53,875

 

 

71,896

Payable for securities purchased

 

 

5,494

 

 

5,156

Payable to reinsurers

 

 

18,939

 

 

12,220

Taxes payable

 

 

8,286

 

 

6,090

Operating lease liabilities

 

 

36,992

 

 

 —

Other liabilities

 

 

27,219

 

 

22,135

Total liabilities

 

 

1,162,956

 

 

1,137,596

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

Common stock:  $0.01 par value; 30,000,000 shares authorized; 17,663,364 and 17,566,180 shares issued

 

 

177

 

 

176

Additional paid-in capital

 

 

198,014

 

 

196,292

Accumulated other comprehensive income (loss), net of taxes

 

 

9,347

 

 

(10,706)

Retained earnings

 

 

631,359

 

 

616,717

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

 

 

(83,835)

 

 

(83,835)

Total shareholders’ equity

 

 

755,062

 

 

718,644

Total liabilities and shareholders’ equity

 

$

1,918,018

 

$

1,856,240

 

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, 

    

 

    

2019

    

2018

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

194,491

 

$

192,033

 

Net investment income

 

 

11,751

 

 

10,531

 

Earnings from partnership investments

 

 

835

 

 

4,864

 

Net realized (losses) gains on investments

 

 

(164)

 

 

1,306

 

Change in net unrealized gains on equity investments

 

 

11,801

 

 

(3,482)

 

Net impairment losses on investments (a)

 

 

(220)

 

 

 —

 

Finance and other service income

 

 

4,085

 

 

4,467

 

Total revenue

 

 

222,579

 

 

209,719

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

126,027

 

 

137,644

 

Underwriting, operating and related expenses

 

 

60,434

 

 

60,856

 

Interest expense

 

 

22

 

 

22

 

Total expenses

 

 

186,483

 

 

198,522

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

36,096

 

 

11,197

 

Income tax expense

 

 

6,150

 

 

2,072

 

Net income

 

$

29,946

 

$

9,125

 

 

 

 

 

 

 

 

 

Earnings per weighted average common share:

 

 

 

 

 

 

 

Basic

 

$

1.97

 

$

0.60

 

Diluted

 

$

1.95

 

$

0.60

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.80

 

$

0.80

 

 

 

 

 

 

 

 

 

Number of shares used in computing earnings per share:

 

 

 

 

 

 

 

Basic

 

 

15,140,804

 

 

15,045,962

 

Diluted

 

 

15,305,785

 

 

15,191,139

 

 

 

 

 

 

 

 

 

(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 March 31, 

 

    

2019

    

2018

Net income

 

$

29,946

 

$

9,125

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

Unrealized holding gains (losses) during the period, net of income tax expense (benefit) of $5,296 and ($3,390).

 

 

19,923

 

 

(12,753)

Reclassification adjustment for net realized losses (gains) on investments included in net income, net of income tax benefit (expense) of $35 and ($274).

 

 

130

 

 

(1,032)

Other comprehensive income (loss), net of tax:

 

 

20,053

 

 

(13,785)

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

49,999

 

$

(4,660)

 

 

 

 

 

 

 

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

    

 

    

Accumulated

    

    

 

    

    

 

    

    

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Comprehensive

 

 

 

 

 

 

 

Total

 

 

Common

 

Paid-in

 

Income,

 

Retained

 

Treasury

 

Shareholders’

 

 

Stock

 

Capital

 

Net of Taxes

 

Earnings

 

Stock

 

Equity

Balance at December 31, 2018

 

$

176

 

$

196,292

 

$

(10,706)

 

$

616,717

 

$

(83,835)

 

$

718,644

Cumulative effect of adoption of updated accounting guidance for callable debt securities at January 1, 2019

 

 

 

 

 

 

 

 

 

 

 

(3,004)

 

 

 

 

 

(3,004)

Net income, January 1 to March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

29,946

 

 

 

 

 

29,946

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

 

 

 

 

 

 

 

 

20,053

 

 

 

 

 

 

 

 

20,053

Restricted share awards issued

 

 

 1

 

 

462

 

 

 

 

 

 

 

 

 

 

 

463

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

 

 

 

 

 

1,260

 

 

 

 

 

 

 

 

 

 

 

1,260

Dividends paid and accrued

 

 

 

 

 

 

 

 

 

 

 

(12,300)

 

 

 

 

 

(12,300)

Balance at March 31, 2019

 

$

177

 

$

198,014

 

$

9,347

 

$

631,359

 

$

(83,835)

 

$

755,062

 

 

 

 

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, 

 

    

2019

    

2018

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

29,946

 

$

9,125

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

 

 

 

 

 

 

Investment amortization, net

 

 

777

 

 

1,243

Fixed Asset depreciation, net

 

 

1,207

 

 

1,153

Stock based compensation

 

 

1,723

 

 

1,614

Provision for deferred income taxes

 

 

469

 

 

34

Net realized losses (gains) on investments

 

 

164

 

 

(1,306)

Net impairment losses on investments

 

 

220

 

 

 —

Earnings from partnership investments

 

 

(835)

 

 

(2,526)

Change in net unrealized  gains on equity investments

 

 

(11,801)

 

 

3,482

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

1,408

 

 

(2,564)

Accrued investment income

 

 

(1,030)

 

 

(1,156)

Receivable from reinsurers

 

 

(16,992)

 

 

(6,554)

Ceded unearned premiums

 

 

437

 

 

(995)

Deferred policy acquisition costs

 

 

1,450

 

 

985

Taxes recoverable

 

 

 —

 

 

(1,660)

Other assets

 

 

(3,849)

 

 

(5,653)

Loss and loss adjustment expense reserves

 

 

(2,957)

 

 

5,720

Unearned premium reserves

 

 

(4,991)

 

 

(1,026)

Taxes payable

 

 

2,196

 

 

 —

Accounts payable and accrued liabilities

 

 

(17,357)

 

 

(9,412)

Payable to reinsurers

 

 

6,719

 

 

5,655

Other liabilities

 

 

5,084

 

 

1,847

Net cash used for operating activities

 

 

(8,012)

 

 

(1,994)

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Fixed maturities purchased

 

 

(31,389)

 

 

(54,567)

Equity securities purchased

 

 

(5,169)

 

 

(12,664)

Other invested assets purchased

 

 

(1,750)

 

 

(129)

Proceeds from sales and paydowns of fixed maturities

 

 

33,587

 

 

35,247

Proceeds from maturities, redemptions, and calls of fixed maturities

 

 

7,260

 

 

23,272

Proceed from sales of equity securities

 

 

4,874

 

 

5,911

Proceeds from other invested assets redeemed

 

 

 —

 

 

944

Fixed assets purchased

 

 

(1,127)

 

 

(558)

Net cash provided by (used for) investing activities

 

 

6,286

 

 

(2,544)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Dividends paid to shareholders

 

 

(12,964)

 

 

(12,340)

Net cash used for financing activities

 

 

(12,964)

 

 

(12,340)

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(14,690)

 

 

(16,878)

Cash and cash equivalents at beginning of year

 

 

37,582

 

 

41,708

Cash and cash equivalents at end of period

 

$

22,892

 

$

24,830

 

 

 

 

 

 

 

 

 

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 months ended March 31, 2019 and 2018 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, 2018 is derived from the audited financial statements included in the Company's 2018 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 28, 2019.

 

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 2018 Annual Report on Form 10-K filed with the SEC on February 28, 2019. 

 

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.

 

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.

 

 

 

2.  Recent Accounting Pronouncements

 

On March 20, 2019, the SEC adopted amendments to Regulation S-K and related rules and forms to modernize and simplify certain disclosure requirements for public companies. The amendments are intended to reduce the costs and burdens of the disclosure process and while continuing to require disclosure of all material information. The amended rules generally are effective on May 2, 2019 and reduce disclosures but some provisions added new requirements. The adoption of the new rules did not have a material impact on the Company’s financial posision, results of operations, cash flows, or disclosures.

 

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)

 

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 amendments  were effective November 5, 2018.  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 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.  The Company adopted ASU 2017-08 effective January 1, 2019 which resulted in the recognition of $3,004 of additional amortization as a cumulative effect adjustment which decreased retained earnings by that amount.

 

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 will depend upon the

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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands except per share and share data)

 

nature and 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 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 adopted ASU 2016-02, ASU 2018-10 and ASU 2018-11 effective January 1, 2019 (“the application date”) using the required modified retrospective transition approach.  In accordance with the guidance, the Company has elected not to adjust comparative periods. As such, Accounting Standards Codification (“ASC”) 842 will be applied to each lease that had commenced as of the application date with a cumulative effect adjustment as of that date. As of January 1, 2019, a right of use asset and lease liability of $35,984 were recorded in the Consolidated Balance Sheets.  All periods prior to the application date presented in the financial statements will not change and the guidance in ASC 840,   Leases , will apply.  There was no impact on retained earnings or other components of equity in the Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018.

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 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.

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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 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 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 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 March 31, 

 

 

2019

 

2018

Earnings attributable to common shareholders - basic and diluted:

 

 

 

 

 

 

Net income from continuing operations

 

$

29,946

 

$

9,125

Allocation of income for participating shares

 

 

(167)

 

 

(56)

Net income from continuing operations attributed to common shareholders

 

$

29,779

 

$

9,069

Earnings per share denominator - basic and diluted

 

 

 

 

 

 

Total weighted average common shares outstanding, including participating shares

 

 

15,225,774

 

 

15,139,036

Less: weighted average participating shares

 

 

(84,970)

 

 

(93,074)

Basic earnings per share denominator

 

 

15,140,804

 

 

15,045,962

Common equivalent shares- stock options

 

 

 —

 

 

 —

Common equivalent shares- non-vested performance stock grants

 

 

164,981

 

 

145,177

Diluted earnings per share denominator

 

 

15,305,785

 

 

15,191,139

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.97

 

$

0.60

Diluted earnings per share

 

$

1.95

 

$

0.60

 

 

 

 

 

 

 

Undistributed earnings attributable to common shareholders - basic and diluted:

 

 

 

 

 

 

Net income from continuing operations attributable to common shareholders -Basic

 

$

1.97

 

$

0.60

Dividends declared

 

 

(0.80)

 

 

(0.80)

Undistributed earnings

 

$

1.17

 

$

(0.20)

 

 

 

 

 

 

 

Net income from continuing operations attributable to common shareholders -Diluted

 

$

1.95

 

$

0.60

Dividends declared

 

 

(0.80)

 

 

(0.80)

Undistributed earnings

 

$

1.15

 

$

(0.20)

 

  Diluted EPS excludes non vested performance stock grants 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 non vested performance stock grants for the three months ended March 31, 2019 and 2018.

 

 

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Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands except per share and share data)

 

4.  Share-Based Compensation

 

2018 Long Term Incentive Plan

 

On April 2, 2018, the Company’s Board of Directors adopted the Safety Insurance Group, Inc. 2018 Long-Term Incentive Plan (“the 2018 Plan”), which was subsequently approved by our shareholders at the 2018 Annual Meeting of Shareholders. The 2018 Plan enables the grant of stock awards, performance shares, cash-based performance units, other stock-based awards, stock options, stock appreciation rights, and stock unit awards, each of which may be granted separately or in tandem with other awards. Eligibility to participate includes officers, directors, employees and other individuals who provide bona fide services to the Company. The 2018 Plan supersedes the Company’s 2002 Management Omnibus Incentive Plan (“the 2002 Incentive Plan”).

 

The 2018 Plan establishes an initial pool of 350,000 shares of common stock available for issuance to our employees and other eligible participants. The Board of Directors and the Compensation Committee intend to issue awards under the 2018 Plan in the future.

 

The maximum number of shares of common stock between both the 2018 Plan and 2002 Incentive Plan with respect to which awards may be granted is 2,850,000. No further grants will be allowed under the 2002 Incentive Plan. At March 31, 2019, there were 293,031 shares available for future grant. 

 

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).

 

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 granted prior to 2018 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.

 

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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)

 

Performance-based awards with market conditions are accounted for and measured differently from awards that have a performance or service condition.  The effect of a market condition is reflected in the award’s fair value on the grant date.  That fair value is recognized as compensation cost over the requisite service period regardless of whether the market-based performance objective has been satisfied.

 

All of the Company’s restricted stock awards are issued as incentive compensation and are equity classified.

 

The following table summarizes restricted stock activity under the Incentive Plan during the three months ended March 31, 2019 assuming a target payout for the 2019 performance-based shares.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Shares 

    

Weighted

 

Performance-based

    

Weighted

 

 

Under

 

Average

 

Shares Under

 

Average

 

 

Restriction

 

Fair Value

 

Restriction

 

Fair Value

Outstanding at beginning of year

 

89,135

 

$

68.70

 

105,170

 

$

66.79

Granted

 

33,778

 

 

92.52

 

63,447

(1)

 

69.61

Vested and unrestricted

 

(43,894)

 

 

68.42

 

(84,512)

 

 

56.42

Forfeited

 

(41)

 

 

53.64

 

 —

 

 

 —

Outstanding at end of period

 

78,978

 

$

79.05

 

84,105

 

$

79.34


(1)

Includes a true-up of previously awarded performance-based restricted share awards. The updated shares were calculated based on the attainment of pre-established performance objectives and granted under the 2002 Incentive Plan.

 

  As of March 31, 2019, there was $9,818 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 three months ended March 31, 2019 and 2018 was $7,771 and $4,292, respectively.  For the three months ended March 31, 2019 and 2018, the Company recorded compensation expense related to restricted stock of $1,361 and $1,275, net of income tax benefits of $362 and $339, 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, 2019

 

 

 

 

 

 

 

 

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

 

$

1,806

 

$

 —

 

$

(17)

 

$

 —

 

$

1,789

Obligations of states and political subdivisions

 

 

250,415

 

 

10,063

 

 

(383)

 

 

 —

 

 

260,095

Residential mortgage-backed securities (1)

 

 

298,494

 

 

2,707

 

 

(3,315)

 

 

 —

 

 

297,886

Commercial mortgage-backed securities

 

 

60,867

 

 

1,427

 

 

(361)

 

 

 —

 

 

61,933

Other asset-backed securities

 

 

55,401

 

 

156

 

 

(175)

 

 

 —

 

 

55,382

Corporate and other securities

 

 

494,569

 

 

6,554

 

 

(4,824)

 

 

 —

 

 

496,299

Subtotal, fixed maturity securities 

 

 

1,161,552

 

 

20,907

 

 

(9,075)

 

 

 —

 

 

1,173,384

Equity securities (2)

 

 

143,608

 

 

20,164

 

 

(3,301)

 

 

 —

 

 

160,471

Other invested assets (5)

 

 

26,238

 

 

 —

 

 

 —

 

 

 —

 

 

26,238

Totals

 

$

1,331,398

 

$

41,071

 

$

(12,376)

 

$

 —

 

$

1,360,093

 

 

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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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

 

 

 

 

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

 

$

1,807

 

$

 —

 

$

(30)

 

$

 —

 

$

1,777

 

Obligations of states and political subdivisions

 

 

262,772

 

 

5,098

 

 

(1,672)

 

 

 —

 

 

266,198

 

Residential mortgage-backed securities (1)

 

 

300,387

 

 

1,477

 

 

(4,841)

 

 

 —

 

 

297,023

 

Commercial mortgage-backed securities

 

 

60,897

 

 

337

 

 

(898)

 

 

 —

 

 

60,336

 

Other asset-backed securities

 

 

61,310

 

 

95

 

 

(329)

 

 

 —

 

 

61,076

 

Corporate and other securities

 

 

488,240

 

 

1,775

 

 

(14,563)

 

 

 —

 

 

475,452

 

Subtotal, fixed maturity securities 

 

 

1,175,413

 

 

8,782

 

 

(22,333)

 

 

 —

 

 

1,161,862

 

Equity securities (2)

 

 

142,948

 

 

15,419

 

 

(10,356)

 

 

 —

 

 

148,011

 

Other invested assets (5)

 

 

23,481

 

 

 —

 

 

 —

 

 

 —

 

 

23,481

 

Totals

 

$

1,341,842

 

$

24,201

 

$

(32,689)

 

$

 —

 

$

1,333,354

 


(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 include common stock, preferred stock, mutual funds and interests in mutual funds held to fund the Company’s executive deferred compensation plan.

(3)

The Company’s investment portfolio included 665 and 958 securities in an unrealized loss position at March 31, 2019 and December 31, 2018, respectively.

(4)

Amounts in this column represent other-than-temporary impairment (“OTTI”) recognized in accumulated other comprehensive (loss) 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, 2019

 

    

Amortized

    

Estimated

 

 

Cost

 

Fair Value

Due in one year or less

 

$

46,084

 

$

46,322

Due after one year through five years

 

 

278,570

 

 

281,177

Due after five years through ten years

 

 

286,839

 

 

289,857

Due after ten years through twenty years

 

 

132,045

 

 

137,575

Due after twenty years

 

 

3,252

 

 

3,252

Asset-backed securities

 

 

414,762

 

 

415,201

Totals

 

$

1,161,552

 

$

1,173,384

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2019

    

2018

Gross realized gains

 

 

 

 

 

 

Fixed maturity securities

 

$

115

 

$

135

Equity securities

 

 

953

 

 

1,644