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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 June 30, 2020

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)

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.01 per share

SAFT

The Nasdaq Stock Market, LLC

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 July 31, 2020 there were 15,074,333 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

46

Item 4.

Controls and Procedures

46

Part II. Other Information

Item 1

Legal Proceedings

48

Item 1A.

Risk Factors

48

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 3.

Defaults upon Senior Securities

49

Item 4.

Mine Safety Disclosures

49

Item 5.

Other Information

49

Item 6.

Exhibits

49

EXHIBIT INDEX

50

SIGNATURE

51

2

Safety Insurance Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

    

June 30, 

    

December 31, 

2020

2019

(Unaudited)

Assets

Investments:

Fixed maturities, available for sale, at fair value (amortized cost: $1,168,666 and $1,192,357, allowance for expected credit losses of $2,471 at June 30, 2020)

$

1,219,714

$

1,228,040

Equity securities, at fair value (cost: $164,991 and $151,121)

 

178,347

 

177,637

Other invested assets

 

35,526

 

37,278

Total investments

 

1,433,587

 

1,442,955

Cash and cash equivalents

 

44,757

 

44,407

Accounts receivable, net of allowance for credit losses of $914 at June 30, 2020

 

199,356

 

193,369

Receivable for securities sold

 

2,523

 

1,784

Accrued investment income

 

8,000

 

8,404

Taxes recoverable

 

411

 

1,003

Receivable from reinsurers related to paid loss and loss adjustment expenses

 

16,018

 

11,319

Receivable from reinsurers related to unpaid loss and loss adjustment expenses

 

116,378

 

122,372

Ceded unearned premiums

 

26,073

 

35,182

Deferred policy acquisition costs

 

77,350

 

74,287

Equity and deposits in pools

 

34,118

 

29,791

Operating lease right-of-use-assets

33,092

 

33,998

Other assets

 

27,251

 

23,798

Total assets

$

2,018,914

$

2,022,669

Liabilities

Loss and loss adjustment expense reserves

$

599,747

$

610,566

Unearned premium reserves

 

440,007

 

442,219

Accounts payable and accrued liabilities

 

60,518

 

75,016

Payable for securities purchased

 

7,451

 

6,377

Payable to reinsurers

 

11,794

 

12,911

Deferred income taxes

4,413

5,717

Debt

30,000

Operating lease liabilities

33,092

33,998

Other liabilities

 

14,914

 

27,459

Total liabilities

 

1,201,936

 

1,214,263

Commitments and contingencies (Note 8)

Shareholders’ equity

Common stock: $0.01 par value; 30,000,000 shares authorized; 17,724,866 and 17,662,779 shares issued

177

177

Additional paid-in capital

 

206,130

 

202,321

Accumulated other comprehensive income, net of taxes

 

42,302

 

28,190

Retained earnings

 

674,349

 

661,553

Treasury stock, at cost: 2,581,414 and 2,279,570 shares

 

(105,980)

 

(83,835)

Total shareholders’ equity

 

816,978

 

808,406

Total liabilities and shareholders’ equity

$

2,018,914

$

2,022,669

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, 

    

2020

    

2019

 

2020

    

2019

Net earned premiums

$

181,902

$

196,426

$

379,797

$

390,917

Net investment income

 

9,916

 

10,574

 

20,626

 

22,325

(Losses) earnings from partnership investments

 

(3,449)

 

735

 

(2,110)

 

1,570

Net realized (losses) gains on investments

 

(721)

 

483

 

(1,352)

 

319

Change in net unrealized gains on equity investments

16,828

3,754

(13,160)

15,555

Net impairment losses on investments (a)

(54)

(274)

Credit loss expense

39

(2,471)

Finance and other service income

 

3,255

 

4,084

 

7,484

 

8,169

Total revenue

 

207,770

 

216,002

388,814

438,581

Losses and loss adjustment expenses

 

90,974

 

122,393

 

211,720

 

248,420

Underwriting, operating and related expenses

 

63,514

 

60,908

 

126,596

 

121,342

Interest expense

 

130

 

23

 

177

 

45

Total expenses

 

154,618

 

183,324

 

338,493

 

369,807

Income before income taxes

 

53,152

 

32,678

50,321

68,774

Income tax expense

 

10,658

 

6,744

 

9,817

 

12,894

Net income

$

42,494

$

25,934

$

40,504

$

55,880

Earnings per weighted average common share:

Basic

$

2.80

$

1.70

$

2.66

$

3.66

Diluted

$

2.78

$

1.68

$

2.64

$

3.63

Cash dividends paid per common share

$

0.90

$

0.80

$

1.80

$

1.60

Number of shares used in computing earnings per share:

Basic

 

15,120,039

 

15,220,822

 

15,175,409

 

15,181,034

Diluted

 

15,237,295

 

15,346,234

 

15,292,186

 

15,326,121

(a) No portion of the other-than-temporary impairments recognized in the period indicated were included in Other Comprehensive Income for the period ended June 30, 2019.

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, 

    

2020

    

2019

 

2020

    

2019

Net income

$

42,494

$

25,934

$

40,504

$

55,880

Other comprehensive income, net of tax:

Unrealized holding gains during the period, net of income tax expense of $9,391, $3,502, $3,467 and $8,798.

 

35,328

 

13,176

 

13,044

 

33,099

Reclassification adjustment for net realized losses (gains) on investments included in net income, net of income tax benefit (expense) of $152, ($102), $284 and ($67).

 

570

 

(382)

 

1,068

 

(252)

Other comprehensive income, net of tax:

 

35,898

 

12,794

 

14,112

 

32,847

Comprehensive income

$

78,392

$

38,728

$

54,616

$

88,727

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 (Loss),

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, net of taxes

(2,373)

(2,373)

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

631,990

(83,835)

755,693

Net income, April 1 to June 30, 2019

 

25,934

 

25,934

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

 

12,794

 

12,794

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

 

1,630

 

1,630

Dividends paid and accrued

 

(12,371)

 

(12,371)

Balance at June 30, 2019

$

177

$

199,644

$

22,141

$

645,553

$

(83,835)

$

783,680

    

    

    

    

    

Accumulated

    

    

    

    

    

    

Other

Additional

Comprehensive

Total

Common

Paid-in

Income,

Retained

Treasury

Shareholders’

Stock

Capital

Net of Taxes

Earnings

Stock

Equity

Balance at December 31, 2019

$

177

$

202,321

$

28,190

$

661,553

$

(83,835)

$

808,406

Net loss, January 1 to March 31, 2020

 

(1,990)

 

(1,990)

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

 

(21,786)

 

(21,786)

Restricted share awards issued

 

 

528

 

528

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

 

1,215

 

1,215

Dividends paid and accrued

 

(13,872)

 

(13,872)

Acquisition of treasury stock

 

(10,392)

 

(10,392)

Balance at March 31, 2020

177

204,064

6,404

645,691

(94,227)

762,109

Net income, April 1 to June 30, 2020

 

42,494

 

42,494

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

 

35,898

 

35,898

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

 

2,066

 

2,066

Dividends paid and accrued

 

(13,836)

 

(13,836)

Acquisition of treasury stock

 

(11,753)

 

(11,753)

Balance at June 30, 2020

$

177

$

206,130

$

42,302

$

674,349

$

(105,980)

$

816,978

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, 

    

2020

    

2019

Cash flows from operating activities:

Net income

$

40,504

$

55,880

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

Investment amortization, net

 

3,253

 

2,782

Fixed Asset depreciation, net

 

3,278

 

2,379

Stock based compensation

3,810

3,353

(Credit) Provision for deferred income taxes

 

(5,028)

 

1,238

Net realized losses (gains) on investments

 

1,352

 

(319)

Net impairment losses on investments

274

Credit loss expense

2,471

Losses (earnings) from partnership investments

 

6,866

 

(1,160)

Change in net unrealized gains on equity investments

13,160

(15,555)

Changes in assets and liabilities:

Accounts receivable

 

(5,987)

 

(19,596)

Accrued investment income

 

404

 

116

Receivable from reinsurers

 

1,295

 

(18,958)

Ceded unearned premiums

 

9,109

 

(1,926)

Deferred policy acquisition costs

 

(3,063)

 

(2,315)

Taxes recoverable

592

(1,671)

Other assets

 

(5,732)

 

(4,219)

Loss and loss adjustment expense reserves

 

(10,819)

 

4,404

Unearned premium reserves

 

(2,212)

 

18,232

Taxes payable

(6,090)

Accounts payable and accrued liabilities

 

(14,362)

 

(14,587)

Payable to reinsurers

 

(1,117)

 

9,020

Other liabilities

 

(12,545)

 

2,135

Net cash provided by operating activities

 

25,229

 

13,417

Cash flows from investing activities:

Fixed maturities purchased

 

(83,172)

 

(79,891)

Equity securities purchased

 

(30,611)

 

(13,721)

Other invested assets purchased

 

(5,291)

 

(5,851)

Proceeds from sales and paydowns of fixed maturities

 

63,228

 

86,215

Proceeds from maturities, redemptions, and calls of fixed maturities

 

40,366

 

14,843

Proceed from sales of equity securities

 

15,758

 

12,323

Proceeds from other invested assets redeemed

158

559

Fixed assets purchased

 

(5,326)

 

(2,327)

Net cash (used for) provided by investing activities

 

(4,890)

 

12,150

Cash flows from financing activities:

Debt

 

30,000

 

Dividends paid to shareholders

 

(27,844)

 

(25,181)

Acquisition of treasury stock

(22,145)

Net cash used for financing activities

 

(19,989)

 

(25,181)

Net increase in cash and cash equivalents

 

350

 

386

Cash and cash equivalents at beginning of year

 

44,407

 

37,582

Cash and cash equivalents at end of period

$

44,757

$

37,968

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, 2020 and 2019 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, 2019 is derived from the audited financial statements included in the Company's 2019 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 28, 2020.

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 2019 Annual Report on Form 10-K filed with the SEC on February 28, 2020.

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 were effective on May 2, 2019 and reduced disclosures but some provisions added new requirements. 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 August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value

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)

measurement disclosure requirements under ASC 820. The Company’s adoption of ASU 2018-13 on January 1, 2020 did not have an impact on the fair value disclosures included in Note 5 – Investments.

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. The Company adopted ASU 2017-08 effective January 1, 2019 which resulted in the recognition of $2,373 of additional amortization as a cumulative effect adjustment which decreased retained earnings by that amount.

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. The Company adopted the updated guidance on January 1, 2020 using the modified retrospective approach. The updated guidance did not have a material impact on the opening balance of retained earnings. The Company has elected not to measure expected credit losses for accrued interest receivables related to its finance receivables and fixed maturity securities. At March 31, 2020, the Company recognized an allowance for expected credit losses related to its available-for-sale (“AFS”) debt securities of $2,510. The Company has not restated comparative information for 2019 and, therefore, the comparative information for 2019 is reported under the prior model and is not comparable to the information presented for 2020.

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 was effective for fiscal years beginning after December 15, 2018. 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 June 30, 2020 and December 31, 2019.

9

Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands except per share and share data)

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 June 30, 

 

Six Months Ended June 30, 

2020

2019

2020

2019

Earnings attributable to common shareholders - basic and diluted:

Net income from continuing operations

$

42,494

$

25,934

$

40,504

$

55,880

Allocation of income for participating shares

(195)

(134)

(190)

(300)

Net income from continuing operations attributed to common shareholders

$

42,299

$

25,800

$

40,314

$

55,580

Earnings per share denominator - basic and diluted

Total weighted average common shares outstanding, including participating shares

15,189,442

15,299,691

15,247,100

15,262,937

Less: weighted average participating shares

(69,403)

(78,869)

(71,691)

(81,903)

Basic earnings per share denominator

15,120,039

15,220,822

15,175,409

15,181,034

Common equivalent shares- non-vested performance stock grants

 

117,256

 

125,412

 

116,777

 

145,087

Diluted earnings per share denominator

 

15,237,295

 

15,346,234

 

15,292,186

 

15,326,121

Basic earnings per share

$

2.80

$

1.70

$

2.66

$

3.66

Diluted earnings per share

$

2.78

$

1.68

$

2.64

$

3.63

Undistributed earnings attributable to common shareholders - basic and diluted:

Net income from continuing operations attributable to common shareholders -Basic

$

2.80

$

1.70

$

2.66

$

3.66

Dividends declared

(0.90)

(0.80)

(1.80)

(1.60)

Undistributed earnings

$

1.90

$

0.90

$

0.86

$

2.06

Net income from continuing operations attributable to common shareholders -Diluted

$

2.78

$

1.68

$

2.64

$

3.63

Dividends declared

(0.90)

(0.80)

(1.80)

(1.60)

Undistributed earnings

$

1.88

$

0.88

$

0.84

$

2.03

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 2,310 and 106 anti-dilutive shares related to non-vested stock grants for the three and six months ended June 30, 2020, respectively, and no anti-dilutive shares related to non-vested stock grants for the three and six months ended June 30, 2019.

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

10

Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands except per share and share data)

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 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 June 30, 2020, there were 234,170 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.

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.

11

Table of Contents

Safety Insurance Group, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands except per share and share data)

The following table summarizes restricted stock activity under the Incentive Plan during the six months ended June 30, 2020 assuming a target payout for the 2020 performance-based shares.

    

Shares 

    

Weighted

Performance-based

    

Weighted

Under

Average

Shares Under

Average

Restriction

Fair Value

Restriction

Fair Value

Outstanding at beginning of year

 

78,202

$

79.09

84,105

$

79.34

Granted

 

34,799

90.10

36,649

(1)

84.68

Vested and unrestricted

 

(43,480)

78.07

(42,123)

73.55

Forfeited

(2,694)

87.70

(6,667)

84.86

Outstanding at end of period

 

66,827

$

85.14

71,964

$

84.94

(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 June 30, 2020, there was $8,527 of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 1.7 years.  The total fair value of the shares that were vested and unrestricted during the six months ended June 30, 2020 and 2019 was $6,493 and $7,784, respectively.  For the six months ended June 30, 2020 and 2019, the Company recorded compensation expense related to restricted stock of $3,010 and $2,649, net of income tax benefits of $800 and $704, 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, 2020

    

Cost or

    

Allowance for

    

Gross Unrealized

    

Estimated

Amortized

Expected Credit

Fair

Cost

Losses

Gains

Losses  (3)

Value

U.S. Treasury securities

$

1,822

$

$

59

$

$

1,881

Obligations of states and political subdivisions

 

225,863

 

 

8,314

 

(139)

 

234,038

Residential mortgage-backed securities (1)

 

272,484

 

 

14,131

 

(28)

 

286,587

Commercial mortgage-backed securities

 

105,542

 

 

8,609

 

 

114,151

Other asset-backed securities

 

27,673

 

 

375

 

(599)

 

27,449

Corporate and other securities

 

535,282

 

(2,471)

 

30,039

 

(7,242)

 

555,608

Subtotal, fixed maturity securities 

 

1,168,666

 

(2,471)

 

61,527

 

(8,008)

 

1,219,714

Equity securities (2)

 

164,991

 

 

19,213

 

(5,857)

 

178,347

Other invested assets (4)

 

35,526

 

 

 

 

35,526

Totals

$

1,369,183

$

(2,471)

$

80,740

$

(13,865)

$

1,433,587

12

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, 2019

 

 

    

Cost or

    

Gross Unrealized

    

Estimated

 

Amortized

Fair

 

Cost

Gains

Losses (3)

Value

 

U.S. Treasury securities

$

1,504

$

8

$

$

1,512

Obligations of states and political subdivisions

 

241,597

 

9,799

 

 

251,396

Residential mortgage-backed securities (1)

 

301,503

 

6,608

 

(909)

 

307,202

Commercial mortgage-backed securities

 

106,902

 

3,233

 

(397)

 

109,738

Other asset-backed securities

 

36,068

 

218

 

(64)

 

36,222

Corporate and other securities

 

504,783

 

18,455

 

(1,268)

 

521,970

Subtotal, fixed maturity securities 

 

1,192,357

 

38,321

 

(2,638)

 

1,228,040

Equity securities (2)

 

151,121

 

27,879

 

(1,363)

 

177,637

Other invested assets (4)

 

37,278

 

 

 

37,278

Totals

$

1,380,756

$

66,200

$

(4,001)

$

1,442,955

(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 527 and 229 securities in an unrealized loss position at June 30, 2020 and December 31, 2019, respectively.
(4) 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 June 30, 2020

    

Amortized

    

Estimated

Cost

Fair Value

Due in one year or less

$

67,468

$

68,303

Due after one year through five years

 

300,404

 

308,520

Due after five years through ten years

 

306,192

 

321,694

Due after ten years through twenty years

 

87,050

 

90,948

Due after twenty years

 

1,854

 

2,063

Asset-backed securities

 

405,698

 

428,186

Totals

$

1,168,666

$

1,219,714

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

Three Months Ended June 30, 

    

Six Months Ended June 30, 

    

2020

    

2019

 

2020

    

2019

Gross realized gains

Fixed maturity securities

$

139

$

479

$

1,028

$

594

Equity securities

 

1,295

 

688

 

2,871

 

1,641

Gross realized losses

Fixed maturity securities

 

(1,096)

 

(241)

 

(1,397)

 

(908)

Equity securities

 

(1,059)

 

(443)

 

(3,854)

 

(1,008)

Net realized (losses) gains on investments

$

(721)

$

483

$

(1,352)

$

319

13

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 the normal course of business, the Company enters into transactions involving various types of financial instruments, including investments in fixed maturities and equity securities. Investment transactions have credit exposure to the extent that a counter party may default on an obligation to the Company. Credit risk is a consequence of carrying, trading and investing in securities. To manage credit risk, the Company focuses on higher quality fixed income securities, reviews the credit strength of all companies in which it invests, limits its exposure in any one investment and monitors the portfolio quality, taking into account credit ratings assigned by recognized statistical rating organizations.

The following tables as of June 30, 2020 and December 31, 2019 present the gross unrealized losses included in the Company’s investment portfolio and the fair value of those securities aggregated by investment category. The tables also present the length of time that they have been in a continuous unrealized loss position.

As of June 30, 2020

Less than 12 Months

12 Months or More

Total

    

Estimated

    

Unrealized

    

Estimated

    

Unrealized

    

Estimated

    

Unrealized

Fair Value

Losses