Quarterly Report (10-q)

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Table of Contents

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

☐

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.

Table of Contents

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

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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)

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

(21,786)

Restricted share awards issued

528

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

1,215

Dividends paid and accrued

(13,872)

Acquisition of treasury stock

(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

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

35,898

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

2,066

Dividends paid and accrued

(13,836)

Acquisition of treasury stock

(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.

Table of Contents

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.

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

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.

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

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.

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

—

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

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

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

SAFT

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