In this discussion, “Safety” refers to Safety Insurance Group, Inc. and “our Company,” “we,” “us” and “our” refer to Safety Insurance Group, Inc. and its consolidated subsidiaries. Our subsidiaries consist of Safety Insurance Company (“Safety Insurance”), Safety Indemnity Insurance Company (“Safety Indemnity”), Safety Property and Casualty Insurance Company (“Safety P&C”), Safety Asset Management Corporation (“SAMC”), and Safety Management Corporation, which is SAMC’s holding company.
We are a leading provider of private passenger automobile insurance in Massachusetts. In addition to private passenger automobile insurance (which represented 57.7% of our direct written premiums in 2016), we offer a portfolio of other insurance products, including commercial automobile (14.9% of 2016 direct written premiums), homeowners (22.4% of 2016 direct written premiums), dwelling fire, umbrella and business owner policies (totaling 5.0% of 2016 direct written premiums). Operating exclusively in Massachusetts, New Hampshire and Maine through our insurance company subsidiaries, Safety Insurance, Safety Indemnity, and Safety P&C (together referred to as the “Insurance Subsidiaries”), we have established strong relationships with independent insurance agents, who numbered 890 in 1,101 locations throughout these three states during 2016. We have used these relationships and our extensive knowledge of the Massachusetts market to become the third largest private passenger automobile and the second largest commercial automobile insurance carrier in Massachusetts, capturing an approximate 9.7% and 14.7% share, respectively, of the Massachusetts private passenger and commercial automobile markets in 2016, according to statistics compiled by CAR based on automobile exposures. We also are the fourth largest homeowners insurance carrier in Massachusetts with a 7.2% share of that market. We were ranked the 48th largest automobile writer in the country according to A.M. Best, based on 2015 direct written premiums. We were incorporated under the laws of Delaware in 2001, but through our predecessors, we have underwritten insurance in Massachusetts since 1979.
On February 9, 2015, the Insurance Subsidiaries each received a license to begin writing our property and casualty insurance products in the state of Maine. We began writing business in Maine in 2016.
claims activity throughout our personal and commercial property lines. An unprecedented level of snow, specifically 9 feet in various Massachusetts communities and 95 inches in the Boston area alone, was received during a 30 day period in the first quarter of 2015.
Policy acquisition costs such as commissions, premium taxes and other variable costs incurred which are directly related to the successful acquisition of a new or renewal insurance contract are capitalized and amortized on a pro rata basis over the period in which the related premiums are earned, rather than expensed as incurred, as required by SAP.
Amounts related to ceded reinsurance are shown gross of ceded unearned premiums and reinsurance recoverables, rather than netted against unearned premium reserves and loss and loss adjustment expense reserves, respectively, as required by SAP.
On March 10, 2006, the Board approved amendments to the Incentive Plan, subject to shareholder approval, to (i) increase the number of shares of common stock available for issuance by 1,250,000 shares, (ii) remove obsolete provisions, and (iii) make other non-material changes. A total of 1,250,000 shares of common stock had previously been authorized for issuance under the Incentive Plan. The Incentive Plan, as amended, was approved by the shareholders at the 2006 Annual Meeting of Shareholders which was held on May 19, 2006. Under the Incentive Plan, as amended, the maximum number of shares of common stock with respect to which awards may be granted is 2,500,000. As of December 31, 2016, there were 279,142 shares available for future grant. The Board and the Compensation Committee intend to issue more awards under the Incentive Plan in the future. Grants outstanding under the Incentive Plan as of December 31, 2016, were comprised of 190,103 restricted shares.
Grants made under the Incentive Plan during the years 2012 through 2016 were as follows.
large losses, primarily in our homeowners line of business. We use various software products to measure our exposure to catastrophe losses and the probable maximum loss to us for catastrophe losses such as hurricanes. The models include estimates for our share of the catastrophe losses generated in the residual market for property insurance by the Massachusetts Property Insurance Underwriting Association (“FAIR Plan”). The reinsurance market has seen from the various software modelers, increases in the estimate of damage from hurricanes in the southern and northeast portions of the United States due to revised estimations of increased hurricane activity and increases in the estimation of demand surge in the periods following a significant event. We continue to manage and model our exposure and adjust our reinsurance programs as a result of the changes to the models. As of January 1, 2017, we have purchased four layers of excess catastrophe reinsurance providing $615,000 of coverage for property losses in excess of $50,000 up to a maximum of $665,000. Our reinsurers’ co-participation is 65.0% of $100,000 for the 1st layer, 80.0% of $280,000 for the 2nd layer, 80.0% of $135,000 for the 3rd layer and 80.0% of $100,000 for the 4th layer. As a result of the changes to the models, and our revised reinsurance program, our catastrophe reinsurance in 2017 protects us in the event of a “130-year storm” (that is, a storm of a severity expected to occur once in a 130-year period). Swiss Re, our primary reinsurer, maintains an A.M. Best rating of “A+” (Superior). Most of our other reinsurers have an A.M. Best rating of “A+” (Superior) or “A” (Excellent).
We also had $86,889 due from CAR comprising of loss and loss adjustment expense reserves, unearned premiums and reinsurance recoverables
The following table shows our insured investment securities that are backed by financial guarantors including pre-refunded securities as of December 31, 2016. We do not have any direct investment holdings in a financial guarantee insurance company.
The Moody's ratings of our insured investments held at December 31, 2016 are essentially the same with or the without the investment guarantees.
Our GAAP loss ratio for the year ended December 31, 2016 and 2015 was 65.3% and 83.0%, respectively. Our GAAP loss ratio excluding loss adjustment expenses was 56.8% and 72.9% for the year ended December 31, 2016 and 2015, respectively. Total prior year favorable development included in the pre-tax results for the year ended December 31, 2016 was $45,448, compared to $30,313, for the comparable 2015 period.
Interest Expenses. Interest expense was $90 for each of the years ended December 31, 2016 and 2015. The credit facility commitment fee included in interest expense was $75 for each of the years ended December 31, 2016 and 2015.
Direct Written Premiums. Direct written premiums for the year ended December 31, 2015 increased by $20,045, or 2.6%, to $785,730 from $765,685 for the comparable 2014 period. The 2015 increases occurred primarily in our homeowners and personal automobile business lines which experienced increases of 6.1% and 3.2%, respectively, in average written premium per exposure. Written exposures increased by 5.8% and 2.4% in our commercial automobile and homeowners lines, respectively. The increase in homeowners exposures is primarily the result of our pricing strategy of offering account discounts to policyholders who insure both an automobile and home with us.
was 3.3% for the year ended December 31, 2015 compared to 3.5% for the year ended December 31, 2014. Our duration was 4.1 years at December 31, 2015 up from 3.8 years at December 31, 2014.
Earnings from Partnership Investments. Earnings from partnership investments were $2,387 for the year ended December 31, 2015 compared to $878 for the year ended December 31, 2014. Investment activity in this partnership commenced in the fourth quarter of 2014.
(3) Our investment portfolio included 514 securities in an unrealized loss position at December 31, 2015.
The majority of the unrealized losses recorded on the investment portfolio at December 31, 2015 resulted from fluctuations in market interest rates and other temporary market conditions as opposed to fundamental changes in the credit quality of the issuers of such securities. Given our current level of liquidity, the fact that we do not intend to sell these securities, and that it is more likely than not that we will not be required to sell these securities prior to recovery of the cost basis of these securities, these decreases in values are viewed as being temporary.
Our GAAP loss ratio for the years ended December 31, 2015 and 2014 was 83.0% and 66.5%, respectively. Our GAAP loss ratio excluding loss adjustment expenses was 72.9% and 57.8% for the years ended December 31, 2015 and 2014, respectively. Total prior year favorable development included in the pre-tax results for the year ended December 31, 2015 was $30,313, compared to $37,368, for the comparable 2014 period.
Net cash provided by operating activities was $98,824, $22,891, and $97,569 during the years ended December 31, 2016, 2015, and 2014, respectively. Our operations typically generate positive cash flows from operations as most premiums are received in advance of the time when claim and benefit payments are required. Cash flows from operations in the year ended 2015 were lower than the years ended 2016 and 2014 due to the increased claims activity resulting from the 2015 winter. These positive operating cash flows are expected to continue to meet our liquidity requirements.
statutory accounting practices. Our Insurance Subsidiaries may not declare an “extraordinary dividend” (defined as any dividend or distribution that, together with other distributions made within the preceding twelve months, exceeds the limits established by Massachusetts statute) until thirty days after the Commissioner has received notice of the intended dividend and has not objected. As historically administered by the Commissioner, this provision requires the Commissioner’s prior approval of an extraordinary dividend. Under Massachusetts law, an insurer may pay cash dividends only from its unassigned funds, also known as earned surplus, and the insurer’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At year-end 2016, the statutory surplus of Safety Insurance was $604,813, and its net income for 2016 was $57,202. As a result, a maximum of $60,481 is available in 2017 for such dividends without prior approval of the Commissioner. Under this Massachusetts statute, the Insurance Subsidiaries has restricted net assets in the amount of $544,332 at December 31, 2016. During the twelve months ended December 31, 2016, Safety Insurance recorded dividends to Safety of $39,156
Since the initial public offering of its common stock in November 2002, the Company has paid regular quarterly dividends to shareholders of its common stock. Quarterly dividends paid during 2016 and 2015 were as follows:
On February 15, 2017, our Board approved and declared a quarterly cash dividend on our common stock of $0.70 per share to be paid on March 15, 2017 to shareholders of record on March 1, 2017. We plan to continue to declare and pay quarterly cash dividends in 2017, depending on our financial position and the regularity of our cash flows.
On August 3, 2007, the Board of Directors approved a share repurchase program of up to $30,000 of the Company’s outstanding common shares. As of December 31, 2016, the Board of Directors had cumulatively authorized increases to the existing share repurchase program of up to $150,000 of its outstanding common shares. Under the program, the Company may repurchase shares of its common stock for cash in public or private transactions, in the open market or otherwise. The timing of such repurchases and actual number of shares repurchased will depend on a variety of factors including price, market conditions and applicable regulatory and corporate requirements. The program does not require us to repurchase any specific number of shares and may be modified, suspended or terminated at any time without prior notice. At December 31, 2016 and December 31, 2015, the Company had purchased 2,279,570 shares at a cost of $83,835.
We have obligations to make future payments under contracts and credit-related financial instruments and commitments. At December 31, 2016, certain long-term aggregate contractual obligations and credit-related commitments are summarized as follows:
As of December 31, 2016, the Company had loss and LAE reserves of $560,321, unpaid reinsurance recoverables of $83,724 and net loss and LAE reserves of $476,597. Our loss and LAE reserves are estimates as described in more detail under Critical Accounting Policies and Estimates. The specific amounts and timing of obligations related to case reserves, IBNR reserves and related LAE reserves are not set contractually, and the amounts and timing of these obligations are unknown. Nonetheless, based upon our cumulative claims paid over the last ten years, the Company estimates that its loss and LAE reserves will be paid in the period shown above. While management believes that historical performance of loss payment patterns is a reasonable source for projecting future claims payments, there is inherent uncertainty in this estimated projected settlement of loss and LAE reserves, and as a result these estimates will differ, perhaps significantly, from actual future payments. Our operations typically generate substantial positive cash flows from operations as most premiums are received in advance of the time when claim and benefit payments are required. These positive operating cash flows are expected to continue to meet our liquidity requirements, including any unexpected variations in the timing of claim settlements.
Significant periods of time can elapse between the occurrence of an insured loss, the reporting to us of that loss and our final payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities. Our reserves represent estimates of amounts needed to pay reported and unreported losses and the expenses of investigating and paying those losses, or loss adjustment expenses. Every quarter, we review our previously established reserves and adjust them, if necessary.
Incurred Loss Indications: This method projects ultimate loss estimates based upon extrapolations of historic incurred loss trends. This method tends to be used on long tail lines of business such as automobile liability and homeowner’s liability.
Bornhuetter-Ferguson Indications: This method projects ultimate loss estimates based upon extrapolations of an expected amount of IBNR, which is added to current incurred losses or paid losses. This method tends to be used on small, immature, or volatile lines of business, such as our BOP and umbrella lines of business.
The following tables present the point estimation of the recorded reserves and the range of estimations by line of business for net loss and LAE reserves as of December 31, 2016 and December 31, 2015.
Our IBNR reserves consist of our estimate of the total loss reserves required less our case reserves. The IBNR reserves for CAR assumed commercial automobile business are 47.2% of our total reserves for CAR assumed commercial automobile business as of December 31, 2016 due to the reporting delays in the information we receive from CAR, as described further in the section on CAR Loss and Loss Adjustment Expense Reserves. Our IBNR reserves for FAIR Plan assumed homeowners are 62.2% of our total reserves for FAIR Plan assumed homeowners at December 31, 2016 due to similar reporting delays in the information we receive from FAIR Plan.
Our assumptions consider that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for establishing our reserves. Our individual key assumptions could each have a reasonable possible range of plus or minus 5 percentage-points for each estimation, although there is no guarantee that our assumptions will not have more than a 5 percentage point variation. The following sensitivity tables present information for each of our primary lines of business on the effect each 1 percentage-point change in each of our key assumptions on unpaid frequency and severity could have on our retained (i.e., direct minus ceded) loss and LAE reserves and net income for the twelve months ended December 31, 2016. In evaluating the information in the table, it should be noted that a 1 percentage-point change in a single assumption would change estimated reserves by 1 percentage-point. A 1 percentage-point change in both our key assumptions would change estimated reserves within a range of plus or minus 2 percentage-points.
The following sensitivity table presents information of the effect each 1 percentage-point change in our assumptions on our share of reserves for CAR and other residual markets could have on our assumed loss and LAE reserves and net income for the year ended December 31, 2016. In evaluating the information in the table, it should be noted that a 1 percentage-point change in our assumptions would change estimated reserves by 1 percentage-point.
The changes we have recorded in our reserves in the past illustrate the uncertainty of estimating reserves. Our prior year reserves decreased by $45,448, $30,313 and $37,368 for the years ended December 31, 2016, 2015, and 2014, respectively.
The following table presents a comparison of prior year development of our net reserves for losses and LAE for the years ended December 31, 2016, 2015 and 2014, respectively. Each accident year represents all claims for an annual accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid. Our financial statements reflect the aggregate results of the current and all prior accident years.
The decreases in prior years reserves during the years ended December 31, 2016, 2015 and 2014 resulted from re-estimations of prior year ultimate loss and LAE liabilities. The 2016 decrease is primarily composed of reductions of $25,019, in our retained automobile reserves and $11,648 in our retained homeowners reserves. The 2015 decrease is primarily composed of reductions of $18,644 in our retained automobile reserves and $7,964 in our retained homeowners reserves. The 2014 decrease is primarily composed of reductions of $23,272 in our retained automobile reserves and $8,804 in our retained homeowners reserves.
The following table presents information by line of business for prior year development of our net reserves for losses and LAE for the year ended December 31, 2016.
Our retained commercial automobile line of business prior year reserves decreased by $6,466 for the year ended December 31, 2016 due primarily to fewer IBNR claims than previously estimated.
Equity and deposits in pools represents the net receivable amounts from the residual market mechanisms, Commonwealth Automobile Reinsurers (“CAR”) for automobile and Massachusetts Property Insurance Underwriting Association (“FAIR Plan”) for homeowner insurance in Massachusetts. See Note 9 for a discussion of the Company’s accounting for amounts assumed from residual markets.
Property, equipment, leasehold improvements, and software which are included in other assets are carried at cost less accumulated depreciation. Depreciation is provided using the straight- line or accelerated method over the estimated useful lives of the related assets, which range from 3 to 10 years. Amortization of leasehold improvements is provided using the straight-line method over the term of the lease. The costs of computer software developed or obtained for internal use are capitalized and amortized over the estimated life of the business system, beginning when the software is ready for its intended use. Maintenance and repairs are charged to expense as incurred.
In December 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-19 - Technical Corrections and Improvements, which covers a wide range of Topics in the Accounting Standards Codification (ASC). The amendments in this Update represent changes to clarify, correct errors, or make minor improvements to the ASC, making it easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments generally fall into one of the following categories: amendments related to differences between original guidance and the ASC, guidance clarification and reference corrections, simplification, or minor improvements. Most of the amendments in ASU 2016-19 do not require transition guidance and are effective upon issuance of ASU 2016-19.
In October 2016, the FASB issued ASU 2016-17 - Consolidation (Topic 810): Interests Held through Related Parties that are Under Common Control, which amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The Update requires the reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include its indirect variable interests in a VIE held through related parties that are under common control on a proportionate basis as opposed to in their entirety. The amendments in this Update will be applied retrospectively and are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of ASU 2016-17 will not have a material impact on the Company’s financial position, results of operations, or cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU 2016-15 provide guidance on specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. The impact of the adoption of ASU 2016-15 to the Company’s financial position and results of operations is currently being evaluated.
In 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 discreet 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. Early adoption is permitted. The impact of the adoption of ASU 2016-09 to the Company’s financial position and results of operations is currently being evaluated.
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of ASU 2016-02 by reviewing its existing lease contracts. The company expects a gross-up of its Consolidated Balance Sheets as a result of recognizing lease liabilities and right of use assets. The extent of such gross-up is under evaluation. The Company does not expect material changes to the Consolidated Statements of Operations.
In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts. ASU 2015-09 requires companies that issue short duration contracts to disclose additional information, including: (i) incurred and paid claims development tables; (ii) frequency and severity of claims; and (iii) information about material changes in judgments made in calculating the liability for unpaid claim adjustment expenses, including reasons for the change and the effects on the financial statements. ASU 2015-09 is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. The amendments in ASU 2015-09 should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. The adoption of ASU 2015-09 is disclosure only and has been reflected in the Loss and Loss Adjustment Expense footnote.
retrospectively. The Company adjusted its previously reported financial information included herein to reflect the change in accounting guidance for assets measured using the net asset value. The impact of adopting the new accounting standard resulted in excluding a real estate investment trust of $19,961 and $19,097, respectively from the fair value level disclosures as of December 31, 2016 and December 31, 2015.
In April 2015, the FASB issued ASU 2015-03, Imputation of Interest. ASU 2015-03 simplifies the presentation of debt issuance costs as the amendments in this update require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. ASU 2015-03 is effective for annual and interim reporting periods beginning after December 15, 2015. The standard requires a retrospective approach where the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The standard also requires compliance with applicable disclosures for a change in an accounting principle. The Company’s adoption of ASU 2015-03 had no impact on the Company’s financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosures of Uncertainties about an Entity’s Ability as a Going Concern” (“ASU 2014-15”). ASU 2014-15 provides guidance on determining when and how to disclose going concern uncertainties in the financial statements, and requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Management has assessed and concluded that there were no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements were issued.
In May 2014, the FASB issued as final, ASU 2014-09, “Revenue from Contracts with Customers (Topic 606), which supersedes virtually all existing revenue recognition guidance under GAAP. The update's core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017 and allows early adoption. ASU 2014-09 allows for the use of either the retrospective or modified retrospective approach of adoption. The Company does not expect the adoption of ASU 2014-09 to have a material impact on its financial position, results of operations, or cash flows.
The Company’s investment portfolio included 343 and 514 securities in an unrealized loss position at December 31, 2016 and December 31, 2015, respectively.
The following tables as of December 31, 2016 and 2015 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.
The unrealized losses in the Company’s fixed income and equity portfolio as of December 31, 2016 were reviewed for potential other-than-temporary asset impairments. The Company held five debt securities at December 31, 2016 with a material (20% or greater) unrealized loss for four or more consecutive quarters that additionally had certain qualitative factors that led to an impairment charge. As a result of our analysis, during the year ended December 31, 2016, the Company recognized OTTI of $798 which consisted entirely of credit losses related to fixed maturity securities. During the year ended December 31, 2015, the Company recognized $796 which consisted entirely of credit losses related to fixed maturity securities.
The Company sponsors the Safety Insurance Company 401(k) qualified defined contribution retirement plan
(the “Retirement Plan”). The Retirement Plan is available to all eligible employees of the Company. An employee must be 21 years of age to be eligible to participate in the Retirement Plan and is allowed to contribute on a pre-tax basis up to the maximum allowed under federal law. The Retirement Plan is administered by the Company and is subject to the provisions of the Employee Retirement Income Security Act of 1974. At the close of each Retirement Plan year, the Company makes a matching contribution equal to 100% of the amount each participant contributed during the plan year from their total pay, up to a maximum amount of 8% of the participant’s base salary, to those participants who have contributed to the Retirement Plan and were employed on the last day of the Retirement Plan year. Compensation expense related to the Retirement Plan was $3,018, $3,019, and $2,775 for the years ended December 31, 2016, 2015, and 2014, respectively.
Long-term incentive compensation is provided under the Company’s 2002 Management Omnibus Incentive Plan (“the Incentive Plan”) which provides for a variety of share-based compensation awards, including nonqualified stock options, incentive stock options, stock appreciation rights and restricted stock (“RS”) awards.
The maximum number of shares of common stock with respect to which awards may be granted is 2,500,000. The Incentive Plan was amended in March of 2013 to remove "share recycling" plan provisions. Hence, shares of stock covered by an award under the Incentive Plan that are forfeited are no longer available for issuance in connection with 2013 and future grants of awards. At December 31, 2016, there were 279,142 shares available for future grant. The Board of Directors and the Compensation Committee intend to issue more awards under the Incentive Plan in the future.
As of December 31, 2016, all stock option awards have expired and all compensation expense related to stock option awards has been recognized. At December 31, 2015, and 2014, the aggregate intrinsic value of outstanding shares under option was $84, and $269 with a weighted average remaining contractual term of 0.2 and 1.2 years, respectively. Aggregate intrinsic value represents the total pretax intrinsic value, which is the difference between the fair value based upon the Company’s closing year- end stock price at December 31, 2015, and 2014 and the exercise price which would have been received by the option holders had all option holders exercised their options as of those dates. The exercise price on stock options outstanding under the Incentive Plan was $42.85 at December 31, 2016, December 31, 2015 and December 31, 2014. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015, and 2014, was $85, $138, and $183, respectively.
As of December 31, 2016, there was $6,455 of unrecognized compensation expense related to non-vested
restricted stock awards that is expected to be recognized over a weighted average period of 1.8 years. The total fair value of the shares that were vested and unrestricted during the years ended December 31, 2016, 2015, and 2014 was $3,732, $2,897, and $3,554, respectively.
The Company has various non-cancelable long-term operating leases. The approximate minimum annual rental payments due under these lease agreements as of December 31, 2016 are presented in the following table.
Certain lease agreements contain renewal options and, in addition to the minimum annual rentals, generally provide for payment of a share of the real estate taxes and operating expenses in excess of a base amount. Rental expense was $4,242, $4,293, and $4,236 for the years ended December 31, 2016, 2015, and 2014, respectively. All leases expire prior to 2020. The Company expects that in the normal course of business, leases that expire will be renewed.
On December 15, 2015, the Company filed for arbitration with a reinsurer in regards to the reinsurance recoverable resulting from the 2015 winter storm losses that are admissible under our contract. The total amount of recoverable in dispute, which is based on our total incurred loss, is $22,838. No provision for collectability has been recorded in the financial statements as we believe the recoverable is valid and will be recovered.
The Company had no amounts outstanding on its credit facility at December 31, 2016 or 2015. The credit facility commitment fee included in interest expense was computed at a rate of 0.25% per annum on the $30,000 commitment at December 31, 2016 and 2015.
At December 31, 2016, our total expected reinsurance recovery from reinsurers under our catastrophe reinsurance program related to the 2015 snow is $67,934. Amounts recoverable from reinsurers are billed to the reinsurer as claims are paid by the Company. The current reinsurance recoverable related to the 2015 snow event is $31,701.
The Company is subject to concentration of credit risk with respect to reinsurance ceded. At December 31, 2016, reinsurance receivables on paid and unpaid loss and LAE with a carrying value of $70,623 and ceded unearned premiums of $26,964 were associated with CAR. At December 31, 2015, reinsurance receivables on paid and unpaid loss and LAE with a carrying value of $57,833 and ceded unearned premiums of $21,594 were associated with CAR. The Company assumes a proportionate share of the obligations from CAR. The Company makes an estimate of its share of assumed activity from the most recent quarter reported by CAR and records adjustments to the reported activity to reflect its anticipated final assumed obligations. The Company’s participation in CAR resulted in assumed net losses of $2,341, $365 and $1,278 for the years ended December 31, 2016, 2015 and 2014, respectively.
At the end of each period, the reserves were re-estimated for all prior accident years. The Company’s prior year reserves decreased by $45,448, $30,313, and $37,368 for the years ended 2016, 2015, and 2014, respectively, and resulted from re-estimations of prior years’ ultimate loss and LAE liabilities. The decrease in prior year reserves during 2016 was primarily composed of reductions of $25,019 in the Company’s retained automobile and $11,648 in the Company’s retained homeowners reserves. The decrease in prior year reserves during 2015 was primarily composed of reductions of $18,644 in the Company’s retained automobile and $7,964 in the Company’s retained homeowners reserves. The decrease in prior year reserves during 2014 was primarily composed of reductions of $23,272 in the Company’s retained automobile and $8,804 in the Company’s retained homeowners reserves.
A summary of the income tax expense (benefit) in the Consolidated Statements of Operations is shown below.
As of December 31, 2016 and December 31, 2015, the Company had no unrecognized tax benefits, and none which if recognized would affect the effective tax rate. The Company does not currently anticipate significant changes in the amount of unrecognized income tax benefits during the next twelve months.
The Company records interest and penalties associated with audits as a component of income before income taxes. Penalties are recorded in underwriting, operating and other expenses, and interest expense is recorded in interest expenses in the Consolidated Statements of Operations. The Company had no interest and penalties related to income taxes accrued as of December 31, 2016 and 2015.
examination was completed during the quarter ending September 30, 2014 with no findings. Tax years prior to 2013 are closed.
On August 3, 2007, the Board of Directors approved a share repurchase program of up to $30,000 of the Company’s outstanding common shares. As of December 31, 2016, the Board of Directors had cumulatively authorized increases to the existing share repurchase program of up to $150,000 of its outstanding common shares. Under the program, the Company may repurchase shares of its common stock for cash in public or private transactions, in the open market or otherwise. The timing of such repurchases and actual number of shares repurchased will depend on a variety of factors including price, market conditions and applicable regulatory and corporate requirements. The program does not require the Company to repurchase any specific number of shares and it may be modified, suspended or terminated at any time without prior notice. No purchases were made by the Company under the program during the years ended December 31, 2016 and December 31, 2015. As of December 31, 2016, the Company had purchased 2,279,570 shares on the open market at a cost of $83,835.
Fair values of instruments are based on (i) quoted prices in active markets for identical assets (Level 1), (ii) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets
that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2) or (iii) valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2016 or 2015.
attributed. The fair value was determined using the trust’s net asset value obtained from its audited financial statements. The Company is required to submit a request to the REIT 45 days before a quarter end to dispose of the security.
Mr. A. Richard Caputo, Jr., a member of the Company’s Board of Directors and Chairman of its Investment Committee, until his resignation in February 2017, is a principal of The Jordan Company, LP (“Jordan”). In 2012, the Company participated as a lender in two loans made by syndicates of lenders to a portfolio company in which funds managed by Jordan are controlling or a significant investor. The first loan, made to Vantage Specialties, Inc.,was disposed of in 2016. The second loan, made to ARCAS Automotive (formerly known as Sequa Auto), was disposed of in 2015. The Company made the loans on the same terms as the other lenders participating in the syndicate. The loans were subject to the approval of the Company’s full Investment Committee.