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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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, 2018

Commission file number:

001-12251

 

AMERISAFE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Texas

 

75-2069407

(State of Incorporation)            

 

(I.R.S. Employer Identification Number)

 

 

 

2301 Highway 190 West, DeRidder, Louisiana

 

70634

(Address of Principal Executive Offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (337) 463-9052

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 definitions 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

 

  (Do not check if a smaller reporting company)

  

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 August 1, 2018, there were 19,269,980 shares of the Registrant’s common stock, par value $.01 per share, outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

No.

 

 

 

 

FORWARD-LOOKING STATEMENTS

3

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1

 

Financial Statements

4

 

 

 

 

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

 

Item 4

 

Controls and Procedures

27

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

 

 

Item 6

 

Exhibits

28

 

2


 

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934. You should not place undue reliance on these statements. These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and the insurance industry in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:

 

the cyclical nature of the workers’ compensation insurance industry;

 

increased competition on the basis of types of insurance offered, premium rates, coverage availability, payment terms, claims management, safety services, policy terms, overall financial strength, financial ratings and reputation;

 

general economic conditions, including recession, inflation, performance of financial markets, interest rates, unemployment rates and fluctuating asset values;

 

changes in relationships with independent agencies;

 

developments in capital markets that adversely affect the performance of our investments;

 

technology breaches or failures, including those resulting from a malicious cyber attack on the Company or its policyholders and medical providers;

 

decreased level of business activity of our policyholders caused by decreased business activity generally, and in particular in the industries we target;

 

greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than our underwriting, reserving or investment practices anticipate based on historical experience or industry data;

 

adverse developments in economic, competitive, judicial or regulatory conditions within the workers’ compensation insurance industry;

 

loss of the services of any of our senior management or other key employees;

 

changes in regulations, laws, rates, rating factors, or taxes applicable to the Company, its policyholders or the agencies that sell its insurance;

 

changes in accounting standards or new accounting standards;

 

changes in legal theories of liability under our insurance policies;

 

changes in rating agency policies, practices or ratings;

 

changes in the availability, cost or quality of reinsurance and the failure of our reinsurers to pay claims in a timely manner or at all;

 

the effects of U.S. involvement in hostilities with other countries and large-scale acts of terrorism, or the threat of hostilities or terrorist acts; and

 

other risks and uncertainties described from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”).

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report, and under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.

 

 

3


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed maturity securities—held-to-maturity, at amortized cost (fair value

   $607,072 and $639,309 in 2018 and 2017, respectively)

 

$

605,877

 

 

$

629,668

 

Fixed maturity securities—available-for-sale, at fair value (cost $443,358 and

   $461,236 in 2018 and 2017, respectively)

 

 

440,762

 

 

 

465,594

 

Equity securities—available-for-sale, at fair value (cost $13,590 and $8,503 in 2018

   and 2017, respectively)

 

 

13,590

 

 

 

9,282

 

Short-term investments

 

 

106,811

 

 

 

25,770

 

Total investments

 

 

1,167,040

 

 

 

1,130,314

 

Cash and cash equivalents

 

 

21,176

 

 

 

55,559

 

Amounts recoverable from reinsurers

 

 

98,961

 

 

 

90,133

 

Premiums receivable, net of allowance

 

 

189,892

 

 

 

174,234

 

Deferred income taxes

 

 

19,891

 

 

 

19,262

 

Accrued interest receivable

 

 

10,458

 

 

 

10,635

 

Property and equipment, net

 

 

6,644

 

 

 

6,128

 

Deferred policy acquisition costs

 

 

21,601

 

 

 

20,251

 

Federal income tax recoverable

 

 

1,205

 

 

 

1,761

 

Other assets

 

 

17,413

 

 

 

9,959

 

Total assets

 

$

1,554,281

 

 

$

1,518,236

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Reserves for loss and loss adjustment expenses

 

$

783,601

 

 

$

771,845

 

Unearned premiums

 

 

167,310

 

 

 

157,270

 

Amounts held for others

 

 

39,103

 

 

 

36,908

 

Policyholder deposits

 

 

47,956

 

 

 

48,364

 

Insurance-related assessments

 

 

30,070

 

 

 

28,246

 

Accounts payable and other liabilities

 

 

38,441

 

 

 

37,076

 

Payable for investments purchased

 

 

2,409

 

 

 

13,104

 

Total liabilities

 

 

1,108,890

 

 

 

1,092,813

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock:  voting—$0.01 par value authorized shares—50,000,000

   in 2018 and 2017; 20,528,230 and 20,504,165 shares issued and 19,269,980

   and 19,245,915  shares outstanding in 2018 and 2017, respectively

 

 

205

 

 

 

204

 

Additional paid-in capital

 

 

210,895

 

 

 

210,081

 

Treasury stock, at cost (1,258,250 shares in 2018 and 2017)

 

 

(22,370

)

 

 

(22,370

)

Accumulated earnings

 

 

258,744

 

 

 

233,896

 

Accumulated other comprehensive income (loss), net

 

 

(2,083

)

 

 

3,612

 

Total shareholders’ equity

 

 

445,391

 

 

 

425,423

 

Total liabilities and shareholders’ equity

 

$

1,554,281

 

 

$

1,518,236

 

 

See accompanying notes.

4


 

AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

93,702

 

 

$

87,039

 

 

$

191,044

 

 

$

182,117

 

Ceded premiums written

 

 

(2,369

)

 

 

(2,198

)

 

 

(4,699

)

 

 

(4,589

)

Net premiums written

 

$

91,333

 

 

$

84,841

 

 

$

186,345

 

 

$

177,528

 

Net premiums earned

 

$

88,995

 

 

$

82,749

 

 

$

176,305

 

 

$

173,661

 

Net investment income

 

 

7,303

 

 

 

7,471

 

 

 

14,512

 

 

 

14,181

 

Net realized losses on investments

 

 

(1,111

)

 

 

(388

)

 

 

(1,142

)

 

 

(569

)

Net unrealized gains (losses) on equity securities

 

 

76

 

 

 

 

 

 

(314

)

 

 

 

Fee and other income

 

 

117

 

 

 

93

 

 

 

194

 

 

 

194

 

Total revenues

 

 

95,380

 

 

 

89,925

 

 

 

189,555

 

 

 

187,467

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses incurred

 

 

52,076

 

 

 

46,428

 

 

 

105,238

 

 

 

102,644

 

Underwriting and certain other operating costs

 

 

7,985

 

 

 

7,645

 

 

 

15,831

 

 

 

16,145

 

Commissions

 

 

6,616

 

 

 

5,984

 

 

 

13,110

 

 

 

12,394

 

Salaries and benefits

 

 

6,681

 

 

 

6,554

 

 

 

12,607

 

 

 

12,866

 

Policyholder dividends

 

 

1,092

 

 

 

1,163

 

 

 

2,425

 

 

 

2,534

 

Total expenses

 

 

74,450

 

 

 

67,774

 

 

 

149,211

 

 

 

146,583

 

Income before income taxes

 

 

20,930

 

 

 

22,151

 

 

 

40,344

 

 

 

40,884

 

Income tax expense

 

 

3,974

 

 

 

6,670

 

 

 

7,219

 

 

 

11,879

 

Net income

 

$

16,956

 

 

$

15,481

 

 

$

33,125

 

 

$

29,005

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.88

 

 

$

0.81

 

 

$

1.73

 

 

$

1.51

 

Diluted

 

$

0.88

 

 

$

0.81

 

 

$

1.72

 

 

$

1.51

 

Shares used in computing earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,208,601

 

 

 

19,162,049

 

 

 

19,197,925

 

 

 

19,156,250

 

Diluted

 

 

19,266,735

 

 

 

19,227,960

 

 

 

19,275,883

 

 

 

19,227,997

 

Cash dividends declared per common share

 

$

0.22

 

 

$

0.20

 

 

$

0.44

 

 

$

0.40

 

 

See accompanying notes.

5


 

AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

16,956

 

 

$

15,481

 

 

$

33,125

 

 

$

29,005

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on securities, net of tax  (1)

 

 

153

 

 

 

1,956

 

 

 

(5,695

)

 

 

2,908

 

Comprehensive income

 

$

17,109

 

 

$

17,437

 

 

$

27,430

 

 

$

31,913

 

______________

(1)

Data presented for 2018 includes debt securities only compared to 2017 which includes both debt and equity securities.

  

See accompanying notes.

6


 

AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Treasury Stock

 

 

Accumulated

Earnings

 

 

Accumulated Other Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Shares

 

 

Amounts

 

 

Earnings

 

 

Income (Loss)

 

 

Total

 

Balance at December 31, 2017

 

 

20,504,165

 

 

$

204

 

 

$

210,081

 

 

 

(1,258,250

)

 

$

(22,370

)

 

$

233,896

 

 

$

3,612

 

 

$

425,423

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,125

 

 

 

(5,695

)

 

 

27,430

 

Impact of adoption of

   ASU 2016-01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

614

 

 

 

 

 

 

614

 

Impact of adoption of

   ASU 2018-02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(414

)

 

 

 

 

 

(414

)

Common stock issued upon

     exercise of options

 

 

15,000

 

 

 

 

 

 

67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

67

 

Common stock issued

 

 

9,065

 

 

 

1

 

 

 

195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

196

 

Share-based compensation

 

 

 

 

 

 

 

 

552

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

552

 

Dividends to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,477

)

 

 

 

 

 

(8,477

)

Balance at June 30, 2018

 

 

20,528,230

 

 

$

205

 

 

$

210,895

 

 

 

(1,258,250

)

 

$

(22,370

)

 

$

258,744

 

 

$

(2,083

)

 

$

445,391

 

 

See accompanying notes.

7


 

AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

33,125

 

 

$

29,005

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

488

 

 

 

529

 

Net amortization of investments

 

 

5,979

 

 

 

7,394

 

Deferred income taxes

 

 

831

 

 

 

302

 

Net realized losses on investments

 

 

1,142

 

 

 

569

 

Net unrealized losses on equity securities

 

 

314

 

 

 

 

Net realized losses on disposal of assets

 

 

 

 

 

2

 

Share-based compensation

 

 

782

 

 

 

937

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Premiums receivable, net

 

 

(15,658

)

 

 

(7,641

)

Accrued interest receivable

 

 

177

 

 

 

153

 

Deferred policy acquisition costs

 

 

(1,350

)

 

 

(1,582

)

Amounts held by others

 

 

(7,855

)

 

 

 

Other assets

 

 

942

 

 

 

(1,900

)

Reserves for loss and loss adjustment expenses

 

 

11,756

 

 

 

6,983

 

Unearned premiums

 

 

10,040

 

 

 

3,867

 

Reinsurance balances

 

 

(8,828

)

 

 

(509

)

Amounts held for others and policyholder deposits

 

 

1,787

 

 

 

1,882

 

Accounts payable and other liabilities

 

 

3,312

 

 

 

807

 

Net cash provided by operating activities

 

 

36,984

 

 

 

40,798

 

Investing activities

 

 

 

 

 

 

 

 

Purchases of investments held-to-maturity

 

 

(38,129

)

 

 

(96,697

)

Purchases of investments available-for-sale

 

 

(56,550

)

 

 

(50,193

)

Purchases of short-term investments

 

 

(100,059

)

 

 

(30,800

)

Proceeds from maturities of investments held-to-maturity

 

 

52,584

 

 

 

66,276

 

Proceeds from sales and maturities of investments available-for-sale

 

 

66,762

 

 

 

54,062

 

Proceeds from sales and maturities of short-term investments

 

 

13,465

 

 

 

13,610

 

Proceeds from redemptions of other investments

 

 

130

 

 

 

6,000

 

Purchases of property and equipment

 

 

(1,004

)

 

 

(240

)

Net cash used in investing activities

 

 

(62,801

)

 

 

(37,982

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

67

 

 

 

 

Dividends to shareholders

 

 

(8,633

)

 

 

(7,785

)

Net cash used in financing activities

 

 

(8,566

)

 

 

(7,785

)

Change in cash and cash equivalents

 

 

(34,383

)

 

 

(4,969

)

Cash and cash equivalents at beginning of period

 

 

55,559

 

 

 

58,936

 

Cash and cash equivalents at end of period

 

$

21,176

 

 

$

53,967

 

 

See accompanying notes.

8


 

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

Note 1. Basis of Presentation

AMERISAFE, Inc. (the “Company”) is an insurance holding company incorporated in the state of Texas. The accompanying unaudited condensed consolidated financial statements include the accounts of AMERISAFE and its subsidiaries: American Interstate Insurance Company (“AIIC”) and its insurance subsidiaries, Silver Oak Casualty, Inc. (“SOCI”) and American Interstate Insurance Company of Texas (“AIICTX”), Amerisafe Risk Services, Inc. (“RISK”) and Amerisafe General Agency, Inc. (“AGAI”). AIIC and SOCI are property and casualty insurance companies organized under the laws of the state of Nebraska. AIICTX is a property and casualty insurance company organized under the laws of the state of Texas. RISK, a wholly owned subsidiary of the Company, is a claims and safety service company currently servicing only affiliated insurance companies. AGAI, a wholly owned subsidiary of the Company, is a general agent for the Company. AGAI sells insurance, which is underwritten by AIIC, SOCI and AIICTX, as well as by nonaffiliated insurance carriers. The assets and operations of AGAI are not significant to that of the Company and its consolidated subsidiaries.

The terms “AMERISAFE,” the “Company,” “we,” “us” or “our” refer to AMERISAFE, Inc. and its consolidated subsidiaries, as the context requires.

The Company provides workers’ compensation insurance for small to mid-sized employers engaged in hazardous industries, principally construction, trucking, logging and lumber, manufacturing, and agriculture. Assets and revenues of AIIC represent at least 95% of comparable consolidated amounts of the Company for each of the six months ended June 30, 2018 and 2017.

In the opinion of management of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, the results of operations and cash flows for the periods presented. The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q under the Securities Exchange Act of 1934 and therefore do not include all information and footnotes to be in conformity with accounting principles generally accepted in the United States (“GAAP”). The results for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited condensed consolidated financial statements contained herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Adopted Accounting Guidance

In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities.  This guidance requires fair value measurement for equity investments (not including those that result in consolidation of the investee or use the equity method of accounting) and the recognition of changes in fair value to be presented as a component of net income.  The guidance also revises the disclosure requirements related to fair value changes of liabilities presented in comprehensive income, eliminates disclosure related to the methods and assumptions underlying fair value for financial instruments measured at amortized cost, and simplifies impairment assessments for equity investments without readily determinable fair values.  The adoption of this new guidance in the first quarter of 2018 resulted in an immaterial decrease in net income of $390 thousand or a $0.02 decrease in our diluted earnings per common share.  

In May 2014, the FASB issued ASU 2014-09 (Topic 606): Revenue from Contracts with Customers.  The guidance revises the criteria for revenue recognition and requires that the revenue recognized reflect the transfer of promised goods or services to customers in an amount that represents the consideration to which the entity expects to be entitled in exchange for those goods or services.  The standard was effective for us in the first quarter of 2018.  The adoption of the new guidance had no impact on the Company's reporting and disclosure of net premiums earned, net investment income or net realized gains and losses, as these items are not within the scope of this new guidance. The remaining revenue sources are immaterial and not impacted by the new standard.

9


 

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220).  This ASU provided new guidance on reclassification from Other Comprehensive Income (“OCI”) of tax effects related to the recently passed tax reform legislation (the “Tax Act”).  The guidance gives entities the option to reclassify to retained earnings tax effects related to items in accumulated OCI deemed to be stranded as a result of tax reform.  The guidance was effective for us in the first quarter of 2018 and was applied retrospectively.  The Company’s policy for releasing income tax effects from accumulated OCI was the individual securities approach for available-for-sale securities.  The adoption of this guidance did not have a material impact on our financial condition and results of operations.

In December 2017, the SEC issued Staff Accounting Bulletin (SAB) 118 which provided guidance on accounting for tax effects of the Tax Act.  Among many changes of the Tax Act which affected Property and Casualty Insurers, the Tax Act required property and casualty taxpayers to discount loss reserves based solely on IRS factors and no longer by reference to historical payment patterns.  As the IRS has yet to release the 2018 discount factors, we have used the 2017 IRS discount factors to estimate the impact of the change in loss reserve discounting factors and adjusted our deferred tax balances for the impact of these changes.  Once the IRS has released the 2018 loss reserve discount factors, we will complete our analysis and include the effect of the difference in the reserve discount factors in the period the analysis is complete or the impact is reasonably estimable.

Prospective Accounting Guidance

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  Under current guidance for lessees, leases are only included on the balance sheet if certain criteria, classifying the contract as a capital lease, are met.  The new guidance requires a lessee to recognize a lease liability and a right of use asset for all leases extending beyond twelve months.  The new guidance is effective for us in the first quarter of 2019.  Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach.  Adoption of the guidance is not expected to have a material effect on the Company’s consolidated financial statements as the Company does not have any significant leases.  

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses.  The new guidance replaces the methodology of credit loss impairment, which currently, delays the recognition of credit losses until a probable loss has been incurred.  The new guidance requires credit losses for securities measured at amortized cost to be determined using current expected credit loss estimates.  These estimates are to be derived from historical, current and reasonable supporting forecasts, including prepayments and estimates, and will be recorded through a valuation allowance account that will run through the income statement.  The same method will be used for available-for-sale securities, but the valuation allowance will be limited to the amount by which the fair value is below amortized cost.  The standard is effective for us in the first quarter of 2020.  The Company will continue to monitor and evaluate the impact as the implementation date approaches.

All other issued but not yet effective accounting and reporting standards as of June 30, 2018 are either not applicable to the Company or are not expected to have a material impact on the Company.

 

 

Note 2. Stock Options and Restricted Stock

As of June 30, 2018, the Company has three equity incentive plans: the AMERISAFE 2005 Equity Incentive Plan (the “2005 Incentive Plan”), the AMERISAFE Non-Employee Director Restricted Stock Plan (the “Restricted Stock Plan”) and the AMERISAFE 2012 Equity and Incentive Compensation Plan (the “2012 Incentive Plan”). In connection with the approval of the 2012 Incentive Plan by the Company’s shareholders, no further grants will be made under the 2005 Incentive Plan.  All grants made under the 2005 Incentive plan continue in effect, subject to the terms and conditions of the 2005 Incentive Plan. See Note 12 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 for additional information regarding the Company’s incentive plans.

During the six months ended June 30, 2018, the Company granted 3,304 shares of common stock to executive officers and 5,761 shares of restricted common stock to non-employee directors.  The market value of the shares granted totaled $0.5 million.  During the six months ended June 30, 2017, the Company granted 7,434 shares of common stock to executive officers and 6,454 shares of restricted common stock to non-employee directors. The market value of the shares granted totaled $0.7 million.

During the six months ended June 30, 2018, options to purchase 15,000 shares of common stock were exercised. In connection with these exercises, the Company received $0.1 million of stock option proceeds.  During the six months ended June 30, 2017, no options to purchase shares of common stock were exercised.

10


 

The Company recognized share-based compensation expense of $0.8 million in the quarter ended June 30, 2018 compared to $0.5 million for the same period in 2017.  The Company recognized share-based compensation expense of $0.8 million in the six months ended June 30, 2018 and $0.9 million for the same period in 2017.

 

 

Note 3. Earnings Per Share

The Company computes earnings per share (“EPS”) in accordance with FASB Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share. The Company has no participating unvested common shares which contain nonforfeitable rights to dividends and applies the treasury stock method in computing basic and diluted earnings per share.

Basic EPS is calculated by dividing net income by the weighted-average number of common shares outstanding during the period.

The diluted EPS calculation includes potential common shares assumed issued under the treasury stock method, which reflects the potential dilution that would occur if any outstanding options were exercised or restricted stock becomes vested.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands, except share and per share amounts)

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income - basic

 

$

16,956

 

 

$

15,481

 

 

$

33,125

 

 

$

29,005

 

Basic weighted average common shares

 

 

19,208,601

 

 

 

19,162,049

 

 

 

19,197,925

 

 

 

19,156,250

 

Basic earnings per common share

 

$

0.88

 

 

$

0.81

 

 

$

1.73

 

 

$

1.51

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income - diluted

 

$

16,956

 

 

$

15,481

 

 

$

33,125

 

 

$

29,005

 

Diluted weighted average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

 

19,208,601

 

 

 

19,162,049

 

 

 

19,197,925

 

 

 

19,156,250

 

Stock options and restricted stock

 

 

58,134

 

 

 

65,911

 

 

 

77,958

 

 

 

71,747

 

Diluted weighted average common shares

 

 

19,266,735

 

 

 

19,227,960

 

 

 

19,275,883

 

 

 

19,227,997

 

Diluted earnings per common share

 

$

0.88

 

 

$

0.81

 

 

$

1.72

 

 

$

1.51

 

 

 

Note 4. Investments

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as held-to-maturity at June 30, 2018 are summarized as follows:

 

 

 

Amortized Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

States and political subdivisions

 

$

432,914

 

 

$

4,714

 

 

$

(2,891

)

 

$

434,737

 

Corporate bonds

 

 

98,702

 

 

 

38

 

 

 

(724

)

 

 

98,016

 

U.S. agency-based mortgage-backed securities

 

 

9,038

 

 

 

420

 

 

 

(71

)

 

 

9,387

 

U.S. Treasury securities and obligations of U.S.

   government agencies

 

 

64,063

 

 

 

385

 

 

 

(691

)

 

 

63,757

 

Asset-backed securities

 

 

1,160

 

 

 

25

 

 

 

(10

)

 

 

1,175

 

Totals

 

$

605,877

 

 

$

5,582

 

 

$

(4,387

)

 

$

607,072

 

 

11


 

The gross unrealized gains and losses on, and the cost or amortized cost and fair value of, those investments classified as available-for-sale at June 30, 2018 are summarized as follows:

 

 

 

Cost or

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

Fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

217,427

 

 

$

3,368

 

 

$

(2,495

)

 

$

218,300

 

Corporate bonds

 

 

144,950

 

 

 

60

 

 

 

(1,051

)

 

 

143,959

 

U.S. agency-based mortgage-backed securities

 

 

13,730

 

 

 

 

 

 

(368

)

 

 

13,362

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

67,251

 

 

 

 

 

 

(2,110

)

 

 

65,141

 

Total fixed maturity

 

 

443,358

 

 

 

3,428

 

 

 

(6,024

)

 

 

440,762

 

Equity securities

 

 

13,590

 

 

 

 

 

 

 

 

 

13,590

 

Totals

 

$

456,948

 

 

$

3,428

 

 

$

(6,024

)

 

$

454,352

 

 

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as held-to-maturity at December 31, 2017 are summarized as follows:

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

States and political subdivisions

 

$

460,428

 

 

$

9,628

 

 

$

(955

)

 

$

469,101

 

Corporate bonds

 

 

100,024

 

 

 

190

 

 

 

(167

)

 

 

100,047

 

U.S. agency-based mortgage-backed securities

 

 

10,260

 

 

 

625

 

 

 

(40

)

 

 

10,845

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

57,657

 

 

 

548

 

 

 

(198

)

 

 

58,007

 

Asset-backed securities

 

 

1,299

 

 

 

25

 

 

 

(15

)

 

 

1,309

 

Totals

 

$

629,668

 

 

$

11,016

 

 

$

(1,375

)

 

$

639,309

 

 

The gross unrealized gains and losses on, and the cost or amortized cost and fair value of, those investments classified as available-for-sale at December 31, 2017 are summarized as follows:

 

 

 

Cost or

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

Fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

244,898

 

 

$

6,819

 

 

$

(577

)

 

$

251,140

 

Corporate bonds

 

 

130,210

 

 

 

224

 

 

 

(212

)

 

 

130,222

 

U.S. agency-based mortgage-backed securities

 

 

18,813

 

 

 

 

 

 

(799

)

 

 

18,014

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

67,315

 

 

 

29

 

 

 

(1,126

)

 

 

66,218

 

Total fixed maturity

 

 

461,236

 

 

 

7,072

 

 

 

(2,714

)

 

 

465,594

 

Equity securities

 

 

8,503

 

 

 

779

 

 

 

 

 

 

9,282

 

Totals

 

$

469,739

 

 

$

7,851

 

 

$

(2,714

)

 

$

474,876

 

 

12


 

A summary of the amortized cost and fair value of investments in fixed maturity securities, classified as held-to-maturity at June 30, 2018, by contractual maturity, is as follows:

 

 

 

Amortized

Cost

 

 

Fair

Value

 

 

 

(in thousands)

 

Maturity:

 

 

 

 

 

 

 

 

Within one year

 

$

91,818

 

 

$

92,103

 

After one year through five years

 

 

252,775

 

 

 

252,787

 

After five years through ten years

 

 

90,966

 

 

 

91,281

 

After ten years

 

 

160,120

 

 

 

160,339

 

U.S. agency-based mortgage-backed securities

 

 

9,038

 

 

 

9,387

 

Asset-backed securities

 

 

1,160

 

 

 

1,175

 

Totals

 

$

605,877

 

 

$

607,072

 

 

A summary of the amortized cost and fair value of investments in fixed maturity securities, classified as available-for-sale at June 30, 2018, by contractual maturity, is as follows:

 

 

 

Amortized

Cost

 

 

Fair

Value

 

 

 

(in thousands)

 

Maturity:

 

 

 

 

 

 

 

 

Within one year

 

$

69,793

 

 

$

69,608

 

After one year through five years

 

 

158,974

 

 

 

156,733

 

After five years through ten years

 

 

32,366

 

 

 

31,784

 

After ten years

 

 

168,495

 

 

 

169,275

 

U.S. agency-based mortgage-backed securities

 

 

13,730

 

 

 

13,362

 

Totals

 

$

443,358

 

 

$

440,762

 

 

The following table summarizes the fair value and gross unrealized losses on securities, aggregated by major investment category and length of time that the individual securities have been in a continuous unrealized loss position:

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Fair Value of

Investments

with

Unrealized

Losses

 

 

Gross

Unrealized

Losses

 

 

Fair Value of

Investments

with

Unrealized

Losses

 

 

Gross

Unrealized

Losses

 

 

Fair Value of

Investments

with

Unrealized

Losses

 

 

Gross

Unrealized

Losses

 

 

 

(in thousands)

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

204,459

 

 

$

2,568

 

 

$

12,424

 

 

$

323

 

 

$

216,883

 

 

$

2,891

 

Corporate bonds

 

 

86,816

 

 

 

703

 

 

 

2,237

 

 

 

21

 

 

 

89,053

 

 

 

724

 

U.S. agency-based mortgage-backed securities

 

 

2,524

 

 

 

71

 

 

 

 

 

 

 

 

 

2,524

 

 

 

71

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

43,357

 

 

 

461

 

 

 

11,659

 

 

 

230

 

 

 

55,016

 

 

 

691

 

Asset-backed securities

 

 

565

 

 

 

10

 

 

 

 

 

 

 

 

 

565

 

 

 

10

 

Total held-to-maturity securities

 

 

337,721

 

 

 

3,813

 

 

 

26,320

 

 

 

574

 

 

 

364,041

 

 

 

4,387

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

77,359

 

 

$

1,356

 

 

$

15,476

 

 

$

1,139

 

 

$

92,835

 

 

$

2,495

 

Corporate bonds

 

 

121,848

 

 

 

1,016

 

 

 

1,021

 

 

 

35

 

 

 

122,869

 

 

 

1,051

 

U.S. agency-based mortgage-backed securities

 

 

11,557

 

 

 

312

 

 

 

1,805

 

 

 

56

 

 

 

13,362

 

 

 

368

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

18,071

 

 

 

630

 

 

 

47,070

 

 

 

1,480

 

 

 

65,141

 

 

 

2,110

 

Total available-for-sale securities

 

 

228,835

 

 

 

3,314

 

 

 

65,372

 

 

 

2,710

 

 

 

294,207

 

 

 

6,024

 

Total

 

$

566,556

 

 

$

7,127

 

 

$

91,692

 

 

$

3,284

 

 

$

658,248

 

 

$

10,411

 

13


 

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Fair Value of

Investments

with

Unrealized

Losses

 

 

Gross

Unrealized

Losses

 

 

Fair Value of

Investments

with

Unrealized

Losses

 

 

Gross

Unrealized

Losses

 

 

Fair Value of

Investments

with

Unrealized

Losses

 

 

Gross

Unrealized

Losses

 

 

 

(in thousands)

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

110,698

 

 

$

654

 

 

$

19,895

 

 

$

301

 

 

$

130,593

 

 

$

955

 

Corporate bonds

 

 

56,425

 

 

 

156

 

 

 

4,121

 

 

 

11

 

 

 

60,546

 

 

 

167

 

U.S. agency-based mortgage-backed securities

 

 

2,798

 

 

 

40

 

 

 

 

 

 

 

 

 

2,798

 

 

 

40

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

48,153

 

 

 

122

 

 

 

3,948

 

 

 

76

 

 

 

52,101

 

 

 

198

 

Asset-backed securities

 

 

 

 

 

 

 

 

967

 

 

 

15

 

 

 

967

 

 

 

15

 

Total held-to-maturity securities

 

 

218,074

 

 

 

972

 

 

 

28,931

 

 

 

403

 

 

 

247,005

 

 

 

1,375

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

23,365

 

 

$

86

 

 

$

19,153

 

 

$

491

 

 

$

42,518

 

 

$

577

 

Corporate bonds

 

 

82,795

 

 

 

171

 

 

 

5,888

 

 

 

41

 

 

 

88,683

 

 

 

212

 

U.S. agency-based mortgage-backed securities

 

 

14,686

 

 

 

59

 

 

 

3,328

 

 

 

740

 

 

 

18,014

 

 

 

799

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

14,730

 

 

 

204

 

 

 

47,716

 

 

 

922

 

 

 

62,446

 

 

 

1,126

 

Total available-for-sale securities

 

 

135,576

 

 

 

520

 

 

 

76,085

 

 

 

2,194

 

 

 

211,661

 

 

 

2,714

 

Total

 

$

353,650

 

 

$

1,492

 

 

$

105,016

 

 

$

2,597

 

 

$

458,666

 

 

$

4,089

 

 

At June 30, 2018, the Company held 419 individual fixed maturity securities that were in an unrealized loss position, of which 46 individual fixed maturity securities were in a continuous unrealized loss position for longer than 12 months.

Investment income is recognized as it is earned. The discount or premium on fixed maturity securities is amortized using the “constant yield” method. Anticipated prepayments, where applicable, are considered when determining the amortization of premiums or discounts. Realized investment gains and losses are determined using the specific identification method.

We regularly review our investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of specific investments. We consider various factors in determining if a decline in the fair value of an individual security is other-than-temporary. The key factors we consider are:

 

any reduction or elimination of preferred dividends, or nonpayment of scheduled principal or interest payments;

 

the financial condition and near-term prospects of the issuer of the applicable security, including any specific events that may affect its operations or earnings;

 

how long and by how much the fair value of the security has been below its cost or amortized cost;

 

any downgrades of the security by a rating agency;

 

our intent not to sell the security for a sufficient time period for it to recover its value;

 

the likelihood of being forced to sell the security before the recovery of its value; and

 

an evaluation as to whether there are any credit losses on debt securities.

We reviewed all securities with unrealized losses in accordance with the impairment policy described above. The Company determined that the unrealized losses in the fixed maturity securities portfolio related primarily to changes in market interest rates since the date of purchase, current conditions in the capital markets and the impact of those conditions on market liquidity and prices generally. During the six months ended June 30, 2018, unrealized losses increased as rising interest rates decreased the fair value of securities held in the fixed maturity securities portfolio.  We expect to recover the carrying value of these securities as it is not more likely than not that we will be required to sell the securities before the recovery of the amortized cost basis.

14


 

During the six months ended June 30, 2018 and 2017, there were no impairment losses recognized for other-than-temporary declines in the fair value of our investments.

Net realized losses in the six months ended June 30, 2018 were $1.1 million resulting from the sale of fixed maturity securities classified as available-for-sale. Net realized losses in the six months ended June 30, 2017 were $0.6 million resulting from called fixed maturity securities.

 

 

Note 5. Income Taxes

In accordance with FASB ASC Topic 740, “Income Taxes,” we provide for the recognition and measurement of deferred income tax benefits based on the likelihood of their realization in future years. As of June 30, 2018, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required.

In December 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code.  Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017.  As a result, we recorded a decrease to our net deferred tax assets revalued at the new lower rate of 21% in the fourth quarter of 2017, the period in which the legislation was enacted.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no uncertain tax positions recognized for the periods ended June 30, 2018 and 2017.

Tax years 2014 through 2017 are subject to examination by the federal and state taxing authorities.

 

 

Note 6. Loss Reserves

 

We record reserves for estimated losses under insurance policies that we write and for loss adjustment expenses related to the investigation and settlement of policy claims. Our reserves for loss and loss adjustment expenses represent the estimated cost of all reported and unreported loss and loss adjustment expenses incurred and unpaid as of a given point in time.  The reserves for loss and loss adjustment expenses are estimated using individual case-basis valuations, statistical analyses and estimates based upon experience for unreported claims and their associated loss and loss adjustment expenses. Such estimates may be more or less than the amounts ultimately paid when the claims are settled. The estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in these estimates, management believes that the reserves for loss and loss adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known. Any adjustments are included in current operations.  See Note 9 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 for additional information regarding the Company’s loss and loss adjustment expense development.

 

15


 

The following table provides the Company’s liability for unpaid loss and loss adjustment expenses, net of related amounts recoverable from reinsurers, for the six months ended June 30, 2018 and 2017:

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Balance, beginning of period

 

$

771,845

 

 

$

742,776

 

Less amounts recoverable from reinsurers

   on unpaid loss and loss adjustment expenses

 

 

84,889

 

 

 

78,256

 

Net balance, beginning of period

 

 

686,956

 

 

 

664,520

 

Add incurred related to:

 

 

 

 

 

 

 

 

Current accident year

 

 

126,060

 

 

 

119,828

 

Prior accident years

 

 

(20,822

)

 

 

(17,184

)

Total incurred

 

 

105,238

 

 

 

102,644

 

Less paid related to:

 

 

 

 

 

 

 

 

Current accident year

 

 

18,386

 

 

 

15,298

 

Prior accident years

 

 

84,194

 

 

 

80,571

 

Total paid

 

 

102,580

 

 

 

95,869

 

Net balance, end of period

 

 

689,614

 

 

 

671,295

 

Add amounts recoverable from reinsurers

   on unpaid loss and loss adjustment expenses

 

 

93,987

 

 

 

78,464

 

Balance, end of period

 

$

783,601

 

 

$

749,759

 

 

The foregoing reconciliation reflects favorable development of the net reserves at June 30, 2018 and June 30, 2017. The favorable development reduced loss and loss adjustment expenses incurred by $20.8 million and $17.2 million in 2018 and 2017, respectively. The revisions to the Company’s reserves reflect new information gained by claims adjusters in the normal course of adjusting claims and is reflected in the financial statements when the information becomes available. It is typical for more serious claims to take several years or longer to settle and the Company continually revises estimates as more information about claimants’ medical conditions and potential disability becomes known and the claims get closer to being settled.  Multiple factors can cause loss development both unfavorable and favorable. The favorable loss development we experienced across accident years was largely due to favorable case reserve development from closed claims and claims where the worker had reached maximum medical improvement.

 

 

Note 7. Comprehensive Income and Accumulated Other Comprehensive Income

Comprehensive income was $17.1 million for the three months ended June 30, 2018, compared to $17.4 million for the three months ended June 30, 2017.  Comprehensive income was $27.4 million for the six months ended June 30, 2018, compared to $31.9 million for the same period in 2017.  The difference between net income as reported and comprehensive income was due to changes in unrealized gains and losses, net of tax on available-for-sale debt securities.

Comprehensive income includes net income plus unrealized gains (losses) on our available-for-sale debt securities, net of tax. In reporting comprehensive income on a net basis in the statements of comprehensive income, we used a 21 percent tax rate in 2018 and a 35 percent tax rate in 2017. The following table illustrates the changes in the balance of each component of accumulated other comprehensive income for each period presented in the interim financial statements.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Beginning balance

 

$

(2,236

)

 

$

460

 

 

$

3,612

 

 

$

(492

)

Other comprehensive income (loss) before

   reclassification

 

 

(449

)

 

 

2,038

 

 

 

(5,863

)

 

 

3,094

 

Amounts reclassified from accumulated other

   comprehensive income

 

 

602

 

 

 

(82

)

 

 

168

 

 

 

(186

)

Net current period other comprehensive

   income (loss)

 

 

153

 

 

 

1,956

 

 

 

(5,695

)

 

 

2,908

 

Ending balance

 

$

(2,083

)

 

$

2,416

 

 

$

(2,083

)

 

$

2,416

 

 

16


 

The sale or other-than-temporary impairment of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive income to current period net income. The effects of reclassifications out of accumulated other comprehensive income by the respective line items of net income are presented in the following table.

 

Component of Accumulated Other

 

Three Months Ended

 

 

Six Months Ended

 

 

Affected line item in the

Comprehensive Income

 

June 30,

 

 

June 30,

 

 

statement of income

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

(in thousands)

 

 

 

Unrealized gains (losses) on

   available-for-sale securities

 

$

(762

)

 

$

126

 

 

$

(466

)

 

$

286

 

 

Net realized losses on

   investments

 

 

 

(762

)

 

 

126

 

 

 

(466

)

 

 

286

 

 

Income before income taxes

 

 

 

160

 

 

 

(44

)

 

 

44

 

 

 

(100

)

 

Income tax expense

 

 

$

(602

)

 

$

82

 

 

$

(422

)

 

$

186

 

 

Net income

 

 

Note 8. Fair Value Measurements

The Company carries available-for-sale securities at fair value in our consolidated financial statements and determines fair value measurements and disclosure in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures.

The Company determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard defines fair value, describes three levels of inputs that may be used to measure fair value, and expands disclosures about fair value measurements.

Fair value is defined in ASC Topic 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is the price to sell an asset or transfer a liability and, therefore, represents an exit price, not an entry price. Fair value is the exit price in the principal market (or, if lacking a principal market, the most advantageous market) in which the reporting entity would transact. Fair value is a market-based measurement, not an entity-specific measurement, and, as such, is determined based on the assumptions that market participants would use in pricing the asset or liability. The exit price objective of a fair value measurement applies regardless of the reporting entity’s intent and/or ability to sell the asset or transfer the liability at the measurement date.

ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset, also known as current replacement cost. Valuation techniques used to measure fair value are to be consistently applied.

In ASC Topic 820, inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable:

 

Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity.

 

Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

17


 

Valuation techniques used to measure fair value are intended to maximize the use of observable inputs and minimize the use of unobservable inputs. ASC Topic 820 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data.

 

Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are to be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters.

The fair values of the Company’s investments are based upon prices provided by an independent pricing service. The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider. Securities reported at fair value utilizing Level 1 inputs represent assets whose fair value is determined based upon observable unadjusted quoted market prices for identical assets in active markets. Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2018.

At June 30, 2018, assets measured at fair value on a recurring basis are summarized below:

 

 

 

June 30, 2018

 

 

 

Level 1

Inputs

 

 

Level 2

Inputs

 

 

Level 3

Inputs

 

 

Total Fair

Value

 

 

 

(in thousands)

 

Financial instruments carried at fair value, classified as a part of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale—fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

 

 

$

218,300

 

 

$

 

 

$

218,300

 

Corporate bonds

 

 

 

 

 

143,959

 

 

 

 

 

 

143,959

 

U.S. agency-based mortgage-backed securities

 

 

 

 

 

13,362

 

 

 

 

 

 

13,362

 

U.S. Treasury securities

 

 

65,141

 

 

 

 

 

 

 

 

 

65,141

 

Total securities available-for-sale—fixed maturity

 

 

65,141

 

 

 

375,621

 

 

 

 

 

 

440,762

 

Securities available-for-sale—equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic common stock

 

 

13,588

 

 

 

 

 

 

2

 

 

 

13,590

 

Total available-for-sale

 

$

78,729

 

 

$

375,621

 

 

$

2

 

 

$

454,352

 

 

At June 30, 2018, assets measured at amortized cost are summarized below:

 

 

 

June 30, 2018

 

 

 

Level 1

Inputs

 

 

Level 2

Inputs

 

 

Level 3

Inputs

 

 

Total Fair

Value

 

 

 

(in thousands)

 

Securities held-to-maturity—fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

 

 

$

434,737

 

 

$

 

 

$

434,737

 

Corporate bonds

 

 

 

 

 

98,016

 

 

 

 

 

 

98,016

 

U.S. agency-based mortgage-backed securities

 

 

 

 

 

9,387

 

 

 

 

 

 

9,387

 

U.S. Treasury securities

 

 

7,095

 

 

 

 

 

 

 

 

 

7,095

 

Obligations of U.S. government agencies

 

 

 

 

 

56,662

 

 

 

 

 

 

56,662

 

Asset-backed securities

 

 

 

 

 

1,175

 

 

 

 

 

 

1,175

 

Total held-to-maturity

 

$

7,095

 

 

$

599,977

 

 

$

 

 

$

607,072

 

 

18


 

At December 31, 2017, assets measured at fair value on a recurring basis are summarized below:

 

 

 

December 31, 2017

 

 

 

Level 1

Inputs

 

 

Level 2

Inputs

 

 

Level 3

Inputs

 

 

Total Fair

Value

 

 

 

(in thousands)

 

Financial instruments carried at fair value, classified as part of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale—fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

 

 

$

251,140

 

 

$

 

 

$

251,140

 

Corporate bonds

 

 

 

 

 

130,222

 

 

 

 

 

 

130,222

 

U.S. agency-based mortgage-backed securities

 

 

 

 

 

18,014

 

 

 

 

 

 

18,014

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

66,218

 

 

 

 

 

 

 

 

 

66,218

 

Total available-for-sale—fixed maturity

 

$

66,218

 

 

$

399,376

 

 

$

 

 

$

465,594

 

Securities available-for-sale—equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic common stock

 

 

9,248

 

 

 

 

 

 

34

 

 

 

9,282

 

Total available-for-sale

 

$

75,466

 

 

$

399,376

 

 

$

34

 

 

$

474,876

 

 

At December 31, 2017, assets measured at amortized cost are summarized below:

 

 

 

December 31, 2017

 

 

 

Level 1

Inputs

 

 

Level 2

Inputs

 

 

Level 3

Inputs

 

 

Total Fair

Value

 

 

 

(in thousands)

 

Securities held-to-maturity—fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

 

 

$

469,101

 

 

$

 

 

$

469,101

 

Corporate bonds

 

 

 

 

 

100,047

 

 

 

 

 

 

100,047

 

U.S. agency-based mortgage-backed securities

 

 

 

 

 

10,845

 

 

 

 

 

 

10,845

 

U.S. Treasury securities

 

 

6,750

 

 

 

 

 

 

 

 

 

6,750

 

Obligations of U.S. government agencies

 

 

 

 

 

51,257

 

 

 

 

 

 

51,257

 

Asset-backed securities

 

 

 

 

 

1,309

 

 

 

 

 

 

1,309

 

Total held-to-maturity

 

$

6,750

 

 

$

632,559

 

 

$

 

 

$

639,309

 

 

The Company determines fair value amounts for financial instruments using available third-party market information. When such information is not available, the Company determines the fair value amounts using appropriate valuation methodologies. Nonfinancial instruments such as real estate, property and equipment, deferred policy acquisition costs, deferred income taxes and loss and loss adjustment expense reserves are excluded from the fair value disclosure.

The following table presents summary information regarding changes in the fair value of assets measured at fair value using Level 3 input.

 

 

 

Six Months Ended

 

 

Twelve Months Ended

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

(in thousands)

 

Balance, beginning of period

 

$

34

 

 

$

 

Transfer into Level 3

 

 

 

 

 

34

 

Unrealized loss on equity security

 

 

(32

)

 

 

 

Balance, end of period

 

$

2

 

 

$

34

 

 

At June 30, 2018, the Company held one security measured at fair value on a nonrecurring basis due to a recognized impairment of $100,000. The security was valued at fair value at the time of impairment and is currently being carried at the adjusted amortized cost value of $12,000 at June 30, 2018.  The security is valued using Level 2 inputs and had a fair value of $32,000 at June 30, 2018.

Cash and Cash Equivalents —The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair values, which are characterized as Level 1 assets.

19


 

Investments —The fair values for fixed maturity and equity securities are based on prices obtained from an independent pricing service. Equity and treasury securities are characterized as Level 1 assets, as their fair values are based on quoted prices in active markets. Fixed maturity securities, other than treasury securities, are characterized as Level 2 assets, as their fair values are determined using observable market inputs.

Short Term Investments —The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair values. These securities are characterized as Level 2 assets in the fair value hierarchy.

The following table summarizes the carrying values and corresponding fair values for financial instruments:

 

 

 

As of  June 30, 2018

 

 

As of  December 31, 2017

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities—held-to-maturity

 

$

605,877

 

 

$

607,072

 

 

$

629,668

 

 

$

639,309

 

Fixed maturity securities—available-for-sale

 

 

440,762

 

 

 

440,762

 

 

 

465,594

 

 

 

465,594

 

Equity securities

 

 

13,590

 

 

 

13,590

 

 

 

9,282

 

 

 

9,282

 

Short-term investments

 

 

106,811

 

 

 

106,811

 

 

 

25,770

 

 

 

25,770

 

Cash and cash equivalents

 

 

21,176

 

 

 

21,176

 

 

 

55,559

 

 

 

55,559

 

 

 

Note 9. Treasury Stock

The Company’s Board of Directors initiated a share repurchase program in February 2010. In October 2016, the Board reauthorized this program with a limit of $25.0 million with no expiration date.  There were no shares repurchased under this program in the six months ended June 30, 2018 and 2017.

 

 

Note 10. Subsequent Events

On July 31, 2018, the Company’s Board of Directors declared a quarterly cash dividend of $0.22 per share payable on September 21, 2018 to shareholders of record as of September 7, 2018. The Board considers the payment of a regular cash dividend each calendar quarter.

20


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q, together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2017.

We begin our discussion with an overview of our Company to give you an understanding of our business and the markets we serve. We then discuss our critical accounting policies. This is followed with a discussion of our results of operations for the three and six months ended June 30, 2018 and 2017. This discussion includes an analysis of certain significant period-to-period variances in our consolidated statements of operations. Our cash flows and financial condition are discussed under the caption “Liquidity and Capital Resources.”

Business Overview

AMERISAFE is a holding company that markets and underwrites workers’ compensation insurance through its insurance subsidiaries. Workers’ compensation insurance covers statutorily prescribed benefits that employers are obligated to provide to their employees who are injured in the course and scope of their employment. Our business strategy is focused on providing this coverage to small to mid-sized employers engaged in hazardous industries, principally construction, trucking, logging and lumber, manufacturing, and agriculture. Employers engaged in hazardous industries pay substantially higher than average rates for workers’ compensation insurance compared to employers in other industries, as measured per payroll dollar. The higher premium rates are due to the nature of the work performed and the inherent workplace danger of our target employers. Hazardous industry employers also tend to have less frequent but more severe claims as compared to employers in other industries due to the nature of their businesses. We provide proactive safety reviews of employers’ workplaces. These safety reviews are a vital component of our underwriting process and also promote safer workplaces. We utilize intensive claims management practices that we believe permit us to reduce the overall cost of our claims. In addition, our audit services ensure that our policyholders pay the appropriate premiums required under the terms of their policies and enable us to monitor payroll patterns that cause underwriting, safety or fraud concerns. We believe that the higher premiums typically paid by our policyholders, together with our disciplined underwriting and safety, claims and audit services, provide us with the opportunity to earn attractive returns for our shareholders.

We actively market our insurance in 27 states through independent agencies, as well as through our wholly owned insurance agency subsidiary. We are also licensed in an additional 20 states, the District of Columbia and the U.S. Virgin Islands.

Critical Accounting Policies

Understanding our accounting policies is key to understanding our financial statements. Management considers some of these policies to be very important to the presentation of our financial results because they require us to make significant estimates and assumptions. These estimates and assumptions affect the reported amounts of our assets, liabilities, revenues and expenses and related disclosures. Some of the estimates result from judgments that can be subjective and complex and, consequently, actual results in future periods might differ from these estimates.

Management believes that the most critical accounting policies relate to the reporting of reserves for loss and loss adjustment expenses, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from reinsurers, premiums receivable, assessments, deferred policy acquisition costs, deferred income taxes, the impairment of investment securities and share-based compensation. These critical accounting policies are more fully described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2017.

21


 

Results of Operations

The following table summarizes our consolidated financial results for the three and six months ended June 30, 2018 and 2017.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(dollars in thousands, except per share data)

 

 

 

(unaudited)

 

Gross premiums written

 

$

93,702

 

 

$

87,039

 

 

$

191,044

 

 

$

182,117

 

Net premiums earned

 

 

88,995

 

 

 

82,749

 

 

 

176,305

 

 

 

173,661

 

Net investment income

 

 

7,303

 

 

 

7,471

 

 

 

14,512

 

 

 

14,181

 

Total revenues

 

 

95,380

 

 

 

89,925

 

 

 

189,555

 

 

 

187,467

 

Total expenses

 

 

74,450

 

 

 

67,774

 

 

 

149,211

 

 

 

146,583

 

Net income

 

 

16,956

 

 

 

15,481

 

 

 

33,125

 

 

 

29,005

 

Diluted earnings per common share

 

$

0.88

 

 

$

0.81

 

 

$

1.72

 

 

$

1.51

 

Other Key Measures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net combined ratio (1)

 

 

83.6

%

 

 

81.9

%

 

 

84.7

%

 

 

84.4

%

Return on average equity (2)

 

 

15.5

%

 

 

13.1

%

 

 

15.2

%

 

 

12.4

%

Book value per share (3)

 

$

23.11

 

 

$

25.02

 

 

$

23.11

 

 

$

25.02

 

 

(1)

The net combined ratio is calculated by dividing the sum of loss and loss adjustment expenses incurred, underwriting and certain other operating costs, commissions, salaries and benefits, and policyholder dividends by net premiums earned in the current period.

(2)

Return on average equity is calculated by dividing the annualized net income by the average shareholders’ equity for the applicable period.

(3)

Book value per share is calculated by dividing shareholders’ equity by total outstanding shares, as of the end of the period.

Consolidated Results of Operations for Three Months Ended June 30, 2018 Compared to June 30, 2017

Gross Premiums Written. Gross premiums written for the quarter ended June 30, 2018 were $93.7 million, compared to $87.0 million for the same period in 2017, an increase of 7.7%. The increase was attributable to a $6.5 million increase in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters and a $0.5 million increase in assumed premium from mandatory pooling arrangements.  Offsetting these increases was a $0.4 million decrease in annual premiums on voluntary policies written during the period.  The effective loss cost multiplier, or ELCM, for our voluntary business was 1.66 for the second quarter ended June 30, 2018 compared to 1.68 for the same period in 2017.

Net Premiums Written. Net premiums written for the quarter ended June 30, 2018 were $91.3 million, compared to $84.8 million for the same period in 2017, an increase of 7.7%. The increase was primarily attributable to the increase in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 2.6% for the second quarter of 2018 and 2017.  For additional information, see Item 1, “Business—Reinsurance” in our Annual Report on Form 10-K for the year ended December 31, 2017.

Net Premiums Earned. Net premiums earned for the second quarter of 2018 were $89.0 million, compared to $82.7 million for the same period in 2017, an increase of 7.5%. The increase was attributable to the increase in net premiums written in the quarter.

Net Investment Income. Net investment income for the quarter ended June 30, 2018 was $7.3 million, compared to $7.5 million for the same period in 2017. The decrease of $0.2 million was largely due to the change in value of an investment in a limited partnership hedge fund recorded in last year’s second quarter.  In last year’s second quarter, there was an increase in the value of the hedge fund.  The change in value of this investment was recorded in investment income.  Average invested assets, including cash and cash equivalents, were $1.2 billion in the quarter ended June 30, 2018 and 2017. The pre-tax investment yield on our investment portfolio was 2.5% and 2.6% per annum during the quarters ended June 30, 2018 and 2017, respectively. The tax-equivalent yield on our investment portfolio was 2.9% per annum for the quarter ended June 30, 2018 and 3.3% for the same period in 2017. The tax-equivalent yield is calculated using the effective interest rate and the appropriate marginal tax rate.

Net Realized Gains (Losses) on Investments. Net realized losses on investments for the three months ended June 30, 2018 totaled $1.1 million compared to net realized losses of $0.4 million for the same period in 2017. Net realized losses in the second quarter of 2018 were attributable to the sale of fixed maturity securities classified as available-for-sale.  Net realized losses in the second quarter of 2017 were attributable to called fixed maturity securities.

22


 

Net Unrealized Gains (Losses) on Equity Securities. Net unrealized gains on equity securities for the three months ended June 30, 2018 were $0.1 million and represent the change in fair value recognized in net income as a result of the adoption of ASU 2016-01 as further discussed in Note 1 above.

Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses (“LAE”) incurred totaled $52.1 million for the three months ended June 30, 2018, compared to $46.4 million for the same period in 2017, an increase of $5.6 million, or 12.2%. The current accident year loss and LAE incurred were $63.6 million, or 71.5% of net premiums earned, compared to $57.1 million, or 69.0% of net premiums earned for the same period in 2017. We recorded favorable prior accident year development of $11.6 million in the second quarter of 2018, compared to favorable prior accident year development of $10.7 million in the same period of 2017, as further discussed below in “Prior Year Development.” Our net loss ratio was 58.5% in the second quarter of 2018, compared to 56.1% for the same period of 2017.

Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for the quarter ended June 30, 2018 were $21.3 million, compared to $20.2 million for the same period in 2017, an increase of 5.4%. This increase was primarily due to a $0.6 million increase in commission expense and a $0.5 million increase in premium taxes.  Offsetting these increases were a decrease of $0.4 million in insurance related assessments and a $0.2 million decrease in accounts receivable write-offs.  Our expense ratio was 23.9% in the second quarter of 2018 compared to 24.4% in the second quarter of 2017.

Income Tax Expense. Income tax expense for the three months ended June 30, 2018 was $4.0 million, compared to $6.7 million for the same period in 2017. The decrease was attributable to the lower federal corporate income tax rate of 21% compared to 35% in the same period of 2017 as well as a decrease in the pre-tax income to $20.9 million in the quarter ended June 30, 2018 from $22.2 million in the same period in 2017. The effective tax rate for the Company decreased to 19.0% in the quarter ended June 30, 2018 from 30.1% in the same period in 2017. The decrease in the effective tax rate resulted from the lower federal income tax rate and a slightly higher proportion of tax-exempt income to underwriting income in the quarter relative to the second quarter of 2017.

Consolidated Results of Operations for Six Months Ended June 30, 2018 Compared to June 30, 2017

Gross Premiums Written. Gross premiums written for the first six months of 2018 were $191.0 million, compared to $182.1 million for the same period in 2017, an increase of 4.9%. The increase was primarily attributable to a $7.5 million increase in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters and a $1.0 million increase in annual premiums on voluntary policies written during the period.  These increases were partially offset by a $3.4 million decrease in assumed premium from mandatory pooling arrangements.  The ELCM for our voluntary business was 1.64 for the six months ended June 30, 2018 compared to 1.67 for the same period in 2017.

Net Premiums Written. Net premiums written for the six months ended June 30, 2018 were $186.3 million, compared to $177.5 million for the same period in 2017, an increase of 5.0%. The increase was primarily attributable to the increase in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 2.6% for the first six months of 2018 and 2017.  For additional information, see Item 1, “Business—Reinsurance” in our Annual Report on Form 10-K for the year ended December 31, 2017.

Net Premiums Earned. Net premiums earned for the first six months of 2018 were $176.3 million, compared to $173.7 million for the same period in 2017, an increase of 1.5%. The increase was attributable to the increase in net premiums written during the period.

Net Investment Income. Net investment income for the first six months of 2018 was $14.5 million, compared to $14.2 million for the same period in 2017, an increase of 2.3%. The increase was largely due to the change in value of an investment in a limited partnership hedge fund recorded in the prior year.  During the six months ended June 30, 2017, there was a decrease in value of the hedge fund.  The change in value of this investment was recorded in investment income.  Average invested assets, including cash and cash equivalents were $1.2 billion in the six months ended June 30, 2018 and 2017. The pre-tax investment yield on our investment portfolio was 2.4% per annum during the six months ended June 30, 2018 and 2017. The tax-equivalent yield on our investment portfolio was 2.9% per annum for the first six months of 2018 compared to 3.3% in the same period in 2017. The tax-equivalent yield is calculated using the effective interest rate and the appropriate marginal tax rate.

Net Realized Gains (Losses) on Investments. Net realized losses on investments for the six months ended June 30, 2018 totaled $1.1 million, compared to net realized losses of $0.6 million for the same period in 2017.  Net realized losses in the first six months of 2018 were attributable to the sale of fixed maturity securities classified as available-for-sale.   Net realized losses in the first six months of 2017 were attributable to called fixed maturity securities.

23


 

Net Unrealized Gains (Losses) on Equity Securities. Net unrealized losses on equity securities for the six months ended June 30, 2018 were $0.3 million and represent the change in fair value recognized in net income as a result of the adoption of ASU 2016-01 as further discussed in Note 1 above.

Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled $105.2 million for the six months ended June 30, 2018, compared to $102.6 million for the same period in 2017, an increase of $2.6 million, or 2.5%. The current accident year loss and LAE incurred were $126.1 million, or 71.5% of net premiums earned, compared to $119.8 million, or 69.0% of net premiums earned, for the same period in 2017. We recorded favorable prior accident year development of $20.8 million in the first six months of 2018, compared to favorable prior accident year development of $17.2 million in the same period of 2017, as further discussed below in “Prior Year Development.” Our net loss ratio was 59.7% in the first six months of 2018, compared to 59.1% for the same period of 2017.

Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for the six months ended June 30, 2018 were $41.5 million, compared to $41.4 million for the same period in 2017, an increase of 0.3%. This increase was primarily due to a $1.5 million increase in premium taxes, a $0.7 million increase in commission expense and a $0.3 million change in reinsurance experience-rated commission.  Offsetting these increases were a $1.7 million decrease in insurance related assessments and a $0.6 million decrease in accounts receivable write-offs. Our expense ratio was 23.6% in the first six months of 2018 compared to 23.8% in the same period of 2017.

Income Tax Expense. Income tax expense for the six months ended June 30, 2018 was $7.2 million, compared to $11.9 million for the same period in 2017. The decrease was attributable to the lower federal corporate income tax rate of 21% compared to 35% in the same period of 2017 in addition to a decrease in pre-tax income to $40.3 million in the first six months of 2018 from $40.9 million in the first six months of 2017. The effective tax rate for the Company decreased to 17.9% for the six months ended June 30, 2018 from 29.1% for the six months ended June 30, 2017.  The decrease in the effective tax rate resulted largely from the lower federal income tax rate for the six months ended June 30, 2018 compared with the six months ended June 30, 2017.

Liquidity and Capital Resources

Our principal sources of operating funds are premiums, investment income and proceeds from sales and maturities of investments. Our primary uses of operating funds include payments of claims and operating expenses. Currently, we pay claims using cash flow from operations and invest the remaining funds.

Net cash provided by operating activities was $37.0 million for the six months ended June 30, 2018, which represented a $3.8 million decrease from $40.8 million in net cash provided by operating activities for the six months ended June 30, 2017. This decrease in operating cash flow was attributable to a $7.9 million increase in amounts held by others, a $6.4 million increase in losses paid and a $1.1 million decrease in investment income.  Offsetting these amounts were a $9.5 million decrease in federal taxes paid and a $2.1 million increase in premium collections.

Net cash used in investing activities was $62.8 million for the six months ended June 30, 2018, compared to net cash used in investment activities of $38.0 million for the same period in 2017. Cash provided by sales and maturities of investments totaled $132.8 million for the six months ended June 30, 2018, compared to $133.9 million for the same period in 2017. A total of $194.7 million in cash was used to purchase investments in the six months ended June 30, 2018, compared to $177.7 million in purchases for the same period in 2017.

Net cash used in financing activities in the six months ended June 30, 2018 was $8.6 million compared to net cash used in financing activities of $7.8 million for the same period in 2017. In the six months ended June 30, 2018, $8.6 million of cash was used for dividends paid to shareholders compared to $7.8 million in the same period of 2017. Proceeds from stock option exercises totaled $0.1 million in first half of 2018 compared to none in the same period in 2017.  

Investment Portfolio

Our investment portfolio, including cash and cash equivalents, totaled $1.2 billion at June 30, 2018 and December 31, 2017. Purchases of fixed maturity securities are classified as available-for-sale or held-to-maturity at the time of purchase based on the individual security. The reported value of our fixed maturity securities classified as held-to-maturity, as defined by FASB ASC Topic 320, Investments-Debt and Equity Securities, was equal to their amortized cost, and thus was not impacted by changing interest rates. Our equity securities and fixed maturity securities classified as available-for-sale were reported at fair value.

24


 

The composition of our investment portfolio, including cash and cash equivalents, as of June 30, 2018, is shown in the following table:

 

 

 

Carrying

Value

 

 

Percentage of

Portfolio

 

 

 

(in thousands)

 

Fixed maturity securities—held-to-maturity:

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

432,914

 

 

 

36.4

%

Corporate bonds

 

 

98,702

 

 

 

8.3

%

U.S. agency-based mortgage-backed securities

 

 

9,038

 

 

 

0.8

%

U.S. Treasury securities and obligations of U.S. government agencies

 

 

64,063

 

 

 

5.4

%

Asset-backed securities

 

 

1,160

 

 

 

0.1

%

Total fixed maturity securities—held-to-maturity

 

 

605,877

 

 

 

51.0

%

Fixed maturity securities—available-for-sale:

 

 

 

 

 

 

 

 

States and political subdivisions

 

 

218,300

 

 

 

18.4

%

Corporate bonds

 

 

143,959

 

 

 

12.1

%

U.S. agency-based mortgage-backed securities

 

 

13,362

 

 

 

1.1

%

U.S. Treasury securities and obligations of U.S. government agencies

 

 

65,141

 

 

 

5.5

%

Total fixed maturity securities—available-for-sale

 

 

440,762

 

 

 

37.1

%

Equity securities

 

 

13,590

 

 

 

1.1

%

Short-term investments

 

 

106,811

 

 

 

9.0

%

Cash and cash equivalents

 

 

21,176

 

 

 

1.8

%

Total investments, including cash and cash equivalents

 

$

1,188,216

 

 

 

100.0

%

 

Our debt securities classified as available-for-sale are “marked to market” as of the end of each calendar quarter. As of that date, unrealized gains and losses are recorded to Accumulated Other Comprehensive Income (Loss), except when such securities are deemed to be other-than-temporarily impaired. For our securities classified as held-to-maturity, unrealized gains and losses are not recorded in the financial statements until realized or until a decline in fair value, below amortized cost, is deemed to be other-than-temporary.

During the three and six months ended June 30, 2018 and 2017, there were no impairment losses recognized for other-than-temporary declines in the fair value of our investments.

Prior Year Development

The Company recorded favorable prior accident year development of $11.6 million in the three months ended June 30, 2018. The table below sets forth the favorable development for the three and six months ended June 30, 2018 and 2017 for accident years 2013 through 2017 and, collectively, for all accident years prior to 2013.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in millions)

 

Accident Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

$

 

 

$

 

 

$

 

 

$

 

2016

 

 

3.2

 

 

 

 

 

 

3.2

 

 

 

 

2015

 

 

3.4

 

 

 

4.3

 

 

 

9.4

 

 

 

4.3

 

2014

 

 

1.4

 

 

 

3.5

 

 

 

4.3

 

 

 

7.5

 

2013

 

 

1.7

 

 

 

1.5

 

 

 

1.7

 

 

 

3.9

 

Prior to 2013

 

 

1.9

 

 

 

1.4

 

 

 

2.2

 

 

 

1.5

 

Total net development

 

$

11.6

 

 

$

10.7

 

 

$

20.8

 

 

$

17.2

 

 

25


 

The table below sets forth the number of open claims as of June 30, 2018 and 2017, and the number of claims reported and closed during the three and six months then ended.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Open claims at beginning of period

 

 

4,943

 

 

 

4,942

 

 

 

4,982

 

 

 

5,195

 

Claims reported

 

 

1,386

 

 

 

1,252

 

 

 

2,645

 

 

 

2,476

 

Claims closed

 

 

(1,307

)

 

 

(1,353

)

 

 

(2,605

)

 

 

(2,830

)

Open claims at end of period

 

 

5,022

 

 

 

4,841

 

 

 

5,022

 

 

 

4,841

 

 

The number of open claims at June 30, 2018 increased by 181 claims as compared to the number of open claims at June 30, 2017. At June 30, 2018, our incurred amounts for certain accident years, particularly 2016, 2015 and 2014, developed more favorably than management previously expected. The revisions to the Company’s reserves reflect new information gained by claims adjusters in the normal course of adjusting claims and is reflected in the financial statements when the information becomes available. It is typical for more serious claims to take several years or longer to settle and the Company continually revises estimates as more information about claimants’ medical conditions and potential disability becomes known and the claims get closer to being settled.  Multiple factors can cause both favorable and unfavorable loss development. The favorable loss development we experienced across accident years was largely due to favorable case reserve development from closed claims and claims where the worker had reached maximum medical improvement.

The assumptions we used in establishing our reserves were based on our historical claims data. However, as of June 30, 2018, actual results for certain accident years have been better than our assumptions would have predicted. We do not presently intend to modify our assumptions for establishing reserves in light of recent results. However, if actual results for current and future accident years are consistent with, or different than, our results in these recent accident years, our historical claims data will reflect this change and, over time, will impact the reserves we establish for future claims.

Our reserves for loss and loss adjustment expenses are inherently uncertain and our focus on providing workers’ compensation insurance to employers engaged in hazardous industries results in our receiving relatively fewer but more severe claims than many other workers’ compensation insurance companies. As a result of this focus on higher severity, lower frequency business, our reserve for loss and loss adjustment expenses may have greater volatility than other workers’ compensation insurance companies. For additional information, see Item 1, “Business—Loss Reserves” in our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are credit risk, interest rate risk and equity price risk. We currently have no exposure to foreign currency risk.

Since December 31, 2017, there have been no material changes in the quantitative or qualitative aspect of our market risk profile. For additional information regarding the Company’s exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2017.

26


 

Item 4. Controls and Procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information we are required to disclose in reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms specified by the SEC. We note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving the stated goals under all potential future conditions.

Because of its inherent limitations, management does not expect that our disclosure controls and procedures and our internal controls over financial reporting will prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate. Any control system, no matter how well designed and operated, is based upon certain assumptions and can only provide reasonable, not absolute assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to errors or fraud will not occur or that all control issues and instances of fraud, if any within the Company, have been detected.

There have not been any changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

27


 

PART II—OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The Board of Directors initially authorized the Company’s share repurchase program in February 2010. In October 2016, the Board reauthorized this program with no expiration date. As of June 30, 2018, we had repurchased a total of 1,258,250 shares of our outstanding common stock for $22.4 million.  The Company had $25.0 million available for future purchases at June 30, 2018 under this program.  There were no shares repurchased during the six months ended June 30, 2018 and 2017. The purchases may be effected from time to time depending upon market conditions and subject to applicable regulatory considerations.  It is anticipated that future purchases will be funded from available capital.  

Item 6. Exhibits.

 

Exhibit

No.

 

Description

 

 

 

  10.1

 

2018 Restated Non-Employee Director Restricted Stock Plan (incorporated by reference to Appendix A to the Company’s Proxy Statement on Schedule 14A filed April 29, 2016)

 

 

 

  31.1

 

Certification of G. Janelle Frost filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

  31.2

 

Certification of Neal A. Fuller filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

  32.1

 

Certification of G. Janelle Frost and Neal A. Fuller filed pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

28


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

AMERISAFE, INC.

 

 

 

August 3, 2018

 

/s/ G. Janelle Frost

 

 

G. Janelle Frost

 

 

President, Chief Executive Officer and Director

 

 

(Principal Executive Officer)

 

 

 

August 3, 2018

 

/s/ Neal A. Fuller

 

 

Neal A. Fuller

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

29