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AMSF > SEC Filings for AMSF > Form 10-Q on 6-Nov-2012All Recent SEC Filings

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Form 10-Q for AMERISAFE INC


6-Nov-2012

Quarterly Report


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 1of 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, 2011.

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 nine months ended September 30, 2012 and 2011. 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 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 employ a proactive, disciplined approach to underwriting employers and providing comprehensive services intended to lessen the overall incidence and cost of workplace injuries. We provide safety services at employers' workplaces as a vital component of our underwriting process and also to 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.


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We actively market our insurance in 35 states and the District of Columbia through independent agencies, as well as through our wholly owned insurance agency subsidiary. We are also licensed in an additional 12 states 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 Part II to our Annual Report on Form 10-K for the year ended December 31, 2011.

Results of Operations

The following table summarizes our consolidated financial results for the three
and nine months ended September 30, 2012 and 2011.



                                                  Three Months Ended                Nine Months Ended
                                                    September 30,                     September 30,
                                                2012              2011            2012            2011
                                                    (dollars in thousands, except per share data)
                                                                     (unaudited)
Gross premiums written                       $    77,283        $  65,698       $ 247,683       $ 209,973
Net premiums earned                               72,425           64,454         211,948         184,804
Net investment income                              6,801            6,495          20,320          19,638
Total revenues                                    80,374           71,743         235,665         205,753
Total expenses                                    71,371           66,225         211,196         187,913
Net income                                         7,121            4,884          20,127          16,108
Diluted earnings per common share            $      0.38        $    0.26       $    1.08       $    0.86

Other Key Measures
Net combined ratio (1)                              98.5 %          102.3 %          99.4 %         101.1 %
Return on average equity (2)                         7.7 %            5.7 %           7.4 %           6.4 %
Book value per share (3)                     $     20.46        $   18.84       $   20.46       $   18.84

(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 the current period's net premiums earned.

(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.

Consolidated Results of Operations for Three Months Ended September 30, 2012 Compared to September 30, 2011

Gross Premiums Written. Gross premiums written for the quarter ended September 30, 2012 were $77.3 million, compared to $65.7 million for the same period in 2011, an increase of 17.6%. The increase was attributable to a $10.2 million increase in annual premiums on voluntary policies written during the period, a $0.6 million increase in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters, a $0.6 million increase in assumed premium from mandatory pooling arrangements, and a $0.2 million increase in premium on direct assignment policies.

Net Premiums Written. Net premiums written for the quarter ended September 30, 2012 were $73.3 million, compared to $62.2 million for the same period in 2011, an increase of 17.8%. The increase was primarily attributable to the increase in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 5.3% for the third quarter of 2012, compared to 5.2% for the third quarter of 2011. For additional information, see "Business-Reinsurance" in our Annual Report on Form 10-K for the year ended December 31, 2011.


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Net Premiums Earned. Net premiums earned for the third quarter of 2012 were $72.4 million, compared to $64.5 million for the same period in 2011, an increase of 12.4%. The increase was attributable to the increase in net premiums written in the quarter, offset by an increase in unearned premiums.

Net Investment Income. Net investment income for the quarter ended September 30, 2012 was $6.8 million compared to $6.5 million for the same period in 2011. Average invested assets, including cash and cash equivalents, were $880.8 million in the quarter ended September 30, 2012, compared to $830.5 million for the same period in 2011, an increase of 6.1%. The pre-tax investment yield on our investment portfolio was 3.1% per annum during the quarters ended September 30, 2012 and September 30, 2011. The tax-equivalent yield on our investment portfolio was 4.5% per annum for the quarter ended September 30, 2012 and 4.6% for the same period in 2011. The tax-equivalent yield is calculated using the effective interest rate and a 35% marginal tax rate.

Net Realized Gains (Losses) on Investments. Net realized gains on investments for the three months ended September 30, 2012 totaled $1.0 million, compared to $0.5 million for the same period in 2011. Net realized gains in the third quarter of 2012 were attributable to called fixed maturity securities and the sale of equity securities and fixed maturity securities from the available-for-sale portfolio. Net realized gains in the third quarter of 2011 were attributable to realized gains from the sale of equity securities and fixed maturity securities from the available for sale portfolio.

Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses (LAE) incurred totaled $53.9 million for the three months ended September 30, 2012, compared to $49.3 million for the same period in 2011, an increase of $4.5 million, or 9.2%. The current accident year losses and LAE incurred were $55.4 million, or 76.5% of net premiums earned, compared to $50.4 million, or 78.2% of net premiums earned, for the same period in 2011. We recorded favorable prior accident year development of $1.6 million in the third quarter of 2012, compared to favorable development of $1.1 million in the same period of 2011, as further discussed below in "Prior Year Development." Our net loss ratio was 74.4% in the third quarter of 2012, compared to 76.5% for the same period of 2011.

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 September 30, 2012 were $16.5 million, compared to $16.3 million for the same period in 2011, an increase of 0.9%. This increase was primarily due to a $0.6 million increase in commission expense and a $0.2 million increase in mandatory pooling arrangement fees. Offsetting these increases was a $0.8 million increase in experience-rated commissions and a decrease in insurance related assessments of $0.2 million. Our expense ratio decreased to 22.8% in the third quarter of 2012 from 25.4% in the third quarter of 2011 mostly as a result of the increase in net premiums earned during the period of 12.4%.

Interest expense. Interest expense for the third quarter of 2012 was $0.1 million, compared to $0.3 million for the same period in 2011. Weighted average borrowings for the quarter ended September 30, 2012 were $6.4 million, compared to $26.4 million for the same period in 2011. The decrease was due to the redemption of $25.8 million of subordinated debt securities in 2012. The weighted average interest rate increased to 4.3% per annum for the third quarter of 2012 from 4.1% per annum for the third quarter of 2011.

Income tax expense. Income tax expense for the three months ended September 30, 2012 was $1.9 million, compared to $0.6 million for the same period in 2011. The increase was attributable to an increase in pre-tax income to $9.0 million in the quarter ended September 30, 2012 from $5.5 million in the same period in 2011. The effective tax rate increased to 20.9% in the third quarter of 2012 from 11.5% in the third quarter of 2011. The increase in the effective tax rate was attributable to a lower ratio of tax-exempt investment income to pre-tax income in the third quarter of 2012 compared to the third quarter of 2011.

Consolidated Results of Operations for Nine Months Ended September 30, 2012 Compared to September 30, 2011

Gross Premiums Written. Gross premiums written for the first nine months of 2012 were $247.7 million, compared to $210.0 million for the same period in 2011, an increase of 18.0%. The increase was attributable to a $24.6 million increase in annual premiums on voluntary policies written during the period, a $10.9 million increase in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters, a $1.9 million increase in assumed premium from mandatory pooling arrangements, and a $0.3 million increase in premium on direct assignment policies.

Net Premiums Written. Net premiums written for the nine months ended September 30, 2012 were $235.8 million, compared to $199.5 million for the same period in 2011, an increase of 18.2%. The increase was primarily attributable to the increase in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 5.3% for the first nine months of 2012, compared to 5.4% for the first nine months of 2011. The decrease in ceded premiums as a percentage of gross premiums earned is a result of a change in our 2012 reinsurance treaties.

Net Premiums Earned. Net premiums earned for the first nine months of 2012 were $211.9 million, compared to $184.8 million for the same period in 2011, an increase of 14.7%. The increase was attributable to the increase in net premiums written, offset by an increase in unearned premiums.


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Net Investment Income. Net investment income for the first nine months of 2012 was $20.3 million, compared to $19.6 million for the same period in 2011. Average invested assets, including cash and cash equivalents, were $872.3 million in the nine months ended September 30, 2012, compared to $828.4 million for the same period in 2011, an increase of 5.3%. The pre-tax investment yield on our investment portfolio was 3.1% per annum during the nine months ended September 30, 2012 and 2011. The tax-equivalent yield on our investment portfolio was 4.5% per annum for the first nine months of 2012 compared to 4.6% for the same period in 2011. The tax-equivalent yield is calculated using the effective interest rate and a 35% marginal tax rate.

Net Realized Gains (Losses) on Investments. Net realized gains on investments for the nine months ended September 30, 2012 totaled $2.9 million, compared to $0.8 million for the same period in 2011. Net realized gains in the first nine months of 2012 were attributable to called fixed maturity securities and from the sale of equity securities and fixed maturity securities from the available-for-sale portfolio. Net realized gains in the first nine months of 2011 primarily resulted from $0.9 million in gains from called fixed maturity securities, the sale of equity securities and the sale of fixed maturity securities from the available-for-sale portfolio. The gains were offset by an other-than-temporary impairment of $0.2 million on one asset-backed security from our held-to-maturity portfolio in the 2011 period.

Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses (LAE) incurred totaled $162.4 million for the nine months ended September 30, 2012, compared to $140.1 million for the same period in 2011, an increase of $22.3 million, or 15.9%. The current accident year losses and LAE incurred were $162.2 million, or 76.5% of net premiums earned, compared to $144.5 million, or 78.2% of net premiums earned, for the same period in 2011. We recorded unfavorable prior accident year development of $0.2 million in the first nine months of 2012, compared to favorable prior accident year development of $4.4 million in the same period of 2011, as further discussed below in "Prior Year Development." Our net loss ratio was 76.6% in the first nine months of 2012, compared to 75.8% for the same period of 2011.

Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for the nine months ended September 30, 2012 were $46.6 million, compared to $45.8 million for the same period in 2011, an increase of 1.6%. This increase was primarily due to a $2.5 million increase in commission expense, a $0.7 million increase in accounts receivable write-offs, a $0.6 million increase in mandatory pooling arrangement fees and an increase in compensation of $0.3 million. Offsetting these increases was a $3.1 million increase in experience-rated commission, a decrease in premium taxes of $0.6 million and a decrease of $0.3 million in ceding commission related to our 2012 reinsurance agreement. Our expense ratio decreased to 22.0% in the first nine months of 2012 from 24.8% in the same period of 2011 mostly as a result of the increase in net premiums earned during the period of 14.7%.

Interest expense. Interest expense for the first nine months of 2012 was $0.6 million, compared to $1.0 million for the same period in 2011. Weighted average borrowings for the nine months ended September 30, 2012 were $17.1 million, compared to $33.0 for the same period of 2011. The decrease was due to the redemption of $25.8 million of subordinated debt securities in 2012. The weighted average interest rate increased to 4.3% per annum for the first nine months of 2012 from 4.2% for the same period of 2011.

Income tax expense. Income tax expense for the nine months ended September 30, 2012 was $4.3 million, compared to $1.7 million for the same period in 2011. The increase was attributable to an increase in pre-tax income to $24.5 million in the first nine months of 2012 from $17.8 million in the first nine months of 2011. The effective tax rate also increased to 17.7% for the nine months ended September 30, 2012 from 9.7% for the nine months ended September 30, 2011. This increase is due to a lower level of tax-exempt investment income relative to our pre-tax income.

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 our excess cash.

Net cash provided by operating activities was $59.0 million for the nine months ended September 30, 2012, which represented a $29.2 million increase from $29.8 million in net cash provided by operating activities for the nine months ended September 30, 2011. This increase in operating cash flow was attributable to a $22.7 million increase in premiums collected, a $4.8 million decrease in underwriting expenses paid, a $4.8 million increase in investment income and a $4.4 million increase in payable for securities sold. Offsetting these increases was a $5.4 million increase in federal income taxes paid.

Net cash used in investing activities was $9.8 million for the nine months ended September 30, 2012, compared to net cash used in investment activities of $4.5 million for the same period in 2011. Cash provided by sales and maturities of investments totaled $209.2 million for the nine months ended September 30, 2012, compared to $197.0 million for the same period in 2011. A total of $218.1 million in cash was used to purchase investments in the nine months ended September 30, 2012, compared to $200.9 million in purchases for the same period in 2011.


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Net cash used in financing activities in the nine months ended September 30, 2012 was $25.4 million, compared to $17.3 million for the same period in 2011. In the nine months ended September 30, 2012, $25.8 million of cash was used to redeem subordinated debt securities compared to $10.3 million for the same period in 2011. During the nine months ended September 30, 2012, there were no repurchases of outstanding shares of our common stock, compared to $9.7 million used for repurchases for the same period in 2011. Proceeds from stock option exercises totaled $0.2 million in the nine months ended September 30, 2012, compared to $2.0 million for the same period in 2011. During the nine months ended September 30, 2012, there was a tax benefit of share based payments in the amount of $0.1 million, compared to $0.7 for the same period in 2011.

The Board of Directors initially authorized the Company's share repurchase program in February 2010. In October 2011, the Board reauthorized this program with a new limit of $25.0 million. In October 2012, the Board extended the share repurchase program through December 31, 2013. There were no shares purchased during the nine months ended September 30, 2012. During the nine months ended September 30, 2011, 517,032 shares were purchased for $9.7 million, or an average price (including commissions) of $18.67 per share.

In May 2012, the Company's Board of Directors authorized the redemption of the remaining $12.9 million principal amount of outstanding subordinated debt securities. The redemption occurred in August of 2012.

Investment Portfolio

As of September 30, 2012, our investment portfolio, including cash and cash equivalents, totaled $882.6 million, an increase of 5.5% from September 30, 2011. Effective April 1, 2010, purchases of fixed maturity securities are classified as available-for-sale or held-to-maturity based on the individual security. Such classification is made at the time of purchase. 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.

The composition of our investment portfolio, including cash and cash equivalents, as of September 30, 2012, is shown in the following table:

                                                        Carrying           Percentage of
                                                          Value              Portfolio
                                                                 (in thousands)
Fixed maturity securities-held-to-maturity:
States and political subdivisions                       $ 414,904                    47.0 %
U.S. agency-based mortgage-backed securities               35,666                     4.0 %
Commercial mortgage-backed securities                      51,535                     5.8 %

U.S. Treasury securities and obligations of U.S.
Government agencies                                        11,035                     1.3 %
Corporate bonds                                            90,067                    10.2 %
Asset-backed securities                                     4,474                     0.5 %

Total fixed maturity securities-held-to-maturity          607,681                    68.8 %

Fixed maturity securities-available-for-sale:
States and political subdivisions                          96,801                    11.0 %
U.S. agency-based mortgage-backed securities               11,062                     1.3 %
Corporate bonds                                            39,268                     4.4 %

Total fixed maturity
securities-available-for-sale                             147,131                    16.7 %

Equity securities                                           7,117                     0.8 %
Short-term investments                                     51,345                     5.8 %
Cash and cash equivalents                                  69,345                     7.9 %

Total investments, including cash and cash
equivalents                                             $ 882,619                   100.0 %

Our 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, 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.


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Prior Year Development

The Company recorded favorable prior accident year development of $1.6 million in the three months ended September 30, 2012 and an unfavorable prior accident year development of $0.2 million for the nine months then ended. The table below sets forth the favorable or unfavorable development for the three and nine months ended September 30, 2012 and 2011 for accident years 2007 through 2011 and, collectively, for all accident years prior to 2007.

                                                                        Favorable/(Unfavorable) Development
                               Three Months Ended                Three Months Ended                Nine Months Ended               Nine Months Ended
                               September 30, 2012                September 30, 2011                September 30, 2012             September 30, 2011
                                                                                   (in millions)
Accident Year
2011                          $                  -             $                   -              $               (3.2 )          $                -
2010                                             -                               (1.4 )                           (5.6 )                        (20.5 )
2009                                            0.1                               0.2                              0.4                            0.2
2008                                            0.5                               0.3                              1.0                            4.0
2007                                            0.4                               1.0                              3.2                            8.9
Prior to 2007                                   0.6                               1.0                              4.0                           11.8

Total net development         $                 1.6            $                  1.1             $               (0.2 )          $               4.4

The table below sets forth the number of open claims as of September 30, 2012 and 2011, and the number of claims reported and closed during the three and nine months then ended.

                                         Three Months Ended           Nine Months Ended
                                            September 30,               September 30,
                                         2012           2011          2012          2011
  Open claims at beginning of period       5,059         5,132         5,184         5,129
  Claims reported                          1,574         1,765         4,468         4,584
  Claims closed                           (1,413 )      (1,442 )      (4,432 )      (4,258 )

  Open claims at end of period             5,220         5,455         5,220         5,455

The number of open claims at September 30, 2012 decreased by 235 claims as compared to the number of open claims at September 30, 2011. Efforts continue to . . .

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