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AMSF > SEC Filings for AMSF > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for AMERISAFE INC


3-May-2013

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 1 of this Quarterly Report on Form 10-Q, together with 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, 2012.

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 months ended March 31, 2013 and 2012. This discussion includes an analysis of certain significant period-to-period variances in our consolidated statements of income. Our cash flows and financial condition are discussed under the caption "Liquidity and Capital Resources."


Table of Contents

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, 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 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.

We actively market our insurance in 30 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 17 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 our Annual Report on Form 10-K for the year ended December 31, 2012.


Table of Contents

Results of Operations

The following table summarizes our consolidated financial results for the three
months ended March 31, 2013 and 2012.



                                                                Three Months Ended
                                                                    March 31,
                                                      2013                               2012
                                                  (Dollars in thousands, except per share data)
                                                                   (unaudited)
Gross premiums written                       $               99,123              $             84,924
Net premiums earned                                          79,709                            69,790
Net investment income                                         6,670                             6,914
Total revenues                                               86,512                            78,654
Total expenses                                               75,432                            67,221

Net income                                   $                8,851              $              9,561

Diluted earnings per common share            $                 0.47              $               0.52

Other Key Measures
Net combined ratio (1)                                         94.7 %                            96.0 %
Return on average equity (2)                                    9.2 %                            10.8 %
Book value per share (3)                     $                21.20              $              19.78

(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 March 31, 2013 Compared to March 31, 2012

Gross Premiums Written. Gross premiums written for the quarter ended March 31, 2013 were $99.1 million, compared to $84.9 million for the same period in 2012, an increase of 16.7%. The increase was attributable to a $12.6 million increase in annual premiums on voluntary policies written during the period, a $0.6 million increase in assumed premium from mandatory pooling arrangements and a $0.6 million increase in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters.

Net Premiums Written. Net premiums written for the quarter ended March 31, 2013 were $94.6 million, compared to $81.0 million for the same period in 2012, an increase of 16.8%. 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 first quarter of 2013 and 2012. For additional information, see Item 1, "Business-Reinsurance" in our Annual Report on Form 10-K for the year ended December 31, 2012.

Net Premiums Earned. Net premiums earned for the first quarter of 2013 were $79.7 million, compared to $69.8 million for the same period in 2012, an increase of 14.2%. 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 March 31, 2013 was $6.7 million, compared to $6.9 million for the same period in 2012. Average invested assets, including cash and cash equivalents, were $912.3 million in the quarter ended March 31, 2013, compared to an average of $863.4 million for the same period in 2012, an increase of 5.7%. The pre-tax investment yield on our investment portfolio was 2.9% and 3.2% per annum during the quarters ended March 31, 2013 and 2012 respectively. The tax-equivalent yield on our investment portfolio was 4.2% per annum for the quarter ended March 31, 2013, compared to 4.5% per annum for the same period in 2012. The tax-equivalent yield is calculated using the effective interest rate and a 35% marginal tax rate.

Net Realized Gains on Investments. Net realized gains on investments for the three months ended March 31, 2013 were immaterial compared to net realized gains of $1.8 million for the same period in 2012. Net realized gains in the first quarter of 2012 were attributable to realized gains from the sale of equity securities and fixed maturity securities from the available-for-sale portfolio.


Table of Contents

Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses (LAE) incurred totaled $56.0 million for the three months ended March 31, 2013, compared to $51.8 million for the same period in 2012, an increase of $4.2 million, or 8.1%. The current accident year losses and LAE incurred were $58.4 million, or 73.2% of net premiums earned, compared to $53.4 million, or 76.5% of net premiums earned, for the same period in 2012. We recorded favorable prior accident year development of $2.4 million in the first quarter of 2013, compared to $1.6 million in the same period of 2012, as further discussed below in "Prior Year Development." Our net loss ratio was 70.3% in the first quarter of 2013, compared to 74.3% for the same period of 2012.

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 March 31, 2013 were $18.9 million, compared to $14.7 million for the same period in 2012, an increase of 28.3%. This increase was primarily due to a $2.3 million increase in insurance related assessments, a $1.0 million decrease in experience-rated commissions, and a $0.9 million increase in commission expense. Offsetting these increases was a $0.4 million decrease in premium taxes. Our expense ratio was 23.7% in the first quarter of 2013 compared to 21.1% in the first quarter of 2012.

Interest expense. There was no interest expense for the first quarter of 2013 compared to $0.3 million for the same period in 2012. There were no weighted average borrowings for the quarter ended March 31, 2013 compared to $25.8 million for the same period in 2012. The weighted average interest rate was 4.3% per annum for the first quarter of 2012.

Income tax expense. Income tax expense for the three months ended March 31, 2012 was $2.2 million, compared to $1.9 million for the same period in 2012. The increase was attributable to an increase in the effective tax rate to 20.1% in the first quarter of 2013 from 16.4% in the first quarter of 2012. The increase in the effective tax rate was attributable to a lower ratio of tax-exempt investment income to pre-tax income in the first quarter of 2013 compared to the first quarter of 2012.

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 excess.

Net cash provided by operating activities was $21.8 million for the three months ended March 31, 2013, which represented a $3.7 million increase from $18.1 million in net cash provided by operating activities for the three months ended March 31, 2012. This increase in operating cash flow was attributable to a $6.4 million increase in premium collections, a $1.2 million decrease in federal income taxes paid and a $1.1 million increase in investment income. Offsetting these increases were a $2.8 million increase in losses paid, a $1.1 million decrease in the payable for securities sold and a $1.0 million increase in underwriting expenses paid.

Net cash used in investing activities was $39.2 million for the three months ended March 31, 2013, compared to net cash provided by investment activities of $0.2 million for the same period in 2012. Cash provided by sales and maturities of investments totaled $78.3 million for the three months ended March 31, 2013, compared to $73.6 million for the same period in 2012. A total of $117.3 million in cash was used to purchase investments in the three months ended March 31, 2013, compared to $73.4 million in purchases for the same period in 2012.

Net cash used in financing activities in the three months ended March 31, 2013 was immaterial compared to $0.0 million for the same period in 2012. In the three months ended March, 31, 2013 and 2012, there were no repurchases of outstanding shares of our common stock. There were proceeds of $0.9 million from stock option exercises in the three months ended March 31, 2013. There were no proceeds from stock option exercises in the three months ended March 31, 2012. During the three months ended March 31, 2013, there was a tax benefit of share based payments in the amount of $0.6 million compared to none in the same period of 2012. Offsetting these increases was a dividend to stockholders of $1.5 million in the three months ended March 31, 2013 compared to none in the same period of 2012.

The Board of Directors initially authorized the Company's share repurchase program in February 2010. In October 2011 and 2012, the Board reauthorized this program. As of December 31, 2012, we had repurchased a total of 1,258,250 shares of our outstanding common stock for $22.4 million. The Company had $24.4 million available for future purchases at December 31, 2012 under this program. There were no shares purchased during the three months ended March 31, 2013 and 2012. We intend to purchase shares of our common stock 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.

The Company's Board of Directors declared its first quarterly cash dividend of $0.08 per share, which was paid on March 28, 2013 to shareholders of record as of March 14, 2013.


Table of Contents

The Company's Board of Directors declared a quarterly cash dividend of $0.08 per share, payable on June 26, 2013 to shareholders of record as of June 12, 2013. The Board intends to consider the payment of a regular cash dividend each calendar quarter. On an annualized basis, the cash dividend is currently expected to be $0.32 per share.

Investment Portfolio

As of March 31, 2013, our investment portfolio, including cash and cash equivalents, totaled $918.7 million, an increase of 5.8% from March 31, 2012. 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 March 31, 2013, is shown in the following table:

                                                         Carrying         Percentage of
                                                           Value            Portfolio
                                                                 (in thousands)
Fixed maturity securities-held-to-maturity:
States and political subdivisions                        $ 399,453                  43.5 %
U.S. agency-based mortgage-backed securities                30,077                   3.3 %
Commercial mortgage-backed securities                       51,524                   5.6 %
U.S. Treasury securities and obligations of U.S.
Government agencies                                         11,027                   1.2 %
Corporate bonds                                             77,596                   8.4 %
Asset-backed securities                                      4,011                   0.4 %

Total fixed maturity securities-held-to-maturity           573,688                  62.4 %

Fixed maturity securities-available-for-sale:
States and political subdivisions                          117,367                  12.8 %
U.S. agency-based mortgage-backed securities                10,066                   1.1 %
Corporate bonds                                             52,679                   5.7 %

Total fixed maturity securities-available-for-sale         180,112                  19.6 %

Equity securities                                           15,197                   1.7 %
Short-term investments                                      74,420                   8.1 %
Cash and cash equivalents                                   75,294                   8.2 %

Total investments, including cash and cash
equivalents                                              $ 918,711                 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.


Table of Contents

Prior Year Development

The Company recorded favorable prior accident year development of $2.4 million
in the three months ended March 31, 2013. The table below sets forth the
favorable or unfavorable development for the three months ended March 31, 2013
and 2012 for accident years 2008 through 2012 and, collectively, for all
accident years prior to 2008.



                                    Favorable/(Unfavorable) Development
                              Three Months Ended            Three Months Ended
                                March 31, 2013                March 31, 2012
                                               (in millions)
     Accident Year
     2012                    $                0.1           $                -
     2011                                      -                           (3.6 )
     2010                                     0.2                           0.1
     2009                                     1.1                           0.3
     2008                                     0.8                           2.8
     Prior to 2008                            0.2                           2.0

     Total net development   $                2.4           $               1.6

The table below sets forth the number of open claims as of March 31, 2013 and 2012, and the number of claims reported and closed during the three months then ended.

                                                   Three Months Ended
                                                        March 31,
                                                   2013           2012
            Open claims at beginning of period       4,964         5,184
            Claims reported                          1,260         1,371
            Claims closed                           (1,145 )      (1,458 )

            Open claims at end of period             5,079         5,097

The number of open claims at March 31, 2013 decreased by 18 claims as compared to the number of open claims at March 31, 2012. Efforts continue to close prior year claims, especially in those circumstances where the claim could be settled for less than the corresponding case reserve amount (which amount represents the estimated ultimate cost to settle the claim, undiscounted). Management believes that these efforts have contributed, in part, to the favorable prior accident year development recorded for the three months ended March 31, 2013.

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, 2012.

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