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AMSF > SEC Filings for AMSF > Form 10-Q on 4-Nov-2013All Recent SEC Filings

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Form 10-Q for AMERISAFE INC


4-Nov-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 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, 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 and nine months ended September 30, 2013 and 2012. 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, 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.


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Results of Operations

The following table summarizes our consolidated financial results for the three
and nine months ended September 30, 2013 and 2012.



                                                  Three Months Ended                Nine Months Ended
                                                    September 30,                     September 30,
                                                2013              2012            2013            2012
                                                    (dollars in thousands, except per share data)
                                                                     (unaudited)
Gross premiums written                       $    86,137        $  77,283       $ 281,075       $ 247,683
Net premiums earned                               81,596           72,425         243,288         211,948
Net investment income                              6,947            6,801          20,266          20,320
Total revenues                                    88,003           80,374         262,026         235,665
Total expenses                                    75,556           71,371         227,852         211,196
Net income                                         9,699            7,121          26,194          20,127
Diluted earnings per common share            $      0.52        $    0.38       $    1.39       $    1.08
Other Key Measures
Net combined ratio (1)                              92.5 %           98.5 %          93.6 %          99.4 %
Return on average equity (2)                         9.8 %            7.7 %           8.9 %           7.4 %
Book value per share (3)                     $     21.67        $   20.46       $   21.67       $   20.46

(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 September 30, 2013 Compared to September 30, 2012

Gross Premiums Written. Gross premiums written for the quarter ended September 30, 2013 were $86.1 million, compared to $77.3 million for the same period in 2012, an increase of 11.5%. The increase was attributable to a $10.3 million increase in annual premiums on voluntary policies written during the period and a $0.7 million increase in assumed premiums from mandatory pooling arrangements. These increases were partially offset by a $2.4 million decrease in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters. The effective LCM for our voluntary business was 1.79 for the third quarter ended September 30, 2013 compared to 1.66 for the same period in 2012.

Net Premiums Written. Net premiums written for the quarter ended September 30, 2013 were $81.6 million, compared to $73.3 million for the same period in 2012, an increase of 11.4%. The increase was primarily attributable to the increase in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 5.2% for the third quarter of 2013 compared to 5.3% for the third quarter of 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 third quarter of 2013 were $81.6 million, compared to $72.4 million for the same period in 2012, an increase of 12.7%. The increase was attributable to the increase in net premiums written in the quarter.

Net Investment Income. Net investment income for the quarter ended September 30, 2013 was $6.9 million compared to $6.8 million for the same period in 2012. Average invested assets, including cash and cash equivalents, were $951.3 million in the quarter ended September 30, 2013, compared to an average of $880.8 million for the same period in 2012, an increase of 8.0%. The pre-tax investment yield on our investment portfolio was 2.9% and 3.1% per annum during the quarters ended September 30, 2013 and 2012, respectively. The tax-equivalent yield on our investment portfolio was 3.9% per annum for the quarter ended September 30, 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/(Losses) on Investments. Net realized losses on investments for the three months ended September 30, 2013 totaled $0.7 million compared to net realized gains of $1.0 million for the same period in 2012. Net realized losses in the third quarter of 2013 were attributable to $0.2 million in other-than-temporary impairments of one equity security and a realized loss of $0.5 million from the sale of equity securities from the available-for-sale portfolio. 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.


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Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses (LAE) incurred totaled $57.0 million for the three months ended September 30, 2013, compared to $53.9 million for the same period in 2012, an increase of $3.2 million, or 5.9%. The current accident year losses and LAE incurred were $59.7 million, or 73.2% of net premiums earned, compared to $55.4 million, or 76.5% of net premiums earned, for the same period in 2012. We recorded favorable prior accident year development of $2.7 million in the third quarter of 2013, compared to favorable prior accident year development of $1.6 million in the same period of 2012, as further discussed below in "Prior Year Development." Our net loss ratio was 69.9% in the third quarter of 2013, compared to 74.4% 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 September 30, 2013 were $18.5 million, compared to $16.5 million for the same period in 2012, an increase of 12.0%. This increase was primarily due to a $0.8 million increase in commission expense, a $0.4 million increase in compensation expense due to annual merit increases, a $0.4 million decrease in experience-rated commission, a $0.2 million increase in premium tax expense and a $0.2 million increase in mandatory pooling arrangement fees. Our expense ratio was 22.6% in the third quarter of 2013 compared to 22.8% in the third quarter of 2012.

Interest Expense. There was no interest expense for the third quarter of 2013 compared to $0.1 million for the same period in 2012. There were no weighted average borrowings for the quarter ended September 30, 2013 compared to $6.4 million for the same period in 2012. The weighted average interest rate was 4.3% per annum for the third quarter of 2012.

Income Tax Expense. Income tax expense for the three months ended September 30, 2013 was $2.7 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 22.1% in the third quarter of 2013 from 20.9% in the third quarter of 2012. The increase in the effective tax rate was attributable to improved underwriting margins which lowered the ratio of tax-exempt investment income to pre-tax income in the third quarter of 2013 compared to the third quarter of 2012.

Consolidated Results of Operations for Nine Months Ended September 30, 2013 Compared to September 30, 2012

Gross Premiums Written. Gross premiums written for the first nine months of 2013 were $281.1 million, compared to $247.7 million for the same period in 2012, an increase of 13.5%. The increase was attributable to a $33.0 million increase in annual premiums on voluntary policies written during the period and a $2.2 million increase in assumed premium from mandatory pooling arrangements. These increases were partially offset by a $2.6 million decrease in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters.

Net Premiums Written. Net premiums written for the nine months ended September 30, 2013 were $267.5 million, compared to $235.8 million for the same period in 2012, an increase of 13.5%. 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 2013 and 2012.

Net Premiums Earned. Net premiums earned for the first nine months of 2013 were $243.3 million, compared to $211.9 million for the same period in 2012, an increase of 14.8%. The increase was attributable to the increase in net premiums written, offset by an increase in unearned premiums.

Net Investment Income. Net investment income for the first nine months of 2013 and 2012 was $20.3 million. Average invested assets, including cash and cash equivalents, were $929.7 million in the nine months ended September 30, 2013, compared to $872.3 million for the same period in 2012, an increase of 6.6%. The pre-tax investment yield on our investment portfolio was 2.9% per annum during the nine months ended September 30, 2013, compared to 3.1% per annum during the same period in 2012. The tax-equivalent yield on our investment portfolio was 3.9% per annum for the first nine months of 2013 compared to 4.5% 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/(Losses) on Investments. Net realized losses on investments for the nine months ended September 30, 2013 totaled $1.9 million, compared to net realized gains of $2.9 million for the same period in 2012. Net realized losses in the nine months ended September 30, 2013 were attributable to $2.2 million in other-than-temporary impairments of certain equity securities offset by $0.2 million in realized gains from the sale of equity securities and fixed maturity securities from the available-for-sale portfolio and $0.1 million attributable to called fixed maturity securities. Net realized gains in the nine months ended September 30, 2012 were attributable to called fixed maturity securities and from the sale of equity and fixed maturity securities from the available-for-sale portfolio.

Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses (LAE) incurred totaled $169.9 million for the nine months ended September 30, 2013, compared to $162.4 million for the same period in 2012, an increase of $7.4 million, or 4.6%. The current accident year losses and LAE incurred were $178.1 million, or 73.2% of net premiums earned, compared to $162.2


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million, or 76.5% of net premiums earned, for the same period in 2012. We recorded favorable prior accident year development of $8.3 million in the first nine months of 2013, compared to unfavorable prior accident year development of $0.2 million in the same period of 2012, as further discussed below in "Prior Year Development." Our net loss ratio was 69.8% in the first nine months of 2013, compared to 76.6% 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 nine months ended September 30, 2013 were $57.0 million, compared to $46.6 million for the same period in 2012, an increase of 22.5%. This increase was primarily due to a $3.6 million increase in insurance related assessments, a $2.5 million increase in commission expense, a $1.9 million increase in compensation expense, a $1.6 million decrease in experience-rated commission, a $1.1 million increase in premium taxes, a $0.6 million increase in mandatory pooling arrangement fees. Offsetting these increases was a $0.4 million increase in ceding commission related to our 2013 reinsurance agreement and a $0.3 million decrease in accounts receivable write-offs. Our expense ratio was 23.4% in the first nine months of 2013 compared to 22.0% in the same period of 2012.

Interest Expense. There was no interest expense for the nine months ended September 30, 2013 compared to $0.6 million for the same period in 2012. There were no weighted average borrowings for the nine months ended September 30, 2013 compared to $17.1 million for the same period in 2012. The weighted average interest rate was 4.3% per annum for the first nine months of 2012.

Income Tax Expense. Income tax expense for the nine months ended September 30, 2013 was $8.0 million, compared to $4.3 million for the same period in 2012. The increase was attributable to an increase in pre-tax income to $34.2 million in the first nine months of 2013 from $24.5 million in the first nine months of 2012. The effective tax rate also increased to 23.4% for the nine months ended September 30, 2013 from 17.7% for the nine months ended September 30, 2012. This increase is due to improved underwriting margins which lowered the ratio 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 the excess.

Net cash provided by operating activities was $99.8 million for the nine months ended September 30, 2013, which represented a $40.7 million increase from $59.1 million in net cash provided by operating activities for the nine months ended September 30, 2012. This increase in operating cash flow was attributable to a $24.4 million increase in premium collections, a $10.0 million decrease in underwriting expenses paid, a $5.5 million decrease in losses paid, a $2.1 million increase in payable for securities sold and a $1.8 increase in investment income. Offsetting these increases were a $5.0 million decrease in reinsurance recoveries and a $4.1 million increase in federal income taxes paid.

Net cash used in investing activities was $74.1 million for the nine months ended September 30, 2013, compared to net cash used in investment activities of $9.8 million for the same period in 2012. Cash provided by sales and maturities of investments totaled $197.2 million for the nine months ended September 30, 2013, compared to $209.2 million for the same period in 2012. A total of $270.5 million in cash was used to purchase investments in the nine months ended September 30, 2013, compared to $218.1 million in purchases for the same period in 2012.

Net cash used in financing activities in the nine months ended September 30, 2013 was $1.6 million compared to $25.4 million for the same period in 2012. In the nine months ended September 30, 2012, $25.8 million of cash was used to redeem subordinated debt securities. There were proceeds of $1.6 million from stock option exercises in the nine months ended September 30, 2013 compared to $0.2 million for the same period in 2012. During the nine months ended September 30, 2013, the tax benefit from share based compensation was $1.2 million compared to a $0.1 million in the same period of 2012. Offsetting these increases were dividends to stockholders of $4.4 million in the nine months ended September 30, 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 September 30, 2013 under this program. There were no shares purchased during the nine months ended September 30, 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.

On October 28, 2013, the Company's Board of Directors declared a quarterly cash dividend of $0.08 per share, payable on December 27, 2013 to shareholders of record as of December 13, 2013. The Board intends to consider the payment of a regular cash dividend each calendar quarter.


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On September 15, 2013, we commuted certain reinsurance agreements with Hannover Re (Ireland) Plc ("Hannover Re") and Aspen Insurance Limited ("Aspen") covering portions of the 2008 through 2009 accident years. Hannover Re and Aspen remain obligated to subsidiaries of the Company under other reinsurance agreements. We received cash of $14.9 million and an additional $17.6 million payment effectuated solely through offset against the balance of the funds withheld account under the reinsurance agreement in exchange for releasing Hannover Re and Aspen from their reinsurance obligations under the commuted agreements. As a result of the commutation, there was no effect on the Company's net income in the three or nine months ended September 30, 2013.

Investment Portfolio

As of September 30, 2013, our investment portfolio, including cash and cash equivalents, totaled $978.3 million, an increase of 10.8% from $882.6 million on September 30, 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 September 30, 2013, is shown in the following table:

                                                        Carrying           Percentage of
                                                          Value              Portfolio
                                                                 (in thousands)
Fixed maturity securities-held-to-maturity:
States and political subdivisions                       $ 388,694                    39.7 %
U.S. agency-based mortgage-backed securities               23,876                     2.4 %
Commercial mortgage-backed securities                      51,414                     5.3 %
U.S. Treasury securities and obligations of U.S.
government agencies                                        11,522                     1.2 %
Corporate bonds                                            71,126                     7.3 %
Asset-backed securities                                     3,521                     0.4 %

Total fixed maturity securities-held-to-maturity          550,153                    56.3 %

Fixed maturity securities-available-for-sale:
States and political subdivisions                         130,558                    13.3 %
U.S. agency-based mortgage-backed securities                8,041                     0.8 %
Corporate bonds                                            64,102                     6.6 %

Total fixed maturity
securities-available-for-sale                             202,701                    20.7 %

Equity securities                                          12,260                     1.3 %
Short-term investments                                     86,131                     8.8 %
Cash and cash equivalents                                 116,778                    11.9 %
Other Investments                                          10,271                     1.0 %

Total investments, including cash and cash
equivalents                                             $ 978,294                   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.

During 2013, the Company recorded charges for certain equity securities whose fair values were determined to be other-than-temporarily impaired. These charges are included in "Net realized gains/(losses) on investments", and total $0.2 million and $2.2 million for the three and nine months ended September 30, 2013, respectively. No such impairment charges were taken in the three or nine months ended September 30, 2012.


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Prior Year Development

The Company recorded favorable prior accident year development of $2.7 million
in the three months ended September 30, 2013. The table below sets forth the
favorable or unfavorable development for the three and nine months ended
September 30, 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                Nine Months Ended              Nine Months Ended
                                       September 30, 2013               September 30, 2012               September 30, 2013              September 30, 2012
                                                                                          (in millions)
Accident Year
2012                                  $                  -             $                  -             $                 0.5           $                 -
2011                                                     -                                -                               0.4                           (3.2 )
2010                                                     -                                -                               0.3                           (5.6 )
2009                                                    1.4                              0.1                              2.4                            0.4
2008                                                    0.8                              0.5                              2.5                            1.0
Prior to 2008                                           0.5                              1.0                              2.2                            7.2
. . .
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