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AMSF > SEC Filings for AMSF > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for AMERISAFE INC

Form 10-Q for AMERISAFE INC


1-Aug-2014

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, 2013.

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, 2014 and 2013. 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."


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, trucking, manufacturing, oil and gas 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 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, 2013.


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Results of Operations

The following table summarizes our consolidated financial results for the three
months and six months ended June 30, 2014 and 2013.



                                                 Three Months Ended                Six Months Ended
                                                      June 30,                         June 30,
                                               2014              2013            2014            2013
                                                   (dollars in thousands, except per share data)
                                                                    (unaudited)
Gross premiums written                      $   103,820        $  95,815       $ 209,523       $ 194,938
Net premiums earned                              93,516           81,983         182,749         161,692
Net investment income                             6,845            6,649          13,553          13,319
Total revenues                                  100,624           87,511         196,797         174,023
Total expenses                                   83,563           76,864         166,332         152,296
Net income                                       12,773            7,644          23,322          16,495
Diluted earnings per common share           $      0.68        $    0.41       $    1.23       $    0.88
Other Key Measures
Net combined ratio (1)                             89.4 %           93.8 %          91.0 %          94.2 %
Return on average equity (2)                       11.9 %            7.8 %          10.9 %           8.5 %
Book value per share (3)                    $     23.26        $   21.29       $   23.26       $   21.29

(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, 2014 Compared to June 30, 2013

Gross Premiums Written. Gross premiums written for the quarter ended June 30, 2014 were $103.8 million, compared to $95.8 million for the same period in 2013, an increase of 8.4%. The increase was attributable to a $7.2 million increase in annual premiums on voluntary policies written during the period and a $0.6 million increase in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters. The effective loss cost multiplier, or LCM, for our voluntary business was 1.86 for the second quarter ended June 30, 2014 compared to 1.76 for the same period in 2013.

Net Premiums Written. Net premiums written for the quarter ended June 30, 2014 were $100.3 million, compared to $91.2 million for the same period in 2013, an increase of 10.0%. The increase was primarily attributable to the increase in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 3.6% for the second quarter of 2014 compared to 5.3% for the second quarter of 2013. The decrease in ceded premiums as a percentage of gross premiums earned is a result of a change in our 2014 reinsurance program. For additional information, see Item 1, "Business-Reinsurance" in our Annual Report on Form 10-K for the year ended December 31, 2013.

Net Premiums Earned. Net premiums earned for the second quarter of 2014 were $93.5 million, compared to $82.0 million for the same period in 2013, an increase of 14.1%. The increase was attributable to the increase in net premiums written in the quarter and a decrease in the change in unearned premiums.

Net Investment Income. Net investment income for the quarter ended June 30, 2014 was $6.8 million, compared to $6.6 million for the same period in 2013. Average invested assets, including cash and cash equivalents, were $1.0 billion in the quarter ended June 30, 2014, compared to an average of $0.9 billion for the same period in 2013, an increase of 12.8%. The pre-tax investment yield on our investment portfolio was 2.6% and 2.9% per annum during the quarters ended June 30, 2014 and 2013, respectively. The tax-equivalent yield on our investment portfolio was 3.7% per annum for the quarter ended June 30, 2014, compared to 4.1% per annum for the same period in 2013. 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 June 30, 2014 totaled $0.2 million compared to net realized losses of $1.3 million for the same period in 2013. Net realized gains in the second quarter of 2014 were attributable to realized gains from the redemption of corporate bonds. Net realized losses in the second quarter of 2013 were attributable to $1.9 million in other-than-temporary impairments of certain equity securities offset by $0.6 million in realized gains from 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 $62.5 million for the three months ended June 30, 2014, compared to $56.8 million for the same period in 2013, an increase of $5.7 million, or 9.9%. The current accident year losses and LAE incurred were $66.9 million, or 71.5% of net premiums earned, compared to $60.0 million, or 73.2% of net premiums earned, for the same period in 2013. We recorded favorable prior accident year development of $4.4 million in the second quarter of 2014, compared to favorable prior accident year development of $3.2 million in the same period of 2013, as further discussed below in "Prior Year Development." Our net loss ratio was 66.8% in the second quarter of 2014, compared to 69.3% for the same period of 2013.

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, 2014 were $21.0 million, compared to $19.7 million for the same period in 2013, an increase of 6.9%. This increase was primarily due to a $0.8 million increase in commission expense, a $0.8 million decrease in experience-rated commission resulting from high severity losses, a $0.5 million increase in insurance related assessments and a $0.4 million decrease in ceding commission related to our 2014 reinsurance program. Offsetting these increases were a $0.6 million decrease in premium taxes and a $0.5 million decrease in compensation expense. Our expense ratio was 22.5% in the second quarter of 2014 compared to 24.0% in the second quarter of 2013.

Income Tax Expense. Income tax expense for the three months ended June 30, 2014 was $4.3 million, compared to $3.0 million for the same period in 2013. The increase was attributable to an increase in the pre-tax income to $17.1 million in the quarter ended June 30, 2014 from $10.6 million in the same period in 2013. The effective tax rate decreased to 25.1% in the quarter ended June 30, 2014 from 28.2% in the same period in 2013.

Consolidated Results of Operations for Six Months Ended June 30, 2014 Compared to June 30, 2013

Gross Premiums Written. Gross premiums written for the first half of 2014 were $209.5 million, compared to $194.9 million for the same period in 2013, an increase of 7.5%. The increase was attributable to a $15.7 million increase in annual premiums on voluntary policies written during the period and a $0.7 million increase in assumed premium from mandatory pooling arrangements. These increases were partially offset by a $2.0 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 six months ended June 30, 2014 were $202.7 million, compared to $185.9 million for the same period in 2013, an increase of 9.0%. The increase was primarily attributable to the increase in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 3.6% and 5.3% for the first half of 2014 and 2013, respectively. The decrease in ceded premiums as a percentage of gross premiums earned is a result of a change in our 2014 reinsurance program. For additional information, see Item 1, "Business-Reinsurance" in our Annual Report on Form 10-K for the year ended December 31, 2013.

Net Premiums Earned. Net premiums earned for the first half of 2014 were $182.7 million, compared to $161.7 million for the same period in 2013, an increase of 13.0%. The increase was attributable to the increase in net premiums written and a decrease in the change in unearned premiums.

Net Investment Income. Net investment income for the first six months of 2014 was $13.6 million, compared to $13.3 million for the same period in 2013. Average invested assets, including cash and cash equivalents, were $1.0 billion in the six months ended June 30, 2014, compared to $0.9 billion for the same period in 2013, an increase of 12.5%. The pre-tax investment yield on our investment portfolio was 2.6% per annum during the six months ended June 30, 2014, compared to 2.9% per annum during the same period in 2013. The tax-equivalent yield on our investment portfolio was 3.7% per annum for the first half of 2014 compared to 4.1% for the same period in 2013. 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 six months ended June 30, 2014 totaled $0.3 million, compared to net realized losses of $1.3 million for the same period in 2013. Net realized gains in the first half of 2014 were attributable to realized gains from the redemption of corporate bonds. Net realized losses in the first half of 2013 were attributable to $1.9 million in other-than-temporary impairments of certain equity securities offset by $0.6 million in 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 LAE incurred totaled $123.7 million for the six months ended June 30, 2014, compared to $112.8 million for the same period in 2013, an increase of $10.9 million, or 9.7%. The current accident year losses and LAE incurred were $130.7 million, or 71.5% of net premiums earned, compared to $118.4 million, or 73.2% of net premiums earned, for the same period in 2013. We recorded favorable prior accident year development of $6.9 million in the first half of 2014, compared to favorable prior accident year development of $5.6 million in the same period of 2013, as further discussed below in "Prior Year Development." Our net loss ratio was 67.7% in the first half of 2014, compared to 69.8% for the same period of 2013.


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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, 2014 were $42.4 million, compared to $38.5 million for the same period in 2013, an increase of 10.0%. This increase was primarily due to a $1.8 million decrease in experience-rated commission, a $1.3 million increase in commission expense, a $0.8 million decrease in ceding commission related to our 2014 reinsurance program, a $0.6 million increase in compensation expense and a $0.2 million increase in insurance related assessments. Offsetting these increases was a $1.1 million decrease in premium taxes. Our expense ratio was 23.2% in the first half of 2014 compared to 23.8% in the same period of 2013.

Income Tax Expense. Income tax expense for the six months ended June 30, 2014 was $7.1 million, compared to $5.2 million for the same period in 2013. The increase was attributable to an increase in pre-tax income to $30.5 million in the first half of 2014 from $21.7 million in the first half of 2013. The effective tax rate decreased to 23.4% for the six months ended June 30, 2014 from 24.1% for the six months ended June 30, 2013.

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 $70.6 million for the six months ended June 30, 2014, which represented a $11.2 million increase from $59.4 million in net cash provided by operating activities for the six months ended June 30, 2013. This increase in operating cash flow was attributable to a $22.4 million increase in premium collections, a $1.9 million increase in investment income and a $0.4 million increase in paid losses payable. Offsetting these increases were a $5.8 million decrease in payable for securities sold, a $4.4 million increase in underwriting expenses paid, a $1.3 million increase in federal income taxes paid, a $0.6 million decrease in reinsurance recoveries and a $0.5 million increase in losses paid.

Net cash used in investing activities was $83.5 million for the six months ended June 30, 2014, compared to net cash used in investment activities of $67.8 million for the same period in 2013. Cash provided by sales and maturities of investments totaled $145.8 million for the six months ended June 30, 2014, compared to $131.6 million for the same period in 2013. A total of $228.6 million in cash was used to purchase investments in the six months ended June 30, 2014, compared to $198.7 million in purchases for the same period in 2013.

Net cash used in financing activities in the six months ended June 30, 2014 was $11.4 million compared to net cash used in financing activities of $0.9 million for the same period in 2013. In the six months ended June 30, 2014, $13.8 million of cash was used for dividends paid to shareholders compared to $2.9 million in the same period of 2013. Offsetting this increases were proceeds of $1.1 million from stock option exercises in the six months ended June 30, 2014 and 2013. During the six months ended June 30, 2014, the tax benefit from share based compensation was $1.2 million compared to $0.9 million for the same period in 2013.

The Board of Directors initially authorized the Company's share repurchase program in February 2010. In October 2011, 2012 and 2013, the Board reauthorized this program. As of June 30, 2014, we had repurchased a total of 1,258,250 shares of our outstanding common stock for $22.4 million. The Company has $25.0 million available for future purchases at June 30, 2014 under this program. There were no shares purchased during the six months ended June 30, 2014 and 2013. 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 February 25, 2014, the Company declared an extraordinary cash dividend of $0.50 per share, or $9.3 million in the aggregate, which was paid on March 28, 2014 to shareholders of record on March 14, 2014. There were no extraordinary cash dividends declared in 2013.

Also on February 25, 2014, the Company declared a regular quarterly cash dividend of $0.12 per share, or $2.2 million, payable on March 28, 2014 to shareholders of record on March 14, 2014. In 2013, the Company paid a quarterly cash dividend of $0.08 per share.

On April 29, 2014, the Company's Board of Directors declared a quarterly cash dividend of $0.12 per share, or $2.2 million, payable on June 26, 2014 to shareholders of record as of June 12, 2014.

On July 29, 2014, the Company's Board of Directors declared a quarterly cash dividend of $0.12 per share, payable on September 26, 2014 to shareholders of record as of September 12, 2014. The Board intends to consider the payment of a regular cash dividend each calendar quarter.


Table of Contents

Investment Portfolio

As of June 30, 2014, our investment portfolio, including cash and cash equivalents, totaled $1.1 billion, an increase of 12.7% from $0.9 billion on June 30, 2013. 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 June 30, 2014, is shown in the following table:

                                                        Carrying           Percentage of
                                                          Value              Portfolio
                                                                 (in thousands)
Fixed maturity securities-held-to-maturity:
States and political subdivisions                      $   392,381                   36.9 %
U.S. agency-based mortgage-backed securities                19,170                    1.8 %
Commercial mortgage-backed securities                       49,327                    4.6 %
U.S. Treasury securities and obligations of U.S.
government agencies                                         12,259                    1.2 %
Corporate bonds                                            102,925                    9.7 %
Asset-backed securities                                      3,083                    0.3 %

Total fixed maturity securities-held-to-maturity           579,145                   54.5 %

Fixed maturity securities-available-for-sale:
States and political subdivisions                          155,092                   14.6 %
U.S. agency-based mortgage-backed securities                 7,758                    0.7 %
Corporate bonds                                            121,763                   11.4 %

Total fixed maturity
securities-available-for-sale                              284,613                   26.7 %

Equity securities                                            3,980                    0.4 %
Short-term investments                                      85,806                    8.1 %
Cash and cash equivalents                                   98,818                    9.3 %
Other investments                                           11,092                    1.0 %

Total investments, including cash and cash
equivalents                                            $ 1,063,454                  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 the three and six months ended June 30, 2014, there were no impairment losses recognized for other-than-temporary declines in the fair value of our investments.

In June 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 totaled $1.9 million for the three and six months ended June 30, 2013.


Table of Contents

Prior Year Development

The Company recorded favorable prior accident year development of $4.4 million
in the three months ended June 30, 2014. The table below sets forth the
favorable or unfavorable development for the three and six months ended June 30,
2014 and 2013 for accident years 2009 through 2013 and, collectively, for all
accident years prior to 2009.



                                                                         Favorable/(Unfavorable) Development
                                    Three Months Ended               Three Months Ended               Six Months Ended            Six Months Ended
                                      June 30, 2014                     June 30, 2013                  June 30, 2014                June 30, 2013
                                                                                    (in millions)
Accident Year
2013                              $                   -             $                  -             $               -            $              -
2012                                                 0.5                              0.3                           0.5                         0.4
2011                                                  -                               0.3                            -                          0.3
2010                                                 1.5                              0.1                           1.8                         0.3
2009                                                 1.0                               -                            2.0                         1.0
Prior to 2009                                        1.4                              2.5                           2.6                         3.6

Total net development             $                  4.4            $                 3.2            $              6.9           $             5.6

The table below sets forth the number of open claims as of June 30, 2014 and 2013, and the number of claims reported and closed during the three and six months then ended.

                                         Three Months Ended            Six Months Ended
                                              June 30,                     June 30,
                                         2014           2013          2014          2013
  Open claims at beginning of period       5,334         5,079         5,297         4,964
  Claims reported                          1,399         1,378         2,719         2,638
  Claims closed                           (1,391 )      (1,212 )      (2,674 )      (2,357 )

  Open claims at end of period             5,342         5,245         5,342         5,245

The number of open claims at June 30, 2014 increased by 97 claims as compared to the number of open claims at June 30, 2013. Efforts continue to close prior year . . .

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