Edgar Filing: AMERISAFE INC

amsf-10q_20160930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

Commission file number:

001-12251

AMERISAFE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Texas		75-2069407
(State of Incorporation)		(I.R.S. Employer Identification Number)

2301 Highway 190 West, DeRidder, Louisiana		70634
(Address of Principal Executive Offices)		(Zip Code)

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

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 26, 2016, there were 19,230,135 shares of the Registrant’s common stock, par value $.01 per share, outstanding.

TABLE OF CONTENTS

		Page
		No.

FORWARD-LOOKING STATEMENTS		3

PART I - FINANCIAL INFORMATION

Item 1	Financial Statements	4

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4	Controls and Procedures	24

PART II - OTHER INFORMATION

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 6	Exhibits	25

FORWARD-LOOKING STATEMENTS

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

•

the cyclical nature of the workers’ compensation insurance industry;

•

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

•

decreased demand for our insurance;

•

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

•

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

•

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

•

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

•

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

•

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

•

changes in rating agency policies, practices or ratings;

•

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

•

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

•

changes in legal theories of liability under our insurance policies;

•

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

•

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

•

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

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report, and under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	September 30, 2016			December 31, 2015
	(unaudited)
Assets
Investments:
Fixed maturity securities—held-to-maturity, at amortized cost (fair value $620,781 and $662,276 in 2016 and 2015, respectively)	$	601,314		$	645,164
Fixed maturity securities—available-for-sale, at fair value (cost $460,497 and $376,109 in 2016 and 2015, respectively)		470,620			380,022
Equity securities—available-for-sale, at fair value (cost $0, in 2016 and 2015)		32			31
Short-term investments		11,494			7,718
Other investments		12,174			12,217
Total investments		1,095,634			1,045,152
Cash and cash equivalents		86,612			69,481
Amounts recoverable from reinsurers		102,815			91,077
Premiums receivable, net of allowance		200,987			185,364
Deferred income taxes		28,278			29,905
Accrued interest receivable		11,948			11,685
Property and equipment, net		6,387			6,181
Deferred policy acquisition costs		20,363			20,412
Other assets		47,154			42,788
Total assets	$	1,600,178		$	1,502,045
Liabilities and shareholders’ equity
Liabilities:
Reserves for loss and loss adjustment expenses	$	736,276		$	718,033
Unearned premiums		175,773			167,983
Reinsurance premiums payable		—			154
Amounts held for others		55,946			49,790
Policyholder deposits		48,781			48,380
Insurance-related assessments		35,875			32,329
Federal income tax payable		2,810			911
Accounts payable and other liabilities		32,905			30,484
Payable for investments purchased		2,069			—
Total liabilities		1,090,435			1,048,064
Shareholders’ equity:
Common stock:
Voting—$0.01 par value authorized shares—50,000,000 in 2016 and 2015; 20,488,385 and 20,388,396 shares issued and 19,230,135 and 19,130,146 shares outstanding in 2016 and 2015, respectively		204			203
Additional paid-in capital		208,009			204,688
Treasury stock at cost (1,258,250 shares in 2016 and 2015)		(22,370	)		(22,370	)
Accumulated earnings		317,304			268,873
Accumulated other comprehensive income, net		6,596			2,587
Total shareholders’ equity		509,743			453,981
Total liabilities and shareholders’ equity	$	1,600,178		$	1,502,045

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenues
Gross premiums written	$	88,837		$	91,061		$	292,443		$	297,872
Ceded premiums written		(2,945	)		(4,232	)		(8,046	)		(9,317	)
Net premiums written	$	85,892		$	86,829		$	284,397		$	288,555
Net premiums earned	$	89,918		$	90,504		$	276,607		$	280,860
Net investment income		8,006			6,923			20,251			20,646
Net realized gains (losses) on investments		181			40			974			(2,518	)
Fee and other income		101			3			272			206
Total revenues		98,206			97,470			298,104			299,194
Expenses
Loss and loss adjustment expenses incurred		50,526			48,942			146,413			166,252
Underwriting and certain other operating costs		8,104			9,293			25,325			26,043
Commissions		6,362			6,696			19,731			20,606
Salaries and benefits		6,298			6,278			18,403			18,070
Policyholder dividends		889			371			3,195			1,024
Total expenses		72,179			71,580			213,067			231,995
Income before income taxes		26,027			25,890			85,037			67,199
Income tax expense		8,131			7,950			26,245			19,810
Net income		17,896			17,940			58,792			47,389
Net income available to common shareholders	$	17,896		$	17,940		$	58,792		$	47,389
Earnings per share
Basic	$	0.94		$	0.95		$	3.08		$	2.51
Diluted	$	0.93		$	0.94		$	3.06		$	2.48
Shares used in computing earnings per share
Basic		19,121,947			18,968,718			19,092,298			18,911,675
Diluted		19,190,191			19,096,259			19,186,398			19,088,140
Cash dividends declared per common share	$	0.18		$	0.15		$	0.54		$	0.45

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2016			2015		2016		2015
Net income	$	17,896		$	17,940	$	58,792	$	47,389
Other comprehensive income:
Unrealized gain (loss) on securities, net of tax		(1,713	)		1,308		4,009		550
Comprehensive income	$	16,183		$	19,248	$	62,801	$	47,939

AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)

	Common Stock				Treasury Stock						Additional Paid-In Capital		Accumulated Earnings			Accumulated Other Comprehensive Income		Total
	Shares		Amount		Shares			Amounts
Balance at December 31, 2015		20,388,396	$	203		(1,258,250	)	$	(22,370	)	$	204,688	$	268,873		$	2,587	$	453,981
Comprehensive income		—		—		—			—			—		58,792			4,009		62,801
Common stock issued upon exercise of options		68,879		1		—			—			836		—			—		837
Tax benefit from share-based payments		—		—		—			—			976		—			—		976
Restricted common stock issued		31,110		—		—			—			603		—			—		603
Share-based compensation		—		—		—			—			906		—			—		906
Dividends to shareholders		—		—		—			—			—		(10,361	)		—		(10,361	)
Balance at September 30, 2016		20,488,385	$	204		(1,258,250	)	$	(22,370	)	$	208,009	$	317,304		$	6,596	$	509,743

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2016			2015
Operating activities
Net income	$	58,792		$	47,389
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		884			1,030
Net amortization of investments		12,306			12,295
Deferred income taxes		(532	)		(752	)
Net realized (gains) losses on investments		(959	)		2,518
Net realized losses on disposal of assets		1			24
Share-based compensation		1,143			691
Changes in operating assets and liabilities:
Premiums receivable, net		(15,623	)		(15,169	)
Accrued interest receivable		(263	)		(571	)
Deferred policy acquisition costs		49			(1,440	)
Amounts held by others		1,016			(27,847	)
Other assets		(2,929	)		(1,712	)
Reserves for loss and loss adjustment expenses		18,243			33,108
Unearned premiums		7,790			7,694
Reinsurance balances		(11,892	)		(5,773	)
Amounts held for others and policyholder deposits		6,557			5,682
Accounts payable and other liabilities		8,285			5,555
Net cash provided by operating activities		82,868			62,722
Investing activities
Purchases of investments held-to-maturity		(102,830	)		(145,771	)
Purchases of investments available-for-sale		(161,482	)		(114,406	)
Purchases of short-term investments		(12,132	)		(7,000	)
Proceeds from maturities of investments held-to-maturity		136,896			115,656
Proceeds from sales and maturities of investments available-for-sale		75,470			70,652
Proceeds from sales and maturities of short-term investments		8,033			33,341
Purchases of property and equipment		(1,091	)		(759	)
Net cash used in investing activities		(57,136	)		(48,287	)
Financing activities
Proceeds from stock option exercises		837			1,277
Tax benefit from share-based payments		976			1,795
Dividends to shareholders		(10,414	)		(8,564	)
Net cash used in financing activities		(8,601	)		(5,492	)
Change in cash and cash equivalents		17,131			8,943
Cash and cash equivalents at beginning of period		69,481			90,956
Cash and cash equivalents at end of period	$	86,612		$	99,899

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Basis of Presentation

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

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

The Company provides workers’ compensation insurance for small to mid-sized employers engaged in hazardous industries, principally construction, trucking, manufacturing, agriculture and oil and gas. Assets and revenues of AIIC represent at least 95% of comparable consolidated amounts of the Company for each of 2016 and 2015.

In the opinion of management of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, the results of operations and cash flows for the periods presented. The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q under the Securities Exchange Act of 1934 and therefore do not include all information and footnotes to be in conformity with accounting principles generally accepted in the United States (“GAAP”). The results for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited condensed consolidated financial statements contained herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015.

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

In May 2015, the FASB issued Accounting Standards Update No. 2015-07, Fair Value Measurements (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The amendments in this update change the disclosure requirements for investments in certain entities that calculate net asset value (NAV) per share. Under current accounting standards entities are permitted to estimate the fair value of certain investments using the investment’s NAV as a practical expedient. The current disclosure guidance also permits entities to disclose the investment at NAV in the fair value hierarchy table as either Level 2 or Level 3, based upon certain criteria. The measurement basis utilizing NAV is different than the measurement criteria of all other investments which utilize inputs to calculate fair value. Due to this inconsistency, the FASB issued this ASU which requires entities to remove investments measured at NAV from the fair value hierarchy table. Other than the change in presentation, the adoption of this new guidance will not have an impact on our consolidated financial statements.

Certain prior year amounts have been reclassified to conform with the current year presentation.

Note 2. Stock Options and Restricted Stock

As of September 30, 2016, the Company has three equity incentive plans: the AMERISAFE 2005 Equity Incentive Plan (the “2005 Incentive Plan”), the AMERISAFE 2010 Non-Employee Director Restricted Stock Plan (the “2010 Restricted Stock Plan”) and the AMERISAFE 2012 Equity and Incentive Compensation Plan (the “2012 Incentive Plan”). The 2005 Incentive Plan expired on October 27, 2015. No grants will be made under the 2005 Incentive Plan after October 27, 2015 but all grants made on or prior to such date will continue in effect thereafter subject to the terms and conditions of the 2005 Incentive Plan. See Note 12 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 for additional information regarding the Company’s incentive plans.

During the nine months ended September 30, 2016, the Company granted 27,077 and 5,952 shares of restricted common stock to executive officers and non-employee directors, respectively. The market value of the restricted shares granted totaled $1.9 million. During the nine months ended September 30, 2015, the Company granted 50,461 and 7,112 shares of restricted common stock to executive officers and non-employee directors, respectively. The market value of the restricted shares granted totaled $2.6 million.

During the nine months ended September 30, 2016, options to purchase 68,879 shares of common stock were exercised. During the nine months ended September 30, 2015, options to purchase 156,850 shares of common stock were exercised. In connection with these exercises, the Company received $0.8 million and $1.3 million of stock option proceeds, respectively.

The Company recognized share-based compensation expense of $0.4 million in the quarter ended September 30, 2016 compared to $0.3 for the same period of 2015. The Company recognized share-based compensation expense of $1.1 million in the nine months ended September 30, 2016 and $0.7 million for the same period of 2015.

Note 3. Earnings Per Share

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

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

The diluted EPS calculation includes potential common shares assumed issued under the treasury stock method, which reflects the potential dilution that would occur if any outstanding options or warrants were exercised or restricted stock becomes vested, and includes the “if converted” method for participating securities if the effect is dilutive.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(in thousands, except share and per share amounts)
Basic EPS:
Net income available to common shareholders - basic	$	17,896	$	17,940	$	58,792	$	47,389
Basic weighted average common shares		19,121,947		18,968,718		19,092,298		18,911,675
Basic earnings per common share	$	0.94	$	0.95	$	3.08	$	2.51
Diluted EPS:
Net income available to common shareholders - diluted	$	17,896	$	17,940	$	58,792	$	47,389
Diluted weighted average common shares:
Weighted average common shares		19,121,947		18,968,718		19,092,298		18,911,675
Stock options and performance shares		68,244		127,541		94,100		176,465
Diluted weighted average common shares		19,190,191		19,096,259		19,186,398		19,088,140
Diluted earnings per common share	$	0.93	$	0.94	$	3.06	$	2.48

Note 4. Investments

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as held-to-maturity at September 30, 2016 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
States and political subdivisions	$	418,155	$	15,675	$	(96	)	$	433,734
Corporate bonds		158,042		1,698		(81	)		159,659
Commercial mortgage-backed securities		290		—		—			290
U.S. agency-based mortgage-backed securities		10,943		1,193		—			12,136
U.S. Treasury securities and obligations of U.S. government agencies		11,863		986		(1	)		12,848
Asset-backed securities		2,021		158		(65	)		2,114
Totals	$	601,314	$	19,710	$	(243	)	$	620,781

The gross unrealized gains and losses on, and the cost or amortized cost and fair value of, those investments classified as available-for-sale at September 30, 2016 are summarized as follows:

	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
Fixed maturity:
States and political subdivisions	$	188,689	$	8,450	$	(359	)	$	196,780
Corporate bonds		197,167		2,259		(214	)		199,212
U.S. agency-based mortgage-backed securities		12,026		51		(797	)		11,280
U.S. Treasury securities and obligations of U.S. government agencies		62,615		821		(88	)		63,348
Total fixed maturity		460,497		11,581		(1,458	)		470,620
Other investments		10,000		2,174		—			12,174
Equity securities		—		32		—			32
Totals	$	470,497	$	13,787	$	(1,458	)	$	482,826

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as held-to-maturity at December 31, 2015 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
States and political subdivisions	$	408,447	$	15,352	$	(45	)	$	423,754
Corporate bonds		171,224		159		(810	)		170,573
Commercial mortgage-backed securities		37,494		204		(15	)		37,683
U.S. agency-based mortgage-backed securities		13,223		1,249		(1	)		14,471
U.S. Treasury securities and obligations of U.S. government agencies		12,487		897		(4	)		13,380
Asset-backed securities		2,289		202		(76	)		2,415
Totals	$	645,164	$	18,063	$	(951	)	$	662,276

The gross unrealized gains and losses on, and the cost or amortized cost and fair value of, those investments classified as available-for-sale at December 31, 2015 are summarized as follows:

	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
Fixed maturity:
States and political subdivisions	$	164,684	$	6,942	$	(207	)	$	171,419
Corporate bonds		202,537		253		(1,486	)		201,304
U.S. agency-based mortgage-backed securities		8,888		4		(1,593	)		7,299
Total fixed maturity		376,109		7,199		(3,286	)		380,022
Other investments		10,000		2,217