The following tables summarize certain selected financial data that should be read in conjunction with our audited financial statements and accompanying notes thereto for the year ended December 31, 2014 included in this report and “
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.
Two of the key financial measures that we use to evaluate our performance are return on average equity and growth in book value per share. We calculate return on average equity by dividing annual net income by the average of annual shareholders’ equity. Our return on average equity was 12.4% in 2014, 10.9% in 2013 and 8.0% in 2012. We calculate book value per share by dividing ending shareholders’ equity by the number of common shares outstanding. Our book value per share was $23.65 at December 31, 2014, $22.41 at December 31, 2013 and $20.88 at December 31, 2012.
Investment income is an important element of our net income. Because the period of time between our receipt of premiums and the ultimate settlement of claims is often several years or longer, we are able to invest cash from premiums for significant periods of time. As a result, we are able to generate more investment income from our premiums as compared to insurance companies that operate in other lines of business that pay claims more quickly. From December 31, 2009 to December 31, 2014, our investment portfolio, including cash and cash equivalents, increased from $800.5 million to $1.1 billion and produced net investment income of $27.2 million in 2014, $27.0 million in 2013 and $27.0 million in 2012.
for each loss occurrence. Losses in the layer between $2.0 million and $10.0 million are ceded to a multi-year reinsurance cover with an aggregate annual deductible of approximately $6.2 million and an aggregate limit of coverage of approximately $33.3 million for 2015. As losses are incurred and recorded, we record amounts recoverable from reinsurers for the portion of the losses ceded to our reinsurers.
In 2014, we decreased our estimates for prior year loss reserves by $23.7 million. In 2013, we decreased our estimates for prior year loss reserves by $12.6 million. In 2012, we decreased our estimates for prior year loss reserves by $2.5 million.
Premiums are earned on a daily pro rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Our insurance policies typically have a term of one year. Thus, for a one-year policy written on July 1, 2014 for an employer with constant payroll during the term of the policy, we would earn half of the premiums in 2014 and the other half in 2015. On a monthly basis, we also recognize net premiums earned from mandatory pooling arrangements.
Income Tax Expense. We incur federal, state, and local income tax expense.
from reinsurers. These amounts are separately reported on our balance sheet as assets and do not reduce our reserves for loss and loss adjustment expenses because reinsurance does not relieve us of liability to our policyholders. We are required to pay claims even if a reinsurer fails to pay us under the terms of a reinsurance contract. We calculate amounts recoverable from reinsurers based on our estimates of the underlying loss and loss adjustment expenses, as well as the terms and conditions of our reinsurance contracts, which could be subject to interpretation. In addition, we bear credit risk with respect to our reinsurers, which can be significant because some of the unpaid loss and loss adjustment expenses for which we have reinsurance coverage remain outstanding for extended periods of time.
Deferred Policy Acquisition Costs. We defer commission expenses, premium taxes and certain marketing, sales, underwriting and safety costs that vary with and primarily relate to the acquisition of insurance policies. These acquisition costs are capitalized and charged to expense ratably as premiums are earned. In calculating deferred policy acquisition costs, these costs are limited to their estimated realizable value, which gives effect to the premiums to be earned, anticipated losses and settlement expenses and certain other costs we expect to incur as the premiums are earned, less related net investment income. Judgments as to the ultimate recoverability of these deferred policy acquisition costs are highly dependent upon estimated future profitability of unearned premiums. If the unearned premiums were less than our expected claims and expenses after considering investment income, we would reduce the deferred costs.
Gross Premiums Written. Gross premiums written for 2014 were $393.8 million, compared to $372.2 million for 2013, an increase of 5.8%. The increase was attributable to a $16.3 million increase in annual premiums on voluntary policies written during the period, a $1.3 million increase in premiums from mandatory pooling arrangements, and a $0.8 million increase in direct assigned risk premiums and a $3.3 million increase in premiums resulting from payroll audits and related premium adjustments. Related premium adjustments in 2014 include a $0.9 million increase in “earned but unbilled”, or EBUB, premium.
Net Realized Gains (Losses) on Investments. Net realized gains on investments in 2014 totaled $0.7 million, compared to a loss of $1.2 million in 2013. In 2014, net realized gains of $0.9 million resulted from gains from called fixed maturity securities, the sale of equity securities and the sale of fixed maturity securities from the available-for-sale portfolio. These gains were partially offset by a realized loss of $0.2 million from an other-than-temporary impairment of a fixed maturity security. In 2013, net realized losses of $2.2 million resulted from other-than-temporary impairments on four equity securities. These losses were offset by realized gains of $1.0 million in 2013 resulting from gains from called fixed maturity securities, the sale of equity securities and the sale of fixed maturity securities from the available-for-sale portfolio.
Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled $244.9 million for 2014, compared to $229.0 million for 2013, an increase of $15.9 million, or 7.0%. The current accident year losses and LAE incurred were $268.6 million, or 71.5% of net premiums earned, compared to $241.6 million, or 73.2% of net premiums earned for 2013. We recorded favorable prior accident year development of $23.7 million in 2014, compared to $12.6 million in 2013. This is further discussed below in “Prior Year Development.” Our net loss ratio was 65.2% for 2014 and 69.4% for 2013.
Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for 2014 were $85.0 million, compared to $67.1 million for 2013, an increase of 26.6%. This increase was primarily due to a $9.3 million decrease in experience-rated commissions, a $2.6 million increase in commission expense, a $1.7 million decrease in ceding commission, a $0.8 million increase in insurance related assessments, a $1.0 million increase in bad debt expense and a $0.3 million increase in mandatory pooling arrangement fees. Offsetting these increases were a $0.2 million decrease in taxes and fees. Our underwriting expense ratio increased to 22.6% in 2014 from 20.3% in 2013.
Net Investment Income. Net investment income in 2013 was $27.0 million, in-line with the $27.0 million reported in 2012. The pre-tax investment yield on our investment portfolio was 2.8% per annum for 2013 and 3.1% for 2012. The tax-equivalent yield on our investment portfolio was 3.9% per annum for 2013, compared to 4.3% per annum for 2012. The tax-equivalent yield is calculated using the effective interest rate and a 35% marginal tax rate. Average invested assets, including cash and cash equivalents, increased 7.6%, from an average of $877.6 million for 2012 to an average of $944.4 million for 2013. During 2013, we invested $10 million in a limited partnership, which we account for under the equity method. The carrying value of this investment was $10.6 million at December 31, 2013.
Net Realized Gains (Losses) on Investments. Net realized losses on investments in 2013 totaled $1.2 million, compared to a gain of $3.0 million in 2012. Net realized losses of $2.2 million resulted from other-than-temporary impairments on four equity securities. These losses were offset by realized gains of $1.0 million in 2013 resulting from gains from called fixed maturity securities, the sale of equity securities and the sale of fixed maturity securities from the available-for-sale portfolio. Net realized gains in 2012 primarily resulted from $2.4 million in gains from called fixed-maturity securities and the sale of certain equity and fixed-maturity securities from the available-for-sale portfolio. These gains in 2012 were offset by an other-than-temporary impairment of $0.2 million on one asset-backed security from our held-to-maturity portfolio.
Income tax expense. Income tax expense for 2013 was $15.6 million, compared to $7.8 million for 2012. The increase was primarily attributable to an increase in pre-tax income, from $37.1 million for 2012 to $59.2 million for 2013. The effective tax rate also increased to 26.3% for 2013, compared to 21.0% for 2012. This increase is due to the changing mix of taxable income versus non-taxable income.
The table below sets forth the number of open claims as of December 31, 2014, 2013 and 2012, and the numbers of claims reported and closed during the years then ended.
Major components of cash provided by operating activities in 2012 were net premiums collected of $290.6 million and investment income collected of $36.3 million, offset in-part by claim payments of $183.6 million, $56.1 million of operating expenditures, federal taxes paid of $7.4 million and dividends to policyholders paid of $1.6 million.
AMERISAFE is a holding company that transacts business through its operating subsidiaries, including American Interstate, Silver Oak Casualty and American Interstate of Texas. AMERISAFE’s primary assets are the capital stock of these insurance subsidiaries. The ability of AMERISAFE to fund its operations depends upon the surplus and earnings of its subsidiaries and their ability to pay dividends to AMERISAFE. Payment of dividends by our insurance subsidiaries is restricted by state insurance laws, including laws establishing minimum solvency and liquidity thresholds. Based upon the prescribed calculation, the insurance subsidiaries could pay to AMERISAFE dividends of up to $37.8 million in 2015 without seeking regulatory approval. See “Business-Regulation-Dividend Limitations” in Item 1 of this report.
Under Nebraska and Texas law, as applicable, each of American Interstate, Silver Oak Casualty and American Interstate of Texas is required to invest only in securities that are either interest-bearing, interest-accruing or eligible for dividends, and must limit its investment in the securities of any single issuer, other than direct obligations of the United States, to five percent of the insurance company’s assets. As of December 31, 2014, we were in compliance with these requirements.
As of December 31, 2014, our investment portfolio, including cash and cash equivalents, totaled $1.1 billion, an increase of 10.5% from December 31, 2013. The majority of our fixed maturity securities are classified as held-to-maturity, as defined by FASB ASC Topic 320, Investments-Debt and Equity Securities. As
such, the reported value of those securities is equal to their amortized cost, and is not impacted by changing interest rates. The remainder of our fixed maturity securities and all of our equity securities are classified as available-for-sale and reported at fair value.
The following table summarizes the fair value of, and the amount of, unrealized losses on our investment securities, segregated by the time period each security has been in a continuous unrealized loss position as of December 31, 2014 and 2013:
We manage risk on certain long-duration claims by settling these claims through the purchase of annuities from unaffiliated life insurance companies. In the event these companies are unable to meet their obligations under these annuity contracts, we could be liable to the claimants, but our reinsurers remain obligated to
indemnify us for all or part of these obligations in accordance with the terms of our reinsurance contracts. As of December 31, 2014, the present value of these annuities was $94.6 million, as estimated by our annuity providers. Substantially all of the annuities are issued or guaranteed by life insurance companies that have an A.M. Best rating of “A” (Excellent) or better. For additional information, see Note 17 to our consolidated financial statements in Item 8 of this report.
We lease equipment and office space under noncancelable operating leases. Future minimum lease payments at December 31, 2014, were as follows:
(1) The loss and loss adjustment expense payments due by period in the table above are based upon the loss and loss adjustment expense estimates as of December 31, 2014 and actuarial estimates of expected payout patterns and are not contractual liabilities as to a time certain. Our contractual liability is to provide benefits under the policy. As a result, our calculation of loss and loss adjustment expense payments due by period is subject to the same uncertainties associated with determining the level of loss and loss adjustment expenses generally and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our loss and loss adjustment expense process, see “Business-Loss Reserves” in Item 1 of this report. Actual payments of loss and loss adjustment expenses by period will vary, perhaps materially, from the amounts shown in the table above to the extent that current estimates of loss and loss adjustment expenses vary from actual ultimate claims amounts and as a result of variations between expected and actual payout patterns. See “Risk Factors- Risks Related to Our Business-Our loss reserves are based on estimates and may be inadequate to cover our actual losses” in Item 1A of this report for a discussion of the uncertainties associated with estimating loss and loss adjustment expenses.
adjustment expenses for a reported claim, we accrue our obligation to pay any applicable assessments. If settlement of the claim is to be paid out over more than one year, our obligation to pay any related loss-based assessments extends for the same period of time. Because our reserves for loss and loss adjustment expenses are based on estimates, our accruals for loss-based insurance assessments are also based on estimates. Actual payments of loss and loss adjustment expenses may differ, perhaps materially, from our reserves. Accordingly, our actual loss-based insurance assessments may vary, perhaps materially, from our accruals.
We have audited the accompanying consolidated balance sheets of AMERISAFE, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2014. Our audits also include the financial statement schedules listed in the Index at Item 15. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
AMERISAFE, Inc. is an insurance holding company incorporated in the state of Texas. The accompanying 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. In 2013, AIIC and SOCI were re-domesticated to Nebraska from Louisiana. 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 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 consolidated entity.
Certain prior year amounts have been reclassified to conform with the current year presentation.
Other investments consist of a limited partnership (“LP”) interest that is accounted for under the equity method valued using the net asset value provided by the general partner of the LP, which approximates the fair value of the interest. The LP’s objective is to generate absolute returns by investing long and short in publicly-traded global securities. Redemptions are allowed monthly following a sixty day notice with no lock up periods. The Company has no unfunded commitments related to the LP.
The direct costs of successfully acquiring and renewing business are capitalized to the extent recoverable and are amortized over the effective period of the related insurance policies in proportion to premium revenue earned. These capitalized costs consist mainly of sales commissions, premium taxes and other underwriting costs. The Company evaluates deferred policy acquisition costs for recoverability by comparing the unearned premiums to the estimated total expected claim costs and related expenses, offset by anticipated investment income. The Company would reduce the deferred costs if the unearned premiums were less than expected claims and expenses after considering investment income, and report any adjustments in amortization of deferred policy acquisition costs. There were no adjustments necessary in 2014, 2013 or 2012.
Experience-rated commissions are earned from certain reinsurance companies based on the financial results of the applicable risks ceded to the reinsurers. These commission revenues on reinsurance contracts are recognized during the related reinsurance treaty period and are based on the same assumptions used for recording loss and allocated loss adjustment expenses. These commissions are reflected as a reduction in underwriting and certain other operating costs and are adjusted as necessary as experience develops or new information becomes known. Any such adjustments are included in current operations. Experience-rated commissions had no impact on underwriting and certain other operating costs in 2014 compared to a reduction of $9.3 million in 2013 and $11.1million in 2012.
All advertising expenditures incurred by the Company are charged to expense in the period to which they relate and are included in underwriting and certain other operating costs in the consolidated statements of income. Total advertising expenses incurred were $0.5 million in 2014, $0.5 million in 2013 and $0.4 million in 2012.
and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Under the two-class method, net income available to common and participating common shareholders is reduced by the amount of dividends declared in the current period and by the contractual amount of dividends that must be paid for the current period related to the Company’s common and participating common shares. Participating common shares include unvested share-based payment awards that contain nonforfeitable rights to dividends, whether paid or unpaid. Any remaining undistributed earnings are allocated to the common and participating common shareholders to the extent that each security shares in earnings as if all of the earnings for
the period had been distributed. The amount of earnings allocable to each security is divided by the number of outstanding shares of the security to which the earnings are allocated to determine the EPS for the security. In a period of loss, no losses are allocated to the participating common shareholders. Instead, all such losses are allocated to the common shareholders.
Amerisafe holds investments in a LP, accounted for under the equity method. The carrying value of this investment is $11.7 million at December 31, 2014.
A summary of the amortized cost and fair value of investments in fixed maturity securities, classified as held-to-maturity at December 31, 2014, by contractual maturity, is as follows:
A summary of the amortized cost and fair value of investments in fixed maturity securities, classified as available-for-sale at December 31, 2014, by contractual maturity, is as follows:
The Company reviewed all securities with unrealized losses in accordance with the impairment policy described above. The Company expects to hold investments in equity securities for a reasonable period of time sufficient for a recovery of fair value. With the exception of one security deemed to be other-than-temporarily impaired, the Company determined that the unrealized losses in the fixed maturity securities portfolio related primarily to changes in market interest rates since the date of purchase, current conditions in the capital markets and the impact of those conditions on market liquidity and prices generally, and the transfer of the investments from the available-for-sale classification to the held-to-maturity classification in January 2004. We expect to recover the carrying value of these securities as it is not more likely than not that we will be required to sell the security before the recovery of its amortized cost basis.
In 2014, the Company exercised a change of control put on a held-to-maturity security. The security held a net carrying value of $2.1 million at the execution of the put option and resulted in a realized loss of $58,000. The issuer experienced a significant downgrade in credit after being acquired by an entity that funded the acquisition primarily through additional borrowings.
Included in premiums receivable at December 31, 2014, 2013 and 2012 is the Company’s estimate for EBUB premium of $5.2 million, $4.3 million and $3.0 million, respectively.
Furniture and equipment included property held under capital leases of $0.1 million at December 31, 2014. Accumulated depreciation includes $49,000 that is related to these properties at December 31, 2014. The capital lease obligations related to these properties are included in accounts payable and other liabilities. The Company had no capital lease obligations at December 31, 2013.
In 2012, 2013 and 2014, the Company made no adjustment to the valuation allowance. As of December 31, 2014, there is no valuation allowance.
Tax years 2009 through 2014 are subject to examination by the federal and state taxing authorities. In April 2012, the Company was notified by the Internal Revenue Service that the examination for tax year 2009 had been completed, but remains subject to state taxing authorities.
In October 2007, the Company entered into an agreement providing for a line of credit in the maximum amount of $20.0 million with Frost Bank, NA. The agreement expired in October 2010. The Company renewed this agreement in the fourth quarter 2010 for an additional three years to mature in December 2013. In the fourth quarter 2013, the Company renewed this agreement for an additional three years to mature in December 2016. Under the agreement, advances may be made either in the form of loans or letters of credit. Borrowings under the agreement accrue at interest rates based upon prime rate or LIBOR. Under the agreement, the Company will pay a fee of 0.25% on the unused portion of the loan in arrears quarterly for a fee of $50,000 annually, assuming the line of credit is not used during the calendar year. The line of credit is unsecured. No borrowings or letters of credit were outstanding under the line of credit arrangement at December 31, 2014 or 2013.
The following table provides a reconciliation of the beginning and ending reserve balances, net of related amounts recoverable from reinsurers, for 2014, 2013 and 2012:
The Company has historically written general liability coverages that are reported in other liability lines of business. These coverages may be associated with the property and casualty’s industry exposure to environmental claims. However, the Company has not been notified by any insured for which exposure exists due to these types of claims. Company management believes potential exposure to environmental claims to be remote. Therefore, the Company has no loss or loss adjustment expense reserves for such liabilities.
The Company is authorized to issue 50,000,000 shares of common stock, par value $0.01 per share. At December 31, 2014, there were 20,155,936 shares of common stock issued and 18,897,686 shares outstanding.
The AMERISAFE 2005 Equity Incentive Plan (the “2005 Incentive Plan”) is administered by the Compensation Committee of the Board and is designed to provide incentive compensation to executive officers and other key management personnel. The 2005 Incentive Plan permits awards in the form of incentive stock options, as defined in Section 422(b) of the Internal Revenue Code of 1986, non-qualified stock options, restricted shares of common stock and restricted stock units. In connection with the approval of the 2012 Equity and Incentive Compensation Plan by the Company’s shareholders, no further awards will be made under the 2005 Equity Incentive Plan.
The following table summarizes information about the stock options outstanding under the 2005 Incentive Plan at December 31, 2012, 2013 and 2014:
The Company recognized compensation expense of $0.3 million in 2014 and 2013 and $0.2 million in 2012, related to awards made under the 2005 Incentive Plan. Total tax benefits realized for tax deductions from vesting of restricted stock in 2014 and 2013 were $38,000, and $4,000, respectively.
The Company recognized compensation expense of $0.6 million, $0.3 million and $12,000 in 2014, 2013 and 2012, respectively, related to share-based grants. The Company recognized compensation expense of $0.4 million, $0.6 million and $0.2 million in 2014, 2013 and 2012, respectively, related to long-term incentive awards under the 2012 Incentive Plan. The long-term incentive award is a liability award.
Comprehensive income includes net income plus unrealized gains/losses on our available-for-sale investment securities, net of tax. In reporting comprehensive income on a net basis in the statement of income, we used a 35% tax rate. The following table illustrates the changes in the balance of each component of accumulated other comprehensive income (loss) for each period presented in the financial statements.
The Company’s 401(k) benefit plan is available to all employees. The Company matches up to 2% of employee compensation for participating employees, subject to certain limitations. Employees are fully vested in employer contributions to this plan after five years. Company contributions to this plan were $0.4 million in 2014, $0.3 million in 2013 and $0.3 million in 2012.
The Company leases equipment and office space under noncancelable operating leases. At December 31, 2014, future minimum lease payments are as follows (in thousands):
Net premiums earned during 2014, 2013 and 2012 for the top ten states in 2014 and all others are shown below:
The following table summarizes the carrying or reported values and corresponding fair values for financial instruments:
The fair values of the Company’s investments are based upon prices provided by an independent pricing service. The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider. Securities reported at fair value utilizing Level 1 inputs represent assets whose fair value is determined based upon observable unadjusted quoted market prices for identical assets in active markets. Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2 during the year ended December 31, 2014.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and 2013 are as follows:
Assets and liabilities measured at amortized cost as of December 31, 2014 and 2013 are as follows:
The following table represents unaudited quarterly financial data for the years ended December 31, 2014 and 2013.
The Company’s Board of Directors initiated a share repurchase program in February 2011. In October 2012, 2013 and 2014 the Board reauthorized this program with a new limit of $25.0 million. Unless reauthorized, the program will expire on December 31, 2015. Since beginning of this plan, the Company has repurchased a total of 1,258,250 shares for $22.4 million, or an average price of $17.78, including commissions.
The Board intends to continue to consider the payment of a regular cash dividend each calendar quarter. On an annualized basis, the cash dividend is expected to be $0.60 per share.