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, 2017 included in this report and “
Our gross reserves for loss and loss adjustment expenses at December 31, 2017, 2016 and 2015 were $771.8 million, $742.8 million and $718.0 million, respectively. As a percentage of gross reserves at year end, IBNR represented 16.8% in 2017 and 22.2% in 2016 and 2015.
In 2017, we decreased our estimates for prior year loss reserves by $34.8 million. In 2016, we decreased our estimates for prior year loss reserves by $51.3 million. In 2015, we decreased our estimates for prior year loss reserves by $47.8 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, 2017 for an employer with constant payroll during the term of the policy, we would earn half of the premiums in 2017 and the other half in 2018. On a monthly basis, we also recognize net premiums earned from mandatory pooling arrangements.
In establishing our reserves, we review the results of analyses using actuarial methods that utilize historical loss data from our more than 32 years of underwriting workers’ compensation insurance. The actuarial analysis of our historical data provides the factors we use in estimating our loss reserves. These factors are primarily measures over time of the number of claims paid and reported, average paid and incurred claim amounts, claim closure rates and claim payment patterns. In evaluating the results of our analyses, management also uses substantial judgment in considering other factors that are not considered in these actuarial analyses, including changes in business mix, claims management, regulatory issues, medical trends, employment and wage patterns, insurance policy coverage interpretations, judicial determinations and other subjective factors. Due to the inherent uncertainty associated with these estimates, and the cost of incurred but unreported claims, our actual liabilities may vary significantly from our original estimates.
Assessments. We are subject to various assessments and premium surcharges related to our insurance activities, including assessments and premium surcharges for state guaranty funds and second injury funds. Our accrual is based on historical assessments as well as updated assessment rates. Assessments based on premiums are recorded as an expense as premiums are earned and generally paid one year after the calendar year in which the policies are written. Assessments based on losses are recorded as an expense as losses are incurred and are generally paid within one year of the calendar year in which the claims are paid by us. State guaranty fund assessments are used by state insurance oversight agencies to pay claims of policyholders of impaired, insolvent or failed insurance companies and the operating expenses of those agencies. Second injury funds are used by states to reimburse insurers and employers for claims paid to injured employees for aggravation of prior conditions or injuries. In some states, these assessments and premium surcharges may be partially recovered through a reduction in future premium taxes.
On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. The reduction of the U.S. corporate tax rate from 35% to 21% has caused us to adjust our deferred tax assets and liabilities to the lower federal base rate of 21%. The impact resulted in a net deferred tax expense of $12.6 million in the fourth quarter of 2017, the period in which the legislation was enacted.
On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017. As a result, we have recorded $12.6 million as additional income tax expense related to our net deferred tax assets revalued at the new lower rate of 21% in the fourth quarter of 2017, the period in which the legislation was enacted.
The prior accident year loss ratio is calculated by dividing the change in loss and loss adjustment expenses incurred for prior accident years by the current year’s net premiums earned.
Net Investment Income. Net investment income in 2017 was $29.3 million, an increase of 4.2% from the $28.1 million reported in 2016. The pre-tax investment yield on our investment portfolio was 2.5% per annum for 2017 and 2016. The tax-equivalent yield on our investment portfolio was 2.9% per annum for 2017, compared to 3.2% per annum for 2016. The tax-equivalent yield is calculated using the effective interest rate and the appropriate marginal tax rate as of January 1, 2018. Average invested assets, including cash and cash equivalents, increased 2.0%, from an average of $1,165.4 million for 2016 to an average of $1,188.7 million for 2017.
Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled $209.3 million for 2017, compared to $199.0 million for 2016, an increase of $10.3 million, or 5.2%. The current accident year losses and LAE incurred were $244.1 million, or 70.5% of net premiums earned, compared to $250.3 million, or 67.9% of net premiums earned for 2016. We recorded favorable prior accident year development of $34.8 million in 2017, compared to $51.3 million in 2016. This is discussed in more detail below in “Prior Year Development.” Our net loss ratio was 60.5% for 2017 and 54.0% for 2016.
Income tax expense. Income tax expense for 2017 was $36.0 million, compared to $35.0 million for 2016. The effective tax rate also increased to 43.8% for 2017, compared to 31.0% for 2016. This increase is due to the impact of tax reform legislation requiring a revaluation of our net deferred tax assets. Excluding the impact of tax reform, our effective rate for 2018 was 28.8% compared to 31.0% for 2016. This decrease is due to a higher proportion of tax-exempt investment income to underwriting income relative to 2016.
Gross Premiums Written. Gross premiums written for 2016 were $373.1 million, compared to $386.5 million for 2015, a decrease of 3.5%. The decrease was attributable to an $8.4 million decrease in annual premiums on voluntary policies written during the period, a $4.2 million decrease in premiums resulting from payroll audits and related premium adjustments and a $0.9 million decrease in premiums from mandatory pooling arrangements.
Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for 2016 were $80.6 million, compared to $84.1 million for 2015, a decrease of 4.2%. This decrease was primarily due to a $1.9 million decrease in insurance related assessments, a $1.4 million decrease in premium taxes and a $1.3 million decrease in commission expense. These decreases were partially offset by an increase of $1.2 million in bad debt expense due to a change in estimate of $1.1 million recorded in 2015. Our underwriting expense ratio decreased to 21.9% in 2016 from 22.4% in 2015.
The table below sets forth the number of open claims as of December 31, 2017, 2016 and 2015, and the numbers of claims reported and closed during the years then ended.
At December 31, 2017, our incurred amounts for certain accident years, particularly 2013, 2014 and 2015, developed more favorably than management previously expected. Multiple factors can cause loss development both unfavorable and favorable. The favorable loss development we experienced across accident years was largely due to favorable case reserve development from closed claims and claims where the worker had reached maximum medical improvement. We believe the favorable loss development in 2013 and 2014 resulted primarily from an intensive claims management focus with the Company actively seeking to settle claims, leading to favorable development.
The assumptions we used in establishing our reserves for these accident years were based on our historical claims data. However, as of December 31, 2017, actual results for these accident years have been better than our assumptions would have predicted. We do not presently intend to modify our assumptions for establishing reserves in light of recent results. However, if actual results for current and future accident years are consistent with, or different than, our results in these recent accident years, our historical claims data will reflect this change and, over time, will impact the reserves we establish for future claims.
We forecast claim payments based on our historical trends. We seek to manage the funding of claim payments by actively managing available cash and forecasting cash flows on a short- and long-term basis. Cash payments, net of reinsurance, for claims were $186.9 million in 2017, $187.7 million in 2016 and $189.7 million in 2015. We fund claim payments out of cash flow from operations, principally premiums, net of amounts ceded to our reinsurers, and net investment income. Our investment portfolio increased from $900.8 million at December 31, 2012 to $1.2 billion at December 31, 2017.
As discussed above under “Overview,” we purchase reinsurance to protect us against severe claims and catastrophic events. Based on our estimates of future claims, we believe we are sufficiently capitalized to satisfy the deductibles and retentions in our 2018 reinsurance program. We reevaluate our reinsurance program at least annually, taking into consideration a number of factors, including cost of reinsurance, our liquidity requirements, operating leverage and coverage terms.
Major components of cash provided by operating activities in 2015 were net premiums collected of $368.6 million and investment income collected of $44.3 million, offset in-part by claim payments of $190.1 million, $75.4 million of operating expenditures, $27.8 of an increase in amounts held by others, federal taxes paid of $26.1 million and dividends to policyholders paid of $0.5 million.
Net cash used in investing activities was $51.5 million in 2017, as compared to $50.5 million in 2016 and $49.8 million in 2015. In 2017, major components of net cash used in investing activities included investment purchases of $401.8 million and net purchases of furniture, fixtures and equipment of $0.5 million, offset by proceeds from sales and maturities of investment of investments of $350.7 million.
In 2016, major components of net cash used in investing activities included investment purchases of $354.6 million and net purchases of furniture, fixtures and equipment of $1.6 million, offset by proceeds from sales and maturities of investment of investments of $305.8 million. In 2015, major components of net cash used in investing activities included investment purchases of $326.2 million and net purchases of furniture, fixtures and equipment of $1.0 million, offset by proceeds from sales and maturities of investment of investments of $277.3 million.
Net cash used in financing activities was $82.6 million in 2017, as compared to net cash used in financing activities of $74.3 million in 2016 and net cash used in financing activities of $64.5 million in 2015. Cash used in financing activities in 2017 included cash used for dividends paid to shareholders of $82.6 million.
The Board of Directors initially authorized the Company’s share repurchase program in February 2010. In October 2016, the Board reauthorized this program with no expiration date. As of December 31, 2017, we had repurchased a total of 1,258,250 shares of our outstanding common stock for $22.4 million. The Company had $25.0 million available for future purchases at December 31, 2017 under this program. There were no share repurchases in 2017, 2016 or 2015. The purchases may continue to be effected 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.
In 2017, 2016, 2015, 2014 and 2013, the Company paid regular quarterly cash dividends of $0.20, $0.18, $0.15, $0.12 and $0.08 per share, respectively. In addition, the Company paid extraordinary cash dividends of $3.50 in 2017, $3.25 in 2016, $3.00 in 2015 and $0.50 and $1.00 per share in 2014. The Company did not pay any extraordinary cash dividends in 2013.
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 $0.88 per share in 2018.
The composition of our investment portfolio, including cash and cash equivalents, as of December 31, 2017 is shown in the following table.
The table below provides information with respect to our contractual obligations as of December 31, 2017.
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, 2017 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.
Audited Financial Statements as of December 31, 2017 and 2016 and for the three years in the period ended December 31, 2017:
We have audited the accompanying consolidated balance sheets of AMERISAFE, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, 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, 2017, and the related notes and financial statement schedules listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
The Company provides workers’ compensation insurance for small to mid-sized employers engaged in hazardous industries, principally construction, trucking, logging and lumber, manufacturing, agriculture, maritime, and oil and gas. Assets and revenues of AIIC and its subsidiaries represent at least 95% of comparable consolidated amounts of the Company for each of 2017, 2016 and 2015.
In May 2015, FASB issued Accounting Standards Update, or ASU, 2015-09, Financial Services - Insurance (Topic 944): Disclosures about Short-Duration Contracts. The guidance requires additional disclosures for short-duration insurance contracts. New disclosures are to include more information about initial claim estimates and subsequent adjustments to those estimates, the methodologies and judgments used to estimate claims, and the timing, frequency, and severity of claims. This standard was effective for us beginning with our 2016 annual financial statement. The guidance requires a change in disclosure only (see Note 9 to our financial statements), and thus has no impact on our financial condition or results of operations.
On February 15, 2018 the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This ASU provides new guidance on reclassification from Other Comprehensive Income (OCI) of tax effects related to recently passed tax reform legislation. The guidance gives entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income (OCI) deemed to be stranded as a result of tax reform. The guidance is effective for us in the first quarter of 2018 and will be applied retrospectively. The Company’s policy for releasing income tax effects from accumulated OCI will be the individual securities approach for available-for-sale securities. Based on our understanding of the guidance available as of the filing date, we do not expect the adoption of this guidance to have a material impact on our financial condition and results of operations.
On December 22, 2017, the SEC issued Staff Accounting Bulletin (SAB) 118 which provides guidance on accounting for tax effects of the Tax Act. The Tax Act required Property and Casualty taxpayers to discount loss reserves based solely on IRS factors and no longer by reference to historical payment patterns. As the IRS has yet to release the 2018 discount factors, we have been unable to reasonably estimate the impact of the change in loss reserve discounting factors and therefore have not adjusted our deferred tax balances at December 31, 2017 for the impact of these changes. As prescribed by SAB 118, we continue to utilize the discount factors based on existing accounting guidance and the provisions of the tax laws that were in effect immediately prior to enactment of the Tax Act. Once the IRS has released the 2018 loss reserve discount factors, we will complete our analysis and include the effect of the difference in the reserve discount factors in the period the analysis is complete or the impact is reasonably estimable.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses. The new guidance replaces the methodology of credit loss impairment, which currently, delays the recognition of credit losses until a probable loss has been incurred. The new guidance requires credit losses for securities measured at amortized cost, to be determined using current expected credit losses estimates. These estimates are to be derived from historical, current and reasonable supporting forecasts, including prepayments and estimates, and will be recorded through a valuation allowance account that will run
through the income statement. The same method will be used for available-for-sale securities, but the valuation allowance will be limited to the amount by which the fair value is below amortized cost. The standard is effective for us in the first quarter of 2020. The Company will continue to monitor and evaluate the impact as the implementation date approaches.
All other issued but not yet effective accounting and reporting standards as of December 31, 2017 are either not applicable to the Company or are not expected to have a material impact on the Company.
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 2017, 2016 or 2015.
Ceding commissions are earned from certain reinsurance companies and are intended to reimburse the Company for policy acquisition costs related to those premiums ceded to the reinsurers. Ceding commission income is recognized over the effective period of the related insurance policies in proportion to premium revenue earned and is reflected as a reduction in underwriting and certain other operating costs.
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 income from current operations. Experience-rated commissions increased underwriting and certain other operating costs by $0.2 million in 2017 compared to no impact in 2016 and an increase of $0.3 million in 2015.
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 2017 and $0.7 million in 2016 and 2015.
Insurance-related assessments are accrued in the period in which they have been incurred. The Company is subject to a variety of assessments related to insurance commerce, including those by state guaranty funds and workers’ compensation second-injury funds. State guaranty fund assessments are used by state insurance oversight agencies to cover losses of policyholders of insolvent or rehabilitated insurance companies and for the operating expenses of such agencies. Assessments based on premiums are generally paid one year after the calendar year in which the premium is written, while assessments based on losses are generally paid within one year of the calendar year in which the loss is paid.
Short-term investments held at December 31, 2017 include $ 25.8 million of U.S. Treasury securities and obligation of U.S. government agencies. Short-term investments held at December 31, 2016 include $21.9 million of U.S. Treasury securities and obligations of U.S. government agencies, $4.9 million of states and political subdivisions and $2.8 million of corporate bonds..
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, 2016 are summarized as follows:
A summary of the amortized cost and fair value of investments in fixed maturity securities, classified as held-to-maturity at December 31, 2017, 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, 2017, by contractual maturity, is as follows:
A summary of the Company’s realized gains and losses on sales, calls or redemptions of investments for 2017, 2016 and 2015 is as follows:
At December 31, 2017, the Company held 299 individual fixed maturity securities that were in an unrealized loss position, of which 61 were in a continuous unrealized loss position for longer than 12 months.
Included in premiums receivable at December 31, 2017, 2016 and 2015 is the Company’s estimate for EBUB premium of $6.3 million, $7.7 million and $7.6 million, respectively.
Deferred policy acquisition costs represent those costs that are incremental and directly related to the successful acquisition of new or the renewal of existing insurance contracts. We defer incremental costs that result directly from, and are essential to, the acquisition or renewal of an insurance contract.
The Company received reinsurance recoveries of $1.6 million in 2017, $0.5 million in 2016 and $ 1.0 million in 2015.
Tax years 2014 through 2017 are subject to examination by the federal and state taxing authorities.
The following development tables provide the incurred and paid claims and allocated claim adjustment expenses, net of reinsurance, for workers’ compensation and general liability for accident years 2008 through 2017. The incurred but not reported (“IBNR”) claims and claims frequency is included for each accident year presented.
The average annual percentage payout of incurred claims by age, net of reinsurance, for workers’ compensation and general liability as of December 31, 2017 is summarized below. Since workers’ compensation has long payout periods, the table below shows less than 100% in the years disclosed. This is required supplementary information, which is unaudited.
The foregoing reconciliation reflects favorable development of the net reserves at December 31, 2017, 2016 and 2015. The favorable development reduced loss and loss adjustment expenses incurred by $34.8 million in 2017, driven primarily by accident years 2013, 2014 and 2015 of $5.8 million, $14.0 million and $10.1 million, respectively. In 2016 and 2015, the Company recorded favorable development of $51.3 million and $47.8 million, respectively. The revisions to the Company’s reserves reflect new information gained by claims adjusters in the normal course of adjusting claims and is reflected in the financial statements when the information becomes available. It is typical for more serious claims to take several years or longer to settle and the Company continually revises estimates as more information about claimants’ medical conditions and potential disability becomes known and the claims get closer to being settled. Multiple factors can cause loss development both unfavorable and favorable. The favorable loss development we experienced across accident years was largely due to favorable case reserve development from closed claims and claims where the worker had reached maximum medical improvement.
The Company is authorized to issue 50,000,000 shares of common stock, par value $0.01 per share. At December 31, 2017, there were 20,504,165 shares of common stock issued and 19,245,915 shares outstanding.
The Company is authorized to issue 10,000,000 shares of preferred stock, par value $0.01 per share. At December 31, 2017, there were no shares of preferred stock outstanding.
The following table summarizes information about the stock options outstanding under the 2005 Incentive Plan at December 31, 2015, 2016 and 2017:
The following table summarizes information about the restricted stock outstanding under the 2005 Incentive Plan at December 31, 2017:
In 2017, 9,326 shares of restricted stock were granted under the 2012 Incentive Plan, which will vest through 2022. In 2016, 27,077 shares of restricted stock were granted under the 2012 Incentive Plan, which will vest through 2021. At December 31, 2017, there were 346,451 shares of common stock available for future awards under the 2012 Incentive Plan.
As of December 31, 2017, there were 6,454 shares of restricted stock outstanding under the Non-Employee Director Restricted Stock Plan, all of which will vest on the date of the annual meeting of shareholders in 2018.
The following table summarizes information about the restricted stock outstanding under the Non-Employee Director Restricted Stock Plan at December 31, 2017:
The Company recognized compensation expense of $355,000 in 2017, $361,000 in 2016 and $266,000 in 2015 related to the Non-Employee Director Restricted Stock Plan. There were no tax benefits realized for tax deductions from vesting of restricted stock in 2017. Total tax benefits realized for tax deductions from vesting of restricted stock in 2016 and 2015 were $52,000 and $13,000, respectively.
Diluted earnings per share includes common shares assumed issued under the “treasury stock method,” which reflects the potential dilution that would occur if any outstanding options are exercised. Diluted earnings per share also includes the “if converted” method for participating securities if the result is dilutive.
The calculation of basic and diluted EPS for the years ended December 31, 2017, 2016 and 2015 are presented below.
The sale or other-than-temporary impairment (OTTI) of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive income to current period net income. The effects of reclassifications out of accumulated other comprehensive income by the respective line items of net income are presented in the following table.
The Company’s 401(k) benefit plan is available to all employees. The Company matches up to 3% 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 $0.6 million in 2017 and $0.4 million in 2016 and 2015.
The Company manages risk on certain long-duration claims by settling these claims through the purchase of annuities from unaffiliated carriers. In the event these carriers are unable to meet their obligations under these contracts, the Company could be liable to the claimants. The following table summarizes (in thousands) the fair value of the annuities at December 31, 2017, that the Company has purchased to satisfy its obligations.
Net premiums earned during 2017, 2016 and 2015 for the top ten states in 2017 and all others are shown below:
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016 are as follows:
There was an immaterial transfer between Level 1 and Level 3 due to the reclassification of a common stock security with unobservable fair value inputs.
In 2013, the Company’s Board of Directors initiated a regular quarterly dividend. During 2017, the Company’s Board of Directors declared a quarterly dividend of $0.20 per share compared to $0.18 per share in 2016, $0.15 per share in 2015, $0.12 per share in 2014 and $0.08 per share in 2013. The Company declared extraordinary dividends totaling $3.50 per share in 2017, $3.25 per share in 2016, $3.00 per share in 2015 and $1.50 per share in 2014. The Company did not pay any extraordinary cash dividends in 2013.