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, 2015 included in this report and “
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included in Item 8 of this report. This discussion includes forward-looking statements that are subject to risks, uncertainties and other factors described in Item 1A of this report. These factors could cause our actual results in 2016 and beyond to differ materially from those expressed in, or implied by, those forward-looking statements.
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.
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, 2010 to December 31, 2015, our investment portfolio, including cash and cash equivalents, increased from $826.5 million to $1.1 billion and produced net investment income of $27.9 million in 2015, $27.2 million in 2014 and $27.0 million in 2013.
For example, for the five-year period ended December 31, 2015 we had recorded 49 severe claims, or an average of 10 severe claims per year for accident years 2011 through 2015. The number of severe claims reported in any one accident year as of December 31, 2015 ranged from a low of 6 in 2011 to a high of 13 in 2014. The average reported case severity for these claims ranged from $1.6 million for the 2011 accident year to $2.6 million for the 2014 accident year. For the five accident years, the case incurred for these severe claims accounted for an average of 6.4 percentage points of our overall loss and loss adjustment expense, or LAE, ratio, measured at December 31, 2015.
Our gross reserves for loss and loss adjustment expenses at December 31, 2015, 2014 and 2013 were $718.0 million, $687.6 million and $614.6 million, respectively. As a percentage of gross reserves at year end, IBNR represented 22.2% in 2015, 22.4% in 2014 and 20.2% in 2013.
In 2015, we decreased our estimates for prior year loss reserves by $47.8 million. 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.
competition that results in lower premium rates, expanded policy coverage terms, and higher commissions paid to agencies. Our strategy is to focus on maintaining underwriting profitability throughout the cycle.
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, 2015 for an employer with constant payroll during the term of the policy, we would earn half of the premiums in 2015 and the other half in 2016. On a monthly basis, we also recognize net premiums earned from mandatory pooling arrangements.
We estimate the annual premiums to be paid by our policyholders when we issue the policies and record those amounts on our balance sheet as premiums receivable. We conduct premium audits on all of our voluntary business policyholders annually, upon the expiration of each policy, including when the policy is renewed. The purpose of these audits is to verify that policyholders have accurately reported their payroll expenses and employee job classifications, and therefore have paid us the premium required under the terms of the policies. The difference between the estimated premium and the ultimate premium is referred to as “earned but unbilled” premium, or EBUB premium. EBUB premium can be higher or lower than the estimated premium. EBUB premium is subject to significant variability and can either increase or decrease earned premium based upon several factors, including changes in premium growth, industry mix and economic conditions. Due to the timing of audits and other adjustments, the ultimate premium earned is generally not determined for several months after the expiration of the policy.
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.
several factors, including changes in premium growth, industry mix and economic conditions. EBUB assumptions include historical development factors, current economic outlook and current trends in particular sectors of our business.
Net Premiums Earned. Net premiums earned for 2015 were $375.9 million, compared to $375.7 million for 2014, an immaterial increase.
Net Realized Gains (Losses) on Investments. Net realized losses on investments in 2015 totaled $2.5 million, compared to a gain of $0.7 million in 2014. In 2015, net realized losses of $2.7 million resulted from an other-than-temporary impairment of four fixed maturity securities. These losses were partially offset by realized gains of $0.2 million on called fixed maturity securities and other sales of securities. 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. These gains were partially offset by a realized loss of $0.2 million from an other-than-temporary impairment of a fixed maturity security.
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, 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 EBUB premium.
Net Premiums Written. Net premiums written for 2014 were $380.0 million, compared to $353.8 million for 2013, an increase of 7.4%. The increase was primarily attributable to the increase in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 3.5% for 2014 compared to 5.3% for 2013.
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.
Our reserves for loss and loss adjustment expenses are inherently uncertain and our focus on providing workers’ compensation insurance to employers engaged in hazardous industries results in our receiving relatively fewer but more severe claims than many other workers’ compensation insurance companies. As a result of this focus on higher severity, lower frequency business, our reserve for loss and loss adjustment expenses may have greater volatility than other workers’ compensation insurance companies. Additional information regarding our reserves for loss and loss adjustment expenses and the actuarial methods and other factors used in establishing these reserves can be found under the caption “Business-Loss Reserves” in Item 1 of this report.
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 $189.7 million in 2015, $182.5 million in 2014 and $178.4 million in 2013. 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 has increased from $826.5 million at December 31, 2010 to $1.1 billion at December 31, 2015.
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 2016 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 2013 were net premiums collected of $325.0 million and investment income collected of $39.5 million, offset in-part by claim payments of $177.7 million, $46.4 million of operating expenditures, federal taxes paid of $14.5 million and dividends to policyholders paid of $1.6 million.
Net cash used in investing activities was $49.8 million in 2015, as compared to $141.3 million in 2014 and $97.2 million in 2013. 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. In 2014, major components of net cash used in investing activities included investment purchases of $455.2 million and net purchases of furniture, fixtures and equipment of $1.0 million, offset by proceeds from sales and maturities of investments of $315.2 million. In 2013, major components of net cash used in investing activities included investment purchases of $355.6 million and net purchases of furniture, fixtures and equipment of $1.1 million, offset by proceeds from sales and maturities of investments of $259.8 million.
The Company has a line of credit agreement with Frost Bank, N.S. for borrowings up to a maximum of $20.0 million. 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 and are unsecured. Under the agreement, the Company pays a fee of 0.25% on the unused portion of the loan in arrears quarterly, for a fee of $50,000 annually. At December 31, 2015, there were no outstanding borrowings. Unless renewed, the agreement will expire in December, 2016.
The Board of Directors initially authorized the Company’s share repurchase program in February 2010. In October 2011, 2012 2013, 2014 and 2015 the Board reauthorized this program. As of December 31, 2015, 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, 2015 under this program. There were no share repurchases in 2015, 2014 or 2013. The purchases will 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.
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
In 2014, the Company paid a quarterly cash dividend of $0.12 per share. In 2015, the Company paid a quarterly dividend of $0.15 share. In addition, the Company paid an extraordinary cash dividend of $3.00 in 2015 and two extraordinary cash dividends of $0.50 and $1.00 per share in 2014.
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, 2015, we were in compliance with these requirements.
The composition of our investment portfolio, including cash and cash equivalents, as of December 31, 2015 is shown in the following table.
During 2013, the Company impaired securities totaling $2.2 million related to four equity securities. The impairment charge is included in “Net realized gains (losses) on investments” for 2013. We impaired the securities due to the amount of the accumulated unrealized loss positions, the amount of time in those loss positions and management’s revised outlook on those securities.
The pre-tax investment yield on our investment portfolio was 2.5% per annum during the twelve months ended December 31, 2015, compared to 2.6% per annum during the same period in 2014.
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, 2015, the present value of these annuities was $95.7 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 16 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, 2015, were as follows:
The table below provides information with respect to our contractual obligations as of December 31, 2015.
(2) We are subject to various annual assessments imposed by certain of the states in which we write insurance policies. These assessments are generally based upon the amount of premiums written or losses paid during the applicable year. Assessments based on premiums are generally paid within one year after the calendar year in which the policies are written, while assessments based on losses are generally paid within one year after calendar year in which the loss is paid. When we establish a reserve for loss and loss 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, 2015 and 2014, 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, 2015. 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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AMERISAFE, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2016 expressed an unqualified opinion thereon.
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 2015, 2014 and 2013.
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). 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.
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 60 day notice with no lock up periods. The Company has no unfunded commitments related to the LP.
The Company funds its obligations under certain settled claims where the payment pattern and ultimate cost are fixed and determinable on an individual claim basis through the purchase of annuities. These annuities are purchased from unaffiliated carriers and name the claimant as payee. The cost of purchasing the annuity is recorded as paid loss and loss adjustment expenses. To the extent the annuity funds estimated future claims, reserves for loss and loss adjustment expense are reduced.
The Company writes certain policies for which the policyholder may participate in favorable claims experience through a dividend. An estimated provision for workers’ compensation policyholders’ dividends is accrued as the related premiums are earned. Dividends do not become a fixed liability unless and until declared by the respective Boards of Directors of AMERISAFE’s insurance subsidiaries. The dividend to which a policyholder may be entitled is set forth in the policy and is related to the amount of losses sustained under the policy. Dividends are calculated after the policy expiration. The Company is able to estimate the policyholder dividend liability because the Company has information regarding the underlying loss experience of the policies written with dividend provisions and can estimate future dividend payments from the policy terms.
The Company computes earnings per share (EPS) in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share. Additionally, during 2013, the Company applied the “two-class method” in computing basic and diluted earnings per share as a result of the participating unvested common shares which contained nonforfeitable rights to dividends during this period. As of January 1, 2014, the Company no longer has participating unvested common shares which contain nonforfeitable rights to dividends and now applies the treasury stock method in computing basic and diluted earnings per share.
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
Short-term investments held at December 31, 2015 include $7.7 million of corporate bonds. Short-term investments held at December 31, 2014 include $32.7 million of corporate bonds and certificates of deposit of $1.0 million. All certificates of deposit are fully insured by the Federal Deposit Insurance Corporation.
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, 2014 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, 2015, 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, 2015, by contractual maturity, is as follows:
A summary of the Company’s realized gains and losses on sales, calls or redemptions of investments for 2015, 2014 and 2013 is as follows:
The following table summarizes the fair value and gross unrealized losses on securities, aggregated by major investment category and length of time that the individual securities have been in a continuous unrealized loss position:
At December 31, 2015, the Company held 198 individual fixed maturity securities that were in an unrealized loss position, of which 29 were in a continuous unrealized loss position for longer than 12 months.
our intent not to sell the security for a sufficient time period for it to recover its value;
Premiums receivable consist primarily of premium-related balances due from policyholders. The balance is shown net of the allowance for doubtful accounts. The components of premiums receivable are shown below:
Included in premiums receivable at December 31, 2015, 2014 and 2013 is the Company’s estimate for EBUB premium of $7.6 million, $5.2 million and $4.3 million, respectively.
The company made a partial disposition election under tax regulations to write-off capitalized amounts for book and tax purposes of certain fixed assets and deductible repairs in the amount of $0.6 million in 2015 and this amount is included in “Loss on disposal of assets.”
Amounts recoverable from reinsurers consists of ceded case reserves, ceded incurred but not reported (“IBNR”) reserves, paid losses recoverable and experience-rated commissions recoverable. Ceded case and ceded IBNR reserves represent the portion of gross loss and loss adjustment expense liabilities that are recoverable under reinsurance agreements, but are not yet due from reinsurers. Paid losses recoverable are receivables currently due from reinsurers for ceded paid losses. The Company considers paid losses recoverable outstanding for more than 90 days to be past due. At December 31, 2015, there were no paid losses recoverable past due. Experience-rated commissions recoverable represents earned commission from certain reinsurance companies based on the financial results of the applicable risks ceded to the reinsurers.
At December 31, 2015, unsecured reinsurance recoverables from reinsurers that exceeded 1.5% of statutory surplus of the Company’s insurance subsidiary are shown below (in thousands). The A.M. Best Company rating for the reinsurer is shown parenthetically.
In 2013, 2014 and 2015, the Company made no adjustment to the valuation allowance. As of December 31, 2015, there is no valuation allowance.
Income tax expense from operations is different from the amount computed by applying the U.S. federal income tax statutory rate of 35% to income before income taxes as follows:
Tax years 2012 through 2015 are subject to examination by the federal and state taxing authorities. Tax year 2011 is currently being examined by the state of Illinois.
In 2013, 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 expires 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, 2015 or 2014.
The following table provides a reconciliation of the beginning and ending reserve balances, net of related amounts recoverable from reinsurers, for 2015, 2014 and 2013:
Pursuant to regulatory requirements, AIIC cannot pay dividends to the Company in excess of the lesser of 10% of statutory surplus, or statutory net income, excluding realized investment gains, for the preceding 12-month period, without the prior approval of the Nebraska Director of Insurance. However, for purposes of this dividend calculation, net income from the previous two calendar years may be carried forward to the extent that it has not already been paid out as dividends. AIIC paid $50.0 million in dividends to the Company in 2015, $25.0 million in 2014 and $15.0 million in 2013. Based upon the dividend limitation described above, AIIC could pay to the Company dividends of up to $57.1 million in 2016 without seeking regulatory approval.
The Company is authorized to issue 50,000,000 shares of common stock, par value $0.01 per share. At December 31, 2015, there were 20,388,396 shares of common stock issued and 19,130,146 shares outstanding.
The following table summarizes information about the stock options outstanding under the 2005 Incentive Plan at December 31, 2013, 2014 and 2015:
The following table summarizes information about the restricted stock outstanding under the 2005 Incentive Plan at December 31, 2015:
As of December 31, 2015, there were 7,112 shares of restricted stock outstanding under the 2010 Restricted Stock Plan, all of which will vest on the date of the annual meeting of shareholders in 2016.
In 2015, 50,461 shares of restricted stock were granted under the 2012 Incentive Plan, which will vest through 2020. In 2014, 4,312 shares of restricted stock were granted under the 2012 Incentive Plan, which will vest through 2017. At December 31, 2015, there were 380,935 shares of common stock available for future awards under the 2012 Incentive Plan.
The following table summarizes information about the restricted stock outstanding under the 2012 Incentive Plan at December 31, 2015:
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 percent 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.
In February 2015, the Company was notified of an adverse verdict against its subsidiary, American Interstate Insurance Company, related to a 2009 workers’ compensation claim in the State of Iowa. The verdict was for $25.3 million, of which $0.3 million was for actual damages and $25.0 million was awarded for punitive damages. American Interstate is appealing both the verdict and the damage awards. The Company has posted an appeal bond in the amount of $27.8 million, as required by law. The Company maintains reinsurance against catastrophic losses, including court ordered judgments. The Company presently believes that this reserve amount, together with its reinsurance coverage, is adequate to satisfy this claim. As of December 31, 2015, the Company’s total reserve for the claim was $2.5 million. The $2.5 million reserve does not include payments that the Company has previously paid in this case. The expenses, plus the $2.5 million reserve, total $5.4 million. The Company’s retention is $5.0 million before its reinsurance providers are obligated to reimburse the Company for additional costs.
Short Term Investments-The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair value.
Other Investments-Other investments consist of an investment in a limited partnership hedge fund valued using the net asset value provided by the general partner of the limited partnership, which approximates the fair
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and 2014 are as follows:
Assets and liabilities measured at amortized cost as of December 31, 2015 and 2014 are as follows:
At December 31, 2015, the Company held two securities measured at fair value on a nonrecurring basis due to a recognized impairment of $0.3 million. The securities are valued using Level 2 inputs and had a value of
$0.3 million at December 31, 2015. The securities were valued at fair value at the time of impairment and are currently being carried at the adjusted amortized cost. The fair value of the securities was $0.5 million at December 31, 2015.
The Company’s Board of Directors initiated a share repurchase program in February 2010. In October 2015, the Board reauthorized this program with a limit of $25.0 million. Unless reauthorized, the program will expire on December 31, 2016. 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.