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, 2012 included in this report and “Item. 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The financial data for 2008 to 2011 has been adjusted to reflect the retrospective adoption of the accounting for deferred acquisition costs. For additional information see Note 1 in the notes of our consolidated financial statements included in this report.
(2) Reflects the participation rights of our redeemable preferred stock, which was redeemed on December 31, 2009. See Note 12 to our audited financial statements.
(4) 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.
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 8.0% in 2012, 7.1% in 2011 and 10.9% in 2010. We calculate book value per share by dividing ending shareholder’s equity by number of common shares outstanding. Our book value per share was $20.88 at December 31, 2012, $19.25 at December 31, 2011 and $17.91 at December 31, 2010.
For example, for the five-year period ended December 31, 2012 we had recorded 194 severe claims, or an average of 39 severe claims per year for accident years 2008 through 2012. The number of severe claims reported in any one accident year as of December 31, 2012 ranged from a low of 35 in 2012 to a high of 43 in 2009. The average reported severity for these claims ranged from $0.8 million for the 2008 accident year to $1.0 million for the 2010 accident year. For the five accident years, these severe claims accounted for an average of 13.3 percentage points of our overall loss and loss adjustment expense, or LAE, ratio, measured at December 31, 2012.
Our gross reserves for loss and loss adjustment expenses at December 31, 2012, 2011 and 2010 were $570.5 million, $538.2 million and $532.2 million, respectively. As a percentage of gross reserves at year end, IBNR represented 21.6% in 2012, 22.3% in 2011 and 19.6% in 2010.
In 2012, we decreased our estimates for prior year loss reserves by $2.5 million. In 2011, we decreased our estimates for prior year loss reserves by $6.6 million. In 2010, we decreased our estimates for prior year loss reserves by $21.6 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, 2012 for an employer with constant payroll during the term of the policy, we would earn half of the premiums in 2012 and the other half in 2013. 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.
We review the estimate of EBUB premiums on a quarterly basis using historical data and applying various assumptions based on the current market, and we record an adjustment to premium, related losses, and expenses as warranted.
Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses incurred represents our largest expense item and, for any given reporting period, includes estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending, and administering claims. These expenses fluctuate based on the amount and types of risks we insure. We record loss and loss adjustment expenses related to estimates of future claim payments based on case-by-case valuations and statistical analyses. We seek to establish all reserves at the most likely ultimate exposure based on our historical claims experience. It is typical for our more serious claims to take several years to settle and we revise our estimates as we receive additional information about the condition of the injured employees. Our ability to estimate loss and loss adjustment expenses accurately at the time of pricing our insurance policies is a critical factor in our profitability.
In establishing our reserves, we review the results of analyses using actuarial methods that utilize historical loss data from our more than 27 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.
Gross Premiums Written. Gross premiums written for 2012 were $328.8 million, compared to $272.1 million for 2011, an increase of 20.8%. The increase was attributable to a $38.9 million increase in annual premiums on voluntary policies written during the period, a $15.0 million increase in premiums resulting from payroll audits and related premium adjustments, a $2.4 million increase in premiums from mandatory pooling arrangements, and a $0.4 million increase in direct assigned risk premiums. Related premium adjustments in 2012 include a $0.9 million increase in “earned but unbilled”, or EBUB, premium. Premium adjustments for the same period in 2011 included a $0.3 million increase in EBUB premium.
Net Premiums Earned. Net premiums earned for 2012 were $290.7 million, compared to $251.0 million for 2011, an increase of 15.8%. The increase was attributable to the increase in net premiums written, offset by an increase in unearned premiums.
Interest expense. Interest expense for 2012 was $0.6 million, compared to $1.3 million for 2011. Weighted average borrowings for 2012 were $12.9 million, compared to $31.1 million for 2011. The weighted average interest rate increased to 4.3% per annum for 2012 from 4.2% per annum for 2011. The Company retired all of its debt by August 2012.
Net Realized Gains (Losses) on Investments. Net realized gains on investments in 2011 totaled $2.2 million, compared to $2.4 million in 2010. Net realized gains in 2011 resulted from $2.4 million in 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 offset by an other-than-temporary impairment of $0.2 million on one asset-
backed security from our held-to-maturity portfolio. Net realized gains in 2010 primarily resulted from $3.1 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 2010 were offset by an other-than-temporary impairment of $0.7 million on one equity security.
The Company recorded favorable prior accident year loss and loss adjustment expense development of $2.5 million in 2012, $6.6 million in 2011 and $21.6 million in 2010. The table below sets forth the favorable or unfavorable development for accident years 2007 through 2011 and, collectively, all accident years prior to 2007.
Our principal sources of operating funds are premiums, investment income, and proceeds from maturities of investments. Our primary uses of operating funds include payments for claims and operating expenses. We pay claims and operating expenses using cash flow from operations and invest our excess cash in fixed maturity and equity securities. We presently expect that our projected cash flow from operations will provide us sufficient liquidity to fund future operations, including payment of claims and operating expenses, payment of interest on our subordinated notes and other holding company expenses, for at least the next 18 months.
The Board of Directors initially authorized the Company’s share repurchase program in February 2010. In October 2011 and 2012, the Board reauthorized this program. As of December 31, 2012, we had repurchased a total of 1,258,250 shares of our outstanding common stock for $22.4 million. The Company had $24.4 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 $32.4 million after March 2013 without seeking regulatory approval. See “Business-Regulation-Dividend Limitations” in Item 1 of this report.
The pre-tax investment yield on our investment portfolio was 3.1% per annum during the twelve months ended December 31, 2012, compared to 3.1% per annum during the same period in 2011.
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.
(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, 2012 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.
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.
Audited Financial Statements as of December 31, 2012 and 2011 and for the three years in the period ended December 31, 2012:
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, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2013, expressed an unqualified opinion thereon.
The following table reflects the adjustments to the financial statement line items at December 31, 2011 (dollars in thousands).
The following table reflects the adjustments to the financial statement line items for the years ended December 31, 2010 and 2011 (dollars in thousands except per share data).
Additionally, retained earnings at January 1, 2010 was decreased by $1,385,000.
The adjustments did not change subtotals of net cash provided by operating activities, investing activities, or cash flows used in financing activities.
See note 21 for additional information regarding our unaudited quarterly financial data for the years ended December 31, 2011 and 2010, which data reflects this adjustment.
Short-term investments include municipal securities, corporate bonds and certificates of deposit with an original maturity greater than three months but less than one year.
shown net of the allowance for doubtful accounts. Receivables due from insureds are charged off when a determination has been made that a specific balance will not be collected based upon the collection efforts of Company personnel. An estimate of amounts that are likely to be charged off is established as an allowance for doubtful accounts as of the balance sheet date. The estimate is primarily comprised of specific balances that are considered probable to be charged off after all collection efforts have ceased, as well as historical trends and an analysis of the aging of the receivables.
All advertising expenditures incurred by the Company are charged to expense in the period to which they relate and are included in underwriting and other operating costs in the consolidated statements of income. Total advertising expenses incurred were $444,000 in 2012, $421,000 in 2011 and $413,000 in 2010.
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. The Company has a premium tax benefit accrued of $3.4 million and $3.3 million as of December 31, 2012 and 2011, respectively for mandatory assessments that may be recovered through a reduction in future premium taxes in certain states. Assessments related to premiums are generally paid one year after the calendar year in which the premium is written, while assessments related to losses are generally paid within one year of when the loss is paid.
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.
In December 2003, the Company formed Amerisafe Capital Trust I (“ACT I”) for the sole purpose of issuing $10.0 million in trust preferred securities. ACT I used the proceeds from the sale of these securities and the Company’s initial capital contribution to purchase $10.3 million of subordinated debt securities from the Company. In July 2011, the Company redeemed all $10.3 million of subordinated debt securities from ACT I and the trust was canceled. The debt securities had been the sole assets of ACT I, and the payments under the debt securities were the sole revenues of ACT I.
The Company computes earnings per share in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share. Additionally, for periods prior to January 1, 2010, the Company applied the “two-class method” in computing basic and diluted earnings per share. ASC Topic 260 clarifies that unvested share-based payment awards with a right to receive nonforfeitable dividends are participating securities.
In June 2011, the FASB issued Accounting Standards Update 2011-05, “Presentation of Comprehensive Income.” This guidance requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Short-term investments held at December 31, 2012 include $63.5 million of corporate bonds, certificates of deposit of $0.9 million and $4.5 million of municipal securities. Short-term investments held at December 31, 2011 include $37.0 million of corporate bonds, certificates of deposits of $9.7 million and $0.3 million of municipal securities. All certificates of deposits are fully insured by the Federal Deposit Insurance Corporation.
The gross unrealized gains and losses on, and the cost and fair value of, those investments classified as held-to-maturity at December 31, 2012 are summarized as follows:
The gross unrealized gains and losses on, and the cost and fair value of, those investments classified as available-for-sale at December 31, 2012 are summarized as follows:
A summary of the cost or amortized cost and fair value of investments in fixed maturity securities, classified as available-for-sale at December 31, 2012, by contractual maturity, is as follows:
The Company cedes certain premiums and losses to various reinsurers under quota share and excess-of-loss treaties. These reinsurance arrangements provide for greater diversification of business, allow management to control exposure to potential losses arising from large risks, and provide additional capacity for growth. Ceded reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. To minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers on a continual basis. The effect of reinsurance on premiums written and earned in 2012, 2011 and 2010 was as follows:
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, 2012, 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.
The Company received reinsurance recoveries of $5,344,000 in 2012, $2,861,000 in 2011 and $3,667,000 in 2010.
In 2012, the Company made no adjustment to the valuation allowance. In 2011, the Company recorded a reduction of $1.4 million in the valuation allowance of $3.0 million established in 2008 for unrealized losses resulting from other-than-temporary impairments.
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. 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. The Company pays a fee of 3/8% (three
The following table provides a reconciliation of the beginning and ending reserve balances, net of related amounts recoverable from reinsurers, for 2012, 2011 and 2010:
Shareholders approved an amended Certificate of Formation for the Company on June 15, 2010 under which the Company is authorized to issue 10,000,000 shares of preferred stock, par value $0.01 per share. At December 31, 2012, there were no shares of preferred stock outstanding.
No shares of these classes of capital stock were outstanding at December 31, 2012 or 2011. No shares of these classes of capital stock were issued in the three year period ended December 31, 2012. Effective December 31, 2009, all outstanding shares of Series C preferred stock and Series D preferred stock were redeemed and canceled.
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 permitted 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.
At December 31, 2012, 248,009 shares of common stock were available for future awards under the 2005 Incentive Plan.
No options were granted under the 2005 Incentive Plan in 2012, 2011 or 2010.
The following table summarizes information about the restricted stock outstanding under the 2005 Incentive Plan at December 31, 2012:
In 2010, the Company’s shareholders approved an amendment to the AMERISAFE Non-Employee Director Restricted Stock Plan (the “2010 Restricted Stock Plan”). The Plan is administered by the Compensation Committee of the Board and provides for the automatic grant of restricted stock awards to non-employee directors of the Company. Awards to non-employee directors are generally subject to terms including non-transferability, immediate vesting upon death or total disability of a director, forfeiture of unvested shares upon termination of service by a director and acceleration of vesting upon a change of control of the Company. The maximum number of shares of common stock that may be issued pursuant to restricted stock awards under the 2010 Restricted Stock Plan is 100,000 shares, subject to the authority of the Board to adjust this amount in the event of a merger, consolidation, reorganization, stock split, combination of shares, recapitalization or similar transaction affecting the common stock. At December 31, 2012, there were 70,824 shares of common stock available for future awards under the 2010 Restricted Stock Plan.
The Company recognized compensation expense of $210,000 in 2012, $210,000 in 2011 and $163,000 in 2010 related to the 2010 Restricted Stock Plan. In 2012, total tax benefits realized for tax deductions from vesting of restricted stock was $16,000. In 2011, total tax benefits realized for tax deductions from vesting of restricted stock was $18,000. In 2010, total tax expense of $5,000 was for tax from vesting of restricted stock.
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 $322,000 in 2012, $316,000 in 2011 and $307,000 in 2010.
The Company leases equipment and office space under noncancelable operating leases. At December 31, 2012, future minimum lease payments are as follows (in thousands):
Net premiums earned during 2012, 2011 and 2010 for the top ten states in 2012 and all others are shown below:
Subordinated Debt Securities-The carrying value of the Company’s subordinated debt securities approximated the estimated fair value of the obligations as the interest rates on these securities were comparable to rates that the Company believed it would have incurred on comparable borrowings.
The Company carries available-for-sale securities at fair value in our consolidated financial statements and determines fair value measurements and disclosure in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosure.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and 2011 are as follows:
The following table represents unaudited quarterly financial data for the years ended December 31, 2012 and 2011. Financial data for the three months ended March 31, 2011, June 30, 2011, September 30, 2011 and for the three months ended December 31, 2011 have been adjusted to reflect the accounting change related to the retrospective adoption of the calculation of deferred acquisition costs. See Note 1.
Previously reported amounts for the three months ended March 31, 2011 for income before income taxes, net income and comprehensive income were $7,486, $6,627 and $6,535, respectively. Adjustment amounts for income before income taxes, net income and comprehensive income were increases of $4, $3 and $2, respectively.
Previously reported amounts for the three months ended June 30, 2011 for income before income taxes, net income and comprehensive income were $4,793, $4,569 and $5,360, respectively. Adjustment amounts for income before income taxes, net income and comprehensive income were increases of $39, $25 and $26, respectively.
Previously reported amounts for the three months ended December 31, 2011 for income before income taxes, net income and comprehensive income were $9,494, $8,058 and $8,031, respectively. Adjustment amounts for income before income taxes, net income and comprehensive income were increases of $23, $15 and $15, respectively.