amsf-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

Commission file number:

001-12251

 

AMERISAFE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Texas

 

75-2069407

(State of Incorporation)

 

(I.R.S. Employer Identification Number)

 

 

 

2301 Highway 190 West, DeRidder, Louisiana

 

70634

(Address of Principal Executive Offices)

 

(Zip Code)

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

 

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

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

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

 

 Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

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

As of October 24, 2018, there were 19,269,980 shares of the Registrant’s common stock, par value $.01 per share, outstanding.

 

 


 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

No.

 

 

 

 

FORWARD-LOOKING STATEMENTS

3

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1

 

Financial Statements

4

 

 

 

 

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

 

Item 4

 

Controls and Procedures

26

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

 

Item 6

 

Exhibits

27

 

2


FORWARD-LOOKING STATEMENTS

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

 

the cyclical nature of the workers’ compensation insurance industry;

 

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

 

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

 

changes in relationships with independent agencies;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

changes in accounting standards or new accounting standards;

 

changes in legal theories of liability under our insurance policies;

 

changes in rating agency policies, practices or ratings;

 

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

 

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

 

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

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report, and under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.

 

 

3


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed maturity securities—held-to-maturity, at amortized cost (fair value

   $599,885 and $639,309 in 2018 and 2017, respectively)

 

$

602,830

 

 

$

629,668

 

Fixed maturity securities—available-for-sale, at fair value (cost $473,315 and

   $461,236 in 2018 and 2017, respectively)

 

 

468,019

 

 

 

465,594

 

Equity securities, at fair value (cost $14,532 and $8,503 in 2018

   and 2017, respectively)

 

 

14,791

 

 

 

9,282

 

Short-term investments

 

 

104,896

 

 

 

25,770

 

Total investments

 

 

1,190,536

 

 

 

1,130,314

 

Cash and cash equivalents

 

 

33,324

 

 

 

55,559

 

Amounts recoverable from reinsurers

 

 

109,269

 

 

 

90,133

 

Premiums receivable, net of allowance

 

 

178,625

 

 

 

174,234

 

Deferred income taxes

 

 

19,898

 

 

 

19,262

 

Accrued interest receivable

 

 

10,776

 

 

 

10,635

 

Property and equipment, net

 

 

6,462

 

 

 

6,128

 

Deferred policy acquisition costs

 

 

21,326

 

 

 

20,251

 

Federal income tax recoverable

 

 

 

 

 

1,761

 

Other assets

 

 

16,753

 

 

 

9,959

 

Total assets

 

$

1,586,969

 

 

$

1,518,236

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Reserves for loss and loss adjustment expenses

 

$

791,129

 

 

$

771,845

 

Unearned premiums

 

 

165,167

 

 

 

157,270

 

Amounts held for others

 

 

40,269

 

 

 

36,908

 

Policyholder deposits

 

 

47,624

 

 

 

48,364

 

Insurance-related assessments

 

 

29,814

 

 

 

28,246

 

Federal income tax payable

 

 

1,558

 

 

 

 

Accounts payable and other liabilities

 

 

38,996

 

 

 

37,076

 

Payable for investments purchased

 

 

13,416

 

 

 

13,104

 

Total liabilities

 

 

1,127,973

 

 

 

1,092,813

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock:  voting—$0.01 par value authorized shares—50,000,000

   in 2018 and 2017; 20,528,230 and 20,504,165 shares issued and 19,269,980

   and 19,245,915  shares outstanding in 2018 and 2017, respectively

 

 

205

 

 

 

204

 

Additional paid-in capital

 

 

211,156

 

 

 

210,081

 

Treasury stock, at cost (1,258,250 shares in 2018 and 2017)

 

 

(22,370

)

 

 

(22,370

)

Accumulated earnings

 

 

274,206

 

 

 

233,896

 

Accumulated other comprehensive income (loss), net

 

 

(4,201

)

 

 

3,612

 

Total shareholders’ equity

 

 

458,996

 

 

 

425,423

 

Total liabilities and shareholders’ equity

 

$

1,586,969

 

 

$

1,518,236

 

 

See accompanying notes.

4


AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

85,324

 

 

$

87,035

 

 

$

276,368

 

 

$

269,152

 

Ceded premiums written

 

 

(2,283

)

 

 

(1,992

)

 

 

(6,982

)

 

 

(6,581

)

Net premiums written

 

$

83,041

 

 

$

85,043

 

 

$

269,386

 

 

$

262,571

 

Net premiums earned

 

$

85,184

 

 

$

85,118

 

 

$

261,489

 

 

$

258,779

 

Net investment income

 

 

7,884

 

 

 

7,788

 

 

 

22,396

 

 

 

21,969

 

Net realized losses on investments

 

 

(329

)

 

 

(192

)

 

 

(1,471

)

 

 

(761

)

Net unrealized gains on equity securities

 

 

573

 

 

 

 

 

 

259

 

 

 

 

Fee and other income

 

 

217

 

 

 

90

 

 

 

411

 

 

 

284

 

Total revenues

 

 

93,529

 

 

 

92,804

 

 

 

283,084

 

 

 

280,271

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses incurred

 

 

47,598

 

 

 

48,394

 

 

 

152,836

 

 

 

151,038

 

Underwriting and certain other operating costs

 

 

8,011

 

 

 

7,218

 

 

 

23,842

 

 

 

23,363

 

Commissions

 

 

6,416

 

 

 

6,030

 

 

 

19,526

 

 

 

18,424

 

Salaries and benefits

 

 

6,179

 

 

 

6,033

 

 

 

18,786

 

 

 

18,899

 

Policyholder dividends

 

 

865

 

 

 

1,573

 

 

 

3,290

 

 

 

4,107

 

Total expenses

 

 

69,069

 

 

 

69,248

 

 

 

218,280

 

 

 

215,831

 

Income before income taxes

 

 

24,460

 

 

 

23,556

 

 

 

64,804

 

 

 

64,440

 

Income tax expense

 

 

4,759

 

 

 

6,979

 

 

 

11,978

 

 

 

18,858

 

Net income

 

$

19,701

 

 

$

16,577

 

 

$

52,826

 

 

$

45,582

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.03

 

 

$

0.86

 

 

$

2.75

 

 

$

2.38

 

Diluted

 

$

1.02

 

 

$

0.86

 

 

$

2.74

 

 

$

2.37

 

Shares used in computing earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,216,545

 

 

 

19,171,912

 

 

 

19,204,196

 

 

 

19,161,529

 

Diluted

 

 

19,272,984

 

 

 

19,236,114

 

 

 

19,281,036

 

 

 

19,235,955

 

Cash dividends declared per common share

 

$

0.22

 

 

$

0.20

 

 

$

0.66

 

 

$

0.60

 

 

See accompanying notes.

5


AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

19,701

 

 

$

16,577

 

 

$

52,826

 

 

$

45,582

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on securities, net of tax  (1)

 

 

(2,118

)

 

 

617

 

 

 

(7,813

)

 

 

3,525

 

Comprehensive income

 

$

17,583

 

 

$

17,194

 

 

$

45,013

 

 

$

49,107

 

______________

(1)

Data presented for 2018 includes debt securities only compared to 2017 which includes both debt and equity securities.

  

See accompanying notes.

6


AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Treasury Stock

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Shares

 

 

Amounts

 

 

Earnings

 

 

Income (Loss)

 

 

Total

 

Balance at December 31, 2017

 

 

20,504,165

 

 

$

204

 

 

$

210,081

 

 

 

(1,258,250

)

 

$

(22,370

)

 

$

233,896

 

 

$

3,612

 

 

$

425,423

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

52,826

 

 

 

(7,813

)

 

 

45,013

 

Impact of adoption of

   ASU 2016-01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

614

 

 

 

 

 

 

614

 

Impact of adoption of

   ASU 2018-02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(414

)

 

 

 

 

 

(414

)

Common stock issued upon

     exercise of options

 

 

15,000

 

 

 

 

 

 

67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

67

 

Common stock issued

 

 

9,065

 

 

 

1

 

 

 

195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

196

 

Share-based compensation

 

 

 

 

 

 

 

 

813

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

813

 

Dividends to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,716

)

 

 

 

 

 

(12,716

)

Balance at September 30, 2018

 

 

20,528,230

 

 

$

205

 

 

$

211,156

 

 

 

(1,258,250

)

 

$

(22,370

)

 

$

274,206

 

 

$

(4,201

)

 

$

458,996

 

 

See accompanying notes.

7


AMERISAFE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

52,826

 

 

$

45,582

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

748

 

 

 

760

 

Net amortization of investments

 

 

8,414

 

 

 

10,815

 

Deferred income taxes

 

 

1,388

 

 

 

342

 

Net realized losses on investments

 

 

1,471

 

 

 

761

 

Net unrealized gains on equity securities

 

 

(259

)

 

 

 

Net realized losses on disposal of assets

 

 

 

 

 

2

 

Share-based compensation

 

 

1,074

 

 

 

1,283

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Premiums receivable, net

 

 

(4,391

)

 

 

(2,492

)

Accrued interest receivable

 

 

(141

)

 

 

125

 

Deferred policy acquisition costs

 

 

(1,075

)

 

 

(1,606

)

Amounts held by others

 

 

(7,855

)

 

 

27,848

 

Other assets

 

 

2,692

 

 

 

(5,131

)

Reserves for loss and loss adjustment expenses

 

 

19,284

 

 

 

12,250

 

Unearned premiums

 

 

7,897

 

 

 

3,792

 

Reinsurance balances

 

 

(19,136

)

 

 

(1,320

)

Amounts held for others and policyholder deposits

 

 

2,621

 

 

 

2,503

 

Accounts payable and other liabilities

 

 

5,185

 

 

 

6,813

 

Net cash provided by operating activities

 

 

70,743

 

 

 

102,327

 

Investing activities

 

 

 

 

 

 

 

 

Purchases of investments held-to-maturity

 

 

(71,872

)

 

 

(149,981

)

Purchases of investments available-for-sale

 

 

(82,519

)

 

 

(79,116

)

Purchases of equity securities

 

 

(5,251

)

 

 

(7,499

)

Purchases of short-term investments

 

 

(133,355

)

 

 

(53,789

)

Proceeds from maturities of investments held-to-maturity

 

 

85,322

 

 

 

112,715

 

Proceeds from sales and maturities of investments available-for-sale

 

 

79,539

 

 

 

82,270

 

Proceeds from sales and maturities of short-term investments

 

 

48,965

 

 

 

17,610

 

Proceeds from redemptions of other investments

 

 

130

 

 

 

9,000

 

Purchases of property and equipment

 

 

(1,083

)

 

 

(446

)

Net cash used in investing activities

 

 

(80,124

)

 

 

(69,236

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

67

 

 

 

 

Dividends to shareholders

 

 

(12,921

)

 

 

(11,649

)

Net cash used in financing activities

 

 

(12,854

)

 

 

(11,649

)

Change in cash and cash equivalents

 

 

(22,235

)

 

 

21,442

 

Cash and cash equivalents at beginning of period

 

 

55,559

 

 

 

58,936

 

Cash and cash equivalents at end of period

 

$

33,324

 

 

$

80,378

 

 

See accompanying notes.

8


AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

Note 1. Basis of Presentation

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

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

The Company provides workers’ compensation insurance for small to mid-sized employers engaged in hazardous industries, principally construction, trucking, logging and lumber, manufacturing, and agriculture. Assets and revenues of AIIC represent at least 95% of comparable consolidated amounts of the Company for each of the nine months ended September 30, 2018 and 2017.

In the opinion of management of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, the results of operations and cash flows for the periods presented. The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q under the Securities Exchange Act of 1934 and therefore do not include all information and footnotes to be in conformity with accounting principles generally accepted in the United States (“GAAP”). The results for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited condensed consolidated financial statements contained herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017.

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.

Adopted Accounting Guidance

In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities.  This guidance requires fair value measurement for equity investments (not including those that result in consolidation of the investee or use the equity method of accounting) and the recognition of changes in fair value to be presented as a component of net income.  The guidance also revises the disclosure requirements related to fair value changes of liabilities presented in comprehensive income, eliminates disclosure related to the methods and assumptions underlying fair value for financial instruments measured at amortized cost, and simplifies impairment assessments for equity investments without readily determinable fair values.  The adoption of this new guidance in the first quarter of 2018 resulted in an immaterial decrease in net income of $390 thousand or a $0.02 decrease in our diluted earnings per common share.  At December 31, 2017, equity investments were classified as available-for-sale on the Company’s balance sheet.  However, upon adoption, the updated guidance eliminated the available-for-sale balance sheet classification for equity investments.  

In May 2014, the FASB issued ASU 2014-09 (Topic 606): Revenue from Contracts with Customers.  The guidance revises the criteria for revenue recognition and requires that the revenue recognized reflect the transfer of promised goods or services to customers in an amount that represents the consideration to which the entity expects to be entitled in exchange for those goods or services.  The standard was effective for us in the first quarter of 2018.  The adoption of the new guidance had no impact on the Company's reporting and disclosure of net premiums earned, net investment income or net realized gains and losses, as these items are not within the scope of this new guidance. The remaining revenue sources are immaterial.

9


In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220).  This ASU provided new guidance on reclassification from Other Comprehensive Income (“OCI”) of tax effects related to the recently passed tax reform legislation (the “Tax Act”).  The guidance gives entities the option to reclassify to retained earnings tax effects related to items in accumulated OCI deemed to be stranded as a result of tax reform.  The guidance was effective for us in the first quarter of 2018 and was applied retrospectively.  The Company’s policy for releasing income tax effects from accumulated OCI was the individual securities approach for available-for-sale securities.  The adoption of this guidance did not have a material impact on our financial condition and results of operations.

In December 2017, the SEC issued Staff Accounting Bulletin (SAB) 118 which provided guidance on accounting for tax effects of the Tax Act.  Among many changes of the Tax Act which affected Property and Casualty Insurers, 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 used the 2017 IRS discount factors to estimate the impact of the change in loss reserve discounting factors and adjusted our deferred tax balances for the impact of these changes.  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.

Prospective Accounting Guidance

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  Under current guidance for lessees, leases are only included on the balance sheet if certain criteria, classifying the contract as a capital lease, are met.  The new guidance requires a lessee to recognize a lease liability and a right of use asset for all leases extending beyond twelve months.  The new guidance is effective for us in the first quarter of 2019.  Prior comparative periods will not be adjusted.  Adoption of the guidance is not expected to have a material effect on the Company’s consolidated financial statements as the Company does not have any significant leases.  

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 loss 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 September 30, 2018 are either not applicable to the Company or are not expected to have a material impact on the Company.

 

 

Note 2. Stock Options and Restricted Stock

As of September 30, 2018, the Company has three equity incentive plans: the AMERISAFE 2005 Equity Incentive Plan (the “2005 Incentive Plan”), the AMERISAFE Non-Employee Director Restricted Stock Plan (the “Restricted Stock Plan”) and the AMERISAFE 2012 Equity and Incentive Compensation Plan (the “2012 Incentive Plan”). In connection with the approval of the 2012 Incentive Plan by the Company’s shareholders, no further grants will be made under the 2005 Incentive Plan.  All grants made under the 2005 Incentive plan continue in effect, subject to the terms and conditions of the 2005 Incentive Plan. See Note 12 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 for additional information regarding the Company’s incentive plans.

During the nine months ended September 30, 2018, the Company granted 3,304 shares of common stock to executive officers and 5,761 shares of restricted common stock to non-employee directors.  The market value of the shares granted totaled $0.5 million.  During the nine months ended September 30, 2017, the Company granted 7,434 shares of common stock to executive officers and 6,454 shares of restricted common stock to non-employee directors. The market value of the shares granted totaled $0.7 million.

During the nine months ended September 30, 2018, options to purchase 15,000 shares of common stock were exercised. In connection with these exercises, the Company received $0.1 million of stock option proceeds.  During the nine months ended September 30, 2017, no options to purchase shares of common stock were exercised.

The Company recognized share-based compensation expense of $0.3 million in the quarter ended September 30, 2018 and 2017.  The Company recognized share-based compensation expense of $1.1 million in the nine months ended September 30, 2018 and $1.3 million for the same period in 2017.

 

 

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Note 3. Earnings Per Share

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

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

The diluted EPS calculation includes potential common shares assumed issued under the treasury stock method, which reflects the potential dilution that would occur if any outstanding options were exercised or restricted stock becomes vested.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands, except share and per share amounts)

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

19,701

 

 

$

16,577

 

 

$

52,826

 

 

$

45,582

 

Basic weighted average common shares

 

 

19,216,545

 

 

 

19,171,912

 

 

 

19,204,196

 

 

 

19,161,529

 

Basic earnings per common share

 

$

1.03

 

 

$

0.86

 

 

$

2.75

 

 

$

2.38

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

19,701

 

 

$

16,577

 

 

$

52,826

 

 

$

45,582

 

Diluted weighted average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

 

19,216,545

 

 

 

19,171,912

 

 

 

19,204,196

 

 

 

19,161,529

 

Stock options and restricted stock

 

 

56,439

 

 

 

64,202

 

 

 

76,840

 

 

 

74,426

 

Diluted weighted average common shares

 

 

19,272,984

 

 

 

19,236,114

 

 

 

19,281,036

 

 

 

19,235,955

 

Diluted earnings per common share

 

$

1.02

 

 

$

0.86

 

 

$

2.74

 

 

$

2.37

 

 

 

Note 4. Investments

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as held-to-maturity at September 30, 2018 are summarized as follows:

 

 

 

Amortized Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

States and political subdivisions

 

$

430,408

 

 

$

3,053

 

 

$

(4,773

)

 

$

428,688

 

Corporate bonds

 

 

95,731

 

 

 

9

 

 

 

(879

)

 

 

94,861

 

U.S. agency-based mortgage-backed securities

 

 

8,535

 

 

 

359

 

 

 

(87

)

 

 

8,807

 

U.S. Treasury securities and obligations of U.S.

   government agencies

 

 

67,052

 

 

 

325

 

 

 

(966

)

 

 

66,411

 

Asset-backed securities

 

 

1,104

 

 

 

24

 

 

 

(10

)

 

 

1,118

 

Totals

 

$

602,830

 

 

$

3,770

 

 

$

(6,715

)

 

$

599,885

 

 

The gross unrealized gains and losses on, and the cost or amortized cost and fair value of, those investments classified as available-for-sale at September 30, 2018 are summarized as follows:

 

 

 

Cost or

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

States and political subdivisions

 

$

229,007

 

 

$

2,334

 

 

$

(3,854

)

 

$

227,487

 

Corporate bonds

 

 

163,834

 

 

 

43

 

 

 

(929

)

 

 

162,948

 

U.S. agency-based mortgage-backed securities

 

 

13,256

 

 

 

 

 

 

(476

)

 

 

12,780

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

67,218

 

 

 

 

 

 

(2,414

)

 

 

64,804

 

Totals

 

$

473,315

 

 

$

2,377

 

 

$

(7,673

)

 

$

468,019

 

 

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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, 2017 are summarized as follows:

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

States and political subdivisions

 

$

460,428

 

 

$

9,628

 

 

$

(955

)

 

$

469,101

 

Corporate bonds

 

 

100,024

 

 

 

190

 

 

 

(167

)

 

 

100,047

 

U.S. agency-based mortgage-backed securities

 

 

10,260

 

 

 

625

 

 

 

(40

)

 

 

10,845

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

57,657

 

 

 

548

 

 

 

(198

)

 

 

58,007

 

Asset-backed securities

 

 

1,299

 

 

 

25

 

 

 

(15

)

 

 

1,309

 

Totals

 

$

629,668

 

 

$

11,016

 

 

$

(1,375

)

 

$

639,309

 

 

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, 2017 are summarized as follows:

 

 

 

Cost or

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

States and political subdivisions

 

$

244,898

 

 

$

6,819

 

 

$

(577

)

 

$

251,140

 

Corporate bonds

 

 

130,210

 

 

 

224

 

 

 

(212

)

 

 

130,222

 

U.S. agency-based mortgage-backed securities

 

 

18,813

 

 

 

 

 

 

(799

)

 

 

18,014

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

67,315

 

 

 

29

 

 

 

(1,126

)

 

 

66,218

 

Total fixed maturity

 

 

461,236

 

 

 

7,072

 

 

 

(2,714

)

 

 

465,594

 

Equity securities

 

 

8,503

 

 

 

779

 

 

 

 

 

 

9,282

 

Totals

 

$

469,739

 

 

$

7,851

 

 

$

(2,714

)

 

$

474,876

 

 

A summary of the amortized cost and fair value of investments in fixed maturity securities, classified as held-to-maturity at September 30, 2018, by contractual maturity, is as follows:

 

 

 

Amortized

Cost

 

 

Fair</