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MarketScreener Homepage  >  Equities  >  Nasdaq  >  AMERISAFE, Inc.    AMSF

AMERISAFE, INC.

(AMSF)
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AMERISAFE : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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11/01/2019 | 03:05pm EDT
The following discussion should be read in conjunction with the accompanying
unaudited consolidated financial statements and the related notes included in
Item 1 of Part I of this Quarterly Report on Form 10-Q, together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in our Annual Report on Form 10-K for the year ended
December 31, 2018.

We begin our discussion with an overview of our Company to give you an
understanding of our business and the markets we serve. We then discuss our
critical accounting policies. This is followed with a discussion of our results
of operations for the three and nine months ended September 30, 2019 and 2018.
This discussion includes an analysis of certain significant period-to-period
variances in our consolidated statements of operations. Our cash flows and
financial condition are discussed under the caption "Liquidity and Capital
Resources."

Business Overview


AMERISAFE is a holding company that markets and underwrites workers'
compensation insurance through its insurance subsidiaries. Workers' compensation
insurance covers statutorily prescribed benefits that employers are obligated to
provide to their employees who are injured in the course and scope of their
employment. Our business strategy is focused on providing this coverage to small
to mid-sized employers engaged in hazardous industries, principally
construction, trucking, logging and lumber, manufacturing, and agriculture.
Employers engaged in hazardous industries pay substantially higher than average
rates for workers' compensation insurance compared to employers in other
industries, as measured per payroll dollar. The higher premium rates are due to
the nature of the work performed and the inherent workplace danger of our target
employers. Hazardous industry employers also tend to have less frequent but more
severe claims as compared to employers in other industries due to the nature of
their businesses. We provide proactive safety reviews of employers' workplaces.
These safety reviews are a vital component of our underwriting process and also
promote safer workplaces. We utilize intensive claims management practices that
we believe permit us to reduce the overall cost of our claims. In addition, our
audit services ensure that our policyholders pay the appropriate premiums
required under the terms of their policies and enable us to monitor payroll
patterns that cause underwriting, safety or fraud concerns. We believe that the
higher premiums typically paid by our policyholders, together with our
disciplined underwriting and safety, claims and audit services, provide us with
the opportunity to earn attractive returns for our shareholders.

We actively market our insurance in 27 states through independent agencies, as well as through our wholly owned insurance agency subsidiary. We are also licensed in an additional 20 states, the District of Columbia and the U.S. Virgin Islands.

Critical Accounting Policies


Understanding our accounting policies is key to understanding our financial
statements. Management considers some of these policies to be very important to
the presentation of our financial results because they require us to make
significant estimates and assumptions. These estimates and assumptions affect
the reported amounts of assets, liabilities, revenues and expenses and related
disclosures. Some of the estimates result from judgments that can be subjective
and complex and, consequently, actual results in future periods might differ
from these estimates.

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. These critical accounting policies are
more fully described in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of our Annual Report on Form 10-K
for the year ended December 31, 2018.

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Results of Operations

The following table summarizes our consolidated financial results for the three and nine months ended September 30, 2019 and 2018.



                                                                                          Nine Months Ended
                                             Three Months Ended September 30,               September 30,
                                                2019                  2018              2019             2018
                                                       (dollars in

thousands, except per share data)

                                                                        (unaudited)
Gross premiums written                     $        82,629$        85,324$  262,754$  276,368
Net premiums earned                                 82,712                85,184        250,611          261,489
Net investment income                                8,264                 7,884         24,448           22,396
Total revenues                                      91,488                93,529        278,431          283,084
Total expenses                                      64,875                69,069        205,840          218,280
Net income                                          21,386                19,701         58,676           52,826
Diluted earnings per common share          $          1.11       $          1.02     $     3.04$     2.74
Other Key Measures
Net combined ratio (1)                                78.4 %                81.1 %         82.1 %           83.5 %
Return on average equity (2)                          18.6 %                17.4 %         17.8 %           15.9 %
Book value per share (3)                   $         24.29       $         23.82     $    24.29$    23.82

(1) The net combined ratio is calculated by dividing the sum of loss and loss

adjustment expenses incurred, underwriting and certain other operating costs,

commissions, salaries and benefits, and policyholder dividends by net

premiums earned in the current period.

(2) Return on average equity is calculated by dividing the annualized net income

by the average shareholders' equity for the applicable period.

(3) Book value per share is calculated by dividing shareholders' equity by total

outstanding shares, as of the end of the period.

Consolidated Results of Operations for Three Months Ended September 30, 2019 Compared to September 30, 2018


Gross Premiums Written. Gross premiums written for the quarter ended
September 30, 2019 were $82.6 million, compared to $85.3 million for the same
period in 2018, a decrease of 3.2%. The decrease was attributable to a $7.3
million decrease in annual premiums on voluntary policies written during the
period. Offsetting this decrease was a $4.1 million increase in premiums
resulting from payroll audits and related premium adjustments for policies
written in previous quarters and a $0.4 million increase in assumed premium from
mandatory pooling arrangements. The effective loss cost multiplier, or ELCM, for
our voluntary business was 1.62 for the third quarter ended September 30, 2019
compared to 1.65 for the same period in 2018.

Net Premiums Written. Net premiums written for the quarter ended September 30,
2019 were $80.5 million, compared to $83.0 million for the same period in 2018,
a decrease of 3.1%. The decrease was primarily attributable to the decrease in
gross premiums written. As a percentage of gross premiums earned, ceded premiums
were 2.6% for the third quarter of 2019 and 2018. For additional information,
see Item 1, "Business-Reinsurance" in our Annual Report on Form 10-K for the
year ended December 31, 2018.

Net Premiums Earned. Net premiums earned for the third quarter of 2019 were
$82.7 million, compared to $85.2 million for the same period in 2018, a decrease
of 2.9%. The decrease was primarily attributable to the decrease in net premiums
written during the period.

Net Investment Income. Net investment income for the quarter ended September 30,
2019 was $8.3 million, compared to $7.9 million for the same period in 2018, an
increase of 4.8%. The increase was due to slightly higher investment yields on
fixed-income securities. Average invested assets, including cash and cash
equivalents, were $1.2 billion in the quarter ended September 30, 2019 and 2018.
The pre-tax investment yield on our investment portfolio was 2.7% per annum
during the quarter ended September 30, 2019 compared to 2.6% per annum during
the same period in 2018. The tax-equivalent yield on our investment portfolio
was 3.1% per annum for the quarter ended September 30, 2019 and 3.0% for the
same period in 2018. The tax-equivalent yield is calculated using the effective
interest rate and the appropriate marginal tax rate.

Net Realized Gains (Losses) on Investments. Net realized losses on investments
for the three months ended September 30, 2019 were immaterial compared to losses
of $0.3 million for the same period in 2018. Net realized losses in the third
quarter of 2018 were attributable to the call of fixed maturity securities.

                                       23

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Net Unrealized Gains (Losses) on Equity Securities. Net unrealized gains on equity securities for the three months ended September 30, 2019 were $0.4 million compared to net unrealized gains of $0.6 million for the same period in 2018.


Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses
("LAE") incurred totaled $44.3 million for the three months ended September 30,
2019, compared to $47.6 million for the same period in 2018, a decrease of $3.3
million, or 6.9%. The current accident year loss and LAE incurred were $60.0
million, or 72.5% of net premiums earned, compared to $60.9 million, or 71.5% of
net premiums earned for the same period in 2018. We recorded favorable prior
accident year development of $15.6 million in the third quarter of 2019,
compared to favorable prior accident year development of $13.3 million in the
same period of 2018, as further discussed below in "Prior Year Development." Our
net loss ratio was 53.6% in the third quarter of 2019, compared to 55.9% for the
same period of 2018.

Underwriting and Certain Other Operating Costs, Commissions and Salaries and
Benefits. Underwriting and certain other operating costs, commissions and
salaries and benefits for the quarter ended September 30, 2019 were $19.3
million, compared to $20.6 million for the same period in 2018, a decrease of
6.4%. This decrease was primarily due to a $1.0 million decrease in insurance
related assessments and a $0.3 million decrease in commission expense. Our
expense ratio was 23.3% in the third quarter of 2019 compared to 24.2% in the
third quarter of 2018.

Income Tax Expense. Income tax expense for the three months ended September 30,
2019 was $5.2 million, compared to $4.8 million for the same period in 2018. The
increase was attributable to an increase in the pre-tax income to $26.6 million
in the quarter ended September 30, 2019 from $24.5 million in the same period in
2018. The effective tax rate for the Company increased to 19.6% in the quarter
ended September 30, 2019 from 19.5% in the same period in 2018. The increase in
the effective tax rate is due to a lower proportion of tax-exempt income to
underwriting income in the quarter relative to the third quarter of 2018.

Consolidated Results of Operations for Nine Months Ended September 30, 2019 Compared to September 30, 2018


Gross Premiums Written. Gross premiums written for the first nine months of 2019
were $262.8 million, compared to $276.4 million for the same period in 2018, a
decrease of 4.9%. The decrease was attributable to a $17.1 million decrease in
annual premiums on voluntary policies written during the period. Offsetting this
decreases was a $3.3 million increase in premiums resulting from payroll audits
and related premium adjustments for policies written in previous quarters and a
$0.3 million increase in assumed premium from mandatory pooling
arrangements. The ELCM for our voluntary business was 1.61 for the nine months
ended September 30, 2019 compared to 1.65 for the same period in 2018.

Net Premiums Written. Net premiums written for the nine months ended
September 30, 2019 were $256.0 million, compared to $269.4 million for the same
period in 2018, a decrease of 5.0%. The decrease was primarily attributable to
the decrease in gross premiums written. As a percentage of gross premiums
earned, ceded premiums were 2.6% for the first nine months of 2019 and 2018. For
additional information, see Item 1, "Business-Reinsurance" in our Annual Report
on Form 10-K for the year ended December 31, 2018.

Net Premiums Earned. Net premiums earned for the first nine months of 2019 were
$250.6 million, compared to $261.5 million for the same period in 2018, a
decrease of 4.2%. The decrease was primarily attributable to the decrease in net
premiums written during the period.

Net Investment Income. Net investment income for the first nine months of 2019
was $24.4 million, compared to $22.4 million for the same period in 2018, an
increase of 9.2%. The increase was due to slightly higher investment yields on
fixed-income securities. Average invested assets, including cash and cash
equivalents were $1.2 billion in the nine months ended September 30, 2019 and
2018. The pre-tax investment yield on our investment portfolio was 2.7% per
annum during the nine months ended September 30, 2019 compared to 2.5% per annum
for the same period in 2018. The tax-equivalent yield on our investment
portfolio was 3.1% per annum for the first nine months of 2019 compared to 3.0%
in the same period in 2018. The tax-equivalent yield is calculated using the
effective interest rate and the appropriate marginal tax rate.

Net Realized Gains (Losses) on Investments. Net realized losses on investments
for the nine months ended September 30, 2019 were immaterial compared to net
realized losses of $1.5 million for the same period in 2018. Net realized losses
in the first nine months of 2018 were attributable to the sale of equity and
fixed maturity securities classified as available-for-sale and called fixed
maturity securities.

Net Unrealized Gains (Losses) on Equity Securities. Net unrealized gains on equity securities for the nine months ended September 30, 2019 were $3.2 million compared to net unrealized gains of $0.3 million for the same period in 2018.

                                       24

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Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled
$142.8 million for the nine months ended September 30, 2019, compared to $152.8
million for the same period in 2018, a decrease of $10.0 million, or 6.6%. The
current accident year loss and LAE incurred were $181.7 million, or 72.5% of net
premiums earned, compared to $187.0 million, or 71.5% of net premiums earned,
for the same period in 2018. We recorded favorable prior accident year
development of $38.9 million in the first nine months of 2019, compared to
favorable prior accident year development of $34.1 million in the same period of
2018, as further discussed below in "Prior Year Development." Our net loss ratio
was 57.0% in the first nine months of 2019, compared to 58.4% for the same
period of 2018.

Underwriting and Certain Other Operating Costs, Commissions and Salaries and
Benefits. Underwriting and certain other operating costs, commissions and
salaries and benefits for the nine months ended September 30, 2019 were $59.7
million, compared to $62.2 million for the same period in 2018, a decrease of
4.0%. This decrease was primarily due to a $1.7 million decrease in insurance
related assessments, a $0.8 million decrease in commission expense, and a $0.5
million decrease in premium tax expense. Offsetting these decreases were a $0.4
million increase in compensation expense and a $0.3 million increase in accounts
receivable write-offs. Our expense ratio was 23.8% in the first nine months of
2019 and 2018.

Income Tax Expense. Income tax expense for the nine months ended September 30,
2019 was $13.9 million, compared to $12.0 million for the same period in 2018.
The increase was attributable to an increase in pre-tax income to $72.6 million
in the first nine months of 2019 from $64.8 million in the first nine months of
2018. The effective tax rate for the Company increased to 19.2% for the nine
months ended September 30, 2019 from 18.5% for the nine months ended
September 30, 2018. The increase in the effective tax rate is due to a lower
proportion of tax-exempt income to underwriting income and an increase of $0.2
million for the change in valuation allowance for deferred tax assets for the
nine months ended September 30, 2019 compared with the nine months ended
September 30, 2018.

Liquidity and Capital Resources


Our principal sources of operating funds are premiums, investment income and
proceeds from sales and maturities of investments. Our primary uses of operating
funds include payments of claims and operating expenses. Currently, we pay
claims using cash flow from operations and invest the remaining funds.

Net cash provided by operating activities was $62.5 million for the nine months
ended September 30, 2019, which represented a $8.3 million decrease from $70.7
million in net cash provided by operating activities for the nine months ended
September 30, 2018. This decrease in operating cash flow was due to $16.9
million in lower premium cash receipts, an $8.5 million increase in federal
taxes paid, a $1.6 million increase in underwriting expenses paid and a $0.8
million increase in dividends paid to policyholders. Offsetting these amounts
were an $11.9 million decrease in losses paid and a $7.9 million decrease in
amounts held by others.

Net cash provided by investing activities was $37.8 million for the nine months
ended September 30, 2019, compared to net cash used in investment activities of
$80.1 million for the same period in 2018. Cash provided by sales and maturities
of investments totaled $283.8 million for the nine months ended September 30,
2019, compared to $213.8 million for the same period in 2018. A total of $245.2
million in cash was used to purchase investments in the nine months ended
September 30, 2019, compared to $293.0 million in purchases for the same period
in 2018.

Net cash used in financing activities in the nine months ended September 30, 2019 was $14.7 million compared to net cash used in financing activities of $12.9 million for the same period in 2018. In the nine months ended September 30, 2019, $14.7 million of cash was used for dividends paid to shareholders compared to $12.9 million in the same period of 2018.

Investment Portfolio


Our investment portfolio, including cash and cash equivalents, totaled $1.2
billion at September 30, 2019 and December 31, 2018. Purchases of fixed maturity
securities are classified as available-for-sale or held-to-maturity at the time
of purchase based on the individual security. The reported value of our fixed
maturity securities classified as held-to-maturity, as defined by FASB ASC Topic
320, Investments-Debt and Equity Securities, was equal to their amortized cost,
and thus was not impacted by changing interest rates. Our equity securities and
fixed maturity securities classified as available-for-sale were reported at fair
value.

                                       25

--------------------------------------------------------------------------------

The composition of our investment portfolio, including cash and cash equivalents, as of September 30, 2019, is shown in the following table:



                                                           Carrying        Percentage of
                                                            Value            Portfolio
                                                                  (in thousands)
Fixed maturity securities-held-to-maturity:
States and political subdivisions                        $    438,055                36.0 %
Corporate bonds                                               115,982                 9.5 %
U.S. agency-based mortgage-backed securities                   11,910                 1.0 %
U.S.Treasury securities and obligations of
  U.S. government agencies                                     37,513                 3.1 %
Asset-backed securities                                           701                 0.1 %
Total fixed maturity securities-held-to-maturity              604,161                49.7 %
Fixed maturity securities-available-for-sale:
States and political subdivisions                             230,191                18.9 %
Corporate bonds                                               145,421                12.0 %
U.S. agency-based mortgage-backed securities                   24,423                 2.0 %
U.S.Treasury securities and obligations of
  U.S. government agencies                                     40,182                 3.3 %
Total fixed maturity securities-available-for-sale            440,217                36.2 %
Equity securities                                              25,936                 2.1 %
Short-term investments                                         20,964                 1.7 %
Cash and cash equivalents                                     125,870                10.3 %
Total investments, including cash and cash equivalents   $  1,217,148               100.0 %




Our debt securities classified as available-for-sale are "marked to market" as
of the end of each calendar quarter. As of that date, unrealized gains and
losses are recorded to Accumulated Other Comprehensive Income (Loss), except
when such securities are deemed to be other-than-temporarily impaired. For our
securities classified as held-to-maturity, unrealized gains and losses are not
recorded in the financial statements until realized or until a decline in fair
value, below amortized cost, is deemed to be other-than-temporary. The change in
fair value of our equity investments is presented as a component of net income.

During the three and nine months ended September 30, 2019 and 2018, there were
no impairment losses recognized for other-than-temporary declines in the fair
value of our investments.

Prior Year Development

The Company recorded favorable prior accident year development of $15.6 million
in the three months ended September 30, 2019. The table below sets forth the
favorable development for the three and nine months ended September 30, 2019 and
2018 for accident years 2014 through 2018 and, collectively, for all accident
years prior to 2014.





                                             Three Months Ended September 30,             Nine Months Ended September 30,
                                               2019                    2018                2019                    2018
                                                                             (in millions)
Accident Year
2018                                      $             -         $             -     $             -         $             -
2017                                                  1.9                       -                 3.2                       -
2016                                                  6.5                     2.4                15.9                     5.6
2015                                                  3.3                     4.9                 8.3                    14.3
2014                                                  2.0                     3.1                 6.3                     7.4
Prior to 2014                                         1.9                     2.9                 5.2                     6.8
Total net development                     $          15.6         $          13.3     $          38.9         $          34.1




                                       26

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The table below sets forth the number of open claims as of September 30, 2019 and 2018, and the number of claims reported and closed during the three and nine months then ended.



                                            Three Months Ended September 30,           Nine Months Ended September 30,
                                               2019                  2018                2019                  2018
Open claims at beginning of period                  4,978                 5,022               5,190                 4,982
Claims reported                                     1,472                 1,536               4,032                 4,181
Claims closed                                      (1,414 )              (1,273 )            (4,186 )              (3,878 )
Open claims at end of period                        5,036                 5,285               5,036                 5,285




The number of open claims at September 30, 2019 decreased by 249 claims as
compared to the number of open claims at September 30, 2018. At September 30,
2019, our incurred amounts for certain accident years, particularly 2014 through
2017, developed more favorably than management previously expected. The
revisions to the Company's reserves reflect new information gained by claims
adjusters in the normal course of adjusting claims and is reflected in the
financial statements when the information becomes available. It is typical for
more serious claims to take several years or longer to settle and the Company
continually revises estimates as more information about claimants' medical
conditions and potential disability becomes known and the claims get closer to
being settled. Multiple factors can cause both favorable and unfavorable loss
development. The favorable loss development we experienced across accident years
was largely due to favorable case reserve development from closed claims and
claims where the worker had reached maximum medical improvement.

The assumptions we used in establishing our reserves were based on our
historical claims data. However, as of September 30, 2019, actual results for
certain accident years have been better than our assumptions would have
predicted. We do not presently intend to modify our assumptions for establishing
reserves in light of recent results. However, if actual results for current and
future accident years are consistent with, or different than, our results in
these recent accident years, our historical claims data will reflect this change
and, over time, will impact the reserves we establish for future claims.

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. For additional information, see Item 1,
"Business-Loss Reserves" in our Annual Report on Form 10-K for the year ended
December 31, 2018.

© Edgar Online, source Glimpses

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