NOTES TO UNAUDITED 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 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, agriculture, maritime, and oil and gas. Assets and revenues of AIIC and its subsidiaries represent at least 95% of comparable consolidated amounts of the Company for each of the three months ended March 31, 2019 and 2018.
In the opinion of management of the Company, the accompanying unaudited 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 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 consolidated financial statements contained herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of our 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.
Adopted Accounting Guidance
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new guidance requires a lessee to recognize a lease liability and a right of use asset for all leases extending beyond twelve months. This standard was effective for us beginning in the first quarter of 2019. We elected the new transition method under the transition guidance within the new standard. Therefore, prior comparative periods are not adjusted. We also elected the package of practical expedients, which among other things, allows us to carryforward the historical lease classification. We made an accounting policy election not to recognize lease assets and lease liabilities for short-term operating leases. Adoption of the new guidance resulted in the Company recognizing right-of-use assets of $0.4 million and lease liabilities of $0.3 million. The cumulative effect adjustment to the opening balance of retained earnings was minimal. Adoption of this new guidance did not have a material effect on the Company’s consolidated financial statements as the Company does not have any significant leases.
Prospective Accounting Guidance
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 account. The same method will be used for available-for-sale securities, but the valuation account 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. Implementation of the new guidance requires a modified retrospective approach without restatement, which means the first cumulative adjustment required will be a charge to retained earnings, with subsequent changes in the valuation account reported in the income statement. The financial statement impact will be determined by the nature of the portfolio held and the economic conditions at the time of implementation.
9
The Company has formed an internal working group to evaluate the new standard and develop an implementation strategy. The group has researched data,
developed models and methodologies and is working toward implementation. The Company will continue to monitor and evaluate the financial impact as the implementation date approaches.
All other issued but not yet effective accounting and reporting standards as of March 31, 2019 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 March 31, 2019, 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 will 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, 2018 for additional information regarding the Company’s incentive plans.
During the three months ended March 31, 2019 and 2018, options to purchase 5,000 and 15,000 shares of common stock were exercised, respectively. In connection with these exercises, the Company received minimal stock option proceeds in the current year and $0.1 million of stock option proceeds in the same period of 2018.
The Company recognized share-based compensation expense of $0.6 million in the quarter ended March 31, 2019 and $17.8 thousand in the quarter ended March 31, 2018.
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
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands, except share and per share amounts)
|
|
Basic EPS
:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,400
|
|
|
$
|
16,169
|
|
Basic weighted average common shares
|
|
|
19,229,134
|
|
|
|
19,187,136
|
|
Basic earnings per common share
|
|
$
|
1.01
|
|
|
$
|
0.84
|
|
Diluted EPS
:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,400
|
|
|
$
|
16,169
|
|
Diluted weighted average common shares:
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
19,229,134
|
|
|
|
19,187,136
|
|
Stock options and restricted stock
|
|
|
68,902
|
|
|
|
75,101
|
|
Diluted weighted average common shares
|
|
|
19,298,036
|
|
|
|
19,262,237
|
|
Diluted earnings per common share
|
|
$
|
1.01
|
|
|
$
|
0.84
|
|
10
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 March 31, 2019 are summarized as follows:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
States and political subdivisions
|
|
$
|
431,247
|
|
|
$
|
10,468
|
|
|
$
|
(242
|
)
|
|
$
|
441,473
|
|
Corporate bonds
|
|
|
102,774
|
|
|
|
520
|
|
|
|
(155
|
)
|
|
|
103,139
|
|
U.S. agency-based mortgage-backed securities
|
|
|
9,824
|
|
|
|
396
|
|
|
|
(56
|
)
|
|
|
10,164
|
|
U.S. Treasury securities and obligations of U.S.
government agencies
|
|
|
59,210
|
|
|
|
352
|
|
|
|
(140
|
)
|
|
|
59,422
|
|
Asset-backed securities
|
|
|
1,001
|
|
|
|
24
|
|
|
|
(6
|
)
|
|
|
1,019
|
|
Totals
|
|
$
|
604,056
|
|
|
$
|
11,760
|
|
|
$
|
(599
|
)
|
|
$
|
615,217
|
|
The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as available-for-sale at March 31, 2019 are summarized as follows:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
States and political subdivisions
|
|
$
|
220,749
|
|
|
$
|
6,710
|
|
|
$
|
(395
|
)
|
|
$
|
227,064
|
|
Corporate bonds
|
|
|
170,375
|
|
|
|
1,465
|
|
|
|
(217
|
)
|
|
|
171,623
|
|
U.S. agency-based mortgage-backed securities
|
|
|
12,462
|
|
|
|
—
|
|
|
|
(180
|
)
|
|
|
12,282
|
|
U.S. Treasury securities and obligations
of U.S. government agencies
|
|
|
61,154
|
|
|
|
40
|
|
|
|
(909
|
)
|
|
|
60,285
|
|
Totals
|
|
$
|
464,740
|
|
|
$
|
8,215
|
|
|
$
|
(1,701
|
)
|
|
$
|
471,254
|
|
The gross unrealized gains and losses on, and the cost of equity securities at March 31, 2019 are summarized as follows:
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic common stock
|
|
$
|
20,769
|
|
|
$
|
846
|
|
|
$
|
—
|
|
|
$
|
21,615
|
|
Total equity securities
|
|
$
|
20,769
|
|
|
$
|
846
|
|
|
$
|
—
|
|
|
$
|
21,615
|
|
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, 2018 are summarized as follows:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
States and political subdivisions
|
|
$
|
445,922
|
|
|
$
|
5,109
|
|
|
$
|
(2,084
|
)
|
|
$
|
448,947
|
|
Corporate bonds
|
|
|
91,762
|
|
|
|
62
|
|
|
|
(455
|
)
|
|
|
91,369
|
|
U.S. agency-based mortgage-backed securities
|
|
|
8,102
|
|
|
|
327
|
|
|
|
(80
|
)
|
|
|
8,349
|
|
U.S. Treasury securities and obligations
of U.S. government agencies
|
|
|
67,042
|
|
|
|
340
|
|
|
|
(339
|
)
|
|
|
67,043
|
|
Asset-backed securities
|
|
|
1,050
|
|
|
|
22
|
|
|
|
(8
|
)
|
|
|
1,064
|
|
Totals
|
|
$
|
613,878
|
|
|
$
|
5,860
|
|
|
$
|
(2,966
|
)
|
|
$
|
616,772
|
|
11
The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as available-for-sale at
December 31, 2018
are su
mmarized as follows:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
States and political subdivisions
|
|
$
|
231,848
|
|
|
$
|
3,515
|
|
|
$
|
(2,118
|
)
|
|
$
|
233,245
|
|
Corporate bonds
|
|
|
173,904
|
|
|
|
243
|
|
|
|
(933
|
)
|
|
|
173,214
|
|
U.S. agency-based mortgage-backed securities
|
|
|
12,835
|
|
|
|
—
|
|
|
|
(320
|
)
|
|
|
12,515
|
|
U.S. Treasury securities and obligations
of U.S. government agencies
|
|
|
61,185
|
|
|
|
—
|
|
|
|
(1,429
|
)
|
|
|
59,756
|
|
Totals
|
|
$
|
479,772
|
|
|
$
|
3,758
|
|
|
$
|
(4,800
|
)
|
|
$
|
478,730
|
|
The gross unrealized gains and losses on, and the cost of equity securities at December 31, 2018 are summarized as follows:
|
|
Cost
|
|
|
Gross
Gains
|
|
|
Gross
Losses
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic common stock
|
|
$
|
19,962
|
|
|
$
|
30
|
|
|
$
|
(1,341
|
)
|
|
$
|
18,651
|
|
Total equity securities
|
|
$
|
19,962
|
|
|
$
|
30
|
|
|
$
|
(1,341
|
)
|
|
$
|
18,651
|
|
A summary of the amortized cost and fair value of investments in fixed maturity securities, classified as held-to-maturity at March 31, 2019, by contractual maturity, is as follows:
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
Maturity:
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
67,547
|
|
|
$
|
67,672
|
|
After one year through five years
|
|
|
248,804
|
|
|
|
251,430
|
|
After five years through ten years
|
|
|
86,353
|
|
|
|
88,108
|
|
After ten years
|
|
|
190,527
|
|
|
|
196,824
|
|
U.S. agency-based mortgage-backed securities
|
|
|
9,824
|
|
|
|
10,164
|
|
Asset-backed securities
|
|
|
1,001
|
|
|
|
1,019
|
|
Totals
|
|
$
|
604,056
|
|
|
$
|
615,217
|
|
A summary of the amortized cost and fair value of investments in fixed maturity securities, classified as available-for-sale at March 31, 2019, by contractual maturity, is as follows:
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
Maturity:
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
68,592
|
|
|
$
|
68,518
|
|
After one year through five years
|
|
|
159,000
|
|
|
|
159,135
|
|
After five years through ten years
|
|
|
47,350
|
|
|
|
48,152
|
|
After ten years
|
|
|
177,336
|
|
|
|
183,167
|
|
U.S. agency-based mortgage-backed securities
|
|
|
12,462
|
|
|
|
12,282
|
|
Totals
|
|
$
|
464,740
|
|
|
$
|
471,254
|
|
12
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:
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair Value of
Investments
with
Unrealized
Losses
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value of
Investments
with
Unrealized
Losses
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value of
Investments
with
Unrealized
Losses
|
|
|
Gross
Unrealized
Losses
|
|
|
|
(in thousands)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
78,248
|
|
|
$
|
242
|
|
|
$
|
78,248
|
|
|
$
|
242
|
|
Corporate bonds
|
|
|
3,728
|
|
|
|
5
|
|
|
|
37,828
|
|
|
|
150
|
|
|
|
41,556
|
|
|
|
155
|
|
U.S. agency-based mortgage-backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
2,248
|
|
|
|
56
|
|
|
|
2,248
|
|
|
|
56
|
|
U.S. Treasury securities and obligations
of U.S. government agencies
|
|
|
—
|
|
|
|
—
|
|
|
|
40,587
|
|
|
|
140
|
|
|
|
40,587
|
|
|
|
140
|
|
Asset-backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
510
|
|
|
|
6
|
|
|
|
510
|
|
|
|
6
|
|
Total held-to-maturity securities
|
|
|
3,728
|
|
|
|
5
|
|
|
|
159,421
|
|
|
|
594
|
|
|
|
163,149
|
|
|
|
599
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
1,957
|
|
|
$
|
1
|
|
|
$
|
27,768
|
|
|
$
|
394
|
|
|
$
|
29,725
|
|
|
$
|
395
|
|
Corporate bonds
|
|
|
5,734
|
|
|
|
7
|
|
|
|
75,651
|
|
|
|
210
|
|
|
|
81,385
|
|
|
|
217
|
|
U.S. agency-based mortgage-backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
12,281
|
|
|
|
180
|
|
|
|
12,281
|
|
|
|
180
|
|
U.S. Treasury securities and obligations
of U.S. government agencies
|
|
|
—
|
|
|
|
—
|
|
|
|
56,466
|
|
|
|
909
|
|
|
|
56,466
|
|
|
|
909
|
|
Total available-for-sale securities
|
|
|
7,691
|
|
|
|
8
|
|
|
|
172,166
|
|
|
|
1,693
|
|
|
|
179,857
|
|
|
|
1,701
|
|
Total
|
|
$
|
11,419
|
|
|
$
|
13
|
|
|
$
|
331,587
|
|
|
$
|
2,287
|
|
|
$
|
343,006
|
|
|
$
|
2,300
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair Value of
Investments
with
Unrealized
Losses
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value of
Investments
with
Unrealized
Losses
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value of
Investments
with
Unrealized
Losses
|
|
|
Gross
Unrealized
Losses
|
|
|
|
(in thousands)
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
28,369
|
|
|
$
|
59
|
|
|
$
|
180,550
|
|
|
$
|
2,025
|
|
|
$
|
208,919
|
|
|
$
|
2,084
|
|
Corporate bonds
|
|
|
17,448
|
|
|
|
36
|
|
|
|
48,315
|
|
|
|
419
|
|
|
|
65,763
|
|
|
|
455
|
|
U.S. agency-based mortgage-backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
2,287
|
|
|
|
80
|
|
|
|
2,287
|
|
|
|
80
|
|
U.S. Treasury securities and obligations
of U.S. government agencies
|
|
|
2,865
|
|
|
|
4
|
|
|
|
46,486
|
|
|
|
335
|
|
|
|
49,351
|
|
|
|
339
|
|
Asset-backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
525
|
|
|
|
8
|
|
|
|
525
|
|
|
|
8
|
|
Total held-to-maturity securities
|
|
|
48,682
|
|
|
|
99
|
|
|
|
278,163
|
|
|
|
2,867
|
|
|
|
326,845
|
|
|
|
2,966
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
16,109
|
|
|
$
|
81
|
|
|
$
|
76,255
|
|
|
$
|
2,037
|
|
|
$
|
92,364
|
|
|
$
|
2,118
|
|
Corporate bonds
|
|
|
59,099
|
|
|
|
279
|
|
|
|
70,306
|
|
|
|
654
|
|
|
|
129,405
|
|
|
|
933
|
|
U.S. agency-based mortgage-backed securities
|
|
|
—
|
|
|
|
—
|
|
|
|
12,515
|
|
|
|
320
|
|
|
|
12,515
|
|
|
|
320
|
|
U.S. Treasury securities and obligations
of U.S. government agencies
|
|
|
—
|
|
|
|
—
|
|
|
|
59,756
|
|
|
|
1,429
|
|
|
|
59,756
|
|
|
|
1,429
|
|
Total available-for-sale securities
|
|
|
75,208
|
|
|
|
360
|
|
|
|
218,832
|
|
|
|
4,440
|
|
|
|
294,040
|
|
|
|
4,800
|
|
Total
|
|
$
|
123,890
|
|
|
$
|
459
|
|
|
$
|
496,995
|
|
|
$
|
7,307
|
|
|
$
|
620,885
|
|
|
$
|
7,766
|
|
13
At
March 31, 2019
,
we
held
184
individual fixed maturity securities that were in an unrealized loss position, of which
176
individual fixed maturity securities were in a continuous unrealized loss position for longer than 12 months.
During the first quarter of 2019, we recognized through income $2.2 million of net unrealized gains on equity securities held as of March 31, 2019. For the three months ended March 31, 2018, we recognized through income $0.4 million of net unrealized losses on equity securities held as of March 31, 2018.
Investment income is recognized as it is earned. The discount or premium on fixed maturity securities is amortized using the “constant yield” method. Anticipated prepayments, where applicable, are considered when determining the amortization of premiums or discounts. Realized investment gains and losses are determined using the specific identification method.
We regularly review our investment portfolio to evaluate the existence of other-than-temporary declines in the fair value of investments. We consider various factors in determining if a decline in the fair value of an individual security is other-than-temporary. The key factors we consider are:
|
•
|
any reduction or elimination of preferred dividends, or nonpayment of scheduled principal or interest payments;
|
|
•
|
the financial condition and near-term prospects of the issuer of the applicable security, including any specific events that may affect its operations or earnings;
|
|
•
|
how long and by how much the fair value of the security has been below its cost or amortized cost;
|
|
•
|
any downgrades of the security by a rating agency;
|
|
•
|
our intent not to sell the security for a sufficient time period for it to recover its value;
|
|
•
|
the likelihood of being required to sell the security before the recovery of its value; and
|
|
•
|
an evaluation as to whether there are any credit losses on debt securities.
|
We reviewed all securities with unrealized losses in accordance with the impairment policy described above. We determined that the unrealized losses in the fixed maturity securities portfolio related primarily to changes in market interest rates since the date of purchase, current conditions in the capital markets and the impact of those conditions on market liquidity and prices generally. We expect to recover the carrying value of these securities as it is not more likely than not that we will be required to sell the securities before the recovery of its amortized cost basis.
During the three months ended March 31, 2019 and 2018, there were no impairment losses recognized for other-than-temporary declines in the fair value of our investments.
Net realized gains in the three months ended March 31, 2019 were $0.1 million resulting from the sale of equity and fixed maturity securities classified as available-for-sale. Net realized gains in the three months ended March 31, 2018 were immaterial.
Note 5. Income Taxes
In accordance with FASB ASC Topic 740, “Income Taxes,” we provide for the recognition and measurement of deferred income tax benefits based on the likelihood of their realization in future years. As of March 31, 2019, the Company established a valuation allowance of $0.2 million against its deferred income tax benefits.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no uncertain tax positions recognized for the periods ended March 31, 2019 and 2018.
Tax years 2015 through 2018 are subject to examination by the federal and state taxing authorities.
14
Note 6. Loss Reserves
We record reserves for estimated losses under insurance policies that we write and for loss adjustment expenses related to the investigation and settlement of policy claims. Our reserves for loss and loss adjustment expenses represent the estimated cost of all reported and unreported loss and loss adjustment expenses incurred and unpaid as of a given point in time. The reserves for loss and loss adjustment expenses are estimated using individual case-basis valuations, statistical analyses and estimates based upon experience for unreported claims and their associated loss and loss adjustment expenses. Such estimates may be more or less than the amounts ultimately paid when the claims are settled. The estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in these estimates, management believes that the reserves for loss and loss adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known. Any such adjustments are included in income from current operations. See Note 9 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information regarding the Company’s loss and loss adjustment expense development.
The following table provides the Company’s liability for unpaid loss and loss adjustment expenses, net of related amounts recoverable from reinsurers, for the three months ended March 31, 2019 and 2018:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Balance, beginning of period
|
|
$
|
798,409
|
|
|
$
|
771,845
|
|
Less amounts recoverable from reinsurers
on unpaid loss and loss adjustment expenses
|
|
|
107,216
|
|
|
|
84,889
|
|
Net balance, beginning of period
|
|
|
691,193
|
|
|
|
686,956
|
|
Add incurred related to:
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
61,587
|
|
|
|
62,426
|
|
Prior accident years
|
|
|
(11,974
|
)
|
|
|
(9,264
|
)
|
Total incurred
|
|
|
49,613
|
|
|
|
53,162
|
|
Less paid related to:
|
|
|
|
|
|
|
|
|
Current accident year
|
|
|
3,381
|
|
|
|
4,686
|
|
Prior accident years
|
|
|
43,180
|
|
|
|
47,354
|
|
Total paid
|
|
|
46,561
|
|
|
|
52,040
|
|
Net balance, end of period
|
|
|
694,245
|
|
|
|
688,078
|
|
Add amounts recoverable from reinsurers
on unpaid loss and loss adjustment expenses
|
|
|
106,335
|
|
|
|
89,220
|
|
Balance, end of period
|
|
$
|
800,580
|
|
|
$
|
777,298
|
|
The foregoing reconciliation reflects favorable development of the net reserves at March 31, 2019 and March 31, 2018. The favorable development reduced loss and loss adjustment expenses incurred by $12.0 million and $9.3 million in 2019 and 2018, respectively. The revisions to the Company’s reserves reflect new information gained by claims adjusters in the normal course of adjusting claims and is reflected in the financial statements when the information becomes available. It is typical for more serious claims to take several years or longer to settle and the Company continually revises estimates as more information about claimants’ medical conditions and potential disability becomes known and the claims get closer to being settled. Multiple factors can cause loss development both unfavorable and favorable. The favorable loss development we experienced across accident years was largely due to favorable case reserve development from closed claims and claims where the worker had reached maximum medical improvement.
Note 7. Comprehensive Income and Accumulated Other Comprehensive Income
Comprehensive income was $25.2 million for the three months ended March 31, 2019, compared to $10.3 million for the three months ended March 31, 2018. The difference between net income as reported and comprehensive income was due to changes in unrealized gains and losses, net of tax on available-for-sale debt securities and in 2019, due to a change in the deferred tax asset valuation allowance of $0.2 million.
15
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 statements of comprehensive income, we used a 21 percent tax rate in 201
9
and 201
8
.
The following table illustrates the changes in
the balance of each component of accumulated other comprehensive income for each period presented in the interim financial statements.
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
(832
|
)
|
|
$
|
3,612
|
|
Other comprehensive income (loss) before
reclassification
|
|
|
5,981
|
|
|
|
(5,634
|
)
|
Amounts reclassified from accumulated other
comprehensive income
|
|
|
11
|
|
|
|
(214
|
)
|
Change in deferred tax valuation allowance
|
|
|
(198
|
)
|
|
|
—
|
|
Net current period other comprehensive
income (loss)
|
|
|
5,794
|
|
|
|
(5,848
|
)
|
Ending balance
|
|
$
|
4,962
|
|
|
$
|
(2,236
|
)
|
The sale or other-than-temporary impairment of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive income to current period net income. The effects of reclassifications out of accumulated other comprehensive income by the respective line items of net income are presented in the following table.
Component of Accumulated Other Comprehensive
Income
|
|
Three Months Ended March 31,
|
|
|
Affected line item in the statement
of income
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Unrealized gains (losses) on available-for-
sale securities
|
|
$
|
(14
|
)
|
|
$
|
17
|
|
|
Net realized gains (losses) on investments
|
|
|
|
(14
|
)
|
|
|
17
|
|
|
Income before income taxes
|
|
|
|
3
|
|
|
|
(57
|
)
|
|
Income tax expense
|
|
|
$
|
(11
|
)
|
|
$
|
(40
|
)
|
|
Net income
|
Note 8. Fair Value Measurements
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 Disclosures.
The Company determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard defines fair value, describes three levels of inputs that may be used to measure fair value, and expands disclosures about fair value measurements.
Fair value is defined in ASC Topic 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is the price to sell an asset or transfer a liability and, therefore, represents an exit price, not an entry price. Fair value is the exit price in the principal market (or, if lacking a principal market, the most advantageous market) in which the reporting entity would transact. Fair value is a market-based measurement, not an entity-specific measurement, and, as such, is determined based on the assumptions that market participants would use in pricing the asset or liability. The exit price objective of a fair value measurement applies regardless of the reporting entity’s intent and/or ability to sell the asset or transfer the liability at the measurement date.
ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset, also known as current replacement cost. Valuation techniques used to measure fair value are to be consistently applied.
16
In ASC Topic 820, inputs refer broadly to the ass
umptions that market participants would use in pricing the asset or liability, including assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inheren
t in the inputs to the valuation technique. Inputs may be observable or unobservable:
|
•
|
Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity.
|
|
•
|
Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
|
Valuation techniques used to measure fair value are intended to maximize the use of observable inputs and minimize the use of unobservable inputs. ASC Topic 820 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:
|
•
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
|
|
•
|
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data.
|
|
•
|
Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are to be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
|
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters.
The fair values of the Company’s investments are based upon prices provided by an independent pricing service. The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider. Securities reported at fair value utilizing Level 1 inputs represent assets whose fair value is determined based upon observable unadjusted quoted market prices for identical assets in active markets. Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2019.
At March 31, 2019, assets measu
r
ed at fair value on a recurring basis are summarized below:
|
|
March 31, 2019
|
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total Fair
Value
|
|
|
|
(in thousands)
|
|
Financial instruments carried at fair value, classified as a part of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale—fixed maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
—
|
|
|
$
|
227,064
|
|
|
$
|
—
|
|
|
$
|
227,064
|
|
Corporate bonds
|
|
|
—
|
|
|
|
171,623
|
|
|
|
—
|
|
|
|
171,623
|
|
U.S. agency-based mortgage-backed securities
|
|
|
—
|
|
|
|
12,282
|
|
|
|
—
|
|
|
|
12,282
|
|
U.S. Treasury securities
|
|
|
60,285
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60,285
|
|
Total securities available-for-sale—fixed maturity
|
|
|
60,285
|
|
|
|
410,969
|
|
|
|
—
|
|
|
|
471,254
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic common stock
|
|
|
21,615
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,615
|
|
Total
|
|
$
|
81,900
|
|
|
$
|
410,969
|
|
|
$
|
—
|
|
|
$
|
492,869
|
|
17
At
March 31, 2019
, assets measured at amortized cost are summarized below:
|
|
March 31, 2019
|
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total Fair
Value
|
|
|
|
(in thousands)
|
|
Securities held-to-maturity—fixed maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
—
|
|
|
$
|
441,473
|
|
|
$
|
—
|
|
|
$
|
441,473
|
|
Corporate bonds
|
|
|
—
|
|
|
|
103,139
|
|
|
|
—
|
|
|
|
103,139
|
|
U.S. agency-based mortgage-backed securities
|
|
|
—
|
|
|
|
10,164
|
|
|
|
—
|
|
|
|
10,164
|
|
U.S. Treasury securities
|
|
|
8,325
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,325
|
|
Obligations of U.S. government agencies
|
|
|
—
|
|
|
|
51,097
|
|
|
|
—
|
|
|
|
51,097
|
|
Asset-backed securities
|
|
|
—
|
|
|
|
1,019
|
|
|
|
—
|
|
|
|
1,019
|
|
Total held-to-maturity
|
|
$
|
8,325
|
|
|
$
|
606,892
|
|
|
$
|
—
|
|
|
$
|
615,217
|
|
At December 31, 2018, assets measured at fair value on a recurring basis are summarized below:
|
|
December 31, 2018
|
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total Fair
Value
|
|
|
|
(in thousands)
|
|
Financial instruments carried at fair value, classified as part of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale—fixed maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
—
|
|
|
$
|
233,245
|
|
|
$
|
—
|
|
|
$
|
233,245
|
|
Corporate bonds
|
|
|
—
|
|
|
|
173,214
|
|
|
|
—
|
|
|
|
173,214
|
|
U.S. agency-based mortgage-backed securities
|
|
|
—
|
|
|
|
12,515
|
|
|
|
—
|
|
|
|
12,515
|
|
U.S. Treasury securities and obligations
of U.S. government agencies
|
|
|
59,756
|
|
|
|
—
|
|
|
|
—
|
|
|
|
59,756
|
|
Total securities available-for-sale—fixed maturity
|
|
$
|
59,756
|
|
|
$
|
418,974
|
|
|
$
|
—
|
|
|
$
|
478,730
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic common stock
|
|
|
18,651
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,651
|
|
Total
|
|
$
|
78,407
|
|
|
$
|
418,974
|
|
|
$
|
—
|
|
|
$
|
497,381
|
|
At December 31, 2018, assets measured at amortized cost are summarized below:
|
|
December 31, 2018
|
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total Fair
Value
|
|
|
|
(in thousands)
|
|
Securities held-to-maturity—fixed maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
—
|
|
|
$
|
448,947
|
|
|
$
|
—
|
|
|
$
|
448,947
|
|
Corporate bonds
|
|
|
—
|
|
|
|
91,369
|
|
|
|
—
|
|
|
|
91,369
|
|
U.S. agency-based mortgage-backed securities
|
|
|
—
|
|
|
|
8,349
|
|
|
|
—
|
|
|
|
8,349
|
|
U.S. Treasury securities
|
|
|
7,111
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,111
|
|
Obligations of U.S. government agencies
|
|
|
—
|
|
|
|
59,932
|
|
|
|
—
|
|
|
|
59,932
|
|
Asset-backed securities
|
|
|
—
|
|
|
|
1,064
|
|
|
|
—
|
|
|
|
1,064
|
|
Total held-to-maturity
|
|
$
|
7,111
|
|
|
$
|
609,661
|
|
|
$
|
—
|
|
|
$
|
616,772
|
|
The Company determines fair value amounts for financial instruments using available third-party market information. When such information is not available, the Company determines the fair value amounts using appropriate valuation methodologies. Nonfinancial instruments such as real estate, property and equipment, deferred policy acquisition costs, deferred income taxes and loss and loss adjustment expense reserves are excluded from the fair value disclosure.
At March 31, 2019, the Company held one security measured at fair value on a nonrecurring basis due to a recognized impairment of $100,000. The security was valued using level 2 inputs and had an adjusted amortized cost of $11,000 at March 31, 2019. The security was valued at fair value at the time of impairment and is currently being carried at the adjusted amortized cost. The fair value of the security is $31,000 at March 31, 2019.
18
Cash and Cash Equival
ents
—The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair values, which are characterized as Level 1 assets.
Investments
—The fair values for fixed maturity and equity securities are based on prices obtained from an independent pricing service. Equity and treasury securities are characterized as Level 1 assets, as their fair values are based on quoted prices in active markets. Fixed maturity securities, other than treasury securities, are characterized as Level 2 assets, as their fair values are determined using observable market inputs.
Short Term Investments
—The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair values. These securities are characterized as Level 2 assets in the fair value hierarchy.
The following table summarizes the carrying values and corresponding fair values for financial instruments:
|
|
As of March 31, 2019
|
|
|
As of December 31, 2018
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities—held-to-maturity
|
|
$
|
604,056
|
|
|
$
|
615,217
|
|
|
$
|
613,878
|
|
|
$
|
616,772
|
|
Fixed maturity securities—available-for-sale
|
|
|
471,254
|
|
|
|
471,254
|
|
|
|
478,730
|
|
|
|
478,730
|
|
Equity securities
|
|
|
21,615
|
|
|
|
21,615
|
|
|
|
18,651
|
|
|
|
18,651
|
|
Short-term investments
|
|
|
64,708
|
|
|
|
64,708
|
|
|
|
14,231
|
|
|
|
14,231
|
|
Cash and cash equivalents
|
|
|
34,895
|
|
|
|
34,895
|
|
|
|
40,344
|
|
|
|
40,344
|
|
Note 9. Treasury Stock
The Company’s Board of Directors initiated a share repurchase program in February 2010. In October 2016, the Board reauthorized this program with a limit of $25.0 million with no expiration date. There were no shares repurchased under this program in the three months ended March 31, 2019 and 2018.
Note 10. Leases
The Company has operating and finance leases for office space and equipment. Our leases have remaining lease terms of 5 months to 58 months, some of which include options to extend the leases for up to 5 years. The Company, in determining the present value of lease payments, utilizes either the rate implicit in the lease if that rate is readily determinable or the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease.
Supplemental balance sheet information related to leases is as follows:
|
|
March 31, 2019
|
|
|
Balance Sheet Classification
|
|
|
(in thousands)
|
|
|
|
Operating leases:
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
539
|
|
|
Other assets
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
$
|
539
|
|
|
Accounts payable and other liabilities
|
|
|
|
|
|
|
|
Finance leases:
|
|
|
|
|
|
|
Finance lease right-of-use assets
|
|
$
|
185
|
|
|
|
Finance lease accumulated amortization
right-of-use assets
|
|
|
(133
|
)
|
|
|
Property and equipment, net
|
|
$
|
52
|
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
Finance lease liabilities
|
|
$
|
90
|
|
|
Accounts payable and other liabilities
|
Note 11. Subsequent Events
On April 29, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.25 per share payable on June 21, 2019 to shareholders of record as of June 7, 2019. The Board considers the payment of a regular cash dividend each calendar quarter.
19