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, manufacturing, agriculture and oil and gas. Assets and revenues of AIIC represent at least 95% of comparable consolidated amounts of the Company for each of 2016 and 2015.
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, 2015.
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.
In May 2015, the FASB
issued Accounting Standards Update No. 2015-07, Fair Value Measurements (Topic 820):
Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
. The amendments in this update change
the disclosure requirements for investments in certain entities that calculate net asset value (NAV) per share. Under current accounting standards entities are permitted to estimate the fair value of certain investments using the investments
NAV as a practical expedient. The current disclosure guidance also permits entities to disclose the investment at NAV in the fair value hierarchy table as either Level 2 or Level 3, based upon certain criteria. The measurement basis utilizing NAV is
different than the measurement criteria of all other investments which utilize inputs to calculate fair value. Due to this inconsistency, the FASB issued this ASU which requires entities to remove investments measured at NAV from the fair value
hierarchy table. Other than the change in presentation, the adoption of this new guidance will not have an impact on our consolidated financial statements.
Certain prior year amounts have been reclassified to conform with the current year presentation.
Note 2. Stock Options and Restricted Stock
As of June 30, 2016, the Company has three equity incentive plans: the AMERISAFE 2005 Equity Incentive Plan (the 2005 Incentive
Plan), the AMERISAFE 2010 Non-Employee Director Restricted Stock Plan (the 2010 Restricted Stock Plan) and the AMERISAFE 2012 Equity and Incentive Compensation Plan (the 2012 Incentive Plan). The 2005 Incentive Plan
expired on October 27, 2015. No grants will be made under the 2005 Incentive Plan after October 27, 2015 but all grants made on or prior to such date will continue in effect thereafter 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, 2015 for additional information regarding the Companys incentive plans.
During the six months ended June 30, 2016, the Company granted 27,077 and 5,952 shares of restricted common stock to executive officers
and non-employee directors, respectively. The market value of the restricted shares granted totaled $1.9 million. During the six months ended June 30, 2015, the Company granted 25,461 and 7,112 shares of restricted common stock to executive
officers and non-employee directors, respectively. The market value of the restricted shares granted totaled $1.4 million.
8
During the six months ended June 30, 2016, options to purchase 38,879 shares of common stock
were exercised. During the six months ended June 30, 2015, options to purchase 97,850 shares of common stock were exercised. In connection with these exercises, the Company received $0.5 million and $0.8 million of stock option proceeds,
respectively.
The Company recognized share-based compensation expense of $0.5 million in the quarter ended June 30, 2016 compared to
an immaterial amount for the same period of 2015. The Company recognized share-based compensation expense of $0.7 million in the six months ended June 30, 2016 and $0.4 million for the same period of 2015.
Note 3. Earnings Per Share
The Company
computes earnings per share (EPS) in accordance with Financial Accounting Standards Board (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 income available to common shareholders 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 or warrants were exercised or restricted stock
becomes vested, and includes the if converted method for participating securities if the effect is dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands, except share and per share amounts)
|
|
Basic EPS
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders - basic
|
|
$
|
16,639
|
|
|
$
|
14,319
|
|
|
$
|
40,896
|
|
|
$
|
29,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
|
19,096,718
|
|
|
|
18,917,229
|
|
|
|
19,077,328
|
|
|
|
18,882,693
|
|
Basic earnings per common share
|
|
$
|
0.87
|
|
|
$
|
0.76
|
|
|
$
|
2.14
|
|
|
$
|
1.56
|
|
Diluted EPS
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders - diluted
|
|
$
|
16,639
|
|
|
$
|
14,319
|
|
|
$
|
40,896
|
|
|
$
|
29,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
19,096,718
|
|
|
|
18,917,229
|
|
|
|
19,077,328
|
|
|
|
18,882,693
|
|
Stock options and performance shares
|
|
|
88,266
|
|
|
|
162,836
|
|
|
|
101,565
|
|
|
|
187,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares
|
|
|
19,184,984
|
|
|
|
19,080,065
|
|
|
|
19,178,893
|
|
|
|
19,069,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.87
|
|
|
$
|
0.75
|
|
|
$
|
2.13
|
|
|
$
|
1.54
|
|
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
June 30, 2016 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
States and political subdivisions
|
|
$
|
423,631
|
|
|
$
|
19,066
|
|
|
$
|
(3
|
)
|
|
$
|
442,694
|
|
Corporate bonds
|
|
|
163,648
|
|
|
|
1,739
|
|
|
|
(117
|
)
|
|
|
165,270
|
|
Commercial mortgage-backed securities
|
|
|
6,681
|
|
|
|
37
|
|
|
|
(6
|
)
|
|
|
6,712
|
|
U.S. agency-based mortgage-backed securities
|
|
|
11,849
|
|
|
|
1,280
|
|
|
|
(1
|
)
|
|
|
13,128
|
|
U.S. Treasury securities and obligations of U.S. government agencies
|
|
|
12,261
|
|
|
|
1,057
|
|
|
|
|
|
|
|
13,318
|
|
Asset-backed securities
|
|
|
2,095
|
|
|
|
183
|
|
|
|
(76
|
)
|
|
|
2,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
620,165
|
|
|
$
|
23,362
|
|
|
$
|
(203
|
)
|
|
$
|
643,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
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 June 30, 2016 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Fixed maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
171,931
|
|
|
$
|
9,788
|
|
|
$
|
(70
|
)
|
|
$
|
181,649
|
|
Corporate bonds
|
|
|
201,031
|
|
|
|
2,590
|
|
|
|
(288
|
)
|
|
|
203,333
|
|
U.S. agency-based mortgage-backed securities
|
|
|
12,672
|
|
|
|
46
|
|
|
|
(703
|
)
|
|
|
12,015
|
|
U.S. Treasury securities and obligations of U.S. government agencies
|
|
|
62,354
|
|
|
|
1,346
|
|
|
|
|
|
|
|
63,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity
|
|
|
447,988
|
|
|
|
13,770
|
|
|
|
(1,061
|
)
|
|
|
460,697
|
|
Other investments
|
|
|
10,000
|
|
|
|
850
|
|
|
|
|
|
|
|
10,850
|
|
Equity securities
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
457,988
|
|
|
$
|
14,652
|
|
|
$
|
(1,061
|
)
|
|
$
|
471,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2015 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
States and political subdivisions
|
|
$
|
408,447
|
|
|
$
|
15,352
|
|
|
$
|
(45
|
)
|
|
$
|
423,754
|
|
Corporate bonds
|
|
|
171,224
|
|
|
|
159
|
|
|
|
(810
|
)
|
|
|
170,573
|
|
Commercial mortgage-backed securities
|
|
|
37,494
|
|
|
|
204
|
|
|
|
(15
|
)
|
|
|
37,683
|
|
U.S. agency-based mortgage-backed securities
|
|
|
13,223
|
|
|
|
1,249
|
|
|
|
(1
|
)
|
|
|
14,471
|
|
U.S. Treasury securities and obligations of U.S. government agencies
|
|
|
12,487
|
|
|
|
897
|
|
|
|
(4
|
)
|
|
|
13,380
|
|
Asset-backed securities
|
|
|
2,289
|
|
|
|
202
|
|
|
|
(76
|
)
|
|
|
2,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
645,164
|
|
|
$
|
18,063
|
|
|
$
|
(951
|
)
|
|
$
|
662,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2015 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Fixed maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
164,684
|
|
|
$
|
6,942
|
|
|
$
|
(207
|
)
|
|
$
|
171,419
|
|
Corporate bonds
|
|
|
202,537
|
|
|
|
253
|
|
|
|
(1,486
|
)
|
|
|
201,304
|
|
U.S. agency-based mortgage-backed securities
|
|
|
8,888
|
|
|
|
4
|
|
|
|
(1,593
|
)
|
|
|
7,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity
|
|
|
376,109
|
|
|
|
7,199
|
|
|
|
(3,286
|
)
|
|
|
380,022
|
|
Other investments
|
|
|
10,000
|
|
|
|
2,217
|
|
|
|
|
|
|
|
12,217
|
|
Equity securities
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
386,109
|
|
|
$
|
9,447
|
|
|
$
|
(3,286
|
)
|
|
$
|
392,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
A summary of the cost and fair value of investments in fixed maturity securities, classified as
held-to-maturity at June 30, 2016, by contractual maturity, is as follows:
|
|
|
|
|
|
|
|
|
Maturity
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Within one year
|
|
$
|
101,082
|
|
|
$
|
102,092
|
|
After one year through five years
|
|
|
294,889
|
|
|
|
304,442
|
|
After five years through ten years
|
|
|
117,736
|
|
|
|
123,845
|
|
After ten years
|
|
|
85,833
|
|
|
|
90,903
|
|
U.S. agency-based mortgage-backed securities
|
|
|
11,849
|
|
|
|
13,128
|
|
Commercial mortgage-backed securities
|
|
|
6,681
|
|
|
|
6,712
|
|
Asset-backed securities
|
|
|
2,095
|
|
|
|
2,202
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
620,165
|
|
|
$
|
643,324
|
|
|
|
|
|
|
|
|
|
|
A summary of cost and fair value of investments in fixed maturity securities, classified as available-for-sale
at June 30, 2016, by contractual maturity, is as follows:
|
|
|
|
|
|
|
|
|
Maturity
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Within one year
|
|
$
|
59,564
|
|
|
$
|
59,891
|
|
After one year through five years
|
|
|
214,075
|
|
|
|
217,789
|
|
After five years through ten years
|
|
|
52,827
|
|
|
|
54,534
|
|
After ten years
|
|
|
108,850
|
|
|
|
116,468
|
|
U.S. agency-based mortgage-backed securities
|
|
|
12,672
|
|
|
|
12,015
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
447,988
|
|
|
$
|
460,697
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
14,753
|
|
|
$
|
71
|
|
|
$
|
5,498
|
|
|
$
|
46
|
|
|
$
|
20,251
|
|
|
$
|
117
|
|
States and political subdivisions
|
|
|
4,780
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
4,780
|
|
|
|
3
|
|
U.S. agency-based mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
1
|
|
|
|
25
|
|
|
|
1
|
|
Commercial mortgage-backed securities
|
|
|
1,720
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
1,720
|
|
|
|
6
|
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
|
|
1,269
|
|
|
|
76
|
|
|
|
1,269
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity securities
|
|
|
21,253
|
|
|
|
80
|
|
|
|
6,792
|
|
|
|
123
|
|
|
|
28,045
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
10,008
|
|
|
$
|
103
|
|
|
$
|
3,078
|
|
|
$
|
185
|
|
|
$
|
13,086
|
|
|
$
|
288
|
|
States and political subdivisions
|
|
|
1,807
|
|
|
|
1
|
|
|
|
4,722
|
|
|
|
69
|
|
|
|
6,529
|
|
|
|
70
|
|
U.S. agency-based mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
7,792
|
|
|
|
703
|
|
|
|
7,792
|
|
|
|
703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
|
11,815
|
|
|
|
104
|
|
|
|
15,592
|
|
|
|
957
|
|
|
|
27,407
|
|
|
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,068
|
|
|
$
|
184
|
|
|
$
|
22,384
|
|
|
$
|
1,080
|
|
|
$
|
55,452
|
|
|
$
|
1,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2015
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
128,436
|
|
|
$
|
687
|
|
|
$
|
18,139
|
|
|
$
|
123
|
|
|
$
|
146,575
|
|
|
$
|
810
|
|
States and political subdivisions
|
|
|
24,068
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
24,068
|
|
|
|
45
|
|
U.S. Treasury securities and obligations of U.S. government agencies
|
|
|
2,980
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
2,980
|
|
|
|
4
|
|
U.S. agency-based mortgage-backed securities
|
|
|
18
|
|
|
|
|
|
|
|
28
|
|
|
|
1
|
|
|
|
46
|
|
|
|
1
|
|
Commercial mortgage-backed securities
|
|
|
9,784
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
9,784
|
|
|
|
15
|
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
|
|
1,389
|
|
|
|
76
|
|
|
|
1,389
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity securities
|
|
|
165,286
|
|
|
|
751
|
|
|
|
19,556
|
|
|
|
200
|
|
|
|
184,842
|
|
|
|
951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
141,857
|
|
|
$
|
1,475
|
|
|
$
|
4,216
|
|
|
$
|
11
|
|
|
$
|
146,073
|
|
|
$
|
1,486
|
|
States and political subdivisions
|
|
|
6,560
|
|
|
|
9
|
|
|
|
4,439
|
|
|
|
198
|
|
|
|
10,999
|
|
|
|
207
|
|
U.S. agency-based mortgage-backed securities
|
|
|
434
|
|
|
|
37
|
|
|
|
6,794
|
|
|
|
1,556
|
|
|
|
7,228
|
|
|
|
1,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
|
148,851
|
|
|
|
1,521
|
|
|
|
15,449
|
|
|
|
1,765
|
|
|
|
164,300
|
|
|
|
3,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
314,137
|
|
|
$
|
2,272
|
|
|
$
|
35,005
|
|
|
$
|
1,965
|
|
|
$
|
349,142
|
|
|
$
|
4,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2016, the Company held 51 individual fixed maturity securities that were in an unrealized
loss position, of which 24 individual fixed maturity securities were in a continuous unrealized loss position for longer than 12 months.
The Company holds investments in a limited partnership hedge fund accounted for under the equity method. The carrying value of this investment
is $10.8 million at June 30, 2016.
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 necessity of recording impairment losses for
other-than-temporary declines in the fair value of specific 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 forced 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. The Company 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
12
generally, and the transfer of the investments from the available-for-sale classification to the held-to-maturity classification in January 2004. 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 the amortized cost basis.
During the six months ended June 30, 2016, there were no impairment losses recognized for other-than-temporary declines in the fair value
of our investments compared to $2.7 million for the same period in 2015.
Net realized gains in the six months ended June 30, 2016
were $0.8 million resulting from the sale of fixed maturity securities classified as available-for-sale. Net realized losses in the six months ended June 30, 2015 were $2.6 million resulting from an impairment loss of $2.7 million recognized
for the other-than-temporary decline in the fair value of four fixed maturity securities offset by $0.1 million in gains on called fixed maturity securities.
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 June 30, 2016, the Company had no material
unrecognized tax benefits and no adjustments to liabilities or operations were required.
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 June 30, 2016 and 2015.
Tax years 2012 through 2015 are subject to examination by the federal and state taxing authorities.
Note 6. Comprehensive Income and Accumulated Other Comprehensive Income
Comprehensive income was $19.6 million for the three months ended June 30, 2016, compared to $12.7 million for the three months ended
June 30, 2015. Comprehensive income was $46.6 million for the six months ended June 30, 2016, compared to $28.7 million for the same period in 2015. 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 securities.
Comprehensive income includes net income plus unrealized
gains (losses) on our available-for-sale investment securities, net of tax. In reporting comprehensive income on a net basis in the statement of income, we used a 35 percent tax rate. The following table illustrates the changes in the balance of
each component of accumulated other comprehensive income for each period presented in the interim financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
5,380
|
|
|
$
|
3,628
|
|
|
$
|
2,587
|
|
|
$
|
2,810
|
|
Other comprehensive income (loss) before reclassification
|
|
|
3,286
|
|
|
|
(2,130
|
)
|
|
|
5,986
|
|
|
|
(1,628
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(357
|
)
|
|
|
554
|
|
|
|
(264
|
)
|
|
|
870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
2,929
|
|
|
|
(1,576
|
)
|
|
|
5,722
|
|
|
|
(758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
8,309
|
|
|
$
|
2,052
|
|
|
$
|
8,309
|
|
|
$
|
2,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
Affected line item in the statement
of income
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
(in thousands)
|
|
|
|
Unrealized gains on available-for-sale securities
|
|
$
|
549
|
|
|
$
|
1,273
|
|
|
$
|
406
|
|
|
$
|
261
|
|
|
Net realized gains (losses) on investments
|
Other-than-temporary impairment
|
|
|
|
|
|
|
(2,126
|
)
|
|
|
|
|
|
|
(1,600
|
)
|
|
Net realized gains (losses) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
549
|
|
|
|
(853
|
)
|
|
|
406
|
|
|
|
(1,339
|
)
|
|
Income before income taxes
|
|
|
|
(192
|
)
|
|
|
299
|
|
|
|
(142
|
)
|
|
|
469
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
357
|
|
|
$
|
(554
|
)
|
|
$
|
264
|
|
|
$
|
(870
|
)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7. 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 entitys 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.
In ASC Topic 820, inputs refer broadly to the assumptions 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 inherent 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 entitys 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.
|
14
|
|
|
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 Companys 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 six months ended June 30, 2016.
At June 30, 2016, assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
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 saleequity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic common stock
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Securities available for salefixed maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
|
|
|
|
|
181,649
|
|
|
|
|
|
|
|
181,649
|
|
Corporate bonds
|
|
|
|
|
|
|
203,333
|
|
|
|
|
|
|
|
203,333
|
|
U.S. agency-based mortgage-backed securities
|
|
|
|
|
|
|
12,015
|
|
|
|
|
|
|
|
12,015
|
|
U.S. Treasury securities
|
|
|
63,700
|
|
|
|
|
|
|
|
|
|
|
|
63,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for salefixed maturity
|
|
|
63,700
|
|
|
|
396,997
|
|
|
|
|
|
|
|
460,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
63,732
|
|
|
$
|
396,997
|
|
|
$
|
|
|
|
$
|
460,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2016, assets and liabilities measured at amortized cost are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total Fair
Value
|
|
|
|
(in thousands)
|
|
Securities held-to-maturityfixed maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
|
|
|
$
|
442,694
|
|
|
$
|
|
|
|
$
|
442,694
|
|
Corporate bonds
|
|
|
|
|
|
|
165,270
|
|
|
|
|
|
|
|
165,270
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
6,712
|
|
|
|
|
|
|
|
6,712
|
|
U.S. agency-based mortgage-backed securities
|
|
|
|
|
|
|
13,128
|
|
|
|
|
|
|
|
13,128
|
|
U.S. Treasury securities
|
|
|
7,437
|
|
|
|
|
|
|
|
|
|
|
|
7,437
|
|
Obligations of U.S. government agencies
|
|
|
|
|
|
|
5,881
|
|
|
|
|
|
|
|
5,881
|
|
Asset-backed securities
|
|
|
|
|
|
|
2,202
|
|
|
|
|
|
|
|
2,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity
|
|
$
|
7,437
|
|
|
$
|
635,887
|
|
|
$
|
|
|
|
$
|
643,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
At December 31, 2015, assets and liabilities measured at fair value on a recurring basis are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
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 saleequity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic common stock
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
Securities available for salefixed maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
|
|
|
|
|
171,419
|
|
|
|
|
|
|
|
171,419
|
|
U.S. agency-based mortgage-backed securities
|
|
|
|
|
|
|
7,299
|
|
|
|
|
|
|
|
7,299
|
|
Corporate bonds
|
|
|
|
|
|
|
201,304
|
|
|
|
|
|
|
|
201,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for salefixed maturity
|
|
$
|
|
|
|
$
|
380,022
|
|
|
$
|
|
|
|
$
|
380,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
31
|
|
|
$
|
380,022
|
|
|
$
|
|
|
|
$
|
380,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015, assets and liabilities measured at amortized cost are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total Fair
Value
|
|
|
|
(in thousands)
|
|
Securities held-to-maturityfixed maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
|
$
|
|
|
|
$
|
423,754
|
|
|
$
|
|
|
|
$
|
423,754
|
|
Corporate bonds
|
|
|
|
|
|
|
170,573
|
|
|
|
|
|
|
|
170,573
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
37,683
|
|
|
|
|
|
|
|
37,683
|
|
U.S. agency-based mortgage-backed securities
|
|
|
|
|
|
|
14,471
|
|
|
|
|
|
|
|
14,471
|
|
U.S. Treasury securities
|
|
|
7,599
|
|
|
|
|
|
|
|
|
|
|
|
7,599
|
|
Obligations of U.S. government agencies
|
|
|
|
|
|
|
5,781
|
|
|
|
|
|
|
|
5,781
|
|
Asset-backed securities
|
|
|
|
|
|
|
2,415
|
|
|
|
|
|
|
|
2,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity
|
|
$
|
7,599
|
|
|
$
|
654,677
|
|
|
$
|
|
|
|
$
|
662,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Cash and Cash
Equivalents
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.
Other Investments
Other investments consist of a limited partnership (LP) interest that is accounted for under the
equity method valued using the net asset value provided by the general partner of the LP, which approximates the fair value of the interest. The LPs objective is to generate absolute returns by investing long and short in publicly-traded
global securities. Redemptions are allowed monthly following a 60 day notice with no lock up periods. The Company has no unfunded commitments related to the LP.
16
The following table summarizes the carrying values and corresponding fair values for financial
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
|
As of December 31, 2015
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securitiesheld-to-maturity
|
|
$
|
620,165
|
|
|
$
|
643,324
|
|
|
$
|
645,164
|
|
|
$
|
662,276
|
|
Fixed maturity securitiesavailable-for-sale
|
|
|
460,697
|
|
|
|
460,697
|
|
|
|
380,022
|
|
|
|
380,022
|
|
Equity securities
|
|
|
32
|
|
|
|
32
|
|
|
|
31
|
|
|
|
31
|
|
Cash and cash equivalents
|
|
|
70,155
|
|
|
|
70,155
|
|
|
|
69,481
|
|
|
|
69,481
|
|
Short-term investments
|
|
|
17,165
|
|
|
|
17,165
|
|
|
|
7,718
|
|
|
|
7,718
|
|
Other investments
|
|
|
10,850
|
|
|
|
10,850
|
|
|
|
12,217
|
|
|
|
12,217
|
|
Note 8. Treasury Stock
The Companys Board of Directors initiated a share repurchase program in February 2010. In October 2015, the Board reauthorized this
program with a limit of $25.0 million. Unless reauthorized, the program will expire on December 31, 2016. There were no shares repurchased under this program in the six months ended June 30, 2016. Since the beginning of this plan, the
Company has repurchased a total of 1,258,250 shares for $22.4 million, or an average price of $17.78, including commissions.
Note 9. Commitments and
Contingencies
In February 2015, the Company was notified of an adverse verdict against its subsidiary, American Interstate Insurance
Company, related to a 2009 workers compensation claim in the State of Iowa. The verdict was for $25.3 million, of which $0.3 million was for actual damages and $25.0 million was awarded for punitive damages. American Interstate is appealing
both the verdict and the damage awards. The Company has posted an appeal bond in the amount of $27.8 million, as required by law. The Company maintains reinsurance against catastrophic losses, including court ordered judgments. As of June 30,
2016, the Companys total reserve for the claim was $2.5 million. The $2.5 million reserve does not include payments that the Company has previously paid in this case. The payments, plus the $2.5 million reserve, total $5.4 million. The
Companys retention is $5.0 million before its reinsurance providers are obligated to reimburse the Company for additional costs. The Company presently believes that the reserve amount, together with its reinsurance coverage, is adequate to
satisfy this claim.
Note 10. Subsequent Events
On July 26, 2016, the Companys Board of Directors declared a quarterly cash dividend of $0.18 per share payable on
September 23, 2016 to shareholders of record as of September 9, 2016. The Board intends to consider the payment of a regular cash dividend each calendar quarter.