e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
Commission File Number: 000-51520
AMERISAFE, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Texas
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75-2069407 |
(State of Incorporation)
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(I.R.S. Employer Identification Number) |
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2301 Highway 190 West, DeRidder, Louisiana
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70634 |
(Address of Principal Executive Offices)
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(Zip Code) |
Registrants telephone number, including area code: (337) 463-9052
Securities registered pursuant to Section 12(b) of the Act:
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Title of Class
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Name of Each Exchange on Which Registered |
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Common Stock, par value $0.01 per share
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Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the voting common stock held by non-affiliates of the Registrant as
of June 30, 2006 (the last business day of the Registrants most recently completed second fiscal
quarter) was approximately $120.1 million, based upon the closing price of the shares on the NASDAQ
Global Select Market on that date.
As of February 20, 2007, there were 18,708,898 shares of the Registrants common stock, par
value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement relating to the 2007 Annual Meeting of
Shareholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this
report.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and 21E of the Securities Exchange Act of 1934. You should not place undue
reliance on these statements. These forward-looking statements include statements that reflect the
current views of our senior management with respect to our financial performance and future events
with respect to our business and the insurance industry in general. Statements that include the
words expect, intend, plan, believe, project, forecast, estimate, may, should,
anticipate and similar statements of a future or forward-looking nature identify forward-looking
statements. Forward-looking statements address matters that involve risks and uncertainties.
Accordingly, there are or will be important factors that could cause our actual results to differ
materially from those indicated in these statements. We believe that these factors include, but
are not limited to, the following:
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increased competition on the basis of coverage availability, claims management, safety
services, payment terms, premium rates, policy terms, types of insurance offered, overall
financial strength, financial ratings and reputation; |
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the cyclical nature of the workers compensation insurance industry; |
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greater frequency or severity of claims and loss activity, including as a result of
natural or man-made catastrophic events, than our underwriting, reserving or investment
practices anticipate based on historical experience or industry data; |
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changes in rating agency policies or practices; |
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changes in the availability, cost or quality of reinsurance and the failure of our
reinsurers to pay claims in a timely manner or at all; |
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negative developments in the workers compensation insurance industry; |
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decreased level of business activity of our policyholders; |
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decreased demand for our insurance; |
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changes in regulations or laws applicable to us, our policyholders or the agencies
that sell our insurance; |
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changes in legal theories of liability under our insurance policies; |
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developments in capital markets that adversely affect the performance of our investments; |
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loss of the services of any of our senior management or other key employees; |
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the effects of U.S. involvement in hostilities with other countries and large-scale
acts of terrorism, or the threat of hostilities or terrorist acts; and |
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changes in general economic conditions, including interest rates, inflation and other
factors. |
The foregoing factors should not be construed as exhaustive and should be read together with
the other cautionary statements included in this report, including under the caption Risk Factors
in Item 1A of this report. If one or more events related to these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be incorrect, actual results may differ
materially from what we anticipate.
3
PART I
Item 1. Business.
Overview
We are a specialty provider of workers compensation insurance focused on small to mid-sized
employers engaged in hazardous industries, principally construction, trucking, logging,
agriculture, oil and gas, maritime and sawmills. Since commencing operations in 1986, we have
gained significant experience underwriting the complex workers compensation exposures inherent in
these industries. We provide coverage to employers under state and federal workers compensation
laws. These laws prescribe wage replacement and medical care benefits that employers are obligated
to provide to their employees who are injured in the course and scope of their employment. Our
workers compensation insurance policies provide benefits to injured employees for, among other
things, temporary or permanent disability, death and medical and hospital expenses. The benefits
payable and the duration of those benefits are set by state or federal law. The benefits vary by
jurisdiction, the nature and severity of the injury and the wages of the employee. The employer,
who is the policyholder, pays the premiums for coverage.
Hazardous industry employers tend to have less frequent but more severe claims as compared to
employers in other industries due to the nature of their businesses. Injuries that occur are often
severe in nature including death, dismemberment, paraplegia and quadriplegia. As a result,
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. For example, our construction employers generally paid premium
rates equal to $7.78 per $100 of payroll to obtain workers compensation coverage for all of their
employees in 2006.
We employ a proactive, disciplined approach in underwriting employers and providing
comprehensive services intended to lessen the overall incidence and cost of workplace injuries. We
provide safety services at employers workplaces as a vital component of our underwriting process
and to 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 or aberrations 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 on equity.
We completed our initial public offering in November 2005. In the offering, we issued
8,000,000 shares of common stock at $9.00 per share. Upon the completion of the offering, we
issued an additional 9,120,948 shares of common stock in exchange for shares of our Series A
preferred stock. Of the $63.2 million of net proceeds from this offering, we contributed $45.0
million to our insurance subsidiaries and used $10.2 million to redeem shares of our preferred
stock. We expect to use the balance of the net proceeds to make additional capital contributions
to our insurance subsidiaries as necessary to support our anticipated growth and for general
corporate purposes.
In November 2006, we completed a public offering of 9,071,576 shares of common stock. All of
these shares were offered by existing shareholders. We did not receive any of the proceeds from
this offering.
AMERISAFE is an insurance holding company and was incorporated in Texas in 1985. We began
operations in 1986 by focusing on workers compensation insurance for logging contractors in the
southeast United States. In 1994, we expanded our focus to include the other hazardous industries
we serve
today. Two of our three insurance subsidiaries, American Interstate Insurance Company and
Silver Oak Casualty, are domiciled in Louisiana. Our other insurance subsidiary, American
Interstate Insurance Company of Texas, is domiciled in Texas.
4
Competitive Advantages
We believe we have the following competitive advantages:
Focus on Hazardous Industries. We have extensive experience insuring employers engaged in
hazardous industries and have a history of profitable underwriting in these industries. Our
specialized knowledge of these hazardous industries helps us better serve our policyholders, which
leads to greater employer loyalty and policy retention. Our policy renewal rate on voluntary
business that we elected to quote for renewal was 91.1% in 2006, 90.6% in 2005 and 93.0% in 2004.
Focus on Small to Mid-Sized Employers. We believe large insurance companies generally do not
target small to mid-sized employers in hazardous industries due to their smaller premium size, type
of operations, mobile workforce and extensive service needs. We provide enhanced customer services
to our policyholders. For example, unlike many of our competitors, our premium payment plans
enable our policyholders to better match their premium payments with their payroll costs.
Specialized Underwriting Expertise. Based on our 21-year underwriting history of insuring
employers engaged in hazardous industries, we have developed industry specific risk analysis and
rating tools to assist our underwriters in risk selection and pricing. We are highly disciplined
when quoting and binding new business. We do not delegate underwriting authority to agencies that
sell our insurance or to any other third party.
Comprehensive Safety Services. We provide proactive safety reviews of employers worksites,
which are often located in rural areas. These safety reviews are a vital component of our
underwriting process and also assist our policyholders in loss prevention and encourage the safest
workplaces possible by deploying experienced field safety professionals, or FSPs, to our
policyholders worksites. In 2006, more than 94.0% of our new voluntary business policyholders
were subject to pre-quotation safety inspections. We perform periodic on-site safety surveys on
all of our voluntary business policyholders.
Proactive Claims Management. Our employees manage substantially all of our open claims
in-house utilizing our intensive claims management practices that emphasize a personal approach and
quality, cost-effective medical treatment. We currently average 56 open indemnity claims per field
case manager, or FCM, which we believe is significantly less than the industry average. We believe
our claims management practices allow us to achieve a more favorable claim outcome, accelerate an
employees return to work, lessen the likelihood of litigation and more rapidly close claims, all
of which ultimately lead to lower overall costs.
Strategy
We intend to pursue profitable growth and favorable returns on equity using the following
strategies:
Expand in our Existing Markets. Our current market share in each of the six states where we
derived 5.0% or more of our gross premiums written in 2006 did not exceed 5.0% of the workers
compensation market in that state, based on data received from the National Association of
Insurance Commissioners, or the NAIC. Competition in our target markets is fragmented by state and
employer industry focus. We believe that our specialized underwriting expertise and safety, claims
and audit services position us to profitably increase our market share in our existing principal
markets, with minimal increase in field service employees.
Prudent and Opportunistic Geographic Expansion. While we actively market our insurance in
31states and the District of Columbia, 44.2% of our voluntary in-force premiums were generated in
the six
states where we derived 5% or more of our gross premiums written in 2006. We are licensed in
an additional 14 states and the U.S. Virgin Islands. Our existing licenses and rate filings will
expedite our ability to write policies in these markets when we decide it is prudent to do so. In
late 2006, we expanded our operations into selected areas of Nevada and Colorado.
5
Focus on Underwriting Profitability. We intend to maintain our underwriting discipline and
profitability throughout market cycles. Our strategy is to focus on underwriting workers
compensation insurance in hazardous industries and to maintain adequate rate levels commensurate
with the risks we underwrite. We will also continue to strive for improved risk selection and
pricing, as well as reduced frequency and severity of claims through comprehensive workplace safety
reviews, effective medical cost containment measures and rapid closing of claims through personal,
direct contact with our policyholders and their employees.
Leverage Existing Information Technology. We believe our customized information system,
ICAMS, significantly enhances our ability to select risk, write profitable business and
cost-effectively administer our billing, claims and audit functions. We also believe our
infrastructure is scalable and will enable us to accommodate our anticipated premium growth at
current staffing levels and at minimal cost, which should have a positive effect on our expense
ratio over time as we grow our premium base.
Maintain Capital Strength. We plan to manage our capital to achieve our growth and
profitability goals while maintaining a prudent operating leverage for our insurance company
subsidiaries. To accomplish this objective, we intend to maintain underwriting profitability
throughout market cycles, use a substantial portion of the proceeds of our initial public offering
toward the judicious growth of our business, optimize our use of reinsurance and maximize an
appropriate risk adjusted return on our growing investment portfolio.
Industry
Overview. Workers compensation is a statutory system under which an employer is required to
pay for its employees medical, disability, vocational rehabilitation and death benefit costs for
work-related injuries or illnesses. Most employers satisfy this requirement by purchasing workers
compensation insurance. The principal concept underlying workers compensation laws is that
employees injured in the course and scope of their employment have only the legal remedies
available under workers compensation laws and do not have any other recourse against their
employer. An employers obligation to pay workers compensation does not depend on any negligence
or wrongdoing on the part of the employer and exists even for injuries that result from the
negligence or fault of another person, a co-employee or, in most instances, the injured employee.
Workers compensation insurance policies generally provide that the insurance carrier will pay
all benefits that the insured employer may become obligated to pay under applicable workers
compensation laws. Each state has a regulatory and adjudicatory system that quantifies the level
of wage replacement to be paid, determines the level of medical care required to be provided and
the cost of permanent impairment and specifies the options in selecting medical providers available
to the injured employee or the employer. These state laws generally require two types of benefits
for injured employees: (1) medical benefits, which include expenses related to diagnosis and
treatment of the injury, as well as any required rehabilitation, and (2) indemnity payments, which
consist of temporary wage replacement, permanent disability payments and death benefits to
surviving family members. To fulfill these mandated financial obligations, virtually all employers
are required to purchase workers compensation insurance or, if permitted by state law or approved
by the U.S. Department of Labor, to self-insure. The employers may purchase workers compensation
insurance from a private insurance carrier, a state-sanctioned assigned risk pool or a
self-insurance fund, which is an entity that allows employers to obtain workers compensation
coverage on a pooled basis, typically subjecting each employer to joint and several liability for
the entire fund.
Workers compensation was the fourth-largest property and casualty insurance line in the
United States in 2005, according to A.M. Best. Direct premiums written in 2005 for the workers
compensation insurance industry were $56 billion, and direct premiums written for the property and
casualty industry as a whole were $489 billion, according to A.M. Best. According to the most
recent market data reported by the National Council on Compensation Insurance, Inc., or the NCCI,
which is the official ratings bureau in the majority of states in which we are licensed, total
premiums reported for the specific occupational class
codes for which we underwrite business was $16 billion. Total premiums reported for all
occupational class codes reported by the NCCI for these same jurisdictions was $39 billion.
6
Outlook. We believe the challenges faced by the workers compensation insurance industry over
the past decade have created significant opportunity for workers compensation insurers to increase
the amount of business that they write. The year 2002 marked the first year in five years that
private carriers in the property and casualty insurance industry experienced an increase in annual
after-tax returns on surplus, including capital gains, according to NCCI. Workers compensation
insurance industry calendar year combined ratios declined for the first time in seven years,
falling from 122% (with 1.9% attributable to the September 11, 2001 terrorist attacks) to 105% in
2004 as premium rates have increased and claims frequency has declined. In addition, claims
frequency has declined. From 1991 through 2004, the cumulative decline in lost-time claims
frequency was 45.8%. The NCCI estimates that lost-time claims frequency declined an additional
4.5% in 2005. We believe that opportunities remain for us to provide needed underwriting capacity
at attractive rates and upon terms and conditions more favorable to insurers than in the past.
Policyholders
As of December 31, 2006, we had more than 6,800 voluntary business policyholders with an
average annual workers compensation policy premium of $40,673. As of December 31, 2006, our ten
largest voluntary business policyholders accounted for 2.6% of our in-force premiums. Our policy
renewal rate on voluntary business that we elected to quote for renewal was 91.1% in 2006, 90.6% in
2005 and 93.0% in 2004.
In addition to our voluntary workers compensation business, we underwrite workers
compensation policies for employers assigned to us and assume reinsurance premiums from mandatory
pooling arrangements, in each case to fulfill our obligations under residual market programs
implemented by the states in which we operate. In addition, we separately underwrite general
liability insurance policies for our workers compensation policyholders in the logging industry on
a select basis. Our assigned risk business fulfills our statutory obligation to participate in
residual market plans in six states. See RegulationResidual Market Programs below. For the
year ended December 31, 2006, our assigned risk business accounted for 3.6% of our gross premiums
written, and our assumed premiums from mandatory pooling arrangements accounted for 1.3% of our
gross premiums written. In addition, our general liability insurance business accounted for 0.7%
of our gross premiums written for the year ended December 31, 2006.
Targeted Industries
We provide workers compensation insurance primarily to employers in the following targeted
hazardous industries:
Construction. Includes a broad range of operations such as highway and bridge construction,
building and maintenance of pipeline and powerline networks, excavation, commercial construction,
roofing, iron and steel erection, tower erection and numerous other specialized construction
operations. In 2006, our average policy premium for voluntary workers compensation within the
construction industry was $42,338, or $7.78 per $100 of payroll.
Trucking. Includes a large spectrum of diverse operations including contract haulers,
regional and local freight carriers, special equipment transporters and other trucking companies
that conduct a variety of short- and long-haul operations. In 2006, our average policy premium for
voluntary workers compensation within the trucking industry was $47,097, or $7.61per $100 of
payroll.
Logging. Includes tree harvesting operations ranging from labor intensive chainsaw felling
and trimming to sophisticated mechanized operations using heavy equipment. In 2006, our average
policy
premium for voluntary workers compensation within the logging industry was $21,182, or $17.02
per $100 of payroll.
Agriculture. Including crop maintenance and harvesting, grain and produce operations, nursery
operations, meat processing and livestock feed and transportation. In 2006, our average policy
premium for voluntary workers compensation within the agricultural industry was $28,651, or $9.35
per $100 of payroll.
7
Oil and Gas. Including various oil and gas activities including gathering, transportation,
processing, production and field service operations. In 2006, our average policy premium for
voluntary workers compensation within the oil and gas industry was $58,860, or $5.77 per $100 of
payroll.
Maritime. Including ship building and repair, pier and marine construction, inter-coastal
construction and stevedoring. In 2006, our average policy premium for voluntary workers
compensation within the maritime industry was $55,787, or $9.24 per $100 of payroll.
Sawmills. Including sawmills and various other lumber-related operations. In 2006, our
average policy premium for the sawmill industry was $30,654, or $7.27 per $100 of payroll.
Our gross premiums are derived from:
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Direct Premiums. Includes premiums from workers compensation and general liability
insurance policies that we issue to: |
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employers who seek to purchase insurance directly from us and who we voluntarily
agree to insure, which we refer to as our voluntary business; and |
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employers assigned to us under residual market programs implemented by some of the
states in which we operate, which we refer to as our assigned risk business. |
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Assumed Premiums. Includes premiums from our participation in mandatory pooling
arrangements under residual market programs implemented by some of the states in which we
operate. |
In addition to workers compensation insurance, we also offer general liability insurance
coverage only to our workers compensation policyholders in the logging industry on a select basis.
As of December 31, 2006, less than 1.0% of our voluntary in-force premiums were derived from
general liability policies.
Gross premiums written during the years ended December 31, 2006, 2005 and 2004 and the
allocation of those premiums among the hazardous industries we target are presented in the table
below.
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Percentage of |
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Gross Premiums Written |
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Gross Premiums Written |
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2006 |
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2005 |
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2004 |
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2006 |
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2005 |
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2004 |
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(In thousands) |
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Voluntary business: |
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Construction |
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$ |
132,083 |
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$ |
117,134 |
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$ |
101,298 |
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39.7 |
% |
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40.3 |
% |
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38.3 |
% |
Trucking |
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70,221 |
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59,348 |
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57,822 |
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21.1 |
% |
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20.4 |
% |
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21.8 |
% |
Logging |
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24,553 |
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26,324 |
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30,340 |
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7.4 |
% |
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9.0 |
% |
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11.5 |
% |
Agriculture |
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13,681 |
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13,119 |
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11,203 |
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4.1 |
% |
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4.5 |
% |
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4.2 |
% |
Oil and Gas |
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10,578 |
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8,035 |
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7,226 |
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3.2 |
% |
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2.8 |
% |
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2.7 |
% |
Maritime |
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9,180 |
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7,262 |
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5,909 |
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2.8 |
% |
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2.5 |
% |
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2.2 |
% |
Sawmills |
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4,260 |
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4,441 |
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5,566 |
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1.3 |
% |
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1.5 |
% |
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2.1 |
% |
Other |
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51,547 |
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34,382 |
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28,117 |
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15.5 |
% |
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11.8 |
% |
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10.6 |
% |
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Total voluntary
business |
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316,103 |
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270,045 |
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247,481 |
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95.1 |
% |
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92.8 |
% |
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93.4 |
% |
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Assigned risk business |
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11,936 |
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13,924 |
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9,431 |
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3.6 |
% |
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4.8 |
% |
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3.6 |
% |
Assumed premiums |
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4,452 |
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6,922 |
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8,050 |
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1.3 |
% |
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2.4 |
% |
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3.0 |
% |
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Total |
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$ |
332,491 |
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$ |
290,891 |
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$ |
264,962 |
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100.0 |
% |
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100.0 |
% |
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100.0 |
% |
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8
Geographic Distribution
We are licensed to provide workers compensation insurance in 45 states, the District of
Columbia and the U.S. Virgin Islands. We operate on a geographically diverse basis with no more
than 9.1% of our gross premiums written in 2006 derived from any one state. The table below
identifies, for the years ended December 31, 2006, 2005 and 2004, the states in which the
percentage of our gross premiums written exceeded 3.0% for any of the years presented.
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Percentage of Gross Premiums Written |
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Year Ended December 31, |
State |
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2006 |
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2005 |
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2004 |
Georgia |
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9.1 |
% |
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10.5 |
% |
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9.5 |
% |
Louisiana |
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8.9 |
% |
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8.3 |
% |
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10.6 |
% |
North Carolina |
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7.5 |
% |
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6.7 |
% |
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6.3 |
% |
Florida |
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6.5 |
% |
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5.9 |
% |
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4.9 |
% |
Virginia |
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6.1 |
% |
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5.3 |
% |
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5.2 |
% |
Texas |
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5.8 |
% |
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5.0 |
% |
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6.5 |
% |
Pennsylvania |
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4.8 |
% |
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5.3 |
% |
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4.5 |
% |
Illinois |
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4.6 |
% |
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5.4 |
% |
|
|
6.4 |
% |
South Carolina |
|
|
4.5 |
% |
|
|
4.9 |
% |
|
|
4.6 |
% |
Alaska |
|
|
4.4 |
% |
|
|
5.3 |
% |
|
|
4.4 |
% |
Minnesota |
|
|
4.4 |
% |
|
|
4.2 |
% |
|
|
3.6 |
% |
Oklahoma |
|
|
4.4 |
% |
|
|
4.1 |
% |
|
|
3.3 |
% |
Tennessee |
|
|
4.2 |
% |
|
|
4.2 |
% |
|
|
3.9 |
% |
Mississippi |
|
|
4.2 |
% |
|
|
3.5 |
% |
|
|
3.9 |
% |
Arkansas |
|
|
3.8 |
% |
|
|
3.9 |
% |
|
|
4.7 |
% |
Wisconsin |
|
|
2.9 |
% |
|
|
3.5 |
% |
|
|
3.3 |
% |
Sales and Marketing
We sell our workers compensation insurance through agencies. As of December 31, 2006, our
insurance was sold through more than 2,400 independent agencies and our wholly owned insurance
agency subsidiary, Amerisafe General Agency, which is licensed in 24 states. We are selective in
establishing and maintaining relationships with independent agencies. We establish and maintain
relationships only with those agencies that provide quality application flow from prospective
policyholders that are reasonably likely to accept our quotes. We compensate these agencies by
paying a commission based on the premium collected from the policyholder. Our average commission
rate for our independent agencies was 6.9% for the year ended December 31, 2006. We pay our
insurance agency subsidiary a commission rate of 8.0% . Neither our independent agencies nor our
insurance agency subsidiary has authority to underwrite or bind coverage. We do not pay contingent
commissions.
As of December 31, 2006, independent agencies accounted for 84.7% of our voluntary in-force
premiums, and no independent agency accounted for more than 1.1% of our voluntary in-force premiums
at that date.
9
Underwriting
Our underwriting strategy is to focus on employers in certain hazardous industries that
operate in those states where our underwriting efforts are the most profitable and efficient. We
analyze each prospective policyholder on its own merits relative to known industry trends and
statistical data. Our underwriting guidelines specify that we do not write workers compensation
insurance for certain hazardous activities, including sub-surface mining and the use of explosives.
Underwriting is a multi-step process that begins with the receipt of an application from one
of our agencies. We initially review the application to confirm that the prospective policyholder
meets certain established criteria, including that it is engaged in one of our targeted hazardous
industries and industry classes and operates in the states we target. If the application satisfies
these criteria, the application is forwarded to our underwriting department for further review.
Our underwriting department reviews the application to determine if the application meets our
underwriting criteria and whether all required information has been provided. If additional
information is required, the underwriting department requests additional information from the
agency. This initial review process is generally completed within three days after the application
is received by us. Once this initial review process is complete, our underwriting department
requests that a pre-quotation safety inspection be performed.
After the pre-quotation safety inspection has been completed, our underwriting professionals
review the results of the inspection to determine if a rate quote should be made and, if so,
prepare the quote. The rate quote must be reviewed and approved by our underwriting department
before it is delivered to the agency. All decisions by our underwriting department, including
decisions to decline applications, are subject to review and approval by our management-level
underwriters.
Our underwriting professionals participate in an incentive compensation program under which
bonuses are paid quarterly based upon achieving premium underwriting volume and loss ratio targets.
The determination of whether targets have been satisfied is made 30 months after the relevant
incentive compensation period.
Pricing
In the majority of states, workers compensation insurance rates are based upon the published
loss costs. Loss costs are derived from wage and loss data reported by insurers to the states
statistical agent, in most states the NCCI. The state agent then promulgates loss costs for
specific job descriptions or class codes. Insurers file requests for adoption of a loss cost
multiplier, or LCM, to be applied to the loss costs to support operating costs and profit margins.
In addition, most states allow pricing flexibility above and below the filed LCM, within certain
limits.
We obtain approval of our rates, including our LCMs, from state regulatory authorities. To
maintain rates at profitable levels, we regularly monitor and adjust our LCMs. The effective LCM
for our voluntary business was 1.54 for 2006, 1.56 for policy year 2005, 1.53 for policy year
2004, 1.43 for policy year 2003, and 1.37 for policy year 2002. If we are unable to charge rates
in a particular state or industry to produce satisfactory results, we seek to control and reduce
our premium volume in that state or industry and redeploy our capital in other states or industries
that offer greater opportunity to earn an underwriting profit.
10
Safety
Our safety inspection process begins with a request from our underwriting department to
perform a pre-quotation safety inspection. Our safety inspections focus on a prospective
policyholders operations, loss exposures and existing safety controls to prevent potential losses.
The factors considered in our inspection include employee experience, turn-over, training,
previous loss history and corrective actions, and workplace conditions, including equipment
condition and, where appropriate, use of fall protection, respiratory protection or other safety
devices. Our field safety professionals, or FSPs, travel to employers worksites to perform these
safety inspections. This initial in-depth analysis allows our underwriting professionals to make
decisions on both insurability and pricing. In certain circumstances, we will agree to provide
workers compensation insurance only if the employer agrees to implement and maintain the safety
management practices that we recommend. In 2006, more than 94% of our new voluntary business
policyholders were inspected prior to our offering a premium quote. The remaining voluntary
business policyholders were not inspected prior to a premium quote for a variety of reasons,
including small premium size or the policyholder was previously a policyholder subject to our
safety inspections.
After an employer becomes a policyholder, we continue to emphasize workplace safety through
periodic workplace visits, assisting the policyholder in designing and implementing enhanced safety
management programs, providing current industry-specific safety-related information and conducting
rigorous post-accident management. Generally, we may cancel or decline to renew an insurance
policy if the policyholder does not implement or maintain reasonable safety management practices
that we recommend.
Our FSPs participate in an incentive compensation program under which bonuses are paid
quarterly based upon an FSPs production and their policyholders aggregate loss ratios. The
results are measured 30 months after the inception of the subject policy period.
Claims
We have structured our claims operation to provide immediate, intensive and personal
management of all claims to guide injured employees through medical treatment, rehabilitation and
recovery with the primary goal of returning the injured employee to work as promptly as
practicable. We seek to limit the number of claim disputes with injured employees through early
intervention in the claims process.
We have claims offices located throughout the markets we serve. Our field case managers, or
FCMs, are located in the geographic areas where our policyholders are based. We believe the
presence of our FCMs in the field enhances our ability to guide an injured employee to the
appropriate conclusion in a friendly, dignified and supportive manner. Our FCMs have broad
authority to manage claims from occurrence of a workplace injury through resolution, including
authority to retain many different medical providers at our expense, including not only our
recommended medical providers but also nurse case managers, independent medical examiners,
vocational specialists, rehabilitation specialists and other specialty providers of medical
services necessary to achieve a quality outcome.
Following notification of a workplace injury, an FCM will contact the policyholder, the
injured employee and/or the treating physician to determine the nature and severity of the injury.
If a serious injury occurs, the FCM will promptly visit the injured employee or the employees
family members to discuss the benefits provided and will also visit the treating physician to
discuss the proposed treatment plan. Our FCM assists the injured employee in receiving appropriate
medical treatment and encourages the use of our recommended medical providers and facilities. For
example, our FCM may suggest that a treating physician refer an injured worker to another physician
or treatment facility that we believe has had positive outcomes for other workers with similar
injuries. We actively monitor the number of open cases handled by a single FCM in order to
maintain focus on each specific injured employee. As of December 31, 2006, we averaged 56 open
indemnity claims per FCM, which we believe is significantly less than the industry average.
11
Locating our FCMs in the field also allows us to build professional relationships with local
medical providers. In selecting medical providers, we rely, in part, on the recommendations of our
FCMs who have developed professional relationships within their geographic areas. We also seek
input from our policyholders and other contacts in the markets that we serve. While cost factors
are considered in selecting medical providers, we consider the most important factor in the
selection process to be the medical providers ability to achieve a quality outcome. We define
quality outcome as the injured workers rapid, conclusive recovery and return to sustained, full
capacity employment.
While we seek to promptly settle valid claims, we also aggressively defend against claims we
consider to be non-meritorious. Where possible, we purchase annuities on longer life claims to
close the claim while still providing an appropriate level of benefits to an injured employee.
Premium Audits
We conduct premium audits on all of our voluntary business policyholders annually, upon the
expiration of each policy, including when the policy is renewed. The purpose of these audits is to
verify that policyholders have accurately reported their payroll expenses and employee job
classifications, and therefore have paid us the premium required under the terms of their policies.
In addition to annual audits, we selectively perform interim audits on certain classes of business
if significant or unusual claims are filed or if the monthly reports submitted by a policyholder
reflect a payroll pattern or other aberrations that cause underwriting, safety or fraud concerns.
We also mitigate against potential losses from underreporting of premium or delinquent premium
payment by collecting a deposit from the policyholder at the inception of the policy, typically
representing 15% of the total estimated annual premium, which deposit can be utilized to offset
losses from non-payment of premium.
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 at a given point in time. In establishing our
reserves, we do not use loss discounting, which involves recognizing the time value of money and
offsetting estimates of future payments by future expected investment income. Our process and
methodology for estimating reserves applies to both our voluntary and assigned risk business and
does not include our reserves for mandatory pooling arrangements. We record reserves for mandatory
pooling arrangements as those reserves are reported to us by the pool administrators. We use a
consulting actuary to assist in the evaluation of the adequacy of our reserves for loss and loss
adjustment expenses.
When a claim is reported, we establish an initial case reserve for the estimated amount of our
loss based on our estimate of the most likely outcome of the claim at that time. Generally, a case
reserve is established within 14 days after the claim is reported and consists of anticipated
medical costs, indemnity costs and specific adjustment expenses, which we refer to as defense and
cost containment expenses, or DCC expenses. At any point in time, the amount paid on a claim, plus
the reserve for future amounts to be paid, represents the estimated total cost of the claim, or the
case incurred amount. The estimated amount of loss for a reported claim is based upon various
factors, including:
|
|
|
type of loss; |
|
|
|
|
severity of the injury or damage; |
|
|
|
|
age and occupation of the injured employee; |
|
|
|
|
estimated length of temporary disability; |
|
|
|
|
anticipated permanent disability; |
|
|
|
|
expected medical procedures, costs and duration; |
12
|
|
|
our knowledge of the circumstances surrounding the claim; |
|
|
|
|
insurance policy provisions related to the claim, including coverage; |
|
|
|
|
jurisdiction of the occurrence; and |
|
|
|
|
other benefits defined by applicable statute. |
The case incurred amount can vary due to uncertainties with respect to medical treatment and
outcome, length and degree of disability, employment availability and wage levels and judicial
determinations. As changes occur, the case incurred amount is adjusted. The initial estimate of
the case incurred amount can vary significantly from the amount ultimately paid, especially in
circumstances involving severe injuries with comprehensive medical treatment. Changes in case
incurred amounts, or case development, is an important component of our historical claim data.
In addition to case reserves, we establish reserves on an aggregate basis for loss and DCC
expenses that have been incurred but not reported, or IBNR. Our IBNR reserves are also intended to
provide for aggregate changes in case incurred amounts as well as the unpaid cost of recently
reported claims for which an initial case reserve has not been established.
The third component of our reserves for loss and loss adjustment expenses is our adjusting and
other reserve, or AO reserve. Our AO reserve is established for the costs of future unallocated
loss adjustment expenses for all known and unknown claims. Our AO reserve covers primarily the
estimated cost of administering claims. The final component of our reserves for loss and loss
adjustment expenses is the reserve for mandatory pooling arrangements.
In establishing reserves, we rely on the analysis of our more than 148,000 claims in our
21-year history. Using statistical analyses and actuarial methods, we estimate reserves based on
historical patterns of case development, payment patterns, mix of business, premium rates charged,
case reserving adequacy, operational changes, adjustment philosophy and severity and duration
trends.
We review our reserves by industry and state on a quarterly basis. Individual open claims are
reviewed more frequently by our field case managers and adjustments to case incurred amounts are
made based on expected outcomes. The number of claims reported or occurring during a period,
combined with a calculation of average case incurred amounts, and measured over time, provide the
foundation for our reserve estimates. In establishing our reserve estimates, we use historical
trends in claim reporting timeliness, frequency of claims in relation to earned premium or covered
payroll, premium rate levels charged and case development patterns. However, the number of
variables and judgments involved in establishing reserve estimates, combined with some random
variation in loss development patterns, results in uncertainty regarding projected ultimate losses.
As a result, our ultimate liability for loss and loss adjustment expenses may be more or less than
our reserve estimate.
Our analysis of our historical data provides the factors we use in our statistical and
actuarial analysis in estimating our loss and DCC expense reserve. These factors are primarily
measures over time of claims reported, average case incurred amounts, case development, duration,
severity and payment patterns. However, these factors cannot be directly used as these factors do
not take into consideration changes in business mix, claims management, regulatory issues, medical
trends, employment and wage patterns and other subjective factors. We use this combination of
factors and subjective assumptions in the use of the following six actuarial methodologies:
|
|
|
Paid Development Method uses historical, cumulative paid losses by accident year and
develops those actual losses to estimated ultimate losses based upon the assumption that
each accident year will develop to estimated ultimate cost in a manner that is analogous
to prior years. |
|
|
|
|
Paid Cape Cod Method multiplies estimated ultimate claims for each accident year by
a weighted average, trended severity. The estimated ultimate claims used in this method
are based on paid claim count development. The selected severity for a given accident
year is then derived by giving some weight to all of the accident years in the experience
history rather than treating each accident year independently. |
13
|
|
|
Paid Bornhuetter-Ferguson (BF) Method a combination of the Paid Development Method
and the Paid Cape Cod Method, the Paid BF Method estimates ultimate losses by adding
actual paid losses and projected, future unpaid losses. The amounts produced are then
added to cumulative paid losses to produce the final estimates of ultimate incurred
losses. |
|
|
|
|
Incurred Development Method uses historical, cumulative incurred losses by accident
year and develops those actual losses to estimated ultimate losses based upon the
assumption that each accident year will develop to estimated ultimate cost in a manner
that is analogous to prior years. |
|
|
|
|
Incurred Cape Cod Method multiplies estimated ultimate claims for each accident year
by a weighted average, trended severity. The estimated ultimate claims used in this
method are based on incurred claim count development. The selected severity for a given
accident year is then derived by giving some weight to all of the accident years in the
experience history rather than treating each accident year independently. |
|
|
|
|
Incurred Bornhuetter-Ferguson Method a combination of the Incurred Development
Method and the Incurred Cape Cod Method, the Incurred BF Method estimates ultimate losses
by adding actual incurred losses and projected, future unreported losses. The amounts
produced are then added to cumulative incurred losses to produce an estimate of ultimate
incurred losses. |
For each method, we calculate the amount of our total loss and DCC expenses that we estimate
will ultimately be paid by our reinsurers, which is subtracted from our total gross reserve to
produce our total net reserve. We then analyze the results and may emphasize or deemphasize some
or all of the outcomes to reflect our judgment of their reasonableness in relation to supplementary
information and operational and industry changes. These outcomes are then aggregated to produce a
single weighted average point estimate that is the base estimate for net loss and DCC expense
reserves.
In determining the level of emphasis that may be placed on some or all of the methods, we
review statistical information as to which methods are most appropriate, whether adjustments are
appropriate within the particular methods, and if results produced by each method include inherent
bias reflecting operational and industry changes. This supplementary information may include:
|
|
|
open and closed claim counts; |
|
|
|
|
statistics related to open and closed claim count percentages; |
|
|
|
|
claim closure rates; |
|
|
|
|
changes in average case reserves and average loss and loss adjustment expenses
incurred on open claims; |
|
|
|
|
reported and ultimate average case incurred changes; |
|
|
|
|
reported and projected ultimate loss ratios; and |
|
|
|
|
loss payment patterns. |
In establishing our AO reserves, we review our past adjustment expenses in relation to paid
claims and estimated future costs based on expected claims activity and duration.
The sum of our net loss and DCC expense reserve, our AO reserve and our reserve for mandatory
pooling arrangements is our total net reserve for loss and loss adjustment expenses.
14
As of December 31, 2006, our best estimate of our ultimate liability for loss and loss
adjustment expenses, net of amounts recoverable from reinsurers, was $412.4 million, which includes
$9.5 million in reserves for mandatory pooling arrangements as reported by the pool administrators.
This estimate was derived from the process and methodology described above which relies on
substantial judgment. There is inherent uncertainty in estimating our reserves for loss and loss
adjustment expenses. It is possible that our actual loss and loss adjustment expenses incurred may
vary significantly from our estimates.
As noted above, our reserve estimate is developed based upon our analysis of our historical
data, and factors derived from that data, including claims reported, average claim amount incurred,
case development, duration, severity and payment patterns, as well as subjective assumptions. We
view our estimate of loss and DCC expenses as the most significant component of our reserve for
loss and loss adjustment expenses.
We prepared a sensitivity analysis of our net loss and DCC expense reserve as of December 31,
2006 by analyzing the effect of reasonably likely changes to the assumptions used in deriving our
estimates. Since the base estimate for our net loss and DCC expense reserve is derived from the
outcomes of the six actuarial methodologies discussed above, the most significant assumption in
establishing our reserve is the adjustment of and emphasis on those methods that we believe are
most appropriate.
Of the six actuarial methods we use, three are incurred methods and three are paid
methods. The selected development factors within each method are derived from our data and the
design characteristics of the particular method. The six different methods each have inherent
biases in their respective designs that are more or less predictive in their use. Incurred
methods rely on historical development factors derived from changes in our incurred estimates of
claims paid and reserve amounts over time, while paid methods focus on our claim payment patterns
and ultimate paid costs. Incurred methods focus on the measurement of the adequacy of case
reserves at points in time. As a result, if reserving practices change over time, the incurred
methods may produce significant variation in the estimates of ultimate losses. Paid methods rely
on actual claims payment patterns and therefore are not sensitive to changes in reserving
practices.
The low end of the range of our sensitivity analysis was derived by placing more emphasis
(63%) on the outcomes generated by the three paid methods and less emphasis (37%) on the outcomes
generated by the three incurred methods. The high end of the range was derived by placing more
emphasis (63%) on the outcomes generated by the three incurred methods and less emphasis (37%) on
the outcomes generated by the three paid methods. We believe that changing the emphasis on the
incurred and paid methods better reflects reasonably likely outcomes than adjusting selected
development factors or other variables used within each method. We believe the results of this
sensitivity analysis, which are summarized in the table below, constitute a reasonable range of the
expected outcomes of our reserve for net loss and DCC expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Mandatory |
|
|
|
|
|
|
Loss and |
|
|
|
|
|
|
Pooling |
|
|
|
|
|
|
DCC Expenses |
|
|
AO |
|
|
Arrangements |
|
|
Total |
|
|
|
(In thousands) |
|
Low end of range |
|
$ |
351,250 |
|
|
$ |
18,903 |
|
|
$ |
9,478 |
|
|
$ |
379,631 |
|
Net reserve |
|
|
383,987 |
|
|
|
18,903 |
|
|
|
9,478 |
|
|
|
412,368 |
|
High end of range |
|
|
384,580 |
|
|
|
18,903 |
|
|
|
9,478 |
|
|
|
412,961 |
|
The resulting range derived from this sensitivity analysis would have increased net reserves by
$593,000 or decreased net reserves by $32.7 million, at December 31, 2006. The increase would have
reduced net income and stockholders equity by $385,000. The
decrease would have increased net income and stockholders equity by $21.3 million. A change in
our net loss and DCC expense reserve would not have an immediate impact on our liquidity, but would
affect cash flow in future periods as the losses are paid.
15
Given the numerous factors and assumptions used in our estimate of reserves, and consequently
this sensitivity analysis, we do not believe that it would be meaningful to provide more detailed
disclosure regarding specific factors and assumptions and the individual effects of these factors
and assumptions on our net reserves. Furthermore, there is no precise method for subsequently
evaluating the impact of any specific factor or assumption on the adequacy of reserves, because the
eventual deficiency or redundancy is affected by multiple interdependent factors.
Reconciliation of Loss Reserves
The table below shows the reconciliation of loss reserves on a gross and net basis for the
years ended December 31, 2006, 2005 and 2004, reflecting changes in losses incurred and paid
losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Balance, beginning of period |
|
$ |
484,485 |
|
|
$ |
432,880 |
|
|
$ |
377,559 |
|
Less amounts recoverable from reinsurers on
unpaid loss and loss adjustment expenses |
|
|
120,232 |
|
|
|
189,624 |
|
|
|
194,558 |
|
|
|
|
|
|
|
|
|
|
|
Net balance, beginning of period |
|
|
364,253 |
|
|
|
243,256 |
|
|
|
183,001 |
|
|
|
|
|
|
|
|
|
|
|
Add incurred related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
201,711 |
|
|
|
182,174 |
|
|
|
160,773 |
|
Prior years |
|
|
(2,227 |
) |
|
|
8,673 |
|
|
|
13,413 |
|
Loss on Converium commutation |
|
|
|
|
|
|
13,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred |
|
|
199,484 |
|
|
|
204,056 |
|
|
|
174,186 |
|
|
|
|
|
|
|
|
|
|
|
Less paid related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
41,002 |
|
|
|
42,545 |
|
|
|
40,312 |
|
Prior years |
|
|
110,367 |
|
|
|
96,620 |
|
|
|
73,619 |
|
|
|
|
|
|
|
|
|
|
|
Total paid |
|
|
151,369 |
|
|
|
139,165 |
|
|
|
113,931 |
|
|
|
|
|
|
|
|
|
|
|
Add effect of Converium commutation (1) |
|
|
|
|
|
|
56,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, end of period |
|
|
412,368 |
|
|
|
364,253 |
|
|
|
243,256 |
|
|
|
|
|
|
|
|
|
|
|
Add amounts recoverable from reinsurers on
unpaid loss and loss adjustment expenses |
|
|
106,810 |
|
|
|
120,232 |
|
|
|
189,624 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
519,178 |
|
|
$ |
484,485 |
|
|
$ |
432,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The total payment from Converium was $61.3 million, of which $56.1 million was for ceded
reserves and $5.2 million was for paid recoverables as of June 30, 2005. |
Our gross reserves for loss and loss adjustment expenses of $519.2 million as of December 31,
2006 are expected to cover all unpaid loss and loss adjustment expenses as of that date. As of
December 31, 2006, we had 5,694 open claims, with an average of $91,180 in unpaid loss and loss
adjustment expenses per open claim. During the year ended December 31, 2006, 6,581 new claims were
reported, and 6,942 claims were closed.
As of December 31, 2005, our gross reserves for loss and loss adjustment expenses were $484.5
million. The increase in our reserves from December 31, 2005 to December 31, 2006 was due to our
premium growth during this time period, partially offset by favorable development in prior accident
years. As of December 31, 2005, we had 6,055 open claims, with an average of $80,014 in unpaid
loss and loss adjustment expenses per open claim. During the year ended December 31, 2005, 7,073
new claims were reported, and 6,702 claims were closed.
16
As of December 31, 2004, our gross reserves for loss and loss adjustment expenses were $432.9
million. The increase in our reserves from December 31, 2004 to December 31, 2005 was due to our
premium growth during this time period, offset by an increase in paid loss and loss adjustment
expenses related to prior years. As of December 31, 2004, we had 5,684 open claims, with an
average of $76,158 in unpaid loss and loss adjustment expenses per open claim. During the year
ended December 31, 2004, 7,015 new claims were reported, and 7,086 claims were closed.
Loss Development
The table below shows the net loss development for business written each year from 1996
through 2006. The table reflects the changes in our loss and loss adjustment expense reserves in
subsequent years from the prior loss estimates based on experience as of the end of each succeeding
year on a GAAP basis.
The first line of the table shows, for the years indicated, our liability including the
incurred but not reported loss and loss adjustment expenses as originally estimated, net of amounts
recoverable from reinsurers. For example, as of December 31, 1996, it was estimated that $44.0
million would be sufficient to settle all claims not already settled that had occurred on or prior
to December 31, 1996, whether reported or unreported. The next section of the table sets forth the
re-estimates in later years of incurred losses, including payments, for the years indicated. The
next section of the table shows, by year, the cumulative amounts of loss and loss adjustment
expense payments, net of amounts recoverable from reinsurers, as of the end of each succeeding
year. For example, with respect to the net loss reserves of $44.0 million as of December 31, 1996, by December 31, 2006
(ten years later) $39.7 million had actually been paid in settlement of the
claims that relate to liabilities as of December 31, 1996.
The cumulative redundancy/(deficiency) represents, as of December 31, 2006, the difference
between the latest re-estimated liability and the amounts as originally estimated. A redundancy
means that the original estimate was higher than the current estimate. A deficiency means that the
current estimate is higher than the original estimate.
Analysis of Loss and Loss Adjustment Expense Reserve Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
1996 |
|
|
1997 |
|
|
1998 |
|
|
1999 |
|
|
2000 |
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
|
(In thousands) |
|
Reserve for loss and loss
adjustment expenses, net of
reinsurance recoverables |
|
$ |
43,952 |
|
|
$ |
55,096 |
|
|
$ |
43,625 |
|
|
$ |
72,599 |
|
|
$ |
86,192 |
|
|
$ |
119,020 |
|
|
$ |
152,908 |
|
|
$ |
183,001 |
|
|
$ |
243,256 |
|
|
$ |
364,253 |
|
|
$ |
412,368 |
|
Net reserve estimated as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
|
35,447 |
|
|
|
54,036 |
|
|
|
49,098 |
|
|
|
75,588 |
|
|
|
96,801 |
|
|
|
123,413 |
|
|
|
155,683 |
|
|
|
196,955 |
|
|
|
265,138 |
|
|
|
362,026 |
|
|
|
|
|
Two years later |
|
|
34,082 |
|
|
|
60,800 |
|
|
|
50,764 |
|
|
|
82,633 |
|
|
|
98,871 |
|
|
|
116,291 |
|
|
|
168,410 |
|
|
|
217,836 |
|
|
|
262,601 |
|
|
|
|
|
|
|
|
|
Three years later |
|
|
34,252 |
|
|
|
63,583 |
|
|
|
57,750 |
|
|
|
86,336 |
|
|
|
92,740 |
|
|
|
119,814 |
|
|
|
187,225 |
|
|
|
218,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
35,193 |
|
|
|
68,754 |
|
|
|
59,800 |
|
|
|
86,829 |
|
|
|
93,328 |
|
|
|
132,332 |
|
|
|
189,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
38,318 |
|
|
|
69,610 |
|
|
|
60,074 |
|
|
|
87,088 |
|
|
|
101,417 |
|
|
|
134,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
38,339 |
|
|
|
70,865 |
|
|
|
61,297 |
|
|
|
90,156 |
|
|
|
104,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
39,459 |
|
|
|
70,684 |
|
|
|
61,578 |
|
|
|
91,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
38,888 |
|
|
|
70,577 |
|
|
|
62,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
39,249 |
|
|
|
71,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later |
|
|
39,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cumulative redundancy
(deficiency) |
|
$ |
4,298 |
|
|
$ |
(15,930 |
) |
|
$ |
(18,859 |
) |
|
$ |
(18,571 |
) |
|
$ |
(18,524 |
) |
|
$ |
(15,816 |
) |
|
$ |
(36,190 |
) |
|
$ |
(35,216 |
) |
|
$ |
(19,345 |
) |
|
$ |
2,227 |
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
1996 |
|
|
1997 |
|
|
1998 |
|
|
1999 |
|
|
2000 |
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
|
(In thousands) |
|
Cumulative amount of
reserve paid, net of
reserve recoveries,
through: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
|
19,143 |
|
|
|
35,005 |
|
|
|
26,140 |
|
|
|
45,095 |
|
|
|
51,470 |
|
|
|
51,114 |
|
|
|
66,545 |
|
|
|
73,783 |
|
|
$ |
40,514 |
|
|
$ |
110,369 |
|
|
|
|
|
Two years later |
|
|
27,843 |
|
|
|
46,735 |
|
|
|
37,835 |
|
|
|
62,141 |
|
|
|
62,969 |
|
|
|
71,582 |
|
|
|
101,907 |
|
|
|
65,752 |
|
|
|
97,091 |
|
|
|
|
|
|
|
|
|
Three years later |
|
|
30,766 |
|
|
|
54,969 |
|
|
|
45,404 |
|
|
|
67,267 |
|
|
|
70,036 |
|
|
|
84,341 |
|
|
|
73,391 |
|
|
|
99,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
32,576 |
|
|
|
60,249 |
|
|
|
48,184 |
|
|
|
70,894 |
|
|
|
73,680 |
|
|
|
42,919 |
|
|
|
96,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
34,765 |
|
|
|
62,361 |
|
|
|
50,045 |
|
|
|
72,744 |
|
|
|
38,939 |
|
|
|
59,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
35,313 |
|
|
|
64,296 |
|
|
|
50,831 |
|
|
|
58,809 |
|
|
|
49,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
36,367 |
|
|
|
64,659 |
|
|
|
51,863 |
|
|
|
62,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
36,379 |
|
|
|
64,289 |
|
|
|
52,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
35,870 |
|
|
|
65,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later |
|
|
36,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserve December 31 |
|
$ |
43,952 |
|
|
$ |
55,096 |
|
|
$ |
43,625 |
|
|
$ |
72,599 |
|
|
$ |
86,192 |
|
|
$ |
119,020 |
|
|
$ |
152,908 |
|
|
$ |
183,001 |
|
|
$ |
243,256 |
|
|
$ |
364,253 |
|
|
$ |
412,368 |
|
Reinsurance recoverables |
|
|
9,525 |
|
|
|
12,463 |
|
|
|
37,086 |
|
|
|
183,818 |
|
|
|
293,632 |
|
|
|
264,013 |
|
|
|
193,634 |
|
|
|
194,558 |
|
|
|
189,624 |
|
|
|
120,232 |
|
|
|
106,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserve December 31 |
|
$ |
53,477 |
|
|
$ |
67,559 |
|
|
$ |
80,711 |
|
|
$ |
256,417 |
|
|
$ |
379,824 |
|
|
$ |
383,033 |
|
|
$ |
346,542 |
|
|
$ |
377,559 |
|
|
$ |
432,880 |
|
|
$ |
484,485 |
|
|
$ |
519,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-estimated reserve |
|
$ |
39,654 |
|
|
$ |
71,023 |
|
|
$ |
62,484 |
|
|
$ |
91,170 |
|
|
$ |
104,716 |
|
|
$ |
134,836 |
|
|
$ |
189,098 |
|
|
$ |
218,217 |
|
|
$ |
262,601 |
|
|
$ |
362,026 |
|
|
|
|
|
Re-estimated reinsurance
recoverables |
|
|
26,733 |
|
|
|
34,133 |
|
|
|
123,405 |
|
|
|
282,099 |
|
|
|
385,387 |
|
|
|
347,701 |
|
|
|
274,487 |
|
|
|
217,689 |
|
|
|
178,213 |
|
|
|
115,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross re-estimated reserve |
|
$ |
66,387 |
|
|
$ |
105,156 |
|
|
$ |
185,889 |
|
|
$ |
373,269 |
|
|
$ |
490,103 |
|
|
$ |
482,537 |
|
|
$ |
463,585 |
|
|
$ |
435,906 |
|
|
$ |
440,814 |
|
|
$ |
477,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cumulative redundancy
(deficiency) |
|
$ |
(12,910 |
) |
|
$ |
(37,597 |
) |
|
$ |
(105,178 |
) |
|
$ |
(116,852 |
) |
|
$ |
(110,279 |
) |
|
$ |
(99,504 |
) |
|
$ |
(117,043 |
) |
|
$ |
(58,347 |
) |
|
$ |
(7,934 |
) |
|
$ |
7,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net cumulative redundancy (deficiency) set forth in the table above is net of amounts
recoverable from our reinsurers, including Reliance Insurance Company, one of our former
reinsurers. In 2001, Reliance was placed under regulatory supervision by the Pennsylvania
Insurance Department and was subsequently placed into liquidation. As a result, we recognized
losses related to uncollectible amounts due from Reliance of $770,000 in 2005, $260,000 in 2004,
$1.3 million in 2003, $2.0 million in 2002 and $17.0 million in 2001.
Investments
We derive net investment income from our invested assets. As of December 31, 2006, the
carrying value of our investment portfolio, including cash and cash equivalents, was $665.5 million
and the fair value of the portfolio was $659.7 million.
Our investment strategy is to maximize after tax income and total return on invested assets
while maintaining high quality and low risk investments within the portfolio. We pay investment
management fees based on the market value of assets under management. The investment committee of
our board of directors has established investment guidelines and periodically reviews portfolio
performance for compliance with our guidelines.
In 2006 we began a strategic review of our investment management and related policies. As a
result of this review, we retained Prudential Investment Management, Inc., a registered investment
advisory firm and a subsidiary of Prudential Financial, Inc., to manage our portfolio of fixed
maturity securities effective as of November 1, 2006. Prior to November 1, 2006, our investment
portfolio was managed by Hibernia Asset Management, LLC.
18
Additionally, our strategic investment review resulted in two changes regarding our equity
investments. First, we changed the benchmark for the market value of our holdings of equity
securities, from not more than 15% of our total investment portfolio, to a range from 20% to 30% of
shareholders equity, plus redeemable preferred stock, at the end of the most recently completed
fiscal year. Our second change was to restructure our equity portfolio such that it would be
composed of passively managed investments in equity indexes along with a portion of actively
managed equity positions. As a result of this second change, we sold all of the securities in our
equity portfolio in September and October of 2006 and invested $21.1 million, or 11.5% of
shareholders equity plus redeemable preferred stock at the end of the most recent fiscal year,
into three value-based exchange traded funds. In 2007, we may purchase more index funds, or we
may retain the services of a third-party equity portfolio manager to actively manage a portion of
the equity portfolio.
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Investments for further information on the composition and results of our investment
portfolio.
The table below shows the carrying values of various categories of securities held in our
investment portfolio, the percentage of the total carrying value of our investment portfolio
represented by each category and the annualized tax-equivalent yield for the year ended December
31, 2006 based on the carrying value of each category as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized |
|
|
|
|
|
|
|
Percentage |
|
|
Tax-Equivalent |
|
|
|
Carrying Value |
|
|
of Portfolio |
|
|
Yield |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
$ |
365,282 |
|
|
|
54.9 |
% |
|
|
5.9 |
% |
Mortgage-backed securities |
|
|
117,456 |
|
|
|
17.6 |
% |
|
|
5.6 |
% |
U.S. Treasury securities and obligations
of U.S. Government agencies |
|
|
78,817 |
|
|
|
11.8 |
% |
|
|
5.2 |
% |
Corporate bonds |
|
|
21,123 |
|
|
|
3.2 |
% |
|
|
5.2 |
% |
Asset-backed securities |
|
|
32,436 |
|
|
|
4.9 |
% |
|
|
5.4 |
% |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
|
615,114 |
|
|
|
92.4 |
% |
|
|
5.7 |
% |
Equity securities |
|
|
23,666 |
|
|
|
3.6 |
% |
|
|
2.0 |
% |
Cash and cash equivalents |
|
|
26,748 |
|
|
|
4.0 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
Total investments, including cash and cash
equivalents |
|
$ |
665,528 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, our fixed maturity securities had a carrying value of $615.1 million,
which represented 92.4% of the carrying value of our investments, including cash and cash
equivalents. For the 12 months ended December 31, 2006, the pre-tax investment yield of our
investment portfolio was 4.1% per annum.
19
The gross unrealized gains and losses on, and the cost and fair value of, our investment
portfolio as of December 31, 2006 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Fixed maturity securities, held-to-maturity |
|
$ |
615,114 |
|
|
$ |
1,294 |
|
|
$ |
7,140 |
|
|
$ |
609,268 |
|
Equity securities, available-for-sale |
|
|
22,157 |
|
|
|
1,509 |
|
|
|
|
|
|
|
23,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
637,271 |
|
|
$ |
2,803 |
|
|
$ |
7,140 |
|
|
$ |
632,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost for the fixed maturity securities classified as held-to-maturity includes
an unamortized gain of $4.7 million. This gain resulted in 2004 from the difference between each
securitys par value and fair value at the date of transfer from available-to-sale to
held-to-maturity and is being amortized as a yield adjustment over the respective securitys life.
The table below summarizes the credit quality of our fixed maturity securities as of December
31, 2006, as rated by Standard and Poors.
|
|
|
|
|
|
|
Percentage |
|
|
of Total |
Credit Rating |
|
Carrying Value |
AAA |
|
|
88.3 |
% |
AA |
|
|
8.2 |
% |
A |
|
|
2.2 |
% |
BBB |
|
|
1.3 |
% |
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
|
|
|
As of December 31, 2006, the average composite rating of our fixed maturity securities was
AAA. .
The table below shows the composition of our fixed maturity securities by remaining time to
maturity as of December 31, 2006. For securities that are redeemable at the option of the issuer
and have a carrying value that is greater than par value, the maturity used for the table below is
the earliest redemption date. For securities that are redeemable at the option of the issuer and
have a carrying value that is less than par value, the maturity used for the table below is the
final maturity date.
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 |
|
Remaining Time to Maturity |
|
Carrying Value |
|
|
Percentage |
|
|
|
(In thousands) |
|
|
|
|
|
Less than one year |
|
$ |
65,427 |
|
|
|
10.6 |
% |
One to five years |
|
|
225,135 |
|
|
|
36.6 |
% |
Five to ten years |
|
|
88,160 |
|
|
|
14.3 |
% |
More than ten years |
|
|
86,500 |
|
|
|
14.1 |
% |
Mortgage-backed securities |
|
|
117,456 |
|
|
|
19.1 |
% |
Asset-backed securities |
|
|
32,436 |
|
|
|
5.3 |
% |
|
|
|
|
|
|
|
Total |
|
$ |
615,114 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
20
Reinsurance
We purchase reinsurance to reduce our net liability on individual risks and claims and to
protect against catastrophic losses. Reinsurance involves an insurance company transferring to, or
ceding, a portion of the exposure on a risk to a reinsurer. The reinsurer assumes the exposure in
return for a portion of our premium. The cost and limits of reinsurance we purchase can vary from
year to year based upon the availability of quality reinsurance at an acceptable price and our
desired level of retention. Retention refers to the amount of risk that we retain for our own
account. Under excess of loss reinsurance, covered losses in excess of the retention level up to
the limit of the program are paid by the reinsurer. Our excess of loss reinsurance is written in
layers, in which our reinsurers accept a band of coverage up to a specified amount. Any liability
exceeding the limit of the program reverts to us as the ceding company. Reinsurance does not
legally discharge us from primary liability for the full amount due under our policies. However,
our reinsurers are obligated to indemnify us to the extent of the coverage provided in our
reinsurance agreements.
We believe reinsurance is critical to our business. Our reinsurance purchasing strategy is to
protect against unforeseen and/or catastrophic loss activity that would adversely impact our income
and capital base. We only select financially strong reinsurers with an A.M. Best rating of A
(Excellent) or better at the time we enter into a reinsurance contract. In addition, to minimize
our exposure to significant losses from reinsurer insolvencies, we evaluate the financial condition
of our reinsurers and monitor concentrations of credit risk on a continual basis. We do not
purchase finite reinsurance.
2007 Excess of Loss Reinsurance Treaty Program
Effective January 1, 2007, we entered into a new excess of loss reinsurance treaty program
related to our voluntary and assigned risk business that applies to losses incurred between January
1, 2007 and the date on which our reinsurance agreements are terminated. Our reinsurance treaty
program provides us with reinsurance coverage for each loss occurrence up to $50.0 million, subject
to applicable deductibles, retentions and aggregate limits. However, for any loss occurrence
involving only one claimant, our reinsurance coverage is limited to a maximum of $10.0 million for
any single claimant for the first four layers and $5.0 million for any single claimant for the
fifth layer, subject to applicable deductibles, retentions and aggregate limits. We currently have
16 reinsurers participating in our 2007 reinsurance treaty program. Under certain circumstances,
including a downgrade of a reinsurers A.M. Best rating to B++ (Very Good) or below, our
reinsurers may be required to provide us with security for amounts due under the terms of our
reinsurance program. This security may take the form of, among other things, cash advances or the
issuance of letters of credit to us. If security is required because of a ratings downgrade, the
form of security must be mutually agreed between the reinsurer and us.
Our 2007 reinsurance treaty program provides coverage in the following five layers:
|
|
|
First Layer. Affords coverage up to $3.0 million for each loss occurrence in excess of
$2.0 million, which is retained by us. We are subject to an annual aggregate deductible
of approximately $6.0 million for losses between $2.0 million and $5.0 million before our
reinsurers are obligated to reimburse us. This layer also affords coverage for up to an
aggregate of $3.0 million for certain losses caused by terrorism. The aggregate limit for
all claims under this layer is approximately $51.0 million. The annual aggregate
deductible and aggregate limit are calculated as a percentage of subject premium. |
|
|
|
|
Second Layer. Affords coverage up to $5.0 million for each loss occurrence in excess of
$5.0 million. The aggregate limit to all claims, including terrorism, under this layer is
$15.0 million. |
|
|
|
|
Third Layer. Affords coverage up to $10.0 million for each loss occurrence in excess
of $10.0 million. The aggregate limit for all claims, including terrorism, under this
layer is $20.0 million. |
|
|
|
|
Fourth Layer. Affords coverage up to $10.0 million for each loss occurrence in excess
of $20.0 million. The aggregate limit for all claims, including terrorism, under this
layer is $20.0 million. |
|
|
|
|
Fifth Layer. Affords coverage up to $20.0 million for each loss occurrence in excess
of $30.0 million. The aggregate limit for all claims, including terrorism, under this
layer is $40.0 million. |
21
The agreements under our 2007 reinsurance treaty program may be terminated by us or our
reinsurers upon 90 days prior notice on any December 31. In addition, we may terminate the
participation of one or more of our reinsurers under certain circumstances as permitted by the
terms of our reinsurance agreements.
The table below sets forth the reinsurers participating in our 2007 reinsurance program:
|
|
|
|
|
A.M. Best |
Reinsurer |
|
Rating |
Allied World Assurance Company Ltd. |
|
A |
Aspen Insurance UK Limited |
|
A |
Arch Reinsurance Company |
|
A |
AXA RE |
|
A |
AXIS Reinsurance Company |
|
A |
BRIT Insurance Limited/Danish Re Underwriting Agencies ApS |
|
A |
BRIT Syndicates Limited (1) |
|
A |
Chaucer Syndicates Limited/Chaucer Underwriting (1) |
|
A |
Danish Re Syndicate/Danish Re Underwriting Agencies ApS (1) |
|
A |
Federal Insurance Company/Harbor Point Services, Inc. |
|
A++ |
Hannover Ruckversicherungs-Aktiengesellschaft |
|
A |
Liberty Syndicate Management Limited (1) |
|
A |
M.J. Harrington Syndicate (1) |
|
A |
Partner Reinsurance Company of the U.S |
|
A+ |
Tokio Millenium Re Ltd. |
|
A+ |
XL Reinsurance America Inc. |
|
A+ |
|
|
|
(1) |
|
Member of Lloyds of London syndicate. |
Due to the nature of reinsurance, we have receivables from reinsurers that apply to accident
years prior to 2006. The table below summarizes our amounts recoverable from reinsurers as of
December 31, 2006.
|
|
|
|
|
|
|
|
|
A.M. Best |
|
Amount Recoverable as |
|
Reinsurer |
|
Rating |
|
of December 31, 2006 |
|
|
|
|
|
(In thousands) |
|
Munich Reinsurance America, Inc. |
|
A |
|
$ |
23,737 |
|
Odyssey America Reinsurance Company |
|
A |
|
|
19,750 |
|
St. Paul Fire and Marine Insurance Company |
|
A+ |
|
|
10,885 |
|
Clearwater Insurance Company |
|
A |
|
|
9,795 |
|
SCOR Reinsurance Company |
|
A |
|
|
7,144 |
|
Converium Reinsurance (North America) |
|
B+ |
|
|
6,193 |
|
Hannover Ruckversicherungs-Aktiengesellschaft (1) |
|
A |
|
|
5,792 |
|
Aspen Insurance UK Limited (1) |
|
A |
|
|
5,643 |
|
Partner Reinsurance Company of the U.S (1) |
|
A+ |
|
|
3,794 |
|
American National Insurance Company |
|
A+ |
|
|
3,007 |
|
Other (22 reinsurers) |
|
|
|
|
13,863 |
|
|
|
|
|
|
|
Total |
|
|
|
$ |
109,603 |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Current participant in our 2007 reinsurance program. |
22
Terrorism Reinsurance
The Terrorism Risk Insurance Act of 2002 (the 2002 Act) was enacted in response to the
events of September 11, 2001 and has been extended by the Terrorism Risk Insurance Extension Act of
2005 (the 2005 Act). Both the 2002 Act and the 2005 Act were designed to ensure the availability
of insurance coverage for losses resulting from certain acts of terrorism in the United States.
The 2005 Act continues a federal program established under the 2002 Act through the end of 2007.
This program provides federal reimbursement to insurance companies for a portion of their losses
arising from certain acts of terrorism and requires insurance companies to offer coverage for such
acts. The program only applies to insured losses arising out of acts of terrorism committed on
behalf of foreign persons or foreign interests that are certified as acts of terrorism by the
Secretary of the Treasury. In addition, the program does not provide any reimbursement for any
portion of aggregate industry-wide insured losses from certified acts of terrorism that exceed
$100.0 billion in any one year and is subject to certain other limitations and restrictions.
For insured losses in 2007, each insurance company is responsible for a statutory deductible
under the 2005 Act that is equal to 20% of its direct earned property and casualty insurance
premiums. For losses occurring in 2007, the U.S. Federal Government will reimburse 85% of an
insurance companys covered losses over the statutory deductible. In addition, no federal
reimbursement is available unless the aggregate insurance industry-wide losses from a certified act
of terrorism exceed $100.0 million for any act of terrorism occurring in 2007. However, there is
no relief from the requirement under the 2005 Act that insurance companies offer coverage for
certified acts of terrorism if those acts do not cause losses exceeding these threshold amounts and
thus do not result in any federal reimbursement payments.
Under the 2005 Act, insurance companies must offer coverage for losses due to certified acts
of terrorism in all their commercial property and casualty policies, including workers
compensation policies. Moreover, even in the absence of this federal law requirement, the workers
compensation laws of the various states generally do not permit the exclusion of coverage for
losses arising from acts of terrorism, including terrorism that involves the use of nuclear,
biological or chemical agents. In addition, state law prohibits us from limiting our workers
compensation insurance losses arising from any one catastrophe or any one claimant. We have
reinsurance protection in our 2007 reinsurance treaty program that affords coverage for up to $50
million for losses arising from terrorism or nuclear, biological and chemical attacks, subject to
the deductibles, retentions and aggregate limits.
Technology
We view our internally developed and purchased management information systems as an integral
part of our operations and make a substantial ongoing investment in improving our systems. We
provide our field premium auditors, field safety professionals and field case managers with
computer and communication equipment to more timely and efficiently complete the underwriting
process. This technology also helps to facilitate communication and to report and monitor claims.
All of our systems development and infrastructure operation and maintenance is performed by our
information technology professionals, with limited assistance from outside vendors.
Core Systems
ICAMS. Our internally developed Insurance Claims and Accounting Management System, or ICAMS,
is an application designed to support our workers compensation insurance business. ICAMS provides
comprehensive rating, analysis, quotation, audit, claims, policy issuance and policy-level
accounting transaction processes. By combining the information we obtain in our underwriting
process with information on claims billing and claims management, we are able to enhance our
services to our policyholders.
RealSafe. RealSafe is an internally developed application that supports our field safety
professionals, as well as safety, claims and underwriting departments in our home office, by
providing risk assessment and reporting of information to support safety and loss control
initiatives.
23
CLAIMExpert. CLAIMExpert is a purchased application utilized by our claims department to
assist in work flow management. The application distributes all claims-related mail to the
appropriate FCM. This application allows for the use of multiple cost containment vendors and
routes our claims-related invoices. CLAIMExpert also serves as the file repository for
claims-related mail and documents and is web accessible by our authorized users.
Document Management System. Our document management system is a purchased application
currently being used by our underwriting, audit, finance and treasury departments to scan, index
and store imaged documents to facilitate the movement of work items from one authority level to the
next. The system will ultimately include all departments. The system allows departmental
management to closely monitor and modify employee workloads as needed.
Freedom Enterprise. FFS-Enterprise is a Fiserv product that functions as our general ledger
and accounts payable systems using an MS SQL database platform. We also use Fiserv companion
products for report writing, check printing and annual statement preparation. Transactions can be
manually entered into Enterprise, interfaced via an ASCII file or copied and pasted from a
spreadsheet application. Enterprise is currently set up to accept transaction detail by
department, cost center, line of business and state. Enterprise also offers the capability of
batch processing, which enables off-peak hour work.
Freedom Reinsurance System (FRS). FRS is a Fiserv product that provides ceded reinsurance
processing. Functions performed by FRS include treaty information management, ceded loss billing
and collection and reinsurance accounting.
Visual Audit. Visual Audit is a purchased application used by our field premium auditors to
input information necessary to complete an interim or final premium audit.
Information Warehouse. Information Warehouse is an internally developed SQL Server-based set
of OLAP cubes, queries and processes that extracts operational data from ICAMS and other of our
applications and transforms that data for porting to Freedom Enterprise and fnet.
fnet. fnet is an internally developed data analysis portal. fnet is populated by our
Information Warehouse, and used throughout our company to generate key performance statistics.
Operating Systems
We use Microsoft Active Directory services to provide application access, domain
authentication and network services. Our server hardware is predominately Compaq/HP, but includes
Dell servers as well. Our production servers are under manufacturer warranties.
Business Continuity/Disaster Recovery
Our Storage Area Network solution provides us with continuous operations using mirrored
servers and storage situated in two separate corporate buildings, with built-in failover
capabilities to minimize business interruption. We utilize software from Veritas for backup and
recovery purposes. Full system backups are performed nightly using one on-site and one off-site
facility for tape storage.
Competition
The insurance industry, in general, is highly competitive and there is significant competition
in the workers compensation insurance industry. Competition in the insurance business is based on
many factors, including premium rates, policy terms, coverage availability, claims management,
safety services, payment terms, types of insurance offered, overall financial strength, financial
ratings assigned by independent rating organizations, such as A.M. Best, and reputation. Some of
the insurers with which we compete have significantly greater financial, marketing and management
resources and experience than we do. We may also compete with new market entrants in the future.
24
We believe the workers compensation market for the hazardous industries we target is
underserved and competition is fragmented and not dominated by one or more competitors. Our
competitors include other insurance companies, individual self-insured companies, state insurance
pools and self-insurance funds. We believe that more than 350 insurance companies participate in
the workers compensation market. The insurance companies with which we compete vary state by
state and by the industries we target.
We believe our competitive advantages include our safety service and claims management
practices, our A.M. Best rating of
A (Excellent) and our ability to reduce claims through
implementation of our work safety programs. In addition, we believe that our insurance is
competitively priced and our premium rates are typically lower than those for policyholders
assigned to the state insurance pools, allowing us to provide a viable alternative for
policyholders in those pools.
Ratings
Many insurance buyers and agencies use the ratings assigned by A.M. Best and other rating
agencies to assist them in assessing the financial strength and overall quality of the companies
from which they are considering purchasing insurance. In February 2007, A.M. Best announced that
it had affirmed our financial strength rating of A (Excellent) by A.M. Best. An A rating
is the fourth highest of 15 rating categories used by A.M. Best. The rating has a stable outlook
for AMERISAFE and our insurance company subsidiaries.
In evaluating a companys financial and operating performance, A.M. Best reviews the companys
profitability, indebtedness and liquidity, as well as its book of business, the adequacy and
soundness of its reinsurance, the quality and estimated fair value of its assets, the adequacy of
its loss reserves, the adequacy of its surplus, its capital structure, the experience and
competence of its management and its market presence. This rating is intended to provide an
independent opinion of an insurers ability to meet its obligations to policyholders and is not an
evaluation directed at investors.
Employees
As of December 31, 2006, we had 448 full-time employees and three part-time employees. None
of our employees is subject to collective bargaining agreements. We believe that our employee
relations are good.
Regulation
Holding Company Regulation
Nearly all states have enacted legislation that regulates insurance holding company systems.
Each insurance company in a holding company system is required to register with the insurance
supervisory agency of its state of domicile and furnish information concerning the operations of
companies within the holding company system that may materially affect the operations, management
or financial condition of the insurers within the system. Under these laws, the respective state
insurance departments may examine us at any time, require disclosure of material transactions and
require prior notice of or approval for certain transactions. All transactions within a holding
company system affecting an insurer must have fair and reasonable terms and are subject to other
standards and requirements established by law and regulation.
25
Change of Control
The insurance holding company laws of nearly all states require advance approval by the
respective state insurance departments of any change of control of an insurer. Control is
generally presumed to exist through the direct or indirect ownership of 10% or more of the voting
securities of a domestic insurance company or any entity that controls a domestic insurance
company. In addition, insurance laws in many states contain provisions that require
pre-notification to the insurance commissioners of a change of control of a non-domestic insurance
company licensed in those states. Any future transactions that would constitute a change of
control of American Interstate, Silver Oak Casualty or American Interstate of Texas, including a
change of control of AMERISAFE, would generally require the party acquiring control to obtain the
prior approval of the department of insurance in the state in which the insurance company being
acquired is incorporated and may require pre-notification in the states where pre-notification
provisions have been adopted. Obtaining these approvals may result in the material delay of, or
deter, any such transaction.
These laws may discourage potential acquisition proposals and may delay, deter or prevent a
change of control of AMERISAFE, including through transactions, and in particular unsolicited
transactions, that some or all of the shareholders of AMERISAFE might consider to be desirable.
State Insurance Regulation
Insurance companies are subject to regulation and supervision by the department of insurance
in the state in which they are domiciled and, to a lesser extent, other states in which they
conduct business. American Interstate and Silver Oak Casualty are primarily subject to regulation
and supervision by the Louisiana Department of Insurance, Workers Compensation Commission and
Insurance Rating Commission. American Interstate of Texas is primarily subject to regulation and
supervision by the Texas Department of Insurance and Workers Compensation Commission. These state
agencies have broad regulatory, supervisory and administrative powers, including among other
things, the power to grant and revoke licenses to transact business, license agencies, set the
standards of solvency to be met and maintained, determine the nature of, and limitations on,
investments and dividends, approve policy forms and rates in some states, periodically examine
financial statements, determine the form and content of required financial statements, and
periodically examine market conduct.
Detailed annual and quarterly financial statements and other reports are required to be filed
with the department of insurance in all states in which we are licensed to transact business. The
financial statements of American Interstate, Silver Oak Casualty and American Interstate of Texas
are subject to periodic examination by the department of insurance in each state in which it is
licensed to do business.
In addition, many states have laws and regulations that limit an insurers ability to withdraw
from a particular market. For example, states may limit an insurers ability to cancel or not
renew policies. Furthermore, certain states prohibit an insurer from withdrawing one or more lines
of business from the state, except pursuant to a plan that is approved by the state insurance
department. The state insurance department may disapprove a plan that may lead to market
disruption. Laws and regulations that limit cancellation and non-renewal and that subject program
withdrawals to prior approval requirements may restrict our ability to exit unprofitable markets.
Insurance agencies are subject to regulation and supervision by the department of insurance in
the state in which they are licensed. Our wholly owned subsidiary, Amerisafe General Agency, Inc.,
is licensed in 24 states and is domiciled in Louisiana. Amerisafe General is primarily subject to
regulation and supervision by the Louisiana Department of Insurance. This agency regulates the
solicitation of insurance and the qualification and licensing of agents and agencies that may
desire to conduct business in Louisiana.
26
State Insurance Department Examinations
We are subject to periodic examinations by state insurance departments in the states in which
we operate. The Louisiana Department of Insurance generally examines each of its domiciliary
insurance companies on a triennial basis. American Interstate Insurance Company and Silver Oak
Casualty, Inc. underwent an examination in the first half of 2006 that covered calendar years 2001
through 2005. We have not received a final report regarding this examination. American Interstate
of Texas was formed in December 2004 and began operations in January 2005. Under Texas insurance
law, American Interstate of Texas will be subject to examination each year in its first three years
of operations. American Interstate Insurance Company of Texas is currently undergoing an
examination covering calendar years 2005 and 2006.
Guaranty Fund Assessments
In most of the states where we are licensed to transact business, there is a requirement that
property and casualty insurers doing business within each such state participate in a guaranty
association, which is organized to pay contractual benefits owed pursuant to insurance policies
issued by impaired, insolvent or failed insurers. These associations levy assessments, up to
prescribed limits, on all member insurers in a particular state on the basis of the proportionate
share of the premium written by member insurers in the lines of business in which the impaired,
insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments
paid through full or partial premium tax offsets.
Property and casualty insurance company insolvencies or failures may result in additional
security fund assessments to us at some future date. At this time, we are unable to determine the
impact, if any, such assessments may have on our financial position or results of operations. We
have established liabilities for guaranty fund assessments with respect to insurers that are
currently subject to insolvency proceedings.
Residual Market Programs
Many of the states in which we conduct business or intend to conduct business, require that
all licensed insurers participate in a program to provide workers compensation insurance to those
employers who have not or cannot procure coverage from a carrier on a negotiated basis. The level
of required participation in such programs is generally determined by calculating the volume of our
voluntarily business in that state as a percentage of all voluntarily business in that state by all
insurers. The resulting factor is the proportion of premium we must accept as a percentage of all
of premiums in policies residing in that states residual market program.
Companies generally can fulfill their residual market obligations by either issuing insurance
policies to employers assigned to them, or participating in a reinsurance pool where the results of
all policies provided through the pool are shared by the participating companies. Currently, we
utilize both methods, depending on managements evaluation of the most cost-efficient method to
adopt in each state that allows a choice of assigned risk or participation in a pooling
arrangement. In general, we believe that assigned risk produces better results as we apply our
cost management approach to these involuntary policyholders. We currently have assigned risk in
six states: Alabama, Alaska, Georgia, North Carolina, South Carolina, and Virginia.
Second Injury Funds
A number of states operate trust funds that reimburse insurers and employers for claims paid
to injured employees for aggravation of prior conditions or injuries. The state-managed trust
funds are funded through assessments against insurers and self-insurers providing workers
compensation coverage in a specific state. Our recoveries from state-managed trust funds for the
years ended December 31, 2006, 2005 and 2004 were $8.3 million, $7.6 million and $8.1 million
respectively. Our cash paid for assessments to state-managed trust funds for the years ended
December 31, 2006, 2005 and 2004 was $3.1million, $3.9 million and $3.6 million, respectively.
27
Dividend Limitations
Under Louisiana law, American Interstate and Silver Oak Casualty cannot pay dividends to their
shareholders in excess of the lesser of 10% of statutory surplus, or statutory net income,
excluding realized investment gains, for the preceding 12-month period without the prior approval
of the Louisiana Commissioner of Insurance. However, net income from the previous two calendar
years may be carried forward to the extent that it has not already been paid out as dividends.
Based on reported capital and surplus at December 31, 2006, this requirement limits American
Interstates ability to make distributions to AMERISAFE in 2007 to $19.6 million without approval
by the Louisiana Department of Insurance. Further, under Texas law, American Interstate of Texas
cannot pay dividends to its shareholder in excess of the greater of 10% of statutory surplus, or
statutory net income, for the preceding 12-month period without the prior approval of the Texas
Commissioner of Insurance.
Federal Law and Regulations
As of December 31, 2006, we derived 2.8% of our voluntary in-force premiums from employers
engaged in the maritime industry. As a provider of workers compensation insurance for employers
engaged in the maritime industry, we are subject to the United States Longshore and Harbor Workers
Compensation Act, or the USL&H Act, and the Merchant Marine Act of 1920, or Jones Act. We are also
subject to regulations related to the USL&H Act and the Jones Act.
The USL&H Act, which is administered by the U.S. Department of Labor, generally covers
exposures on the navigable waters of the United States and in adjoining waterfront areas, including
exposures resulting from stevedoring. The USL&H Act requires employers to provide medical
benefits, compensation for lost wages and rehabilitation services to longshoremen, harbor workers
and other maritime workers who may suffer injury, disability or death during the course and scope
of their employment. The Department of Labor has the authority to require us to make deposits to
serve as collateral for losses incurred under the USL&H Act.
The Jones Act is a federal law, the maritime employer provisions of which provide injured
offshore workers, or seamen, with a remedy against their employers for injuries arising from
negligent acts of the employer or co-workers during the course of employment on a ship or vessel.
Privacy Regulations
In 1999, Congress enacted the Gramm-Leach-Bliley Act, which, among other things, protects
consumers from the unauthorized dissemination of certain personal information. Subsequently, a
majority of states have implemented additional regulations to address privacy issues. These laws
and regulations apply to all financial institutions, including insurance companies, and require us
to maintain appropriate policies and procedures for managing and protecting certain personal
information of our policyholders and to fully disclose our privacy practices to our policyholders.
We may also be exposed to future privacy laws and regulations, which could impose additional costs
and impact our results of operations or financial condition. In 2000, the National Association of
Insurance Commissioners, or the NAIC, adopted the Privacy of Consumer Financial and Health
Information Model Regulation, which assisted states in promulgating regulations to comply with the
Gramm-Leach-Bliley Act. In 2002, to further facilitate the implementation of the
Gramm-Leach-Bliley Act, the NAIC adopted the Standards for Safeguarding Customer Information Model
Regulation. Several states have now adopted similar provisions regarding the safeguarding of
policyholder information. We have established policies and procedures intended to ensure that we
are in compliance with the Gramm-Leach-Bliley related privacy requirements.
28
Federal and State Legislative and Regulatory Changes
From time to time, various regulatory and legislative changes have been proposed in the
insurance industry. Among the proposals that have in the past been or are at present being
considered are the possible introduction of federal regulation in addition to, or in lieu of, the
current system of state regulation of insurers and proposals in various state legislatures (some of
which proposals have been enacted) to conform portions of their insurance laws and regulations to
various model acts adopted by the NAIC. We are unable to predict whether any of these laws and
regulations will be adopted, the form in which any such laws and regulations would be adopted or
the effect, if any, these developments would have on our operations and financial condition.
For information on the Terrorism Risk Act, see ReinsuranceTerrorism Reinsurance.
The National Association of Insurance Commissioners
The NAIC is a group formed by state insurance commissioners to discuss issues and formulate
policy with respect to regulation, reporting and accounting of insurance companies. Although the
NAIC has no legislative authority and insurance companies are at all times subject to the laws of
their respective domiciliary states and, to a lesser extent, other states in which they conduct
business, the NAIC is influential in determining the form in which such laws are enacted. Model
Insurance Laws, Regulations and Guidelines, which we refer to as the Model Laws, have been
promulgated by the NAIC as a minimum standard by which state regulatory systems and regulations are
measured. Adoption of state laws that provide for substantially similar regulations to those
described in the Model Laws is a requirement for accreditation by the NAIC. The NAIC provides
authoritative guidance to insurance regulators on current statutory accounting issues by
promulgating and updating a codified set of statutory accounting practices in its Accounting
Practices and Procedures manual. The Louisiana and Texas legislatures have adopted these codified
statutory accounting practices.
The NAIC has recently proposed a Model Law that would require insurance brokers to obtain the
written consent of the insured before receiving compensation from the insurer. This proposed Model
Law would also require all insurance producers (including agents) to disclose to its customers that
the producer will receive compensation from the insurer, that the compensation received by the
producer may differ depending upon the product and insurer and that the producer may receive
additional compensation from the insurer based upon other factors, such as premium volume placed
with a particular insurer and loss or claims experience. We do not sell insurance through brokers.
We do sell insurance through agents. We do not believe that the disclosure obligations under the
Model Law proposed by the NAIC would have any significant effect on our business if it were adopted
in the states in which we conduct our business.
Under Louisiana law, American Interstate and Silver Oak Casualty are required to maintain
minimum capital and surplus of $3.0 million. Under Texas law, American Interstate of Texas is
required to maintain minimum capital and surplus of $1.0 million. Property and casualty insurance
companies are also subject to certain risk-based capital requirements by the NAIC. Under those
requirements, the amount of capital and surplus maintained by a property and casualty insurance
company is to be determined based on the various risk factors related to it. As of December 31,
2006, American Interstate, Silver Oak Casualty, and American Interstate of Texas exceeded the
minimum risk-based capital requirements.
The key financial ratios of the NAICs Insurance Regulatory Information System, or IRIS, which
ratios were developed to assist insurance departments in overseeing the financial condition of
insurance companies, are reviewed by experienced financial examiners of the NAIC and state
insurance departments to select those companies that merit highest priority in the allocation of
the regulators resources. IRIS identifies 12 industry ratios and specifies usual values for
each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries
from individual state insurance commissioners as to certain aspects of an insurers business.
29
The 2006 IRIS results for American Interstate were within expected values. Silver Oak
Casualtys ratios of net change in adjusted policyholders surplus and two-year reserve development
to policyholders surplus were outside the expected ranges for such ratios. This occurred because
of Silver Oak Casualtys smaller surplus base and the impact of the Converium commutation in 2005.
The results for American Interstate of Texas showed a change in net premium writings greater than
the expected range. This growth was attributable to increased premiums assumed through
intercompany pooling.
Statutory Accounting Practices
Statutory accounting practices, or SAP, are a basis of accounting developed to assist
insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is
primarily concerned with measuring an insurers surplus to policyholders. Accordingly, statutory
accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in
accordance with appropriate insurance law and regulatory provisions applicable in each insurers
domiciliary state.
Generally accepted accounting principles, or GAAP, are concerned with a companys solvency,
but are also concerned with other financial measurements, principally income and cash flows.
Accordingly, GAAP gives more consideration to appropriate matching of revenue and expenses and
accounting for managements stewardship of assets than does SAP. As a direct result, different
assets and liabilities and different amounts of assets and liabilities will be reflected in
financial statements prepared in accordance with GAAP as compared to SAP.
Statutory accounting practices established by the NAIC and adopted in part by the Louisiana
and Texas insurance regulators, determine, among other things, the amount of statutory surplus and
statutory net income of American Interstate, Silver Oak Casualty and American Interstate of Texas
and thus determine, in part, the amount of funds that are available to pay dividends to AMERISAFE.
Website Information
Our corporate website is located at www.amerisafe.com. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports that we
file or furnish pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available through our website, free of charge, as soon as reasonably practicable after they are
electronically filed or furnished to the Securities and Exchange Commission, or the SEC. Our
website also provides access to reports filed by our directors, executive officers and certain
significant shareholders pursuant to Section 16 of the Securities Exchange Act of 1934. In
addition, our Corporate Governance Guidelines, Code of Business Conduct and Ethics and charters for
the standing committees of our board of directors are available on our website. The information on
our website is not incorporated by reference into this report. In addition, the SEC maintains a
website, www.sec.gov, that contains reports, proxy and information statements and other information
that we file electronically with the SEC.
30
Executive Officers of the Registrant
The table below sets forth information about our executive officers and key employees.
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Name |
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Age |
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Position |
Executive Officers |
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C. Allen Bradley, Jr.
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55 |
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Chairman, President and Chief Executive Officer |
Geoffrey R. Banta
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57 |
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Executive Vice President and Chief Financial Officer |
Craig P. Leach
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57 |
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Executive Vice President, Sales and Marketing |
David O. Narigon
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54 |
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Executive Vice President |
Todd Walker
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50 |
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Executive Vice President, General Counsel and Secretary |
Key Employees |
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Allan E. Farr
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48 |
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Senior Vice President, Enterprise Risk Management |
Kelly R. Goins
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40 |
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Senior Vice President, Underwriting Operations |
Cynthia P. Harris
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52 |
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Senior Vice President, Human Resources/Client Services |
Leon J. Lagneaux
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55 |
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Senior Vice President, Safety Operations |
Henry O. Lestage, IV
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46 |
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Senior Vice President, Claims Operations |
Edwin R. Longanacre
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49 |
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Senior Vice President, Information Technology |
G. Janelle Frost
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36 |
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Vice President, Controller |
Angela S. Lannen
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61 |
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Vice President, Treasurer |
C. Allen Bradley, Jr. has served as Chairman of our board of directors since October
2005, our President since November 2002, our Chief Executive Officer since December 2003 and a
Director since June 2003. From November 2002 until December 2003 he served as our Chief Operating
Officer. Since joining our company in 1994, Mr. Bradley has had principal responsibility for the
management of our underwriting operations (December 2000 through June 2005) and safety services
(September 2000 through November 2002) and has served as our General Counsel (September 1997
through December 2003) and Secretary (September 1997 through November 2002). Prior to joining our
company, he was engaged in the private practice of law.
Geoffrey R. Banta has served as our Executive Vice President and Chief Financial Officer since
December 2003. Prior to joining our company in 2003, he held the positions of President and Chief
Executive Officer from 2001 until November 2003, and Chief Operating Officer from 1996 until 2001,
at Scruggs Consulting, an actuarial and management consulting firm. From 1994 to 1996, Mr. Banta
was Chief Financial Officer of the Atlanta Casualty Companies, an issuer of non-standard auto
insurance whose holding company was a subsidiary of American Financial Group, Inc.
Craig P. Leach has served as our Executive Vice President, Sales and Marketing since November
2002. He has served in a variety of sales and key marketing positions within our company since
beginning his insurance career with a predecessor to our company in 1980, including Senior Vice
President, Sales and Marketing from 1997 until November 2002.
31
David O. Narigon has served as an Executive Vice President with responsibility for Claims,
Information Technology and Premium Audit since September 2006. Prior to joining our company, he
provided consulting, mediation, arbitration and expert witness services to the insurance industry
through his company, Narigon Consulting & Settlement Services, from March 2005 until August 2006.
Prior to March 2005, Mr. Narigon was employed by EMC Insurance Companies where he held the
positions of Vice President, Claims from 1988 to June 1998 and Senior Vice President, Claims from
June 1998 until March 2005, and President of EMC Risk Services from 1993 until March 2005.
Todd Walker joined our company in September 2006 as our Executive Vice President, General
Counsel and Secretary. From 2002 through September 2006, he was engaged in the private practice of
law. Prior to 2002, Mr. Walker held various legal positions with Ultramar Diamond Shamrock Corp.,
a New York Stock Exchange listed refining and marketing company, where he had been employed since
1987.
Allan E. Farr has served as our Senior Vice President, Enterprise Risk Management since April
2004. He has been employed with our company since 1998 and served as Vice President, Underwriting
Services from 1999 until 2004.
Kelly R. Goins has served as our Senior Vice President, Underwriting Operations since March
2005. She has been employed with our company since 1986 and served as Vice President, Underwriting
Operations from 2000 until March 2005.
Cynthia P. Harris has served as our Senior Vice President, Human Resources/Client Services
since January 2003. She has been employed with our company since 1977 and served as Vice
President, Policyholder Services and Administration from 1992 until December 2002.
Leon J. Lagneaux has served as our Senior Vice President, Safety Operations since March 2005.
He has been employed with our company since 1994 and served as Vice President, Safety Operations
from 1999 until March 2005.
Henry O. Lestage, IV has served as our Senior Vice President, Claims Operations since
September 2000. He has been employed with our company since 1987 and served as Vice President,
Claims Operations from 1998 until 2000.
Edward R. Longanacre has served as our Senior Vice President, Information Technology since
March 2005. He has been employed with our company since 2000 and held the position of Vice
President, Information Technology from September 2004 until March 2005 and Information Technology
Director from 2000 until September 2004.
G. Janelle Frost has served as our Controller since May 2004 and Vice President since May
2006. She has been employed with our company since 1992 and served as Assistant Vice President
from May 2004 to May 2006 and Deputy Controller from 1998 to April 2004.
Angela S. Lannen has served as our Vice President, Treasurer since January 2001. She has been
employed with our company since 1999 and served as Planning and Analysis Manager from 1999 until
December 2000.
32
Item 1A. Risk Factors.
In evaluating our company, the factors described below should be considered carefully. The
occurrence of one or more of these events could significantly and adversely affect our business,
prospects, financial condition, results of operations and cash flows.
Risks Related to Our Business
We operate in a highly competitive industry and may lack the financial resources to compete
effectively.
There is significant competition in the workers compensation insurance industry. We believe
that our competition in the hazardous industries we target is fragmented and not dominated by one
or more competitors. We compete with other insurance companies, individual self-insured companies,
state insurance pools and self-insurance funds. Many of our existing and potential competitors are
significantly larger and possess greater financial, marketing and management resources than we do.
Moreover, a number of these competitors offer other types of insurance in addition to workers
compensation and can provide insurance nationwide. We compete on the basis of many factors,
including coverage availability, claims management, safety services, payment terms, premium rates,
policy terms, types of insurance offered, overall financial strength, financial ratings and
reputation. If any of our competitors offer premium rates, policy terms or types of insurance that
are more competitive than ours, we could lose market share. No assurance can be given that we will
maintain our current competitive position in the markets in which we currently operate or that we
will establish a competitive position in new markets into which we may expand.
The workers compensation insurance industry is cyclical in nature, which may affect our overall
financial performance.
The financial performance of the workers compensation insurance industry has historically
fluctuated with periods of low premium rates and excess underwriting capacity resulting from
increased competition followed by periods of high premium rates and shortages of underwriting
capacity resulting from decreased competition. Although the financial performance of an individual
insurance company is dependent on its own specific business characteristics, the profitability of
most workers compensation insurance companies generally tends to follow this cyclical market
pattern. Beginning in 2000 and accelerating in 2001, the workers compensation insurance industry
experienced a market reflecting increasing premium rates, more restrictive policy coverage terms
and more conservative risk selection. We believe these trends slowed beginning in 2004. We also
believe the current workers compensation insurance market is slowly transitioning to a more
competitive market environment in which underwriting capacity and price competition may increase.
This additional underwriting capacity may result in increased competition from other insurance
carriers expanding the kinds or amounts of business they write or seeking to maintain or increase
market share at the expense of underwriting discipline. Because this cyclicality is due in large
part to the actions of our competitors and general economic factors, we cannot predict the timing
or duration of changes in the market cycle. We believe that the workers compensation insurance
industry is slowly transitioning to a more competitive market environment. These cyclical patterns
could cause our revenues and net income to fluctuate, which may cause the price of our common stock
to be volatile.
Our loss reserves are based on estimates and may be inadequate to cover our actual losses.
We must establish and maintain reserves for our estimated liability for loss and loss
adjustment expenses. We establish loss reserves that represent an estimate of amounts needed to
pay and administer claims with respect to insured events that have occurred, including events that
have occurred but have not yet been reported to us. Reserves are based on estimates of the
ultimate cost of individual claims. These estimates are inherently uncertain. Judgment is
required to determine the relevance of historical payment and claim settlement patterns under
current facts and circumstances. The interpretation of this historical data can be impacted by
external forces, principally legislative changes, economic fluctuations and legal trends. If there
are unfavorable changes in our assumptions, our reserves may need to be increased.
33
Workers compensation claims often are paid over a long period of time. In addition, there
are no policy limits on our liability for workers compensation claims as there are for other forms
of insurance. Therefore, estimating reserves for workers compensation claims may be more
uncertain than estimating reserves for other types of insurance claims with shorter or more
definite periods between occurrence of the claim and final determination of the loss and with
policy limits on liability for claim amounts. Accordingly, our reserves may prove to be inadequate
to cover our actual losses. If we change our estimates, these changes would result in adjustments
to our reserves and our loss and loss adjustment expenses incurred in the period in which the
estimates are changed. If the estimate is increased, our pre-tax income for the period in which we
make the change will decrease by a corresponding amount. In addition, increasing reserves results
in a reduction in our surplus and could result in a downgrade in our A.M. Best rating. Such a
downgrade could, in turn, adversely affect our ability to sell insurance policies.
A downgrade in our A.M. Best rating would likely reduce the amount of business we are able to
write.
Rating agencies evaluate insurance companies based on their ability to pay claims. We are
currently assigned a group letter rating of
A (Excellent) from A.M. Best, which is the rating
agency that we believe has the most influence on our business. This rating is assigned to
companies that, in the opinion of A.M. Best, have demonstrated an excellent overall performance
when compared to industry standards. A.M. Best considers A rated companies to have an excellent
ability to meet their ongoing obligations to policyholders. The ratings of A.M. Best are subject
to periodic review using, among other things, proprietary capital adequacy models, and are subject
to revision or withdrawal at any time. A.M. Best ratings are directed toward the concerns of
policyholders and insurance agencies and are not intended for the protection of investors or as a
recommendation to buy, hold or sell securities. Our competitive position relative to other
companies is determined in part by our A.M. Best rating. Any downgrade in our rating would likely
adversely affect our business through the loss of certain existing and potential policyholders and
the loss of relationships with certain independent agencies.
If we are unable to obtain reinsurance on favorable terms, our ability to write policies could be
adversely affected.
We purchase reinsurance to protect us from the impact of large losses. Reinsurance is an
arrangement in which an insurance company, called the ceding company, transfers insurance risk by
sharing premiums with another insurance company, called the reinsurer. Conversely, the reinsurer
receives or assumes reinsurance from the ceding company. Our 2007 reinsurance program provides us
with reinsurance coverage for each loss occurrence up to $50.0 million, subject to applicable
deductibles, retentions and aggregate limits. However, for any loss occurrence involving only one
claimant, our reinsurance coverage is limited to $10.0 million for any single claimant for the
first four layers and $5.0 million for any single claimant for the fifth layer, subject to
applicable deductibles, retentions and aggregate limits. Our 2007 program calls for us to retain
the first $2.0 million of each loss. For losses between $2.0 million and $5.0 million, we are
subject to an annual aggregate deductible of approximately $6.0 million before our reinsurers are
obligated to reimburse us. The aggregate limit for all claims for losses between $2.0 million and
$5.0 million is approximately $51.0 million. See BusinessReinsurance. The availability, amount
and cost of reinsurance are subject to market conditions and our experience with insured losses.
Due to the relationship between cost of reinsurance and the level of business we retain, we
have increased our levels of retention on a per occurrence basis each year since 2003. As a
result, we are exposed to increased risk of loss resulting from volatility in the frequency and
severity of claims, which could adversely affect our financial performance.
34
If any of our current reinsurers were to terminate participation in our reinsurance treaty program,
we could be exposed to an increased risk of loss.
The agreements under our 2007 reinsurance treaty program may be terminated by us or our
reinsurers upon 90 days prior notice effective on any January 1. If our reinsurance treaty program
is terminated and we enter into a new program, any decrease in the amount of reinsurance at the
time we enter into a new program, whether caused by the existence of more restrictive terms and
conditions or decreased availability, will also increase our risk of loss and, as a result, could
adversely affect our business, financial condition and results of operations. We currently have
sixteen reinsurers participating in our reinsurance treaty program, and we believe that this is a
sufficient number of reinsurers to provide us with the reinsurance coverage we require. However,
because our reinsurance treaty program may be terminated on any January 1, it is possible that one
or more of our current reinsurers could terminate participation in our program. In addition, we
may terminate the participation of one or more of our reinsurers under certain circumstances as
permitted by the terms of our reinsurance agreements. In either of those events, if our
reinsurance broker is unable to spread the terminated reinsurance among the remaining reinsurers in
the program, it could take a significant amount of time to identify and negotiate agreements with a
replacement reinsurer. During this time, we would be exposed to an increased risk of loss, the
extent of which would depend on the volume of terminated reinsurance.
A downgrade in the A.M. Best rating of one or more of our significant reinsurers could adversely
affect our financial condition.
Our financial condition could be adversely affected if the A.M. Best rating of one or more of
our significant reinsurers is downgraded. For example, our A.M. Best rating may be downgraded if
our amounts recoverable from a reinsurer are significant and the A.M. Best rating of that reinsurer
is downgraded. If one of our reinsurers suffers a rating downgrade, we may consider various
options to lessen the impact on our financial condition, including commutation, novation and the
use of letters of credit to secure amounts recoverable from reinsurers. However, these options may
result in losses to our company, and there can be no assurance that we could implement any of these
options.
We may not be able to recover amounts due from our reinsurers, which would adversely affect our
financial condition.
Reinsurance does not discharge our obligations under the insurance policies we write. We
remain liable to our policyholders even if we are unable to make recoveries that we are entitled to
receive under our reinsurance contracts. As a result, we are subject to credit risk with respect
to our reinsurers. Losses are recovered from our reinsurers as claims are paid. In long-term
workers compensation claims, the creditworthiness of our reinsurers may change before we recover
amounts to which we are entitled. Therefore, if a reinsurer is unable to meet any of its
obligations to us, we would be responsible for all claims and claim settlement expenses for which
we would have otherwise received payment from the reinsurer.
In the past, we have been unable to recover amounts from our reinsurers. In 2001, Reliance
Insurance Company, one of our former reinsurers, was placed under regulatory supervision by the
Pennsylvania Insurance Department and was subsequently placed into liquidation. As a result,
between 2001 and December 31, 2006, we recognized losses related to uncollectible amounts due from
Reliance aggregating $21.3 million.
As of December 31, 2006, we had $109.6 million of recoverables from reinsurers. Of this
amount, $92.4 million was unsecured. As of December 31, 2006, our largest recoverables from
reinsurers included $23.7 million from Munich Reinsurance America, Inc., $19.8 million from Odyssey
America Reinsurance Company and $10.9 million from St. Paul Fire and Marine Insurance Company. If
we are unable to collect amounts recoverable from our reinsurers, our financial condition would be
adversely affected.
35
Negative developments in the workers compensation insurance industry could adversely affect our
financial condition and results of operations.
We principally offer workers compensation insurance. We have no current plans to focus our
efforts on offering other types of insurance. As a result, negative developments in the economic,
competitive or regulatory conditions affecting the workers compensation insurance industry could
have an adverse effect on our financial condition and results of operations. Negative developments
in the workers compensation insurance industry could have a greater effect on us than on more
diversified insurance companies that also sell other types of insurance.
A decline in the level of business activity of our policyholders, particularly those engaged in the
construction, trucking and logging industries, could negatively affect our earnings and
profitability.
In 2006, 68.2% of our gross premiums written were derived from policyholders in the
construction, trucking and logging industries. Because premium rates are calculated, in general,
as a percentage of a policyholders payroll expense, premiums fluctuate depending upon the level of
business activity and number of employees of our policyholders. As a result, our gross premiums
written are primarily dependent upon economic conditions in the construction, trucking and logging
industries and upon economic conditions generally.
If we do not appropriately establish our premium rates, our results of operations will be adversely
affected.
In general, the premium rates for our insurance policies are established when coverage is
initiated and, therefore, before all of the underlying costs are known. Like other workers
compensation insurance companies, we rely on estimates and assumptions in setting our premium
rates. Establishing adequate rates is necessary, together with investment income, to generate
sufficient revenue to offset losses, loss adjustment expenses and other underwriting expenses and
to earn a profit. If we fail to accurately assess the risks that we assume, we may fail to charge
adequate premium rates to cover our losses and expenses, which could reduce our net income and
cause us to become unprofitable. For example, when initiating coverage on a policyholder, we
estimate future claims expense based, in part, on prior claims information provided by the
policyholders previous insurance carriers. If this prior claims information is not accurate, we
may underprice our policy by using claims estimates that are too low. As a result, our actual
costs for providing insurance coverage to our policyholders may be significantly higher than our
premiums. In order to set premium rates appropriately, we must:
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collect and properly analyze a substantial volume of data; |
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develop, test and apply appropriate rating formulae; |
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closely monitor and timely recognize changes in trends; and |
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project both frequency and severity of losses with reasonable accuracy. |
We must also implement our pricing accurately in accordance with our assumptions. Our ability
to undertake these efforts successfully, and as a result set premium rates accurately, is subject
to a number of risks and uncertainties, principally:
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insufficient reliable data; |
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incorrect or incomplete analysis of available data; |
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uncertainties generally inherent in estimates and assumptions; |
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the complexity inherent in implementing appropriate rating formulae or other pricing methodologies; |
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costs of ongoing medical treatment; |
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uncertainties inherent in accurately estimating retention, investment yields and the
duration of our liability for loss and loss adjustment expenses; and |
36
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unanticipated court decisions, legislation or regulatory action. |
Consequently, we could set our premium rates too low, which would negatively affect our
results of operations and our profitability, or we could set our premium rates too high, which
could reduce our competitiveness and lead to lower revenues.
Unfavorable changes in economic conditions affecting the states in which we operate could adversely
affect our financial condition or results of operations.
We currently market our insurance in 31states and the District of Columbia. Although we have
expanded our operations into new geographic areas and expect to continue to do so in the future,
43.9% of our gross premiums written for the year ended December 31, 2006 were derived from the six
states in which we generated 5.0% or more of our gross premiums written in 2006. No other state
accounted for 5.0% or more of gross premiums written in 2006. In the future, we may be exposed to
economic and regulatory risks or risks from natural perils that are greater than the risks faced by
insurance companies that have a larger percentage of their gross premiums written diversified over
a broader geographic area. Unfavorable changes in economic conditions affecting the states in
which we write business could adversely affect our financial condition or results of operations.
See BusinessPolicyholders. in Item 1 of this report.
If we cannot sustain our relationships with independent agencies, we may be unable to operate
profitably.
We market a substantial portion of our workers compensation insurance through independent
agencies. As of December 31, 2006, independent agencies produced 84.7% of our voluntary in-force
premiums. No independent agency accounted for more than 1.1% of our voluntary in-force premiums at
that date. Independent agencies are not obligated to promote our insurance and may sell insurance
offered by our competitors. As a result, our continued profitability depends, in part, on the
marketing efforts of our independent agencies and on our ability to offer workers compensation
insurance and maintain financial strength ratings that meet the requirements of our independent
agencies and their policyholders.
Our revenues and results of operations may fluctuate as a result of factors beyond our control,
which fluctuation may cause the price of our common stock to be volatile.
The revenues and results of operations of insurance companies historically have been subject
to significant fluctuations and uncertainties. Our profitability can be affected significantly by:
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rising levels of claims costs, including medical and prescription drug costs, that we
cannot anticipate at the time we establish our premium rates; |
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fluctuations in interest rates, inflationary pressures and other changes in the
investment environment that affect returns on invested assets; |
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changes in the frequency or severity of claims; |
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the financial stability of our reinsurers and changes in the level of reinsurance
capacity and our capital capacity; |
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new types of claims and new or changing judicial interpretations relating to the scope
of liabilities of insurance companies; |
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volatile and unpredictable developments, including man-made, weather-related and other
natural catastrophes or terrorist attacks; and |
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price competition. |
If our revenues and results of operations fluctuate as a result of one or more of these
factors, the price of our common stock may be volatile.
37
An inability to effectively manage the growth of our operations could make it difficult for us to
compete and affect our ability to operate profitably.
Our continuing growth strategy includes expanding in our existing markets, entering new
geographic markets and further developing our agency relationships. Our growth strategy is subject
to various risks, including risks associated with our ability to:
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identify profitable new geographic markets for entry; |
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attract and retain qualified personnel for expanded operations; |
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identify, recruit and integrate new independent agencies; and |
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augment our internal monitoring and control systems as we expand our business. |
Because we are subject to extensive state and federal regulation, legislative changes may
negatively impact our business.
We are subject to extensive regulation by the Louisiana Department of Insurance and the
insurance regulatory agencies of other states in which we are licensed and, to a lesser extent,
federal regulation. State agencies have broad regulatory powers designed primarily to protect
policyholders and their employees, and not our shareholders. Regulations vary from state to state,
but typically address:
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standards of solvency, including risk-based capital measurements; |
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restrictions on the nature, quality and concentration of our investments; |
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restrictions on the terms of the insurance policies we offer; |
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restrictions on the way our premium rates are established and the premium rates we may charge; |
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required reserves for unearned premiums and loss and loss adjustment expenses; |
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standards for appointing general agencies; |
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limitations on transactions with affiliates; |
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restrictions on mergers and acquisitions; |
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restrictions on the ability of our insurance company subsidiaries to pay dividends to AMERISAFE; |
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certain required methods of accounting; and |
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potential assessments for state guaranty funds, second injury funds and other mandatory
pooling arrangements. |
We may be unable to comply fully with the wide variety of applicable laws and regulations that
are continually undergoing revision. In addition, we follow practices based on our interpretations
of laws and regulations that we believe are generally followed by our industry. These practices
may be different from interpretations of insurance regulatory agencies. As a result, insurance
regulatory agencies could preclude us from conducting some or all of our activities or otherwise
penalize us. For example, in order to enforce applicable laws and regulations or to protect
policyholders, insurance regulatory agencies have relatively broad discretion to impose a variety
of sanctions, including examinations, corrective orders, suspension, revocation or denial of
licenses and the takeover of one or more of our insurance subsidiaries. The extensive regulation
of our business may increase the cost of our insurance and may limit our ability to obtain premium
rate increases or to take other actions to increase our profitability.
38
The effects of emerging claim and coverage issues on our business are uncertain.
As industry practices and legal, judicial, social and other environmental conditions change,
unexpected and unintended issues related to claims and coverage may emerge. These issues may
adversely affect our business by either extending coverage beyond our underwriting intent or by
increasing the number or size of claims. In some instances, these changes may not become apparent
until after we have issued insurance policies that are affected by the changes. As a result, the
full extent of our liability under an insurance policy may not be known until many years after the
policy is issued. For example, medical costs associated with permanent and partial disabilities
may increase more rapidly or be higher than we currently expect. Changes of this nature may expose
us to higher claims than we anticipated when we wrote the underlying policy.
Additional capital that we may require in the future may not be available to us or may be available
to us only on unfavorable terms.
Our future capital requirements will depend on many factors, including state regulatory
requirements, the financial stability of our reinsurers and our ability to write new business and
establish premium rates sufficient to cover our estimated claims. We may need to raise additional
capital or curtail our growth if the capital of our insurance subsidiaries is insufficient to
support future operating requirements and/or cover claims. If we had to raise additional capital,
equity or debt financing might not be available to us or might be available only on terms that are
not favorable. In the case of equity financings, dilution to our shareholders could result and the
securities sold may have rights, preferences and privileges senior to the common stock. In
addition, under certain circumstances, the sale of our common stock, or securities convertible or
exchangeable into shares of our common stock, at a price per share less than the market value of
our common stock may result in an adjustment to the conversion price at which shares of our
existing convertible preferred stock may be converted into shares of our common stock. If we
cannot obtain adequate capital on favorable terms or at all, we may be unable to support future
growth or operating requirements and, as a result, our business, financial condition or results of
operations could be adversely affected.
If we are unable to realize our investment objectives, our financial condition and results of
operations may be adversely affected.
Investment income is an important component of our net income. As of December 31, 2006, our
investment portfolio, including cash and cash equivalents, had a carrying value of $665.5 million.
For the year ended December 31, 2006, we had $25.4 million of net investment income. Our
investment portfolio is managed under investment guidelines approved by our board of directors.
Although these guidelines stress diversification and capital preservation, our investments are
subject to a variety of risks, including risks related to general economic conditions, interest
rate fluctuations and market volatility. General economic conditions may be adversely affected by
U.S. involvement in hostilities with other countries and large-scale acts of terrorism, or the
threat of hostilities or terrorist acts.
Interest rates are highly sensitive to many factors, including governmental monetary policies
and domestic and international economic and political conditions. Changes in interest rates could
have an adverse effect on the value of our investment portfolio and future investment income. For
example, changes in interest rates can expose us to prepayment risks on mortgage-backed securities
included in our investment portfolio. When interest rates fall, mortgage-backed securities are
prepaid more quickly than expected and the holder must reinvest the proceeds at lower interest
rates. In periods of increasing interest rates, mortgage-backed securities are prepaid more
slowly, which may require us to receive interest payments that are below the interest rates then
prevailing for longer than expected.
These and other factors affect the capital markets and, consequently, the value of our
investment portfolio and our investment income. Any significant decline in our investment income
would adversely affect our revenues and net income and, as a result, increase our shareholders
deficit and decrease our surplus.
39
Our business is dependent on the efforts of our executive officers because of their industry
expertise, knowledge of our markets and relationships with the independent agencies that sell our
insurance.
Our success is dependent on the efforts of our executive officers because of their industry
expertise, knowledge of our markets and relationships with our independent agencies. Our executive
officers are C. Allen Bradley, Jr., Chairman, President and Chief Executive Officer; Geoffrey R.
Banta, Executive Vice President and Chief Financial Officer; Craig P. Leach, Executive Vice
President, Sales and Marketing; David O. Narigon, Executive Vice President; and Todd Walker,
Executive Vice President, General Counsel and Secretary. We have entered into employment
agreements with each of our executive officers. The employment agreements with Messrs. Bradley,
Banta, and Leach expire in January 2008, unless extended. The employment agreements with Messrs.
Narigon and Walker expire in September 2009, unless extended. Should any of our executive officers
cease working for us, we may be unable to find acceptable replacements with comparable skills and
experience in the workers compensation insurance industry and the hazardous industries that we
target. As a result, our operations may be disrupted and our business may be adversely affected.
We do not currently maintain life insurance policies with respect to our executive officers.
AMERISAFE is an insurance holding company and does not have any direct operations.
AMERISAFE is a holding company that transacts business through its operating subsidiaries,
including American Interstate. AMERISAFEs primary assets are the capital stock of these operating
subsidiaries. The ability of AMERISAFE to pay dividends to our shareholders depends upon the
surplus and earnings of our subsidiaries and their ability to pay dividends to AMERISAFE. Payment
of dividends by our insurance subsidiaries is restricted by state insurance laws, including laws
establishing minimum solvency and liquidity thresholds, and could be subject to contractual
restrictions in the future, including those imposed by indebtedness we may incur in the future.
See BusinessRegulationDividend Limitations. in Item 1of this report. As a result, at times,
AMERISAFE may not be able to receive dividends from its insurance subsidiaries and may not receive
dividends in amounts necessary to pay dividends on our capital stock. Based on reported capital
and surplus at December 31, 2006, American Interstate would have been permitted under Louisiana
insurance law to pay dividends to AMERISAFE in 2007 in an amount up to $19.6 million without
approval by the Louisiana Department of Insurance.
In addition, our ability to pay dividends is subject to restrictions in the articles of
incorporation of AMERISAFE that prohibit us from paying dividends on our common stock (other than
in additional shares of common stock) without the consent of the holders of two-thirds of the
outstanding shares of our convertible preferred stock. If holders of our convertible preferred
stock consent to the payment of a dividend, we must pay a dividend to the holders of our
convertible preferred stock on an as-converted to common stock basis equal to the dividend we pay
to holders of our common stock. Currently, we do not intend to pay dividends on our common stock.
Assessments and premium surcharges for state guaranty funds, second injury funds and other
mandatory pooling arrangements may reduce our profitability.
Most states require insurance companies licensed to do business in their state to participate
in guaranty funds, which require the insurance companies to bear a portion of the unfunded
obligations of impaired, insolvent or failed insurance companies. These obligations are funded by
assessments, which are expected to continue in the future. State guaranty associations levy
assessments, up to prescribed limits, on all member insurance companies in the state based on their
proportionate share of premiums written in the lines of business in which the impaired, insolvent
or failed insurance companies are engaged. See BusinessRegulation in Item 1 of this report.
Accordingly, the assessments levied on us may increase as we increase our written premium. Some
states also have laws that establish second injury funds to reimburse insurers and employers for
claims paid to injured employees for aggravation of prior conditions or injuries. These funds are
supported by either assessments or premium surcharges based on case incurred losses.
40
In addition, as a condition to conducting business in some states, insurance companies are
required to participate in residual market programs to provide insurance to those employers who
cannot procure coverage from an insurance carrier on a negotiated basis. Insurance companies
generally can fulfill their residual market obligations by, among other things, participating in a
reinsurance pool where the results of all policies provided through the pool are shared by the
participating insurance companies. Although we price our insurance to account for obligations we
may have under these pooling arrangements, we may not be successful in estimating our liability for
these obligations. Accordingly, mandatory pooling arrangements may cause a decrease in our
profits. At December 31, 2006, we participated in mandatory pooling arrangements in 17 states and
the District of Columbia. As we write policies in new states that have mandatory pooling
arrangements, we will be required to participate in additional pooling arrangements. Further, the
impairment, insolvency or failure of other insurance companies in these pooling arrangements would
likely increase the liability for other members in the pool. The effect of assessments and premium
surcharges or changes in them could reduce our profitability in any given period or limit our
ability to grow our business.
Being a public company has increased our expenses and administrative workload.
We completed our initial public offering in November 2005. As a public company, we must
comply with various laws and regulations, including the Sarbanes-Oxley Act of 2002 and related
rules of the Securities and Exchange Commission, or the SEC, and requirements of the NASDAQ Global
Select Market. We were not required to comply with these laws and requirements as a private
company. Complying with these laws and regulations requires the time and attention of our board of
directors and management and increases our expenses. Among other things, we must:
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maintain and evaluate a system of internal controls over financial reporting in
compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related
rules and regulations of the SEC and the Public Company Accounting Oversight Board; |
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maintain policies relating to disclosure controls and procedures; |
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prepare and distribute periodic reports in compliance with our obligations under federal securities laws; |
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institute a more comprehensive compliance function, including with respect to corporate
governance; and |
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involve to a greater degree our outside legal counsel and accountants in the above
activities. |
In addition, being a public company has made it more expensive for us to obtain director and
officer liability insurance. In the future, we may be required to accept reduced coverage or incur
substantially higher costs to obtain this coverage. These factors could also make it more
difficult for us to attract and retain qualified executives and members of our board of directors,
particularly directors willing to serve on our audit committee.
We may have exposure to losses from terrorism for which we are required by law to provide coverage.
When writing workers compensation insurance policies, we are required by law to provide
workers compensation benefits for losses arising from acts of terrorism. The impact of any
terrorist act is unpredictable, and the ultimate impact on us would depend upon the nature, extent,
location and timing of such an act. Our 2007 reinsurance treaty program affords coverage for up to
$50 million for losses arising from terrorism, subject to applicable deductibles, retentions and
aggregate limits. Notwithstanding the protection provided by reinsurance and the Terrorism Risk
Insurance Extension Act of 2005, the risk of severe losses to us from acts of terrorism has not
been eliminated because our reinsurance treaty program includes various sub-limits and exclusions
limiting our reinsurers obligation to cover losses caused by acts of terrorism. Accordingly,
events constituting acts of terrorism may not be covered by, or may exceed the capacity of, our
reinsurance and could adversely affect our business and financial condition. In addition, the
Terrorism Risk Insurance Extension Act of 2005 is set to expire on December 31, 2007. If this law
is not extended or replaced by legislation affording a similar level of protection to the insurance
industry against insured losses arising out of acts of terrorism, reinsurance for losses arising
from terrorism may be unavailable or prohibitively expensive, and we may be further exposed to
losses arising from acts of terrorism.
41
Risks Related to Our Common Stock
The trading price of our common stock may decline.
The trading price of our common stock may decline for many reasons, some of which are beyond
our control, including, among others:
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our results of operations; |
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changes in expectations as to our future results of operations, including financial
estimates and projections by securities analysts and investors; |
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results of operations that vary from those expected by securities analysts and investors; |
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developments in the healthcare or insurance industries; |
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changes in laws and regulations; |
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announcements of claims against us by third parties; and |
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future issuances or sales of our common stock, including issuances upon conversion of
our outstanding convertible preferred stock. |
In addition, the stock market in general has experienced significant volatility that often has
been unrelated to the operating performance of companies whose shares are traded. These market
fluctuations could adversely affect the trading price of our common stock, regardless of our actual
operating performance.
Securities analysts may discontinue coverage of our common stock or may issue negative reports,
which may adversely affect the trading price of our common stock.
There is no assurance that securities analysts will continue to cover our company. If
securities analysts do not cover our company, this lack of coverage may adversely affect the
trading price of our common stock. The trading market for our common stock relies in part on the
research and reports that securities analysts publish about us or our business. If one or more of
the analysts who cover our company downgrades our common stock, the trading price of our common
stock may decline rapidly. If one or more of these analysts ceases to cover our company, we could
lose visibility in the market, which, in turn, could also cause the trading price of our common
stock to decline.
Future sales of our common stock may affect the trading price of our common stock and the future
exercise of options or the exercise of the conversion rights of our convertible preferred stock may
lower our stock price.
We cannot predict what effect, if any, future sales of our common stock, or the availability
of shares for future sale, will have on the trading price of our common stock. Sales of a
substantial number of shares of our common stock in the public market, or the perception that such
sales could occur, may adversely affect the trading price of our common stock and may make it more
difficult for you to sell your shares at a time and price that you determine appropriate. As of
the date of this report, there were 18,708,898 shares of our common stock outstanding and 1,214,771
shares of our common stock are issuable upon the conversion of shares of our outstanding
convertible preferred stock. Upon conversion, these shares of common stock will be freely tradable
without restriction or further registration under the Securities Act. There are outstanding
options exercisable to purchase 1,392,000 shares of our common stock, of which 1,292,000 were
granted in November 2005 and 100,000 were granted in September 2006. All options vest 20% each
year commencing on the first anniversary of the date of grant.
42
The terms of our convertible preferred stock could adversely affect the value of our common stock.
The conversion price of our convertible preferred stock is currently $20.58 per share and our
outstanding convertible preferred stock is presently convertible into 1,214,770 common stock.
Subject to certain exceptions, the conversion price of our convertible preferred stock may decrease
if we issue additional shares of our common stock for less than the market price of our common
stock.
Holders of our convertible preferred stock have the right to cause us to file a registration
statement with the SEC to sell the shares of common stock issuable upon conversion of the
convertible preferred stock. Sales of shares of common stock issuable upon conversion of our
convertible preferred stock could adversely affect the trading price of our common stock.
We may not pay dividends on our common stock (other than in additional shares of common stock)
without the consent of the holders of two-thirds of the outstanding shares of our convertible
preferred stock. If holders of our convertible preferred stock consent to the payment of a
dividend by us, we must pay a dividend to the holders of our convertible preferred stock on an
as-converted to common stock basis equal to the dividend we pay to holders of our common stock.
The terms of our articles of incorporation relating to our convertible preferred stock could
impede a change of control of our company. Following a change of control, holders of our
convertible preferred stock have the right to require us to redeem their shares at a redemption
price of $100 per share plus the cash value of any accrued and unpaid dividends. The redemption
provisions of our convertible preferred stock could have the effect of discouraging a future change
of control of our company.
Provisions of our articles of incorporation and bylaws and under the laws of the states of
Louisiana and Texas could impede an attempt to replace or remove our directors or otherwise effect
a change of control of our company, which could diminish the value of our common stock.
Our articles of incorporation and bylaws contain provisions that may make it more difficult
for shareholders to replace or remove directors even if the shareholders consider it beneficial to
do so. In addition, these provisions could delay or prevent a change of control of our company
that shareholders might consider favorable. Our articles of incorporation and bylaws contain the
following provisions that could have an anti-takeover effect:
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election of our directors is classified, meaning that the members of only one of three
classes of our directors are elected each year; |
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shareholders have limited ability to call shareholder meetings and to bring business
before a meeting of shareholders; |
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shareholders may not act by written consent, unless the consent is unanimous; and |
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our board of directors may authorize the issuance of junior preferred stock with such
rights, preferences and privileges as the board deems appropriate. |
These provisions may make it difficult for shareholders to replace management and could have
the effect of discouraging a future takeover attempt that is not approved by our board of
directors, but which individual shareholders might consider favorable.
We are incorporated in Texas and are subject to Part 13 of the Texas Business Corporation Act.
Under this statute, our ability to enter into a business combination with any affiliated
shareholder is limited.
43
In addition, two of our three insurance company subsidiaries, American Interstate and Silver
Oak Casualty, are incorporated in Louisiana and the other, American Interstate of Texas, is
incorporated in Texas. Under Louisiana and Texas insurance law, advance approval by the state
insurance department is required for any change of control of an insurer. Control is presumed to
exist through the direct or indirect ownership of 10% or more of the voting securities of a
domestic insurance company or any entity that controls a domestic insurance company. Obtaining
these approvals may result in the material delay of, or deter, any such transaction.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We own our 45,000 square foot executive offices located in DeRidder, Louisiana. In addition,
we lease an additional 28,000 square feet of office space in DeRidder, Louisiana, pursuant to a
lease agreement that requires annual lease payments of $250,000 and expires on December 31, 2007.
This lease agreement may be extended for two additional one-year periods, at our option. We also
lease space at other locations for our service and claims representative offices.
Item 3. Legal Proceedings.
In the ordinary course of our business, we are involved in the adjudication of claims
resulting from workplace injuries. We are not involved in any legal or administrative claims that
we believe are likely to have a materially adverse effect on our business, financial condition or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
During the quarter ended December 31, 2006, no matters were submitted to a vote of
shareholders.
44
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters And Issuer
Purchases of Equity Securities.
Market Information and Holders
Our common stock is traded on the NASDAQ Global Select Market under the symbol AMSF and has
been traded on the NASDAQ since our initial public offering on November 18, 2005. Prior to that
time, there was no public market for our common stock. As of February 20, 2007, there were 35
holders of record of our common stock.
The table below sets forth the reported high and low sales prices of our common stock as
quoted on the NASDAQ for the periods presented.
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High |
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Low |
2005 |
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Fourth Quarter (beginning November 18, 2005) |
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$ |
10.98 |
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$ |
8.12 |
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2006 |
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First Quarter |
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$ |
12.50 |
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$ |
8.36 |
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Second Quarter |
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$ |
14.35 |
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$ |
10.25 |
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Third Quarter |
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$ |
13.50 |
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$ |
9.30 |
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Fourth Quarter |
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$ |
15.82 |
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$ |
9.43 |
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Dividend Policy
We have not paid cash dividends on our common stock in the prior two years. We currently
intend to retain any future earnings to finance our operations and growth. As a result, we do not
expect to pay any cash dividends on our common stock for the foreseeable future. Any future
determination to pay cash dividends on our common stock will be at the discretion of our board of
directors and will be dependent on our earnings, financial condition, operating results, capital
requirements, any contractual, regulatory or other restrictions on the payment of dividends by our
subsidiaries to AMERISAFE, and other factors that our board of directors deems relevant.
AMERISAFE is a holding company and has no direct operations. Our ability to pay dividends in
the future depends on the ability of our operating subsidiaries to pay dividends to us. Our
insurance company subsidiaries are regulated insurance companies and therefore are subject to
significant regulatory restrictions limiting their ability to declare and pay dividends.
Our ability to pay dividends is also subject to restrictions set forth in our articles of
incorporation, which prohibit us from paying dividends on our common stock (other than in
additional shares of common stock) without the consent of the holders of two-thirds of the
outstanding shares of our convertible preferred stock. If holders of our convertible preferred
stock consent to the payment of a dividend by us, we must pay a dividend to the holders of our
convertible preferred stock on an as-converted to common stock basis equal to the dividend we pay
to holders of our common stock.
45
Description of Capital Stock
AMERISAFE is authorized to issue 69,000,000 shares of capital stock, consisting of:
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3,000,000 shares of preferred stock, par value $0.01 per share, of which: |
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1,500,000 shares are designated as Series A preferred stock, of which 862,924
shares have been canceled and retired and cannot be reissued; and |
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1,500,000 shares are designated as Series B preferred stock; |
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500,000 shares of convertible preferred stock, par value $0.01 per share, of which: |
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300,000 shares are designated as Series C convertible deferred pay preferred stock
of which 250,000 shares have been canceled and retired and cannot be reissued; and |
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200,000 shares are designated as Series D non-voting convertible deferred pay
preferred stock; |
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500,000 shares of Series E preferred stock, par value $0.01 per share, of which 317,744
shares have been canceled and retired and cannot be reissued; |
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10,000,000 shares of junior preferred stock, par value $0.01 per share; |
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50,000,000 shares of common stock, par value $0.01 per share; and |
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5,000,000 shares of convertible non-voting common stock, par value $0.01 per share. |
As of February 20, 2007, the following shares of our capital stock were outstanding:
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50,000 shares of Series C convertible preferred stock; |
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200,000 shares of Series D convertible preferred stock; and |
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18,708,898 shares of common stock. |
As of February 20, 2007, there were no outstanding shares of Series A, Series B or Series E
preferred stock, junior preferred stock or non-voting common stock. Our Series C and Series D
convertible preferred stock are collectively referred to in this report as our convertible
preferred stock.
The following is a summary of certain provisions of our outstanding capital stock and our
non-voting common stock (which non-voting common stock is issuable upon conversion of our Series D
convertible preferred stock). This summary is qualified in its entirety by the provisions of our
articles of incorporation, a copy of which is filed as an exhibit to this report.
46
Common Stock and Non-Voting Common Stock
Voting. Each holder of our common stock is entitled to one vote for each share on all matters
to be voted on by our shareholders. Holders of our common stock vote together as a single class
with the holders of our Series C convertible preferred stock. Holders of shares of non-voting
common stock are not entitled to vote on any matter to be voted on by our shareholders, except as
required by Texas law.
Dividends. Holders of common stock and non-voting common stock are entitled to receive
dividends, on an equal basis, at the time and in the amount as our board may from time to time
determine, subject to any preferential amounts payable to holders of our outstanding preferred
stock. Our articles of incorporation prohibit us from paying dividends on our common stock and
non-voting common stock (other than in additional shares of common stock or non-voting common
stock, as applicable) without the consent of the holders of two-thirds of the outstanding shares of
our convertible preferred stock. If holders of our convertible preferred stock consent to the
payment of a dividend by us, we must pay a dividend to the holders of our convertible preferred
stock (on an as-converted to common stock or non-voting common stock basis) equal to the dividend
we pay to the holders of our common stock and non-voting common stock.
Stock Repurchases. Our articles of incorporation prohibit us from purchasing or redeeming any
shares of our common stock or non-voting common stock without the consent of the holders of
two-thirds of the outstanding shares of our convertible preferred stock.
Liquidation. Upon a liquidation and dissolution of our company, the holders of common stock
and non-voting common stock are entitled to receive, on an equal basis, all assets available for
distribution to shareholders, subject to any preferential amounts payable to holders of our
then-outstanding preferred stock.
Issuance and Conversion of Non-Voting Common Stock. Shares of our non-voting common stock are
issuable upon conversion of our Series D convertible preferred stock at the option of the holders
of our Series D convertible preferred stock. At the option of the holder, each share of non-voting
common stock may be converted at any time into one share of common stock.
Convertible Preferred Stock
Voting. Each holder of our Series C convertible preferred stock is entitled to one vote for
each share of our common stock into which the Series C convertible preferred stock is convertible
on all matters to be voted on by our shareholders. Holders of our convertible preferred stock vote
together as a single class with holders of our common stock. The Series D convertible preferred
stock is non-voting. However, the holders of Series C convertible preferred stock and Series D
convertible preferred stock have the right to vote as a separate class on any amendment to our
articles of incorporation that would adversely affect the rights, privileges and preferences of the
convertible preferred stock.
In addition, the holders of two-thirds of our convertible preferred stock must approve any
payment of a dividend or distribution on our common stock or non-voting common stock (other than in
additional shares of common stock or non-voting common stock, as applicable) or the purchase or
redemption of any shares of our common stock or non-voting common stock.
Dividends. Prior to the completion of our initial public offering in November 2005, holders
of our convertible preferred stock were entitled to receive pay-in-kind dividends at a rate of
$7.00 per share per annum, payable in shares of Series E preferred stock. Under the terms of our
articles of incorporation, holders of our convertible preferred stock are no longer entitled to
receive these pay-in-kind dividends as a result of the redemption and exchange of all outstanding
shares of our Series A preferred stock in connection with our initial public offering. However, if
the holders of two-thirds of our outstanding convertible preferred stock consent to the payment of
a dividend by us to the holders of our common stock or non-voting common stock, the holders of our
outstanding convertible preferred stock will receive (on an as-converted to common stock or
non-voting common stock basis) a dividend equal to the dividend to be paid to the holders of our
common stock and non-voting common stock.
47
Liquidation Rights. Upon any liquidation, dissolution or winding up of our company, holders
of our convertible preferred stock are entitled to receive, in cash, an amount equal to the greater
of:
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$100 for each share of convertible preferred stock outstanding, plus the cash value,
calculated at $100 per share, of all accrued and unpaid dividends; and |
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the amount distributable to the holders of our convertible preferred stock upon
liquidation, dissolution or winding up had the holders converted their shares into common
stock or non-voting common stock, as the case may be, in accordance with the terms of the
convertible preferred stock immediately prior to liquidation, dissolution or winding up. |
All liquidation payments in respect of shares of our convertible preferred stock are required
to be paid before any distribution is made in respect of our Series A preferred stock, junior
preferred stock, common stock and non-voting common stock.
Conversion. The Series C convertible preferred stock is convertible into our common stock,
and the Series D convertible preferred stock is convertible into our non-voting common stock, in
each case at a conversion rate calculated by multiplying the number of shares to be converted by
$100 and dividing the result by the then-applicable conversion price, as adjusted from time to
time. As of March 15, 2006, the conversion price was $20.58 per share. Our convertible preferred
stock is convertible:
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at any time at the option of the holder; |
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at our option at any time following the consummation of any public offering of our
equity securities or a change of control of our company if the closing price for our
common stock for the prior 20 trading days is, or the proceeds from the change of control
results in a value for our outstanding common stock of, at least $651.60 per share; and |
|
|
|
|
automatically upon consummation of a public offering of our common stock with gross
proceeds to us of at least $40 million at a price to public of at least $651.60 per share,
subject to adjustment to reflect stock splits, combinations and stock dividends. |
Conversion Price Adjustments. Subject to certain exceptions, the conversion price will be
adjusted if we issue or sell shares of our common stock or non-voting common stock (including
options to acquire shares and securities convertible into or exchangeable for shares of common
stock or non-voting common stock) without consideration or for a consideration per share less than
the market price of our common stock or non-voting common stock in effect immediately prior to the
issuance or sale. In that event, the conversion price will be reduced to a conversion price
(calculated to the nearest cent) determined by dividing:
|
|
|
an amount equal to the sum of: |
|
|
|
the number of shares of common stock and non-voting common stock outstanding
immediately prior to the issuance or sale (including as outstanding all shares of
common stock and non-voting common stock issuable upon conversion of outstanding
convertible preferred stock) multiplied by the then-existing market price of our
common stock; plus |
|
|
|
|
the consideration, if any, received by us upon the issuance or sale; by |
|
|
|
the total number of shares of common stock and non-voting common stock outstanding
immediately after such issuance or sale (including as outstanding all shares of common
stock and non-voting common stock issuable upon conversion of outstanding convertible
preferred stock, without giving effect to any adjustment in the number of shares issuable
by reason of such issue and sale). |
48
If we issue or sell shares of common stock or non-voting common stock for cash, the cash
consideration received will be deemed to be the amount received by us, without deduction for any
expenses incurred or any underwriting commissions or concessions paid or allowed by us. If we
issue or sell shares of common stock or non-voting common stock for a consideration other than
cash, the amount of the consideration other than cash received shall be deemed to be the fair value
of such consideration as determined in good faith by our board of directors, without deduction for
any expenses incurred or any underwriting commissions or concessions paid or allowed by us.
No adjustments to the conversion price are required for issuances of shares of our common
stock or non-voting common stock upon any conversion of our convertible preferred stock, under our
equity incentive plans or in connection with any acquisition by us.
Redemption. Following a change of control of our company, holders of our convertible
preferred stock have the right to require us to redeem their shares at a redemption price of $100
plus the cash value, calculated at $100 per share, of all accrued and unpaid dividends. Our
articles of incorporation define a change of control of our company for this purpose to include:
|
|
|
the sale, lease or transfer of all or substantially all of our assets in one or a
series of related transactions to any person; or |
|
|
|
|
the acquisition of beneficial ownership by any person, other than Welsh Carson, in one
or a series of related transactions, of our voting stock representing more than 50% of the
voting power of all outstanding shares of our voting stock, whether by merger,
consolidation or otherwise, other than by way of a public offering of our equity
securities. |
In addition, we may at any time, on 30 days notice, redeem all, but not less than all, shares
of convertible preferred stock at a redemption price of $103.50 plus the cash value, calculated at
$100 per share, of any accrued and unpaid dividends. Until payment of the redemption price, we may
not make any payment or distribution upon any preferred stock, common stock or non-voting common
stock.
49
Item 6. Selected Financial Data.
The following tables summarize certain selected financial data that should be read in
conjunction with our audited financial statements and accompanying notes thereto for the year ended
December 31, 2006 included in this report and Item. 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(In thousands, except share and per share data) |
|
Income Statement Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
332,491 |
|
|
$ |
290,891 |
|
|
$ |
264,962 |
|
|
$ |
223,590 |
|
|
$ |
185,093 |
|
Ceded premiums written |
|
|
(19,950 |
) |
|
|
(21,541 |
) |
|
|
(21,951 |
) |
|
|
(27,600 |
) |
|
|
(26,563 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
$ |
312,541 |
|
|
$ |
269,350 |
|
|
$ |
243,011 |
|
|
$ |
195,990 |
|
|
$ |
158,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
299,303 |
|
|
$ |
256,568 |
|
|
$ |
234,733 |
|
|
$ |
179,847 |
|
|
$ |
163,257 |
|
Net investment income |
|
|
25,383 |
|
|
|
16,882 |
|
|
|
12,217 |
|
|
|
10,106 |
|
|
|
9,419 |
|
Net realized gains (losses) on
investments (1) |
|
|
7,389 |
|
|
|
2,272 |
|
|
|
1,421 |
|
|
|
316 |
|
|
|
(895 |
) |
Fee and other income |
|
|
645 |
|
|
|
561 |
|
|
|
589 |
|
|
|
462 |
|
|
|
2,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
332,720 |
|
|
|
276,283 |
|
|
|
248,960 |
|
|
|
190,731 |
|
|
|
173,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
incurred |
|
|
199,484 |
|
|
|
204,056 |
|
|
|
174,186 |
|
|
|
129,250 |
|
|
|
121,062 |
|
Underwriting and certain other
operating costs (2) |
|
|
35,024 |
|
|
|
31,113 |
|
|
|
28,792 |
|
|
|
23,062 |
|
|
|
22,674 |
|
Commissions |
|
|
19,030 |
|
|
|
16,226 |
|
|
|
14,160 |
|
|
|
11,003 |
|
|
|
9,189 |
|
Salaries and benefits |
|
|
17,234 |
|
|
|
16,045 |
|
|
|
15,229 |
|
|
|
15,037 |
|
|
|
16,541 |
|
Interest expense |
|
|
3,496 |
|
|
|
2,844 |
|
|
|
1,799 |
|
|
|
203 |
|
|
|
498 |
|
Policyholder dividends (3) |
|
|
6,006 |
|
|
|
4 |
|
|
|
1,108 |
|
|
|
736 |
|
|
|
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
280,274 |
|
|
|
270,288 |
|
|
|
235,274 |
|
|
|
179,291 |
|
|
|
170,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
52,446 |
|
|
|
5,995 |
|
|
|
13,686 |
|
|
|
11,440 |
|
|
|
3,743 |
|
Income tax expense (benefit) |
|
|
15,088 |
|
|
|
65 |
|
|
|
3,129 |
|
|
|
2,846 |
|
|
|
(1,438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
37,358 |
|
|
|
5,930 |
|
|
|
10,557 |
|
|
|
8,594 |
|
|
|
5,181 |
|
Payment-in-kind preferred dividends |
|
|
|
|
|
|
(8,593 |
) |
|
|
(9,781 |
) |
|
|
(10,133 |
) |
|
|
(9,453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common shareholders |
|
$ |
37,358 |
|
|
$ |
(2,663 |
) |
|
$ |
776 |
|
|
$ |
(1,539 |
) |
|
$ |
(4,272 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion allocable to common
shareholders (4) |
|
|
88.6 |
% |
|
|
100.0 |
% |
|
|
70.2 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Net income (loss) allocable to
common shareholders |
|
$ |
33,099 |
|
|
$ |
(2,663 |
) |
|
$ |
545 |
|
|
$ |
(1,539 |
) |
|
$ |
(4,272 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
equivalent |
|
$ |
1.88 |
|
|
$ |
(1.25 |
) |
|
$ |
2.14 |
|
|
$ |
(8.55 |
) |
|
$ |
(23.72 |
) |
Diluted weighted average of common
share equivalents outstanding |
|
|
17,597,328 |
|
|
|
2,129,492 |
|
|
|
255,280 |
|
|
|
180,125 |
|
|
|
180,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Insurance Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year loss ratio (5) |
|
|
67.4 |
% |
|
|
71.0 |
% |
|
|
68.5 |
% |
|
|
70.6 |
% |
|
|
71.8 |
% |
Prior accident year loss ratio (6) |
|
|
(0.8 |
)% |
|
|
8.5 |
% |
|
|
5.7 |
% |
|
|
1.3 |
% |
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio |
|
|
66.6 |
% |
|
|
79.5 |
% |
|
|
74.2 |
% |
|
|
71.9 |
% |
|
|
74.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net underwriting expense ratio (7) |
|
|
23.8 |
% |
|
|
24.7 |
% |
|
|
24.8 |
% |
|
|
27.3 |
% |
|
|
29.7 |
% |
Net dividend
ratio (3)(8) |
|
|
2.0 |
% |
|
|
0.0 |
% |
|
|
0.5 |
% |
|
|
0.4 |
% |
|
|
0.1 |
% |
Net combined ratio (9) |
|
|
92.4 |
% |
|
|
104.2 |
% |
|
|
99.5 |
% |
|
|
99.6 |
% |
|
|
104.0 |
% |
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
(In thousands) |
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
26,748 |
|
|
$ |
49,286 |
|
|
$ |
25,421 |
|
|
$ |
49,815 |
|
|
$ |
44,677 |
|
Investments |
|
|
638,780 |
|
|
|
533,618 |
|
|
|
364,868 |
|
|
|
257,729 |
|
|
|
205,315 |
|
Amounts recoverable from reinsurers |
|
|
109,603 |
|
|
|
122,562 |
|
|
|
198,977 |
|
|
|
211,774 |
|
|
|
214,342 |
|
Premiums receivable, net |
|
|
144,384 |
|
|
|
123,934 |
|
|
|
114,141 |
|
|
|
108,380 |
|
|
|
95,291 |
|
Deferred income taxes |
|
|
29,466 |
|
|
|
22,413 |
|
|
|
15,624 |
|
|
|
12,713 |
|
|
|
11,372 |
|
Deferred policy acquisition costs |
|
|
18,486 |
|
|
|
16,973 |
|
|
|
12,044 |
|
|
|
11,820 |
|
|
|
9,505 |
|
Deferred charges |
|
|
3,548 |
|
|
|
3,182 |
|
|
|
3,054 |
|
|
|
2,987 |
|
|
|
1,997 |
|
Total assets |
|
|
994,146 |
|
|
|
892,320 |
|
|
|
754,187 |
|
|
|
678,608 |
|
|
|
603,801 |
|
Reserves for loss and loss
adjustment expenses |
|
|
519,178 |
|
|
|
484,485 |
|
|
|
432,880 |
|
|
|
377,559 |
|
|
|
346,542 |
|
Unearned premiums |
|
|
137,761 |
|
|
|
124,524 |
|
|
|
111,741 |
|
|
|
103,462 |
|
|
|
87,319 |
|
Insurance-related assessments |
|
|
40,886 |
|
|
|
35,135 |
|
|
|
29,876 |
|
|
|
26,133 |
|
|
|
23,743 |
|
Debt |
|
|
36,090 |
|
|
|
36,090 |
|
|
|
36,090 |
|
|
|
16,310 |
|
|
|
8,000 |
|
Redeemable preferred stock (10) |
|
|
25,000 |
|
|
|
50,000 |
|
|
|
131,916 |
|
|
|
126,424 |
|
|
|
121,300 |
|
Shareholders equity (deficit) (11) |
|
|
158,784 |
|
|
|
97,346 |
|
|
|
(42,862 |
) |
|
|
(20,652 |
) |
|
|
(25,100 |
) |
|
|
|
(1) |
|
In 2006, includes $3.5 million net realized gains in connection with the sale of all equity
securities as discussed under Managements Discussion and Analysis of Financial Condition and
Results of OperationsInvestment Portfolio in Item 7 of this report. |
|
(2) |
|
Includes policy acquisition expenses, such as assessments, premium taxes and other general
and administrative expenses, excluding commissions and salaries and benefits, related to
insurance operations and corporate operating expenses. |
|
(3) |
|
In 2006, includes $5.2 million of dividends accrued for policyholders in Florida. Florida
law requires payment of dividends to Florida policyholders pursuant to a formula based on
underwriting results from policies written in Florida in a consecutive three-year period. |
|
(4) |
|
Reflects the participation rights of our convertible preferred stock. See Note 12 to our
audited financial statements. |
|
(5) |
|
The current accident year loss ratio is calculated by dividing loss and loss adjustment
expenses incurred for the current accident year by the current years net premiums earned. |
|
(6) |
|
The prior accident year loss ratio is calculated by dividing the change in loss and loss
adjustment expenses incurred for prior accident years by the current years net premiums
earned. |
|
(7) |
|
The net underwriting expense ratio is calculated by dividing underwriting and certain other
operating costs, commissions and salaries and benefits by the current years net premiums
earned. |
|
(8) |
|
The net dividend ratio is calculated by dividing policyholder dividends by the current years
net premiums earned. |
|
(9) |
|
The net combined ratio is the sum of the net loss ratio, the net underwriting expense ratio
and the net dividend ratio. |
|
(10) |
|
Includes our Series C and Series D convertible preferred stock, each of which is mandatorily
redeemable upon the occurrence of certain events that are deemed to be outside our control.
In November 2006, 250,000 shares of Series C preferred stock were converted into shares of
common stock by the holders in connection with a secondary public offering of common stock.
For years prior to 2005, also includes our Series A preferred stock, which was mandatorily
redeemable upon the occurrence of certain events that were deemed to be outside our control.
In connection with the initial public offering of our common stock in November 2005, all
outstanding shares of our Series A preferred stock were redeemed and exchanged for shares of
our common stock. |
|
(11) |
|
In 1997, we entered into a recapitalization transaction that resulted in a $164.2 million
charge to retained earnings. |
51
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read
in conjunction with our consolidated financial statements and the notes thereto included in Item 8
of this report. This discussion includes forward-looking statements that are subject to risks,
uncertainties and other factors described in Item 1A of this report. These factors could cause our
actual results in 2007 and beyond to differ materially from those expressed in, or implied by,
those forward-looking statements.
Overview
AMERISAFE is a holding company that markets and underwrites workers compensation insurance
through its 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 and
logging. 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 or
aberrations 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 on equity.
We actively market our insurance in 31states and the District of Columbia through independent
agencies, as well as through our wholly owned insurance agency subsidiary. We are also licensed in
an additional 14 states and the U.S. Virgin Islands.
One of the key financial measures that we use to evaluate our operating performance is return
on average equity. We calculate return on average equity by dividing net income by the average of
shareholders equity plus redeemable preferred stock. Our return on average equity was 22.6% in
2006, 5.0% in 2005, and 10.8% in 2004. Our overall financial objective is to produce a return on
equity of at least 15% over the long-term while maintaining optimal operating leverage in our
insurance subsidiaries that is commensurate with our A.M. Best rating. For 2007, we anticipate
producing a combined ratio of 95% or lower. Our combined ratio was 92.4% in 2006, 104.2% in 2005
and 99.5% in 2004.
Investment income is an important element of our net income. Because the period of time
between our receipt of premiums and the ultimate settlement of claims is often several years or
longer, we are able to invest cash from premiums for significant periods of time. As a result, we
are able to generate more investment income from our premiums as compared to insurance companies
that operate in many other lines of business. From December 31, 2002 to December 31, 2006, our
investment portfolio, including cash and cash equivalents, increased from $250.0 million to $665.5
million and produced net investment income of $25.4 million in 2006, $16.9 million in 2005 and
$12.2 million in 2004. In the third quarter of 2005, we received $61.3 million from one of our
reinsurers pursuant to a commutation agreement. In the fourth quarter of 2005 we completed our
initial public offering, and we retained $53.0 million of the net proceeds from the offering. Of
the net proceeds we retained, we contributed $45.0 million to our insurance subsidiaries. The
remaining $8.0 million will be used to make additional capital contributions to our insurance
company subsidiaries as necessary to supplement our anticipated growth and for general corporate
purposes.
52
The use of reinsurance is an important component of our business strategy. We purchase
reinsurance to protect us from the impact of large losses. Our reinsurance program for 2007
includes 16 reinsurers that provide coverage to us in excess of a certain specified loss amount, or
retention level. Under our reinsurance program, we pay our reinsurers a percentage of our gross
premiums earned and, in turn, the reinsurers assume an allocated portion of losses for the accident
year. Our 2007 reinsurance program provides us with reinsurance coverage for each loss occurrence
up to $50.0 million, subject to applicable deductibles, retentions and aggregate limits. However,
our reinsurance coverage is limited to $10.0 million for any single claimant for the first four
layers and $5.0 million for any single claimant for the fifth layer, subject to applicable
deductibles, retentions and aggregate limits. We retain the first $2.0 million of each loss and
are subject to an annual aggregate deductible of approximately $6.0 million for losses between $2.0
million and $5.0 million before our reinsurers are obligated to reimburse us. The aggregate limit
for all claims for losses between $2.0 million and 5.0 million is approximately $51.0 million. As
losses are incurred and recorded, we record amounts recoverable from reinsurers for the portion of
the losses ceded to our reinsurers.
We retain a significant amount of losses under our reinsurance programs. Based, in part, on
the cost of reinsurance, we have increased our retention level in each of the past five years. In
2002, our retention level was $500,000. In 2003, we increased our retention to $500,000 plus 20%
of each loss occurrence between $500,000 and $5.0 million. In 2004, we further increased our
retention level to $1.0 million. In addition, for losses between $1.0 million and $2.0 million, we
had an annual aggregate deductible of $300,000 and, after we satisfied the deductible, retained 10%
of each loss occurrence. For losses between $2.0 million and $5.0 million, we had an annual
aggregate deductible of $1.3 million and, after we satisfied the deductible, retained 20% of each
loss occurrence. In 2005, we continued to retain the first $1.0 million of each loss occurrence.
However, for losses between $1.0 million and $5.0 million, we increased our annual aggregate
deductible to $5.6 million and, after we satisfied the deductible, retained 10% of each loss
occurrence. In 2006, we retained the first $1.0 million of each loss and were subject to an annual
aggregate deductible of $15.4 million for losses between $1.0 million and $2.0 million before our
reinsurers were obligated to reimburse us. After the deductible was satisfied, we retained 25.0%
of each loss between $1.0 million and $2.0 million. The aggregate limit for all claims for losses
between $1.0 million and $2.0 million was $5.4 million. We were subject to an annual aggregate
deductible of $7.7 million for losses between $2.0 million and $5.0 million before our reinsurers
were obligated to reimburse us. The aggregate limit for all claims for losses between $2.0 million
and $5.0 million was $39.0 million. As a result of increases in our retention levels and
collections from our reinsurers in the normal course of business, our amounts recoverable from
reinsurers decreased from $122.6 million at December 31, 2005 to $109.6 million at December 31,
2006.
Our most significant balance sheet liability is our reserve for loss and loss adjustment
expenses. We record reserves for estimated losses under insurance policies that we write and for
loss adjustment expenses related to the investigation and settlement of 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 at any given point in time based on known facts
and circumstances. Reserves are based on estimates of the most likely ultimate cost of individual
claims. These estimates are inherently uncertain. Judgment is required to determine the relevance
of our historical experience and industry information under current facts and circumstances. The
interpretation of this historical and industry data can be impacted by external forces, principally
frequency and severity of future claims, length of time to achieve ultimate settlement of claims,
inflation of medical costs and wages, insurance policy coverage interpretations, jury
determinations and legislative changes. Accordingly, our reserves may prove to be inadequate to
cover our actual losses. If we change our estimates, these changes would be reflected in our
results of operations during the period in which they are made, with increases in our reserves
resulting in decreases in our earnings. In 2006, we decreased our estimates for prior year loss
reserves by $2.2 million, which increased net income by $1.4 million. We increased our estimates
for prior year loss reserves by $8.7 million in 2005 and $13.4 million in 2004. We also recorded a
$13.2 million loss in connection with a commutation agreement with Converium in 2005. These
increased estimates and the commutation decreased our net income by $14.2 million in 2005 and $8.7
million in 2004.
53
The workers compensation insurance industry is cyclical in nature and influenced by many
factors, including price competition, medical cost increases, natural and man-made disasters,
changes in interest rates, changes in state laws and regulations and general economic conditions.
A hard market cycle in our industry is characterized by decreased competition that results in
higher premium rates, more restrictive policy coverage terms and lower commissions paid to
agencies. In contrast, a soft market cycle is characterized by increased competition that results
in lower premium rates, expanded policy coverage terms and higher commissions paid to agencies. We
currently believe that the workers compensation insurance industry is slowly transitioning to a
more competitive market environment. Our strategy across market cycles is to maintain underwriting
profitability, deploy capital judiciously, manage our expenses and focus on underserved markets
within our target industries that we believe will provide opportunities for greater returns.
Principal Revenue and Expense Items
Our revenues consist primarily of the following:
Net Premiums Earned. Net premiums earned is the earned portion of our net premiums written.
Net premiums written is equal to gross premiums written less premiums ceded to reinsurers. Gross
premiums written includes the estimated annual premiums from each insurance policy we write in our
voluntary and assigned risk businesses during a reporting period based on the policy effective date
or the date the policy is bound, whichever is later.
Premiums are earned on a daily pro rata basis over the term of the policy. At the end of each
reporting period, premiums written that are not earned are classified as unearned premiums and are
earned in subsequent periods over the remaining term of the policy. Our insurance policies
typically have a term of one year. Thus, for a one-year policy written on July 1, 2006 for an
employer with constant payroll during the term of the policy, we would earn half of the premiums in
2006 and the other half in 2007. On a monthly basis, we also recognize net premium earned from
mandatory pooling arrangements.
We estimate the annual premiums to be paid by our policyholders when we issue the policies and
record those amounts on our balance sheet as premiums receivable. We conduct premium audits on all
of our voluntary business policyholders annually, upon the expiration of each policy, including
when the policy is renewed. The purpose of these audits is to verify that policyholders have
accurately reported their payroll expenses and employee job classifications, and therefore have
paid us the premium required under the terms of the policies. The difference between the estimated
premium and the audited premium is referred to as earned but unbilled premium, or EBUB premium.
EBUB premium can be higher or lower than the estimated premium. EBUB premium is subject to
significant variability and can either increase or decrease earned premium based upon several
factors, including changes in premium growth, industry mix and economic conditions. Due to the
timing of audits and other adjustments, actual EBUB premium is generally not determined for several
months after the expiration of the policy.
Prior to 2006, we periodically reviewed EBUB premium trends. However, the variability in
those trends caused us to conclude that EBUB premium could not be reasonably estimated. As a
result, we recorded EBUB premium as gross written premium and earned premium in the period that the
premium audit was completed. In 2006, we again analyzed whether EBUB premiums could be reasonably
estimated. Based on this most recent analysis, at December 31, 2006, we recorded an estimate for
EBUB premium of $5.3 million, or 1.6% of gross premiums written in 2006. This adjustment for
estimated EBUB premium less related losses and expenses, increased our 2006 net income by $712,000.
In future periods, we will review our estimate of EBUB premiums and record an adjustment
quarterly.
54
Net Investment Income and Net Realized Gains and Losses on Investments. We invest our
statutory surplus funds and the funds supporting our insurance liabilities in fixed maturity and
equity securities. In addition, a portion of these funds are held in cash and cash equivalents to
pay current claims. Our net investment income includes interest and dividends earned on our
invested assets. We assess the performance of our investment portfolio using a standard tax
equivalent yield metric. Investment income that is tax-exempt is increased by our marginal federal
tax rate of 35% to express yield on tax-exempt securities on the same basis as taxable securities.
Net realized gains and losses on our investments are reported separately from our net investment
income. Net realized gains occur when our investment securities are sold for more than their costs
or amortized costs, as applicable. Net realized losses occur when our investment securities are
sold for less than their costs or amortized costs, as applicable, or are written down as a result
of an other-than-temporary impairment. We classify all of our fixed maturity securities as
held-to-maturity and all of our equity securities as available-for-sale. Net unrealized gains or
losses on our equity securities are reported separately within accumulated other comprehensive
income on our balance sheet.
Fee and Other Income. We recognize commission income earned on policies issued by other
carriers that are sold by our wholly owned insurance agency subsidiary as the related services are
performed. We also recognize a small portion of interest income from mandatory pooling
arrangements in which we participate.
Our expenses consist primarily of the following:
Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses incurred
represents our largest expense item and, for any given reporting period, includes estimates of
future claim payments, changes in those estimates from prior reporting periods and costs associated
with investigating, defending and servicing claims. These expenses fluctuate based on the amount
and types of risks we insure. We record loss and loss adjustment expenses related to estimates of
future claim payments based on case-by-case valuations and statistical analyses. We seek to
establish all reserves at the most likely ultimate exposure based on our historical claims
experience. It is typical for our more serious claims to take several years to settle and we
revise our estimates as we receive additional information about the condition of injured employees.
Our ability to estimate loss and loss adjustment expenses accurately at the time of pricing our
insurance policies is a critical factor in our profitability.
Underwriting and Certain Other Operating Costs. Underwriting and certain other operating
costs are those expenses that we incur to underwrite and maintain the insurance policies we issue.
These expenses include state and local premium taxes and fees and other operating costs, offset by
commissions we receive from reinsurers under our reinsurance treaty program. We pay state and
local taxes, licenses and fees, assessments and contributions to state workers compensation
security funds based on premiums. In addition, other operating costs include general and
administrative expenses, excluding commissions and salaries and benefits, incurred at both the
insurance company and corporate levels.
Commissions. We pay commissions to our subsidiary insurance agency and to the independent
agencies that sell our insurance based on premiums collected from policyholders.
Salaries and Benefits. We pay salaries and provide benefits to our employees.
Policyholder Dividends. In limited circumstances, we pay dividends to policyholders in
particular states as an underwriting incentive. Additionally, Florida law requires payment of
dividends to Florida policyholders pursuant to a formula based on underwriting results from
policies written in Florida over a consecutive three-year period.
Interest Expense. Interest expense represents amounts we incur on our outstanding
indebtedness at the then-applicable interest rate.
Income Tax Expense. We incur federal, state and local income tax expense.
55
Critical Accounting Policies
It is important to understand our accounting policies in order to understand 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 our assets, liabilities, revenues
and expenses and the 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, assessments,
deferred policy acquisition costs, deferred income taxes, the impairment of investment securities
and share-based compensation.
The following is a description of our critical accounting policies.
Reserves for Loss and Loss Adjustment Expenses. 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
at any given point in time based on known facts and circumstances. Our reserves for loss and loss
adjustment expenses are estimated using case-by-case valuations and statistical analyses.
In establishing these estimates, we make various assumptions regarding a number of factors,
including frequency and severity of claims, length of time to achieve ultimate settlement of
claims, projected inflation of medical costs and wages, insurance policy coverage interpretations
and judicial determinations. Due to the inherent uncertainty associated with these estimates, and
the cost of incurred but unreported claims, our actual liabilities may vary significantly from our
original estimates. On a quarterly basis, we review our reserves for loss and loss adjustment
expenses to determine whether adjustments are required. Any resulting adjustments are included in
the results for the current period. In establishing our reserves, we do not use loss discounting,
which would involve recognizing the time value of money and offsetting estimates of future payments
by future expected investment income. Additional information regarding our reserves for loss and
loss adjustment expenses can be found under the caption BusinessLoss Reserves in Item 1 of this
report.
Amounts Recoverable from Reinsurers. Amounts recoverable from reinsurers represent the
portion of our paid and unpaid loss and loss adjustment expenses that are assumed by reinsurers.
These amounts are separately reported on our balance sheet as assets and do not reduce our reserves
for loss and loss adjustment expenses because reinsurance does not relieve us of liability to our
policyholders. We are required to pay claims even if a reinsurer fails to pay us under the terms
of a reinsurance contract. We calculate amounts recoverable from reinsurers based on our estimates
of the underlying loss and loss adjustment expenses, as well as the terms and conditions of our
reinsurance contracts, which could be subject to interpretation. In addition, we bear credit risk
with respect to our reinsurers, which can be significant because some of the unpaid loss and loss
adjustment expenses for which we have reinsurance coverage remain outstanding for extended periods
of time.
Assessments. We are subject to various assessments and premium surcharges related to our
insurance activities, including assessments and premium surcharges for state guaranty funds and
second injury funds. Assessments based on premiums are recorded as an expense as premiums are
earned and generally paid one year after the calendar year in which the policies are written.
Assessments based on losses are recorded as an expense as losses are incurred and are generally
paid within one year of when claims are paid by us. State guaranty fund assessments are used by
state insurance oversight agencies to pay claims of policyholders of impaired, insolvent or failed
insurance companies and the operating expenses of those agencies. Second injury funds are used by
states to reimburse insurers and employers for claims paid to injured employees for aggravation of
prior conditions or injuries. In some states, these assessments and premium surcharges may be
partially recovered through a reduction in future premium taxes.
56
Deferred Policy Acquisition Costs. We defer commission expenses, premium taxes and certain
marketing, sales, underwriting and safety costs that vary with and are primarily related to the
acquisition of insurance policies. These acquisition costs are capitalized and charged to expense
ratably as premiums are earned. In calculating deferred policy acquisition costs, these costs are
limited to their estimated realizable value, which gives effect to the premiums to be earned,
anticipated losses and settlement expenses and certain other costs we expect to incur as the
premiums are earned, less related net investment income. Judgments as to the ultimate
recoverability of these deferred policy acquisition costs are highly dependent upon estimated
future profitability of unearned premiums. If the unearned premiums were less than our expected
claims and expenses after considering investment income, we would reduce the deferred costs.
Deferred Income Taxes. We use the liability method of accounting for income taxes. Under
this method, deferred income tax assets and liabilities are recognized for the future tax
consequences attributed to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities resulting from a tax rate change impacts our net income or loss in the reporting period
that includes the enactment date of the tax rate change.
In assessing whether our deferred tax assets will be realized, management considers whether it
is more likely than not that we will generate future taxable income during the periods in which
those temporary differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, tax planning strategies and projected future taxable income in making
this assessment. If necessary, we establish a valuation allowance to reduce the deferred tax
assets to the amounts that are more likely than not to be realized.
Impairment of Investment Securities. Impairment of an investment security results in a
reduction of the carrying value of the security and the realization of a loss when the fair value
of the security declines below our cost or amortized cost, as applicable, for the security and the
impairment is deemed to be other-than-temporary. We regularly review our investment portfolio to
evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair
value of our investments. We consider various factors in determining if a decline in the fair
value of an individual security is other-than-temporary. Some of the factors we consider include:
|
|
|
how long and by how much the fair value of the security has been below its cost; |
|
|
|
|
the financial condition and near-term prospects of the issuer of the security,
including any specific events that may affect its operations or earnings; |
|
|
|
|
our intent and ability to keep the security for a sufficient time period for it to recover its value; |
|
|
|
|
any downgrades of the security by a rating agency; and |
|
|
|
|
any reduction or elimination of dividends, or nonpayment of scheduled interest payments. |
Share-Based Compensation. As of January 1, 2005, we adopted Statement of Financial Accounting
Standards (SFAS) No. 123(R) Share-Based Payment. In accordance with SFAS No. 123(R), we are
using the modified prospective method to record prospectively compensation costs for new and
modified stock option awards over the applicable vesting periods.
57
Results of Operations
The table below summarizes certain operating results and key measures we use in monitoring and
evaluating our operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Income Statement Data |
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
332,491 |
|
|
$ |
290,891 |
|
|
$ |
264,962 |
|
Ceded premiums written |
|
|
(19,950 |
) |
|
|
(21,541 |
) |
|
|
(21,951 |
) |
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
$ |
312,541 |
|
|
$ |
269,350 |
|
|
$ |
243,011 |
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
299,303 |
|
|
$ |
256,568 |
|
|
$ |
234,733 |
|
Net investment income |
|
|
25,383 |
|
|
|
16,882 |
|
|
|
12,217 |
|
Net realized gains on investments (1) |
|
|
7,389 |
|
|
|
2,272 |
|
|
|
1,421 |
|
Fee and other income |
|
|
645 |
|
|
|
561 |
|
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
332,720 |
|
|
|
276,283 |
|
|
|
248,960 |
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses incurred |
|
|
199,484 |
|
|
|
204,056 |
|
|
|
174,186 |
|
Underwriting and certain other operating costs (2) |
|
|
35,024 |
|
|
|
31,113 |
|
|
|
28,792 |
|
Commissions |
|
|
19,030 |
|
|
|
16,226 |
|
|
|
14,160 |
|
Salaries and benefits |
|
|
17,234 |
|
|
|
16,045 |
|
|
|
15,229 |
|
Interest expense |
|
|
3,496 |
|
|
|
2,844 |
|
|
|
1,799 |
|
Policyholder dividends (3) |
|
|
6,006 |
|
|
|
4 |
|
|
|
1,108 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
280,274 |
|
|
|
270,288 |
|
|
|
235,274 |
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
52,446 |
|
|
|
5,995 |
|
|
|
13,686 |
|
Income tax expense |
|
|
15,088 |
|
|
|
65 |
|
|
|
3,129 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
37,358 |
|
|
$ |
5,930 |
|
|
$ |
10,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Insurance Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year loss ratio (4) |
|
|
67.4 |
% |
|
|
71.0 |
% |
|
|
68.5 |
% |
Prior accident year loss ratio (5) |
|
|
(0.8 |
)% |
|
|
8.5 |
% |
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
Net loss ratio |
|
|
66.6 |
% |
|
|
79.5 |
% |
|
|
74.2 |
% |
|
|
|
|
|
|
|
|
|
|
Net underwriting expense ratio (6) |
|
|
23.8 |
% |
|
|
24.7 |
% |
|
|
24.8 |
% |
Net dividend ratio (3) (7) |
|
|
2.0 |
% |
|
|
0.0 |
% |
|
|
0.5 |
% |
Net combined ratio (8) |
|
|
92.4 |
% |
|
|
104.2 |
% |
|
|
99.5 |
% |
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(In thousands) |
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
26,748 |
|
|
$ |
49,286 |
|
|
$ |
25,421 |
|
Investments |
|
|
638,780 |
|
|
|
533,618 |
|
|
|
364,868 |
|
Amounts recoverable from reinsurers |
|
|
109,603 |
|
|
|
122,562 |
|
|
|
198,977 |
|
Premiums receivable, net |
|
|
144,384 |
|
|
|
123,934 |
|
|
|
114,141 |
|
Deferred income taxes |
|
|
29,466 |
|
|
|
22,413 |
|
|
|
15,624 |
|
Deferred policy acquisition costs |
|
|
18,486 |
|
|
|
16,973 |
|
|
|
12,044 |
|
Deferred charges |
|
|
3,548 |
|
|
|
3,182 |
|
|
|
3,054 |
|
Total assets |
|
|
994,146 |
|
|
|
892,320 |
|
|
|
754,187 |
|
Reserves for loss and loss adjustment expenses |
|
|
519,178 |
|
|
|
484,485 |
|
|
|
432,880 |
|
Unearned premiums |
|
|
137,761 |
|
|
|
124,524 |
|
|
|
111,741 |
|
Insurance-related assessments |
|
|
40,886 |
|
|
|
35,135 |
|
|
|
29,876 |
|
Debt |
|
|
36,090 |
|
|
|
36,090 |
|
|
|
36,090 |
|
Redeemable preferred stock (9) |
|
|
25,000 |
|
|
|
50,000 |
|
|
|
131,916 |
|
Shareholders equity (deficit) (10) |
|
|
158,784 |
|
|
|
97,346 |
|
|
|
(42,862 |
) |
|
|
|
(1) |
|
In 2006, includes $3.5 million net realized gains in connection with the sale of all equity
securities as discussed below under Investment Portfolio in Item 7 of this report. |
|
(2) |
|
Includes policy acquisition expenses, such as assessments, premium taxes and other general
and administrative expenses, excluding commissions and salaries and benefits, related to
insurance operations and corporate operating expenses. |
|
(3) |
|
In 2006, includes $5.2 million of dividends accrued for policyholders in Florida. Florida
law requires payment of dividends to Florida policyholders pursuant to a formula based on
underwriting results from policies written in Florida in a consecutive three-year period. |
|
(4) |
|
The current accident year loss ratio is calculated by dividing loss and loss adjustment
expenses incurred for the current accident year by the current years net premiums earned. |
|
(5) |
|
The prior accident year loss ratio is calculated by dividing the change in loss and loss
adjustment expenses incurred for prior accident years by the current years net premiums
earned. |
|
(6) |
|
The net underwriting expense ratio is calculated by dividing underwriting and certain other
operating costs, commissions and salaries and benefits by the current years net premiums
earned. |
|
(7) |
|
The net dividend ratio is calculated by dividing policyholder dividends by the current years
net premiums earned. |
|
(8) |
|
The net combined ratio is the sum of the net loss ratio, the net underwriting expense ratio
and the net dividend ratio. |
|
(9) |
|
Includes our Series C and Series D convertible preferred stock, each of which is mandatorily
redeemable upon the occurrence of certain events that are deemed to be outside our control.
In November 2006, 250,000 shares of Series C preferred stock were converted into shares of
common stock by the holders in connection with a secondary public offering of common stock.
For 2004, also includes our Series A preferred stock, which was mandatorily redeemable upon
the occurrence of certain events that were deemed to be outside our control. In connection
with the initial public offering of our common stock in November 2005, all outstanding shares
of our Series A preferred stock were redeemed and exchanged for shares of our common stock. |
|
(10) |
|
In 1997, we entered into a recapitalization transaction with our then-principal shareholder
that resulted in a $164.2 million charge to retained earnings. For periods presented prior to
November 2005, shareholders equity (deficit) included our Series E preferred stock. In
connection with the initial public offering of our common stock in November 2005, all
outstanding shares of our Series E preferred stock were redeemed for cash. |
59
Overview of Operating Results
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Gross Premiums Written. Gross premiums written in 2006 were $332.5 million, compared to
$290.9 million in 2005, an increase of 14.3%. The increase was attributable to a $27.9 million
increase in annual premiums on voluntary policies written during the period and an $18.3 million
increase in premiums resulting from payroll audits and related premium adjustments. The increase
from payroll audits and related premium adjustments includes a $5.3 million increase resulting from
an adjustment to estimated earned but unbilled premium as discussed above under Principal
Revenues and Expense Items, in this Item 7. These increases were offset by a $2.2 million
decrease in direct assigned risk premiums and a $2.5 million decrease in assumed premiums from
mandatory pooling arrangements.
Net Premiums Written. Net premiums written in 2006 were $312.5 million, compared to $269.4
million in 2005, an increase of 16.0%. The increase was attributable to the growth in gross
premiums written and a $1.6 million decrease in premiums ceded to reinsurers, from $21.5 million in
2005 to $19.5 million in 2006. As a percentage of gross premiums written, ceded premiums were 6.0%
in 2006, compared to 7.4% in 2005.
Net Premiums Earned. Net premiums earned in 2006 were $299.3 million, compared to $256.6
million in 2005, an increase of 16.7%. This increase was primarily the result of an increase in
premiums written during 2005, which resulted in higher premiums earned in 2006.
Net Investment Income. Net investment income in 2006 was $25.4 million, compared to $16.9
million in 2005, an increase of 50.4% . The change was primarily attributable to an increase in
our investment portfolio, including cash and cash equivalents, from a monthly average of $467.0
million in 2005 to a monthly average of $626.3 million in 2006, an increase of 34.1%. Also
contributing to this growth was an increase in the pre-tax investment yield on our investment
portfolio from 3.5% per annum in 2005, to 4.1% per annum in 2006.
Net Realized Gains on Investments. Net realized gains on investments in 2006 totaled $7.4
million, compared to $2.3 million in 2005. The increase was primarily attributable to the sale of
all equity securities in our investment portfolio pursuant to a revision of our investment
guidelines as discussed below under Investment Portfolio in this Item 7. The net realized gain
from the sale of all equity securities was $3.5 million, of which $1.3 million in losses were
recognized in the third quarter and $4.8 million in gains were recognized in the fourth quarter.
Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses incurred were
$199.5 million in 2006, compared to $204.1 million in 2005, a decrease of $4.6 million, or 2.2%.
The decrease was the result of $21.9 million in additional prior accident year reserves recorded in
2005, which amount included $13.2 million related to the commutation of certain reinsurance
contracts, as well as $2.2 million of favorable prior accident year development in 2006. These
decreases were partially offset by an increase in current accident year loss and loss adjustment
expenses incurred resulting from increased net premiums earned in 2006 as compared to 2005. Our
net loss ratio was 66.6% in 2006, compared to 79.5% in 2005.
60
Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits.
Underwriting and certain other operating costs, commissions and salaries and benefits in 2006 were
$71.3 million, compared to $63.4 million in 2005, an increase of $7.9 million or 12.5%. This
increase was partially due to a $2.8 million increase in agents commissions; a $1.2 million
increase in salaries and benefits, which included a $922,000 increase in salary expense
attributable to share-based compensation; a $3.1 million increase in premium-based assessments and
taxes, which resulted from growth in our gross premiums earned in 2006; a $1.4 million increase in
deferred policy acquisition costs; and a $1.8 million professional fees attributable to
Sarbanes-Oxley compliance and expenses associated with a registered offering of our common stock on
behalf of certain of our shareholders. Offsetting these increases were a $1.7 million increase in
ceding commissions from reinsurers, which acts to reduce underwriting expenses, and a $2.1 million
decrease in loss-based assessments attributable to a reduction in gross reserves. Our underwriting
expense ratio declined from 24.7% in 2005 to 23.8% in 2006.
Interest Expense. Interest expense in 2006 was $3.5 million, compared to $2.8 million in
2005, an increase of 22.9%. This increase was due to an increase in our weighted average interest
rate from 7.3% per annum in 2005 to 8.9% per annum in 2006. Our weighted average borrowings for
both years were $36.1 million.
Policyholder Dividend Expense. Policyholder dividend expense in 2006 was $6.0 million,
compared to $4,000 in 2005. The increase was attributable to $5.2 million of dividends accrued for
Florida policyholders pursuant to a statutory formula based on our underwriting results on policies
written in Florida over a consecutive three-year period.
Income Tax Expense. Income tax expense in 2006 was $15.1 million, compared to $65,000 in
2005. The increase was primarily attributable to a $46.5 million increase in our pre-tax income,
from $6.0 million in 2005 to $52.4 million in 2006.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Gross Premiums Written. Gross premiums written in 2005 were $290.9 million, compared to
$265.0 million in 2004, an increase of 9.8%. The increase was attributable primarily to a $16.8
million increase in annual premiums on policies written during the period, a $5.8 million increase
in premiums resulting from payroll audits and related premium adjustments, and a $3.5 million
increase in assigned risk premiums, offset by a decrease of $1.1 million in assumed premiums from
mandatory pooling arrangements.
Net Premiums Written. Net premiums written in 2005 were $269.4 million, compared to $243.0
million in 2004, an increase of 10.8%. The increase was attributable to growth in gross premiums
written and a small decrease in premiums ceded to reinsurers, $21.5 million in 2005 compared to
$22.0 million in 2004. As a percentage of gross premiums written, ceded premiums were 7.4% in 2005
compared to 8.3% in 2004.
Net Premiums Earned. Net premiums earned in 2005 were $256.6 million, compared to $234.7
million in 2004, an increase of 9.3%. This increase was primarily the result of an increase in
premiums written during 2004, which resulted in higher premiums earned in 2005.
Net Investment Income. Net investment income in 2005 was $16.9 million, compared to $12.2
million in 2004, an increase of 38.2%. The change was attributable to an increase in our
investment portfolio, including cash and cash equivalents, from a monthly average of $350.9 million
in 2004 to a monthly average of $467.0 million in 2005, an increase of 33.0%. Pre-tax investment
yield on our investment portfolio was 3.5% in both 2005 and 2004.
Net Realized Gains on Investments. Net realized gains on investments in 2005 totaled $2.3
million, compared to $1.4 million in 2004. The increase was attributable to the timing of the sale
of equity securities in accordance with our investment guidelines.
61
Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses incurred
totaled $204.1 million in 2005, compared to $174.2 million in 2004, an increase of $29.9 million,
or 17.2%. Increases in our reserves resulting from our commutation with one of our reinsurers and
reserve strengthening for prior accident years accounted for $21.9 million, or 73.3%, of this
increase. Our net loss ratio was 79.5% in 2005, compared to 74.2% in 2004.
Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits.
Underwriting and certain other operating costs, commissions and salaries and benefits in 2005 were
$63.4 million, compared to $58.2 million in 2004, an increase of 8.9%. This increase was primarily
due to a $2.1 million increase in agent commissions, a $1.8 million increase in loss-based
assessments and a $2.4 million decrease in ceding commissions. This increase was partially offset
by an $884,000 decrease in salaries. In 2005, we transferred our employee agents from our
insurance company subsidiary to our insurance agency subsidiary, which resulted in a change in
their compensation expense from salary to commission expense. The increase in our loss-based
assessments resulted primarily from state second injury funds. Ceding commissions, which are
commissions we receive from reinsurers, reduce our total underwriting expenses. Our underwriting
expense ratio declined slightly from 24.8% in 2004 to 24.7% in 2005.
Interest expense. Interest expense in 2005 was $2.8 million, compared to $1.8 million in
2004. Our weighted average borrowings increased to $36.1 million in 2005 from $31.1 million in
2004. The increase in weighted average borrowings resulted from the issuance of $25.8 million of
subordinated notes in April 2004, the proceeds of which were used to redeem then-outstanding shares
of our Series E preferred stock. In addition, our weighted average interest rate increased to 7.3%
per annum in 2005, from 4.9% per annum in 2004.
Income tax expense. Our income tax expense in 2005 was $65,000, compared to income tax
expense of $3.1 million in 2004. The decrease in tax expense was attributable to lower net income
and a 25.9% increase in tax-exempt interest from 2004 to 2005.
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
our excess cash in fixed maturity and equity securities. We presently expect that our projected
cash flow from operations will provide us sufficient liquidity to fund our anticipated growth,
including payment of claims and operating expenses, payment of interest on our subordinated notes
and other holding company expenses, for at least the next 18 months.
We forecast claim payments based on our historical trends. We seek to manage the funding of
claim payments by actively managing available cash and forecasting cash flows on a short- and
long-term basis. Cash payments, net of reinsurance, for claims were $151.4 million in 2006, $139.2
million in 2005 and $113.9 million in 2004. In 2005, we also received $61.3 million in a
commutation with one of our reinsurers, as described below. Since December 31, 2002, we have
funded claim payments from cash flow from operations, principally premiums, net of amounts ceded to
our reinsurers, and net investment income. Our investment portfolio has increased from $250.0
million at December 31, 2002 to $665.5 million at December 31, 2006. We do not presently
anticipate selling securities in our investment portfolio to pay claims or to fund operating
expenses. Accordingly, we currently classify all fixed maturity securities in the held-to-maturity
category. Should circumstances arise that would require us to do so, we may incur losses on such
sales, which would adversely affect our results of operations and could reduce investment income in
future periods.
As discussed above under Overview, we purchase reinsurance to protect us against severe
claims and catastrophic events. Based on our estimates of future claims, we believe we are
sufficiently capitalized to satisfy the deductibles and retentions in our 2007 reinsurance program.
We reevaluate our reinsurance program at least annually, taking into consideration a number of
factors, including cost of reinsurance, our liquidity requirements, operating leverage and coverage
terms.
62
Even if we maintain our existing retention levels, if the cost of reinsurance increases, our
cash flow from operations would decrease as we would cede a greater portion of our written premiums
to our reinsurers. Conversely, our cash flow from operations would increase if the cost of
reinsurance declined relative to our retention.
Net cash provided by operating activities was $81.8 million in 2006, as compared to $142.0
million in 2005, and $91.9 million in 2004. Major components of cash provided by operating
activities in 2006 were net premiums collected of $292.5 million and amounts recovered from
reinsurers of $7.9 million, offset by claim payments of $160.2 million, federal taxes paid of $15.2
million and operating expenditures of $43.2 million. Included in these operating expenditures were
pre-tax expenses of $1.1 million related to a public offering of common stock by certain of our
shareholders. We were obligated to pay these expenses under the terms of a registration rights
agreement. Major components of cash provided by operating activities in 2005 were net premiums
collected of $260.1 million and amounts recovered from reinsurers of $85.0 million, offset by claim
payments of $161.7 million, federal taxes paid of $3.7 million and operating expenditures of $37.7
million. Included in amounts recovered from reinsurers was $61.3 million as the result of a
commutation with one of our reinsurers, as discussed below. Major components of cash provided by
operating activities in 2004 were net premiums collected of $237.8 million and amounts recovered
from reinsurers of $54.1 million, offset by claim payments of $160.6 million and operating
expenditures of $39.4 million.
Net cash used by investing activities was $104.8 million in 2006, as compared to $171.3
million in 2005 and $109.0 million in 2004. In 2006, major components of net cash used by
investing activities included investment purchases of $256.6 million and net purchases of
furniture, fixtures and equipment of $1.2 million, offset by proceeds from sales and maturities of
investments of $153.0 million. In 2005, major components of net cash used by investing activities
included investment purchases of $296.2 million and purchases of furniture, fixtures and equipment
of $1.4 million, offset by proceeds from sales and maturities of investments of $126.3 million. In
2004, major components of net cash used by investing activities included investment purchases of
$145.3 million and net purchases of furniture, fixtures and equipment of $2.8 million, offset by
proceeds from sales and maturities of investments of $36.7 million and proceeds of $2.4 million
from repayment of a loan.
Net cash provided by financing activities was $442,000 in 2006, as compared to $53.1 million
in 2005 and $7.4 million of net cash used in 2004. Major components of cash provided in financing
activities in 2006 were $428,000 of proceeds from the exercise of stock options and $14,000 of tax
benefit from share-based compensation. Major components of cash provided by financing in 2005
included gross proceeds of $72.0 million from the initial public offering, offset by $8.8 million
of underwriting discounts and other costs related to the initial public offering and $10.2 million
to redeem shares of Series A and Series E preferred stock. In 2004, major components of net cash
used in financing activities included the redemption of $27.2 million of Series E preferred stock
and the repayment of the remaining $6.0 million of a note payable, offset by proceeds of $25.8
million from the issuance of subordinated notes pursuant to a trust preferred securities
transaction.
Interest on the outstanding subordinated notes accrues at a floating rate equal to the
three-month LIBOR plus a marginal rate. Our $10.3 million issuance of subordinated notes due 2034
has a marginal rate of 4.1%, and, as of December 31, 2006, had an effective rate of 9.5%. These
notes are prepayable at par beginning in January 2009. Our $25.8 million issuance of subordinated
notes due 2034 has a marginal rate of 3.8% and, as of December 31, 2006, had an effective rate of
9.2%. These notes are prepayable at par beginning in April 2009.
In November 2006, we completed a public offering of 9,071,576 shares of common stock. All of
these shares were offered by existing shareholders. In connection with this public offering,
holders of 250,000 shares of our convertible preferred stock converted those shares into 1,214,771
shares of our common stock. We did not receive any of the proceeds from this offering.
63
Because our convertible preferred stock is mandatorily redeemable upon the occurrence of
certain events that are deemed to be outside of our control, our preferred stock is presented on
the balance sheet outside of shareholders equity. As a result of the conversion of these shares
of preferred stock into common stock, in 2006 we increased shareholders equity by $25 million, the
amount we received when the preferred shares were issued in 1998. Offsetting this increase were
expenses of $1.1 million associated with the public offering.
During 2004, Converium Reinsurance (North America), one of our reinsurers, reported a
significant loss, resulting in a downgrade in its A.M. Best rating. Although Converium continued
to reimburse us under the terms of our reinsurance agreements, we initiated discussions with
Converium to seek to reduce the credit risk associated with the amounts due to us. Effective June
30, 2005, we entered into a commutation agreement with Converium. In the third quarter of 2005,
Converium paid us $61.3 million pursuant to this agreement in exchange for a termination and full
release of three of our five reinsurance agreements with Converium. Under the commutation
agreement, all liabilities reinsured with Converium under these three reinsurance agreements have
reverted back to us. We recorded a pre-tax loss of $13.2 million related to this commutation
agreement. Converium remains obligated to us under the remaining two agreements. At December 31,
2006, the amount recoverable from Converium under the remaining two reinsurance agreements was $6.2
million. The $61.3 million we received in connection with the commutation with Converium was
contributed to our investment portfolio.
AMERISAFE is a holding company that transacts business through its operating subsidiaries,
including American Interstate, Silver Oak Casualty and American Interstate of Texas. AMERISAFEs
primary assets are the capital stock of these operating subsidiaries. The ability of AMERISAFE to
fund its operations depends upon the surplus and earnings of its subsidiaries and their ability to
pay dividends to AMERISAFE. Payment of dividends by our insurance subsidiaries is restricted by
state insurance laws, including laws establishing minimum solvency and liquidity thresholds. See
BusinessRegulationDividend Limitations in Item 1of this report. Based on reported capital and
surplus at December 31, 2006, American Interstate is permitted under Louisiana insurance law to pay
dividends to AMERISAFE in 2007 in an amount up to $19.6 million without approval by the Louisiana
Department of Insurance.
Investment Portfolio
The first priority of our investment strategy is capital preservation, with a secondary focus
on maximizing after-tax income. We presently expect to maintain sufficient liquidity from funds
generated from operations to meet our anticipated insurance obligations and operating and capital
expenditure needs, with excess funds invested in accordance with our investment guidelines.
We allocate our portfolio into three categories; cash and cash equivalents, fixed maturity
securities and equity securities. Cash and cash equivalents includes cash on deposit, commercial
paper, short-term municipal securities, pooled short-term money market funds and certificates of
deposit. Our fixed maturity securities includes obligations of the U.S. Treasury or U.S. agencies,
obligations of states and their subdivisions, long-term certificates of deposit, U.S.
dollar-denominated obligations of the U.S. corporations, mortgage-backed securities, mortgages
guaranteed by the Federal National Mortgage Association and asset-backed securities. As discussed
below, currently a portion of our investment portfolio allocated to equity securities is invested
in three separate value-based exchange traded funds.
In 2006, we began a strategic review of our investment management and related policies. As a
result of this review, we revised our investment guidelines. Under our revised guidelines, the
market value of the equity securities in our investment portfolio will range from 20% to 30% of
shareholders equity, plus redeemable preferred stock, at the end of the most recently completed
fiscal year. Under our prior investment guidelines, the portion of our investment portfolio
invested in equity securities was limited to 12% of the carrying value and 15% of the market value
of the total portfolio. As a result of the changes in our investment guidelines, we expect to hold
a smaller percentage of our investment portfolio in equity securities, with a greater emphasis on
index funds.
64
In anticipation of the change in our investment guidelines, we sold all of the equity
securities in our investment portfolio. These sales began in the third quarter and were completed
in the fourth quarter of 2006. We presently intend to reposition the equity portion of our
investment portfolio to consist of a combination of value-based exchange traded funds and an
externally managed portfolio of individual equity securities. To achieve this repositioning, we
purchased $21.1 million of value-based exchange traded funds in late 2006. Until a new equity
portfolio manager is appointed, we may purchase additional equity index funds to bring the
percentage of our total portfolio invested in equity securities within our current investment
guidelines.
Also as a result of the strategic review, we retained Prudential Investment Management, Inc.,
or PIM, a registered investment advisory firm and a subsidiary of Prudential Financial, Inc., to
manage our portfolio of fixed maturity securities under investment guidelines approved by our board
of directors. PIM began managing our fixed maturity securities in November 2006.
Under Louisiana and Texas law, as applicable, each of American Interstate, Silver Oak Casualty
and American Interstate of Texas is required to invest only in securities that are either
interest-bearing or eligible for dividends, and must limit its investment in the securities of any
single issuer to five percent of the insurance companys assets. As of December 31, 2006, we were
in compliance with these requirements.
We employ diversification policies and balance investment credit risk and related underwriting
risks to minimize our total potential exposure to any one business sector or security. Our
investment portfolio, including cash and cash equivalents, had a carrying value of $665.5 million
as of December 31, 2006, and is summarized in the table below by type of investment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
Carrying Value |
|
|
of Portfolio |
|
|
|
(In thousands) |
|
|
|
|
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
State and political subdivisions |
|
$ |
365,282 |
|
|
|
54.9 |
% |
Mortgage-backed securities |
|
|
117,456 |
|
|
|
17.6 |
% |
U.S. Treasury securities and obligations of
U.S. Government agencies |
|
|
78,817 |
|
|
|
11.8 |
% |
Corporate bonds |
|
|
21,123 |
|
|
|
3.2 |
% |
Asset-backed securities |
|
|
32,436 |
|
|
|
4.9 |
% |
|
|
|
|
|
|
|
Total fixed maturity securities |
|
|
615,114 |
|
|
|
92.4 |
% |
Equity securities (1) |
|
|
23,666 |
|
|
|
3.6 |
% |
Cash and cash equivalents |
|
|
26,748 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
|
Total investments, including cash and cash equivalents |
|
$ |
665,528 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Equity securities represented 12.9% of shareholders equity plus redeemable preferred
stock as of December 31, 2006. |
We regularly evaluate our investment portfolio to identify other-than-temporary impairments in
the fair values of the securities held in our investment portfolio. We consider various factors in
determining whether a decline in the fair value of a security is other-than-temporary, including:
|
|
|
how long and by how much the fair value of the security has been below its cost; |
|
|
|
|
the financial condition and near-term prospects of the issuer of the security,
including any specific events that may affect its operations or earnings; |
|
|
|
|
our intent and ability to keep the security for a sufficient time period for it to recover its value; |
|
|
|
|
any downgrades of the security by a rating agency; and |
65
|
|
|
any reduction or elimination of dividends, or nonpayment of scheduled interest payments. |
As of December 31, 2006, there were no other-than-temporary declines in the fair values of the
securities held in our investment portfolio.
Contractual Obligations and Commitments
We manage risk on certain long-duration claims by settling these claims through the purchase
of annuities from unaffiliated life insurance companies. In the event these companies are unable
to meet their obligations under these annuity contracts, we could be liable to the claimants, but
our reinsurers remain obligated to indemnify us for all or part of these obligations in accordance
with the terms of our reinsurance contracts. As of December 31, 2006, the present value of these
annuities was $60.3 million, as estimated by our annuity providers. Each of the life insurance
companies issuing these annuities, or the entity guaranteeing the life insurance company, has an
A.M. Best rating of A (Excellent) or better. For additional information, see Note 18 to our
consolidated financial statements in Item 8 of this report.
We lease equipment and office space under noncancelable operating leases. Future minimum
lease payments at December 31, 2006, were as follows:
|
|
|
|
|
|
|
Future Minimum |
|
Year |
|
Lease Payments |
|
|
|
(In thousands) |
|
2007 |
|
$ |
749 |
|
2008 |
|
|
569 |
|
2009 |
|
|
473 |
|
2010 |
|
|
8 |
|
|
|
|
|
|
|
$ |
1,799 |
|
|
|
|
|
Rental expense was $1.4 million in 2006, $924,000 in 2005 and $956,000 in 2004.
66
The table below provides information with respect to our long-term debt and contractual
commitments as of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due By Period |
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
More Than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
4-5 Years |
|
|
5 Years |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Subordinated notes (1) |
|
$ |
36,090 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
36,090 |
|
Loss and loss adjustment expenses (2) |
|
|
519,178 |
|
|
|
187,423 |
|
|
|
227,919 |
|
|
|
51,399 |
|
|
|
52,437 |
|
Loss-based insurance assessments (3) |
|
|
17,669 |
|
|
|
6,379 |
|
|
|
7,757 |
|
|
|
1,749 |
|
|
|
1,784 |
|
Capital lease obligations |
|
|
548 |
|
|
|
507 |
|
|
|
41 |
|
|
|
0 |
|
|
|
0 |
|
Operating lease obligations |
|
|
1,799 |
|
|
|
749 |
|
|
|
1,042 |
|
|
|
8 |
|
|
|
0 |
|
Purchase obligations |
|
|
424 |
|
|
|
284 |
|
|
|
140 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
575,708 |
|
|
$ |
195,342 |
|
|
$ |
236,899 |
|
|
$ |
53,156 |
|
|
$ |
90,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts do not include interest payments associated with these obligations. Interest rates
on our subordinated notes are variable and may change on a quarterly basis. See Liquidity
and Capital Resources in Item 1 of this report for further discussion of our subordinated
notes. |
|
(2) |
|
The loss and loss adjustment expense payments due by period in the table above are based upon
the loss and loss adjustment expense estimates as of December 31, 2006 and actuarial estimates
of expected payout patterns and are not contractual liabilities as to a time certain. Our
contractual liability is to provide benefits under the policy. As a result, our calculation
of loss and loss adjustment expense payments due by period is subject to the same
uncertainties associated with determining the level of loss and loss adjustment expenses
generally and to the additional uncertainties arising from the difficulty of predicting when
claims (including claims that have not yet been reported to us) will be paid. For a
discussion of our loss and loss adjustment expense process, see BusinessLoss Reserves in
Item 1 of this report. Actual payments of loss and loss adjustment expenses by period will
vary, perhaps materially, from the amounts shown in the table above to the extent that current
estimates of loss and loss adjustment expenses vary from actual ultimate claims amounts and as
a result of variations between expected and actual payout patterns. See Risk FactorsRisks
Related to Our BusinessOur loss reserves are based on estimates and may be inadequate to
cover our actual losses in Item 1 of this report for a discussion of the uncertainties
associated with estimating loss and loss adjustment expenses. |
|
(3) |
|
We are subject to various annual assessments imposed by certain of the states in which we
write insurance policies. These assessments are generally based upon the amount of premiums
written or losses paid during the applicable year. Assessments based on premiums are
generally paid within one year after the calendar year in which the policies are written,
while assessments based on losses are generally paid within one year after the loss is paid.
When we establish a reserve for loss and loss adjustment expenses for a reported claim, we
accrue our obligation to pay any applicable assessments. If settlement of the claim is to be
paid out over more than one year, our obligation to pay any related loss-based assessments
extends for the same period of time. Because our reserves for loss and loss adjustment
expenses are based on estimates, our accruals for loss-based insurance assessments are also
based on estimates. Actual payments of loss and loss adjustment expenses may differ, perhaps
materially, from our reserves. Accordingly, our actual loss-based insurance assessments may
vary, perhaps materially, from our accruals. |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
67
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of potential economic loss principally arising from adverse changes in
the fair value of financial instruments. The major components of market risk affecting us are
credit risk, interest rate risk and equity price risk. We currently have no exposure to foreign
currency risk.
Credit Risk
Credit risk is the potential loss arising principally from adverse changes in the financial
condition of the issuers of our fixed maturity securities and the financial condition of our
reinsurers.
We address the credit risk related to the issuers of our fixed maturity securities by
investing in fixed maturity securities that are rated BBB or higher by Standard & Poors. We
also independently, and through our independent fixed maturity investment manager, monitor the
financial condition of all issuers of our fixed maturity securities. To limit our risk exposure,
we employ stringent diversification policies that limit the credit exposure to any single issuer or
business sector.
We are subject to credit risk with respect to our reinsurers. Although our reinsurers are
obligated to reimburse us to the extent we cede risk to them, we are ultimately liable to our
policyholders on all risks we have reinsured. As a result, reinsurance contracts do not limit our
ultimate obligations to pay claims and we might not collect amounts recoverable from our
reinsurers. We address this credit risk by initially selecting reinsurers with an A.M. Best
rating of A (Excellent) or better and by performing, along with our reinsurance broker, quarterly
credit reviews of our reinsurers. If one of our reinsurers suffers a credit downgrade, we may
consider various options to lessen the risk of asset impairment including commutation, novation and
letters of credit. See Managements Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources. in Item 7 of this report.
Interest Rate Risk
We had fixed maturity securities with a fair value of $609.3 million and a carrying value of
$615.1 million as of December 31, 2006 that are subject to interest rate risk. We are also subject
to interest rate risk on our subordinated debt securities, which have quarterly adjustable interest
rates based on LIBOR plus a fixed margin. Interest rate risk is the risk that we may incur losses
due to adverse changes in interest rates. Fluctuations in interest rates have a direct impact on
the market valuation of our fixed maturity securities and the cost to service our subordinated debt
securities. We manage our exposure to interest rate risk through a disciplined asset and liability
matching and capital management process. In the management of this risk, the characteristics of
duration, credit and variability of cash flows are critical elements. These risks are assessed
regularly and balanced within the context of our liability and capital position.
68
The table below summarizes the interest rate risk associated with our fixed maturity
securities by illustrating the sensitivity of the fair value and carrying value of our fixed
maturity securities as of December 31, 2006 to selected hypothetical changes in interest rates, and
the associated impact on our shareholders equity. We classify our fixed maturity securities as
held-to-maturity and carry them on our balance sheet at cost or amortized cost, as applicable.
Temporary changes in the fair value of our fixed maturity securities that are held-to-maturity,
such as those resulting from interest rate fluctuations, do not impact the carrying value of these
securities and, therefore, do not affect our shareholders equity. However, temporary changes in
the fair value of our fixed maturity securities that are held as available-for-sale do impact the
carrying value of these securities and are reported in our shareholders equity as a component of
other comprehensive income, net of deferred taxes. The selected scenarios in the table below are
not predictions of future events, but rather are intended to illustrate the effect such events may
have on the fair value and carrying value of our fixed maturity securities and on our shareholders
equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
Increase |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Change in |
|
(Decrease) in |
Hypothetical Change |
|
|
|
|
|
Change in |
|
|
|
|
|
Carrying |
|
Shareholders |
in Interest Rates |
|
Fair Value |
|
Fair Value |
|
Carrying Value |
|
Value |
|
Equity |
200 basis point increase |
|
$ |
557,324 |
|
|
$ |
(51,944 |
) |
|
$ |
615,114 |
|
|
$ |
|
|
|
|
|
|
100 basis point increase |
|
|
581,580 |
|
|
|
(27,688 |
) |
|
|
615,114 |
|
|
|
|
|
|
|
|
|
No change |
|
|
609,268 |
|
|
|
|
|
|
|
615,114 |
|
|
|
|
|
|
|
|
|
100 basis point decrease |
|
|
636,854 |
|
|
|
27,586 |
|
|
|
615,114 |
|
|
|
|
|
|
|
|
|
200 basis point decrease |
|
|
668,529 |
|
|
|
59,262 |
|
|
|
615,114 |
|
|
|
|
|
|
|
|
|
Equity Price Risk
Equity price risk is the risk that we may incur losses due to adverse changes in the market
prices of the equity securities we hold in our investment portfolio. We classify our portfolio of
equity securities as available-for-sale and carry these securities on our balance sheet at fair
value. Accordingly, adverse changes in the market prices of our equity securities result in a
decrease in the value of our total assets and shareholders equity. In order to minimize our
exposure to equity price risk, we invest primarily in mid-to-large capitalization issues and seek
to diversify our equity holdings across several business sectors. In addition, we currently limit
the percentage of equity securities held in our investment portfolio to a range of 20% to 30% of
shareholders equity, plus redeemable preferred stock, at the end of the most recent fiscal year.
As of December 31, 2006, the equity securities in our investment portfolio had a fair value of
$23.7 million, representing 12.9% of shareholders equity plus redeemable preferred stock on that
date. As of that date, our equity portfolio was invested in three value-based exchange traded
funds. See Business Investments in Item 1 of this report.
69
Item 8. Financial Statements and Supplementary Data.
|
|
|
|
|
|
|
Page |
Audited Financial Statements as of December 31, 2006 and 2005 and for the three years in the |
|
|
|
|
period ended December 31, 2006: |
|
|
|
|
|
|
|
71 |
|
|
|
|
72 |
|
|
|
|
73 |
|
|
|
|
74 |
|
|
|
|
75 |
|
|
|
|
76 |
|
|
|
|
|
|
Financial Statement Schedules: |
|
|
|
|
|
|
|
108 |
|
|
|
|
111 |
|
(Schedules I, III, IV and V are not applicable and have been omitted) |
|
|
|
|
70
Report of Independent Registered Public Accounting Firm
The Board of Directors
AMERISAFE, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of AMERISAFE, Inc. and
Subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income,
changes in stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2006. Our audits also include the financial statement schedules listed in the Index
at Item 15(a). These financial statements and schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements and schedules
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of AMERISAFE, Inc. and Subsidiaries at December 31,
2006 and 2005 and the consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of AMERISAFE, Inc. and Subsidiaries internal
control over financial reporting as of December 31, 2006, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 2, 2007, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New Orleans, Louisiana
March 2, 2007
71
AMERISAFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
Fixed maturity securitiesheld-to-maturity, at amortized cost (fair value $609,268 and
$458,819 in 2006 and 2005, respectively) |
|
$ |
615,114 |
|
|
$ |
465,648 |
|
Fixed maturity securitiesavailable-for-sale, at fair value (cost $0 and $1,709 in 2006 and
2005, respectively) |
|
|
|
|
|
|
1,695 |
|
Equity securitiesavailable-for-sale, at fair value (cost $22,157 and $62,875 in 2006
and 2005, respectively) |
|
|
23,666 |
|
|
|
66,275 |
|
|
|
|
|
|
|
|
Total investments |
|
|
638,780 |
|
|
|
533,618 |
|
Cash and cash equivalents |
|
|
26,748 |
|
|
|
49,286 |
|
Amounts recoverable from reinsurers |
|
|
109,603 |
|
|
|
122,562 |
|
Premiums receivable, net |
|
|
144,384 |
|
|
|
123,934 |
|
Deferred income taxes |
|
|
29,466 |
|
|
|
22,413 |
|
Accrued interest receivable |
|
|
5,921 |
|
|
|
4,597 |
|
Property and equipment, net |
|
|
5,687 |
|
|
|
6,321 |
|
Deferred policy acquisition costs |
|
|
18,486 |
|
|
|
16,973 |
|
Deferred charges |
|
|
3,548 |
|
|
|
3,182 |
|
Other assets |
|
|
11,523 |
|
|
|
9,434 |
|
|
|
|
|
|
|
|
|
|
$ |
994,146 |
|
|
$ |
892,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, redeemable preferred stock and shareholders equity |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Reserves for loss and loss adjustment expenses |
|
$ |
519,178 |
|
|
$ |
484,485 |
|
Unearned premiums |
|
|
137,761 |
|
|
|
124,524 |
|
Reinsurance premiums payable |
|
|
1,378 |
|
|
|
694 |
|
Amounts held for others |
|
|
1,827 |
|
|
|
1,484 |
|
Policyholder deposits |
|
|
39,141 |
|
|
|
38,033 |
|
Insurance-related assessments |
|
|
40,886 |
|
|
|
35,135 |
|
Federal income tax payable |
|
|
3,631 |
|
|
|
1,677 |
|
Accounts payable and other liabilities |
|
|
30,470 |
|
|
|
22,852 |
|
Subordinated debt securities |
|
|
36,090 |
|
|
|
36,090 |
|
|
|
|
|
|
|
|
|
|
|
810,362 |
|
|
|
744,974 |
|
Redeemable preferred stock: |
|
|
|
|
|
|
|
|
Series A nonconvertible$0.01 par value, $100 per share redemption value: |
|
|
|
|
|
|
|
|
Authorized shares1,500,000; issued and outstanding sharesnone in 2006
and 2005 |
|
|
|
|
|
|
|
|
Series C convertible$0.01 par value, $100 per share redemption value: |
|
|
|
|
|
|
|
|
Authorized shares300,000; issued and outstanding shares50,000 in 2006 and
300,000 in 2005 |
|
|
5,000 |
|
|
|
30,000 |
|
Series D convertible$0.01 par value, $100 per share redemption value: |
|
|
|
|
|
|
|
|
Authorized shares200,000; issued and outstanding shares200,000 in 2006 and 2005 |
|
|
20,000 |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
50,000 |
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Preferred stock: Series E nonconvertible$0.01 par value, $100 per share redemption value: |
|
|
|
|
|
|
|
|
Authorized500,000; issued and outstanding sharesnone in 2006 and in 2005 |
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
Voting$0.01 par value authorized shares50,000,000 in 2006 and 2005;
issued and outstanding shares18,705,098 in 2006 and 17,424,054 in 2005 |
|
|
187 |
|
|
|
174 |
|
Additional paid-in capital |
|
|
171,557 |
|
|
|
145,206 |
|
Accumulated deficit |
|
|
(16,988 |
) |
|
|
(54,346 |
) |
Accumulated other comprehensive income |
|
|
4,028 |
|
|
|
6,312 |
|
|
|
|
|
|
|
|
|
|
|
158,784 |
|
|
|
97,346 |
|
|
|
|
|
|
|
|
|
|
$ |
994,146 |
|
|
$ |
892,320 |
|
|
|
|
|
|
|
|
See
accompanying notes.
72
AMERISAFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
299,303 |
|
|
$ |
256,568 |
|
|
$ |
234,733 |
|
Net investment income |
|
|
25,383 |
|
|
|
16,882 |
|
|
|
12,217 |
|
Net realized gains on investments |
|
|
7,389 |
|
|
|
2,272 |
|
|
|
1,421 |
|
Fee and other income |
|
|
645 |
|
|
|
561 |
|
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
332,720 |
|
|
|
276,283 |
|
|
|
248,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses incurred |
|
|
199,484 |
|
|
|
204,056 |
|
|
|
174,186 |
|
Underwriting and certain other operating costs |
|
|
35,024 |
|
|
|
31,113 |
|
|
|
28,792 |
|
Commissions |
|
|
19,030 |
|
|
|
16,226 |
|
|
|
14,160 |
|
Salaries and benefits |
|
|
17,234 |
|
|
|
16,045 |
|
|
|
15,229 |
|
Interest expense |
|
|
3,496 |
|
|
|
2,844 |
|
|
|
1,799 |
|
Policyholder dividends |
|
|
6,006 |
|
|
|
4 |
|
|
|
1,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
280,274 |
|
|
|
270,288 |
|
|
|
235,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
52,446 |
|
|
|
5,995 |
|
|
|
13,686 |
|
Income tax expense |
|
|
15,088 |
|
|
|
65 |
|
|
|
3,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
37,358 |
|
|
|
5,930 |
|
|
|
10,557 |
|
Preferred stock dividends |
|
|
|
|
|
|
(8,593 |
) |
|
|
(9,781 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders |
|
$ |
37,358 |
|
|
$ |
(2,663 |
) |
|
$ |
776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.88 |
|
|
$ |
(1.25 |
) |
|
$ |
2.42 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.88 |
|
|
$ |
(1.25 |
) |
|
$ |
2.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
17,579,829 |
|
|
|
2,129,492 |
|
|
|
225,367 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
17,594,736 |
|
|
|
2,129,492 |
|
|
|
255,280 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
73
AMERISAFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Series E |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Income |
|
|
Total |
|
Balance at January 1, 2004 |
|
|
247,209 |
|
|
$ |
24,720 |
|
|
|
180,125 |
|
|
$ |
2 |
|
|
$ |
|
|
|
$ |
(52,544 |
) |
|
$ |
7,170 |
|
|
$ |
(20,652 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,557 |
|
|
|
|
|
|
|
10,557 |
|
Other comprehensive income,
net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117 |
) |
|
|
(117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,440 |
|
Conversion of warrants |
|
|
|
|
|
|
|
|
|
|
119,649 |
|
|
|
1 |
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
86 |
|
Dividends paid in Series A
preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,492 |
) |
|
|
|
|
|
|
(5,492 |
) |
Dividends paid in Series E
preferred stock |
|
|
42,880 |
|
|
|
4,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,289 |
) |
|
|
|
|
|
|
|
|
Redemption of Series E preferred
stock |
|
|
(272,436 |
) |
|
|
(27,244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
17,653 |
|
|
|
1,765 |
|
|
|
299,774 |
|
|
|
3 |
|
|
|
|
|
|
|
(51,683 |
) |
|
|
7,053 |
|
|
|
(42,862 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,930 |
|
|
|
|
|
|
|
5,930 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(741 |
) |
|
|
(741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,189 |
|
Dividends paid in Series A
preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,376 |
) |
|
|
|
|
|
|
(4,376 |
) |
Dividends paid in Series E
preferred stock |
|
|
27,655 |
|
|
|
2,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,766 |
) |
|
|
|
|
|
|
|
|
IPO Common stock issued |
|
|
|
|
|
|
|
|
|
|
8,000,000 |
|
|
|
80 |
|
|
|
71,920 |
|
|
|
|
|
|
|
|
|
|
|
72,000 |
|
IPO Common stock issued
in exchange for Series A
preferred stock |
|
|
|
|
|
|
|
|
|
|
9,120,948 |
|
|
|
91 |
|
|
|
81,997 |
|
|
|
(837 |
) |
|
|
|
|
|
|
81,251 |
|
Restricted common
stock issued |
|
|
|
|
|
|
|
|
|
|
3,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
53 |
|
IPO Series A preferred stock
redeemed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
(52 |
) |
IPO Series E preferred stock
redeemed |
|
|
(45,308 |
) |
|
|
(4,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(562 |
) |
|
|
|
|
|
|
(5,093 |
) |
IPO Offering costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,040 |
) |
|
|
|
|
|
|
|
|
|
|
(5,040 |
) |
Other IPO expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,724 |
) |
|
|
|
|
|
|
|
|
|
|
(3,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
17,424,054 |
|
|
|
174 |
|
|
|
145,206 |
|
|
|
(54,346 |
) |
|
|
6,312 |
|
|
|
97,346 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,358 |
|
|
|
|
|
|
|
37,358 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,284 |
) |
|
|
(2,284 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,074 |
|
Common stock issued
upon conversion of Series C
preferred stock |
|
|
|
|
|
|
|
|
|
|
1,214,771 |
|
|
|
12 |
|
|
|
24,988 |
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
Common stock issued
upon exercise of options |
|
|
|
|
|
|
|
|
|
|
47,500 |
|
|
|
1 |
|
|
|
427 |
|
|
|
|
|
|
|
|
|
|
|
428 |
|
Restricted common stock issued |
|
|
|
|
|
|
|
|
|
|
18,773 |
|
|
|
|
|
|
|
168 |
|
|
|
|
|
|
|
|
|
|
|
168 |
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
754 |
|
|
|
|
|
|
|
|
|
|
|
754 |
|
Tax benefit of share-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
|
|
|
$ |
|
|
|
|
18,705,098 |
|
|
$ |
187 |
|
|
$ |
171,557 |
|
|
$ |
(16,988 |
) |
|
$ |
4,028 |
|
|
$ |
158,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
74
AMERISAFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
37,358 |
|
|
$ |
5,930 |
|
|
$ |
10,557 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,960 |
|
|
|
2,159 |
|
|
|
1,695 |
|
Net amortization/accretion of investments |
|
|
2,272 |
|
|
|
2,256 |
|
|
|
1,673 |
|
Deferred income taxes |
|
|
(5,824 |
) |
|
|
(6,389 |
) |
|
|
(2,849 |
) |
Net realized gains on investments |
|
|
(7,389 |
) |
|
|
(2,272 |
) |
|
|
(1,421 |
) |
(Gain)loss on sale of asset |
|
|
(82 |
) |
|
|
2 |
|
|
|
|
|
Share-based compensation |
|
|
922 |
|
|
|
53 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums receivable |
|
|
(20,450 |
) |
|
|
(9,793 |
) |
|
|
(5,761 |
) |
Accrued interest receivable |
|
|
(1,324 |
) |
|
|
(1,474 |
) |
|
|
(464 |
) |
Deferred policy acquisition costs and deferred charges |
|
|
(1,879 |
) |
|
|
(5,057 |
) |
|
|
(291 |
) |
Other assets |
|
|
(2,089 |
) |
|
|
424 |
|
|
|
3,497 |
|
Reserve for loss and loss adjustment expenses |
|
|
34,693 |
|
|
|
51,605 |
|
|
|
55,321 |
|
Unearned premiums |
|
|
13,237 |
|
|
|
12,783 |
|
|
|
8,279 |
|
Reinsurance balances |
|
|
13,643 |
|
|
|
76,248 |
|
|
|
13,173 |
|
Amounts held for others and policyholder deposits |
|
|
1,451 |
|
|
|
4,557 |
|
|
|
4,975 |
|
Accounts payable and other liabilities |
|
|
15,323 |
|
|
|
11,063 |
|
|
|
3,565 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
81,822 |
|
|
|
142,095 |
|
|
|
91,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments held-to-maturity |
|
|
(214,627 |
) |
|
|
(240,054 |
) |
|
|
(113,461 |
) |
Purchases of investments available-for-sale |
|
|
(41,972 |
) |
|
|
(56,115 |
) |
|
|
(31,795 |
) |
Proceeds from maturities of investments held-to-maturity |
|
|
61,182 |
|
|
|
99,953 |
|
|
|
21,789 |
|
Proceeds from sales and maturities of investments
available-for-sale |
|
|
91,859 |
|
|
|
26,342 |
|
|
|
14,908 |
|
Repayments on mortgage loan |
|
|
|
|
|
|
|
|
|
|
2,370 |
|
Purchases of property and equipment |
|
|
(1,330 |
) |
|
|
(1,409 |
) |
|
|
(2,778 |
) |
Proceeds from sales of property and equipment |
|
|
86 |
|
|
|
3 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(104,802 |
) |
|
|
(171,280 |
) |
|
|
(108,965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock option exercise |
|
|
428 |
|
|
|
|
|
|
|
|
|
Tax benefit from share-based payments |
|
|
14 |
|
|
|
|
|
|
|
|
|
Net proceeds from initial public offering |
|
|
|
|
|
|
63,236 |
|
|
|
|
|
Series A preferred stock redemption |
|
|
|
|
|
|
(5,093 |
) |
|
|
|
|
Series E preferred stock redemption |
|
|
|
|
|
|
(5,093 |
) |
|
|
(27,244 |
) |
Principal payments on note payable |
|
|
|
|
|
|
|
|
|
|
(6,000 |
) |
Warrants exercised |
|
|
|
|
|
|
|
|
|
|
86 |
|
Proceeds from issuance of subordinated debt securities |
|
|
|
|
|
|
|
|
|
|
25,780 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
442 |
|
|
|
53,050 |
|
|
|
(7,378 |
) |
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
(22,538 |
) |
|
|
23,865 |
|
|
|
(24,394 |
) |
Cash and cash equivalents at beginning of year |
|
|
49,286 |
|
|
|
25,421 |
|
|
|
49,815 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
26,748 |
|
|
$ |
49,286 |
|
|
$ |
25,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
2,655 |
|
|
$ |
2,556 |
|
|
$ |
1,260 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
18,638 |
|
|
$ |
3,650 |
|
|
$ |
8,434 |
|
|
|
|
|
|
|
|
|
|
|
Pay-in-kind dividends (non-cash) |
|
$ |
|
|
|
$ |
8,593 |
|
|
$ |
9,781 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
75
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
1. Summary of Significant Accounting Policies
Organization
AMERISAFE, Inc., is an insurance holding company incorporated in the state of Texas. The
accompanying 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 (AIIC-TX),
Amerisafe Risk Services, Inc. (RISK) and Amerisafe General Agency, Inc. (AGAI). AIIC and SOCI
are property and casualty insurance companies organized under the state of Louisiana. AIIC-TX is a
property and casualty insurance company organized under the laws of the state of Texas, was
incorporated on December 20, 2004, and commenced business on January 1, 2005. RISK, a wholly-owned
subsidiary of the Company, is a claims and safety service company 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 AIIC-TX, as well as by
nonaffiliated insurance carriers. The assets and operations of AGAI are not significant to that of
the consolidated entity.
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 and general liability insurance for companies
primarily in special trade groups, including construction, trucking and logging. Assets and
revenues of AIIC represent approximately 99% of comparable consolidated amounts of the Company for
each of 2006, 2005 and 2004.
On November 23, 2005, the Company completed the initial public offering of its common stock
with the sale of 8,000,000 shares at $9.00 per share. Prior to that time, there was no public
market for the Companys common stock. The shares were registered under the Securities Act of 1933
under a Registration Statement on Form S-1 that was declared effective by the Securities and
Exchange Commission on November 17, 2005. The Registration Statement also covered additional
shares of common stock made available for sale by certain of the Companys shareholders pursuant to
an option granted to the underwriters of the offering. On December 9, 2005, the underwriters
exercised the option to purchase 485,750 shares of common stock from the selling shareholders. The
sale of these shares closed on December 14, 2005. The Company did not receive any of the proceeds
from the sale of shares by the selling shareholders.
The Companys net proceeds from the initial public offering were $63.2 million, after
deducting $5.0 million in underwriting discounts and commissions and $3.7 million in other expenses
related to the offering. The Company used $10.2 million of net proceeds to redeem shares of Series
A preferred stock and Series E preferred stock. The Company retained $53.0 million of the net
proceeds from the offering. Of this amount, the Company contributed $45 million to its insurance
company subsidiaries. The remaining $8.0 million will be used to make additional capital
contributions to the Companys insurance company subsidiaries as necessary to support anticipated
growth and for general corporate purposes, including to pay interest on the Companys outstanding
subordinated notes and to fund other holding company operations.
On November 21, 2006, the Company completed a secondary public offering of 9,071,576 shares of
common stock. All of these shares were sold by selling shareholders. The Company did not receive
any of the proceeds from this offering. In connection with the offering, certain selling
shareholders converted 250,000 shares of the Companys outstanding Series C convertible preferred
stock into 1,214,771 shares of common stock.
76
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation. The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States (GAAP). 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 reported period. Actual results could differ from those
estimates.
On October 27, 2005, the Company effected a 72-for-one reverse stock split. All amounts
included in these financial statements have been restated to give effect to the reverse stock
split.
Certain prior year amounts have been reclassified to conform with the current year
presentation.
Investments
At acquisition, investments in held-to-maturity fixed maturity securities are recorded at
amortized cost. The Company has the ability and positive intent to hold these investments until
maturity. Available-for-sale fixed maturity securities and equity securities are recorded at fair
value. Temporary changes in the fair value of the available-for-sale fixed maturity and equity
securities are reported in shareholders equity as a component of other comprehensive income, net
of deferred income taxes.
During 2004, the Company transferred all fixed maturity securities, other than redeemable
preferred stock, from the available-for-sale category to the held-to-maturity category. This
transfer between categories was accounted for at fair value as of the transfer date. At the date
of transfer, the fair value of all securities transferred was $10,707,000 ($6,960,000 net of income
taxes) greater than the securities par value. The difference between each securitys par value
and fair value at the date of transfer is being amortized as a yield adjustment over the respective
securitys life. The fair value at the date of transfer, adjusted for subsequent amortization, is
considered to be the securitys amortized cost basis.
Investment income is recognized as it is earned. The discount or premium on fixed maturities
is amortized using the scientific 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.
The Company regularly reviews the fair value of its investments. Impairment of an investment
security results in a reduction of the carrying value of the security and the realization of a loss
when the fair value of the security declines below the cost or amortized cost, as applicable, for
the security and the impairment is deemed to be other-than-temporary. The Company regularly
reviews the investment portfolio to evaluate the existence of other-than-temporary declines in the
fair value of investments. The Company considers various factors in determining if a decline in
the fair value of an individual security is other-than-temporary, including but not limited to the
length of time and magnitude of the unrealized loss, the volatility of the security, analysts
recommendations and price targets, opinions of the Companys external investment advisor, market
liquidity and the Companys intent to sell or ability to hold the security.
If the Company determines that the decline in fair value is other-than-temporary, the Company
adjusts the cost basis of the investment and reports an impairment charge in net realized gains
(losses) on investments in the consolidated statements of income in the period in which the Company
makes this determination.
77
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
Cash and Cash Equivalents
Cash equivalents include commercial paper, short-term municipal securities, pooled short-term
money market funds and certificates of deposit with an original maturity of three months or less.
Premiums Receivable
Premiums receivable consist primarily of premium-related balances due from policyholders. The
Company considers premiums receivable as past due based on the payment terms of the underlying
policy. The balance is shown net of the allowance for doubtful accounts. Receivables due from
insureds are charged off when a determination has been made that a specific balance will not be
collected based upon the collection efforts of Company personnel. An estimate of amounts that are
likely to be charged off is established as an allowance for doubtful accounts as of the balance
sheet date. The estimate is primarily comprised of specific balances that are considered probable
to be charged off after all collection efforts have ceased, as well as historical trends and an
analysis of the aging of the receivables.
Property and Equipment
The Companys property and equipment, including certain costs incurred to develop or obtain
software for internal use, are stated at cost less accumulated depreciation. Depreciation is
calculated primarily by the straight-line method over the estimated useful lives of the respective
assets, generally 39 years for the building and three to seven years for all other fixed assets.
Deferred Policy Acquisition Costs
The direct costs of acquiring and renewing business are capitalized to the extent recoverable
and are amortized over the effective period of the related insurance policies in proportion to
premium revenue earned. These capitalized costs consist mainly of sales commissions, premium taxes
and other underwriting costs. The Company evaluates deferred policy acquisition costs for
recoverability by comparing the unearned premiums to the estimated total expected claim costs and
related expenses, offset by anticipated investment income. The Company would reduce the deferred
costs if the unearned premiums were less than expected claims and expenses after considering
investment income, and report any adjustments in amortization of deferred policy acquisition costs.
There were no adjustments necessary in 2006, 2005 or 2004.
Reserves for Loss and Loss Adjustment Expenses
Reserves for loss and loss adjustment expenses represent the estimated ultimate cost of all
reported and unreported losses incurred through December 31. The Company does not discount loss
and loss adjustment expense reserves. The Company uses a consulting actuary to assist in the
evaluation of the adequacy of the reserves for loss and loss adjustment expenses. 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 adjustments are
included in current operations.
Subrogation recoverables, as well as deductible recoverables from policyholders, are estimated
using individual case-basis valuations and aggregate estimates. Deductibles that are recoverable
from policyholders and other recoverables from state funds, decrease the liability for loss and
loss adjustment expenses.
78
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
The Company funds its obligations under certain settled claims where the payment pattern and
ultimate cost are fixed and determinable on an individual claim basis through the purchase of
annuities. These annuities are purchased from unaffiliated carriers and name the claimant as
payee. The cost of purchasing the annuity is recorded as paid loss and loss adjustment expenses.
To the extent the annuity funds estimated future claims, reserves for loss and loss adjustment
expense are reduced.
Premium Revenue
Premiums on workers compensation and general liability insurance are based on actual payroll
costs or production during the policy term and are normally billed monthly in arrears or annually.
However, the Company generally requires a deposit at the inception of a policy.
Premium revenue is earned on a pro rata basis over periods covered by the policies. The
reserve for unearned premiums on these policies is computed on a daily pro rata basis.
The Company estimates the annual premiums to be paid by its policyholders when the Company
issues the policies and records those amounts on the balance sheet as premiums receivable. The
Company conducts premium audits on all of its voluntary business policyholders annually, upon the
expiration of each policy, including when the policy is renewed. The purpose of these audits is to
verify that policyholders have accurately reported their payroll expenses and employee job
classifications, and therefore have paid the Company the premium required under the terms of the
policies. The difference between the estimated premium and the audited premium is referred to as
earned but unbilled premium, or EBUB premium. EBUB premium can be higher or lower than the
estimated premium. EBUB premium is subject to significant variability and can either increase or
decrease earned premium based upon several factors, including changes in premium growth, industry
mix and economic conditions. Due to the timing of audits and other adjustments, actual EBUB
premium is generally not determined for several months after the expiration of the policy.
Prior to 2006, the Company periodically reviewed EBUB premium trends. However, the
variability in those trends caused the Company to conclude that EBUB premium could not be
reasonably estimated. As a result, the Company recorded EBUB premium as gross written premium and
earned premium in the period in which the premium audit was completed. In 2006, the Company again
analyzed whether EBUB premiums could be reasonably estimated. Based on this most recent analysis,
at December 31, 2006, the Company recorded an estimate for EBUB premium of $5.3 million, or 1.6% of
gross premiums written in 2006. This adjustment for estimated EBUB premium less related losses and
expenses, increased the Companys 2006 net income by $712,000. In future periods, the Company will review its
estimate of EBUB premiums and record an adjustment quarterly.
Reinsurance
Reinsurance premiums, losses and allocated loss adjustment expenses are accounted for on a
basis consistent with those used in accounting for the original policies issued and the terms of
the reinsurance contracts.
Amounts recoverable from reinsurers include balances currently owed to the Company for losses
and allocated loss adjustment expenses that have been paid to policyholders, as well as amounts
that are currently reserved for and will be recoverable once the related expense has been paid.
Upon managements determination that an amount due from a reinsurer is uncollectible due to
the reinsurers insolvency, or other matters, the amount is written off.
Ceding commissions are earned from certain reinsurance companies and are intended to reimburse
the Company for costs related to acquiring policies. Ceding commission income is recognized over
the effective period of the related insurance policies in proportion to premium revenue earned and
is reflected as a reduction in underwriting and other operating costs.
79
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
Contingent commissions are earned from certain reinsurance companies based on the financial
results of the applicable risks underwritten by the Company. Contingent commission revenue on
reinsurance contracts is recognized during the related reinsurance treaty period and is based on
the same assumptions used for recording loss and allocated loss adjustment expenses. These
commissions are reflected as a reduction in underwriting and other operating costs and are adjusted
as necessary as experience develops or new information becomes known. Any such adjustments are
included in current operations. Contingent commissions recognized reduced underwriting and other
operating costs by $66,000 in 2006 and $200,000 in 2004, and increased underwriting and other costs
by $251,000 in 2005.
Fee and Other Income
The Company recognizes income related to commissions earned by AGAI as the related services
are performed.
Advertising
All advertising expenditures incurred by the Company are charged to expense in the period to
which they relate and are included in underwriting and other operating costs in the consolidated
statements of income. Total advertising expenses incurred were $447,000 in 2006, $382,000 in 2005
and $412,000 in 2004.
Income Taxes
The Company accounts for income taxes using the liability method. The provision for income
taxes has two components, amounts currently payable or receivable and deferred amounts. Deferred
income tax assets and liabilities are recognized for the differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The Company considers deferred tax assets to be recoverable if it is probable that the related
tax losses can be offset by future taxable income. The Company includes reversal of existing
temporary differences, tax planning strategies available and future operating income in this
assessment. To the extent the deferred tax assets exceed the amount expected to be recovered in
future years, the Company records a valuation allowance for the amount determined unrecoverable.
The Company has not recorded a valuation allowance, since the recorded deferred tax asset is
expected to be fully realized.
Insurance-Related Assessments
Insurance-related assessments are accrued in the period in which they have been incurred. The
Company is subject to a variety of assessments related to insurance commerce, including those by
state guaranty funds and workers compensation second-injury funds. State guaranty fund
assessments are used by state insurance oversight agencies to cover losses of policyholders of
insolvent or rehabilitated insurance companies and for the operating expenses of such agencies.
These mandatory assessments may be partially recovered through a reduction in future premium taxes
in certain states. Assessments related to premiums are generally paid one year after the calendar
year in which the premium is written, while assessments related to losses are generally paid within
one year of when the loss is paid.
80
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
Policyholder Dividends
The Company writes certain policies for which the policyholder may participate in favorable
claims experience through a dividend. An estimated provision for workers compensation
policyholders dividends is accrued as the related premiums are earned. Dividends do not become a
fixed liability unless and until declared by the respective Boards of Directors of AMERISAFEs
insurance subsidiaries. The dividend to which a policyholder may be entitled is set forth in the
policy and is related to the amount of losses sustained under the policy. Dividends are calculated
after the policy expiration. The Company is able to estimate the policyholder dividend liability
because the Company has information regarding the underlying loss experience of the policies
written with dividend provisions and can estimate future dividend payments from the policy terms.
Additionally, Florida law requires payment of dividends to Florida policyholders pursuant to a
formula based on underwriting results from policies written in Florida over a consecutive
three-year period.
Variable Interest Entities
In December 2003, the Company formed Amerisafe Capital Trust I (ACT I) for the sole purpose
of issuing $10,000,000 in trust preferred securities. ACT I used the proceeds from the sale of
these securities and the Companys initial capital contribution to purchase $10,310,000 of
subordinated debt securities from the Company. The debt securities are the sole assets of ACT I,
and the payments under the debt securities are the sole revenues of ACT I.
In April 2004, the Company formed Amerisafe Capital Trust II (ACT II) for the sole purpose
of issuing $25,000,000 in trust preferred securities. ACT II used the proceeds from the sale of
these securities and the Companys initial capital contribution to purchase $25,780,000 of
subordinated debt securities from the Company. The debt securities are the sole assets of ACT II,
and the payments under the debt securities are the sole revenues of ACT II.
The Company concluded that the equity investments in ACT I and ACT II (collectively, the
Trusts) are not at risk since the subordinated debt securities issued by the Company are the
Trusts sole assets. Accordingly, the Trusts are considered variable interest entities. The
Company is not considered to be the primary beneficiary of the Trusts and has not consolidated
these entities.
Earnings Per Share
The Company applies the two-class method to compute basic earnings per share (EPS). This
method calculates earnings per share for each class of common stock and participating security.
Income available to common shareholders is allocated to common shares and participating securities
to the extent that each security shares in earnings as if all earnings for the period had been
distributed. The amount of earnings allocated to common shares is divided by the weighted-average
number of common shares outstanding for the period. Participating securities that are convertible
into common stock are included in the computation of basic EPS if the effect is dilutive.
Diluted EPS include 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. The two-class method of calculating diluted EPS is used in the event the
if converted method is anti-dilutive.
81
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
Stock-Based Compensation
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123(R) (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement No. 123(R) supersedes Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement
No. 95, Statement of Cash Flows. Generally, the approach in Statement No. 123(R) is similar to the
approach described in Statement No. 123. However, Statement No. 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an option.
Statement No. 123(R) permits public companies to adopt its requirements using one of two
methods. One method is a modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of Statement No. 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of
Statement 123 for all awards granted to employees prior to the effective date of Statement No.
123(R) that remain unvested on the effective date. The other method is a modified retrospective
method, which includes the requirements of the modified prospective method described above, but
also permits entities to restate based on the amounts previously recognized under Statement No. 123
for purposes of pro forma disclosures for either (a) all prior periods presented or (b) prior
interim periods of the year of adoption. Statement No. 123(R) was to be adopted no later than
January 1, 2006. Early adoption was permitted in periods in which financial statements had not yet
been issued.
In anticipation of the initial public offering of the Companys common stock, the Company
adopted the provisions of Statement No. 123(R) using the modified prospective method, effective
January 1, 2005. As all share-based payments previously issued by the Company were fully vested,
there was no effect on the Companys consolidated financial position or results of operations as of
the date of adoption.
Recent Accounting Pronouncements
In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial
Instruments (SFAS No. 155). SFAS No. 155 allows financial instruments that have embedded
derivatives to be accounted for as a whole, eliminating the need to separate the derivative from
its host, if the holder elects to account for the whole instrument on a fair value basis. This new
standard is effective for fiscal years beginning after September 15, 2006. The Company expects
that SFAS No. 155 will not have a material effect on its consolidated financial position or results
of operations.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109 (FIN 48). FIN 48 provides guidance to
reduce the diversity in practice associated with recognition, measurement, presentation and
disclosure of uncertain tax positions. This interpretation is effective for fiscal years beginning
after December 15, 2006. The Company expects that FIN 48 will not have a material effect on its
consolidated financial condition or results of operations.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS No.
157). SFAS No. 157 defines fair value, establishes a framework and gives guidance regarding the
methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning after November 15,
2007. The Company expects that SFAS No. 157 will not have a material effect on its consolidated
financial condition or results of operations.
82
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159), provides companies with an option to report
selected financial assets and liabilities at fair value. This Statement is effective as of the
beginning of an entitys first fiscal year beginning after November 15, 2007. Early adoption is
permitted as of the beginning of the previous fiscal year provided that the entity makes that
choice in the first 120 days of that fiscal year and also elects to apply the provisions of
Statement 157. The Company has not yet determined the impact this standard will have on its
consolidated financial position or results of operations.
2. Investments
The gross unrealized gains and losses on, and the cost and fair value of, those investments
classified as held-to-maturity at December 31, 2006 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
(In thousands) |
|
U.S. Treasury securities and obligations of
U.S. Government agencies |
|
$ |
78,817 |
|
|
$ |
93 |
|
|
$ |
(921 |
) |
|
$ |
77,989 |
|
States and political subdivisions |
|
|
365,282 |
|
|
|
996 |
|
|
|
(3,481 |
) |
|
|
362,797 |
|
Mortgage-backed and asset-backed
securities |
|
|
149,892 |
|
|
|
193 |
|
|
|
(2,225 |
) |
|
|
147,860 |
|
Corporate bonds |
|
|
21,023 |
|
|
|
12 |
|
|
|
(513 |
) |
|
|
20,522 |
|
Long-term certificates of deposit |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
615,114 |
|
|
$ |
1,294 |
|
|
$ |
(7,140 |
) |
|
$ |
609,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost for the fixed maturity securities classified as held-to-maturity includes
an unamortized gain of $4,688,000. This gain resulted in 2004 from the difference between each
securitys par value and fair value at the date of transfer from available-to-sale to
held-to-maturity and is being amortized as a yield adjustment over the respective securitys life.
The gross unrealized gains and losses on, and the cost and fair value of, those investments
classified as available-for-sale at December 31, 2006 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Equity securities |
|
$ |
22,157 |
|
|
$ |
1,509 |
|
|
$ |
|
|
|
$ |
23,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
The gross unrealized gains and losses on, and the cost and fair value of, those investments
classified as held-to-maturity at December 31, 2005 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
(In thousands) |
|
U.S. Treasury securities and obligations of
U.S. Government agencies |
|
$ |
71,548 |
|
|
$ |
75 |
|
|
$ |
(934 |
) |
|
$ |
70,689 |
|
States and political subdivisions |
|
|
255,598 |
|
|
|
585 |
|
|
|
(4,345 |
) |
|
|
251,838 |
|
Mortgage-backed and asset-backed
securities |
|
|
115,510 |
|
|
|
217 |
|
|
|
(1,950 |
) |
|
|
113,777 |
|
Corporate bonds |
|
|
22,892 |
|
|
|
17 |
|
|
|
(494 |
) |
|
|
22,415 |
|
Long-term certificates of deposit |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
465,648 |
|
|
$ |
894 |
|
|
$ |
(7,723 |
) |
|
$ |
458,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross unrealized gains and losses on, and the cost and fair value of, those investments
classified as available-for-sale at December 31, 2005 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Equity securities |
|
$ |
62,875 |
|
|
$ |
5,355 |
|
|
$ |
(1,955 |
) |
|
$ |
66,275 |
|
Fixed maturity securities |
|
|
1,709 |
|
|
|
7 |
|
|
|
(21 |
) |
|
|
1,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
64,584 |
|
|
$ |
5,362 |
|
|
$ |
(1,976 |
) |
|
$ |
67,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the cost or amortized cost and fair value of investments in fixed maturity
securities at December 31, 2006, by contractual maturity, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Cost or |
|
|
|
|
|
|
Amortized |
|
|
|
|
|
|
Cost |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Maturity: |
|
|
|
|
|
|
|
|
Due in 2007 |
|
$ |
65,427 |
|
|
$ |
65,262 |
|
In 2008 through 2011 |
|
|
225,135 |
|
|
|
221,963 |
|
In 2012 through 2016 |
|
|
88,160 |
|
|
|
87,434 |
|
After 2016 |
|
|
86,500 |
|
|
|
86,749 |
|
Mortgage-backed and asset-backed securities |
|
|
149,892 |
|
|
|
147,860 |
|
|
|
|
|
|
|
|
Totals |
|
$ |
615,114 |
|
|
$ |
609,268 |
|
|
|
|
|
|
|
|
The actual maturities of the fixed maturity securities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties.
At December 31, 2006, there were $275,000 of cash and short-term investments and $14,747,444
of held-to-maturity investments on deposit with regulatory agencies of states in which the Company
does business.
84
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
A summary of the Companys realized gains and losses on sales, calls or redemptions of
investments for 2006, 2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
|
|
|
|
|
|
|
|
|
|
Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
Available |
|
|
Equity |
|
|
|
|
|
|
|
|
|
for Sale |
|
|
Securities |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales |
|
$ |
2,000 |
|
|
$ |
89,859 |
|
|
$ |
|
|
|
$ |
91,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains |
|
$ |
|
|
|
$ |
10,601 |
|
|
$ |
|
|
|
$ |
10,601 |
|
Gross realized investment losses |
|
|
|
|
|
|
(3,142 |
) |
|
|
|
|
|
|
(3,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gain |
|
|
|
|
|
|
7,459 |
|
|
|
|
|
|
|
7,459 |
|
Impairments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, including losses on calls and
redemptions |
|
|
(5 |
) |
|
|
|
|
|
|
(65 |
) |
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses) |
|
$ |
(5 |
) |
|
$ |
7,459 |
|
|
$ |
(65 |
) |
|
$ |
7,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales |
|
$ |
|
|
|
$ |
26,342 |
|
|
$ |
|
|
|
$ |
26,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains |
|
$ |
|
|
|
$ |
3,338 |
|
|
$ |
|
|
|
$ |
3,338 |
|
Gross realized investment losses |
|
|
|
|
|
|
(1,179 |
) |
|
|
|
|
|
|
(1,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gain |
|
|
|
|
|
|
2,159 |
|
|
|
|
|
|
|
2,159 |
|
Impairments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, including gains on calls and
redemptions |
|
|
|
|
|
|
|
|
|
|
113 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains |
|
$ |
|
|
|
$ |
2,159 |
|
|
$ |
113 |
|
|
$ |
2,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales |
|
$ |
|
|
|
$ |
13,529 |
|
|
$ |
|
|
|
$ |
13,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains |
|
$ |
|
|
|
$ |
1,784 |
|
|
$ |
|
|
|
$ |
1,784 |
|
Gross realized investment losses |
|
|
|
|
|
|
(537 |
) |
|
|
|
|
|
|
(537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gain |
|
|
|
|
|
|
1,247 |
|
|
|
|
|
|
|
1,247 |
|
Impairments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, including gains on calls and
redemptions |
|
|
|
|
|
|
|
|
|
|
174 |
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains |
|
$ |
|
|
|
$ |
1,247 |
|
|
$ |
174 |
|
|
$ |
1,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
Major categories of the Companys net investment income are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Gross investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities |
|
$ |
22,261 |
|
|
$ |
15,515 |
|
|
$ |
11,294 |
|
Equity securities |
|
|
1,522 |
|
|
|
1,333 |
|
|
|
811 |
|
Cash and cash equivalents |
|
|
2,674 |
|
|
|
1,031 |
|
|
|
693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross investment income |
|
|
26,457 |
|
|
|
17,879 |
|
|
|
12,798 |
|
Investment expenses |
|
|
(1,074 |
) |
|
|
(997 |
) |
|
|
(581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
25,383 |
|
|
$ |
16,882 |
|
|
$ |
12,217 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the gross unrealized losses on securities which were at a loss
for either less than twelve months or twelve months or longer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than |
|
|
Twelve Months |
|
|
|
Twelve Months |
|
|
or Longer |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities |
|
$ |
157,606 |
|
|
$ |
2,011 |
|
|
$ |
258,177 |
|
|
$ |
5,129 |
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities |
|
|
34,119 |
|
|
|
2,544 |
|
|
|
271,579 |
|
|
|
5,179 |
|
Equity securities |
|
|
40,437 |
|
|
|
1,405 |
|
|
|
3,599 |
|
|
|
571 |
|
The Company reviewed all securities with unrealized losses in accordance with the impairment
policy described in Note 1. The Company determined that the unrealized losses in the fixed
maturity portfolio relate primarily to changes in market interest rates since the date of purchase
or the transfer of the investments from the available-for-sale classification to the
held-to-maturity classification. The Company expects to recover the amortized cost of these
securities since management has the positive intent to hold the securities until they mature. As
of December 31, 2006, there were no unrealized losses in the Companys equity portfolio. All
unrealized losses in the December 31, 2005 equity portfolio were determined to be due to general
market conditions.
3. Premiums Receivable
Premiums receivable consist primarily of premium-related balances due from policyholders. The
balance is shown net of the allowance for doubtful accounts. The components of premiums receivable
are shown below:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Premiums receivable |
|
$ |
146,894 |
|
|
$ |
126,148 |
|
Allowance for doubtful accounts |
|
|
(2,510 |
) |
|
|
(2,214 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums receivable, net |
|
$ |
144,384 |
|
|
$ |
123,934 |
|
|
|
|
|
|
|
|
86
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
The following summarizes the activity in the allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Balance, beginning of year |
|
$ |
2,214 |
|
|
$ |
2,916 |
|
|
$ |
3,229 |
|
Provision for bad debts |
|
|
1,839 |
|
|
|
956 |
|
|
|
1,507 |
|
Write-offs |
|
|
(1,543 |
) |
|
|
(1,658 |
) |
|
|
(1,820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
2,510 |
|
|
$ |
2,214 |
|
|
$ |
2,916 |
|
|
|
|
|
|
|
|
|
|
|
4. Deferred Policy Acquisition Costs
The Company incurs certain costs related to acquiring policies. These costs are deferred and
expensed over the life of the related policies. Major categories of the Companys deferred policy
acquisition costs are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Agents commissions |
|
$ |
12,080 |
|
|
$ |
11,033 |
|
Premium taxes |
|
|
3,469 |
|
|
|
3,088 |
|
Deferred underwriting expenses |
|
|
2,937 |
|
|
|
2,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred policy acquisition costs |
|
$ |
18,486 |
|
|
$ |
16,973 |
|
|
|
|
|
|
|
|
The following summarizes the activity in the deferred policy acquisition costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Balance, beginning of year |
|
$ |
16,973 |
|
|
$ |
12,044 |
|
|
$ |
11,820 |
|
Policy acquisition costs deferred |
|
|
41,939 |
|
|
|
36,714 |
|
|
|
26,193 |
|
Amortization expense during the year |
|
|
(40,426 |
) |
|
|
(31,785 |
) |
|
|
(25,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
18,486 |
|
|
$ |
16,973 |
|
|
$ |
12,044 |
|
|
|
|
|
|
|
|
|
|
|
87
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
5. Property and Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Land and office building |
|
$ |
4,382 |
|
|
$ |
4,383 |
|
Furniture and equipment |
|
|
6,244 |
|
|
|
6,445 |
|
Software |
|
|
6,943 |
|
|
|
6,902 |
|
Automobiles |
|
|
73 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
17,642 |
|
|
|
17,809 |
|
Accumulated depreciation |
|
|
(11,955 |
) |
|
|
(11,488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate, furniture and equipment, net |
|
$ |
5,687 |
|
|
$ |
6,321 |
|
|
|
|
|
|
|
|
At December 31, 2006, furniture and equipment included property held under capital leases of
$70,000 and software included property held under capital leases of $1,315,000. Accumulated
depreciation includes $835,000 that is related to these properties. At December 31, 2005,
furniture and equipment included property held under capital leases of $90,000 and software
included property held under capital leases of $1,242,000. Accumulated depreciation includes
$391,000 that is related to these properties. The capital lease obligations related to this
property are included in accounts payable and other liabilities.
Future minimum lease payments related to the capital lease obligations are detailed below (in
thousands):
|
|
|
|
|
2007 |
|
$ |
507 |
|
2008 |
|
|
41 |
|
|
|
|
|
Total minimum lease payments |
|
|
548 |
|
Less amount representing interest |
|
|
(4 |
) |
|
|
|
|
Present value of net minimum lease payments |
|
$ |
544 |
|
|
|
|
|
6. Reinsurance
The Company cedes certain premiums and losses to various reinsurers under quota share and
excess-of-loss treaties. These reinsurance arrangements provide for greater diversification of
business, allow management to control exposure to potential losses arising from large risks, and
provide additional capacity for growth. Ceded reinsurance contracts do not relieve the Company
from its obligations to policyholders. The Company remains liable to its policyholders for the
portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the
reinsurance agreements. To minimize its exposure to significant losses from reinsurer
insolvencies, the Company evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk arising from similar geographic regions, activities, or economic
characteristics of the reinsurers on a continual basis. The effect of reinsurance on premiums
written and earned in 2006, 2005 and 2004 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Premiums |
|
|
2005 Premiums |
|
|
2004 Premiums |
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
Earned |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Gross |
|
$ |
332,491 |
|
|
$ |
319,253 |
|
|
$ |
290,891 |
|
|
$ |
278,109 |
|
|
$ |
264,962 |
|
|
$ |
256,684 |
|
Ceded |
|
|
(19,950 |
) |
|
|
(19,950 |
) |
|
|
(21,541 |
) |
|
|
(21,541 |
) |
|
|
(21,951 |
) |
|
|
(21,951 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
312,541 |
|
|
$ |
299,303 |
|
|
$ |
269,350 |
|
|
$ |
256,568 |
|
|
$ |
243,011 |
|
|
$ |
234,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
The amounts recoverable from reinsurers consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Unpaid losses recoverable: |
|
|
|
|
|
|
|
|
Case basis |
|
$ |
89,285 |
|
|
$ |
106,626 |
|
Incurred but not reported |
|
|
17,525 |
|
|
|
13,606 |
|
Paid losses recoverable |
|
|
2,793 |
|
|
|
2,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
109,603 |
|
|
$ |
122,562 |
|
|
|
|
|
|
|
|
Amounts recoverable from reinsurers consists of ceded case reserves, ceded IBNR reserves and
paid losses recoverable. Ceded case and ceded IBNR reserves represent the portion of gross loss
and loss adjustment expense liabilities that are recoverable under reinsurance agreements, but are
not yet due from reinsurers. Paid losses recoverable are receivables currently due from reinsurers
for ceded paid losses. The Company considers paid losses recoverable outstanding for more than 90
days to be past due. At December 31, 2006, there were no paid losses recoverable that were past
due.
The Company received reinsurance recoveries of $7,860,000 in 2006, $85,025,000 in 2005 and
$54,144,000 in 2004.
At December 31, 2006, unsecured reinsurance recoverables from reinsurers that exceeded 3% of
statutory surplus of the Companys insurance subsidiary are shown below (in thousands). The A.M.
Best Company rating for the reinsurer is shown parenthetically.
|
|
|
|
|
Munich Reinsurance America, Inc. (A) |
|
$ |
23,737 |
|
Odyssey America Reinsurance Corporation (A) |
|
|
19,750 |
|
St. Paul Fire & Marine Insurance Company (A+) |
|
|
10,885 |
|
Clearwater Insurance Company (A) |
|
|
9,795 |
|
SCOR Reinsurance Company (A) |
|
|
7,144 |
|
Converium Reinsurance (North America) (B+) |
|
|
6,193 |
|
Other reinsurers |
|
|
14,884 |
|
|
|
|
|
Total unsecured reinsurance recoverables |
|
|
92,388 |
|
Letters of credit |
|
|
17,215 |
|
|
|
|
|
Total reinsurance recoverables |
|
$ |
109,603 |
|
|
|
|
|
89
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
7. Income Taxes
The Companys deferred income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
Discounting of net unpaid loss and loss adjustment expenses |
|
$ |
19,105 |
|
|
$ |
16,047 |
|
Unearned premiums |
|
|
11,785 |
|
|
|
10,738 |
|
Accrued expenses and other |
|
|
1,653 |
|
|
|
1,703 |
|
Accrued policyholder dividends |
|
|
2,198 |
|
|
|
271 |
|
Accrued insurance-related assessments |
|
|
6,195 |
|
|
|
6,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
40,936 |
|
|
|
34,948 |
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
Deferred policy acquisition costs |
|
|
(7,965 |
) |
|
|
(7,749 |
) |
Deferred charges |
|
|
(1,087 |
) |
|
|
(998 |
) |
Unrealized gain on securities available-for-sale |
|
|
(2,169 |
) |
|
|
(3,399 |
) |
Property and equipment, primarily a result of differences
in depreciation |
|
|
(249 |
) |
|
|
(372 |
) |
Other |
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(11,470 |
) |
|
|
(12,535 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset |
|
$ |
29,466 |
|
|
$ |
22,413 |
|
|
|
|
|
|
|
|
The components of consolidated income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
20,606 |
|
|
$ |
5,928 |
|
|
$ |
5,444 |
|
State |
|
|
306 |
|
|
|
526 |
|
|
|
534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,912 |
|
|
|
6,454 |
|
|
|
5,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(5,824 |
) |
|
|
(6,389 |
) |
|
|
(2,849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
15,088 |
|
|
$ |
65 |
|
|
$ |
3,129 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) from operations is different from the amount computed by applying
the U.S. federal income tax statutory rate of 35% to income before income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Income tax computed at federal statutory tax rate |
|
$ |
18,356 |
|
|
$ |
2,098 |
|
|
$ |
4,790 |
|
Tax-exempt interest, net |
|
|
(3,145 |
) |
|
|
(2,187 |
) |
|
|
(1,737 |
) |
State income tax |
|
|
306 |
|
|
|
526 |
|
|
|
534 |
|
Dividends received deduction |
|
|
(236 |
) |
|
|
(224 |
) |
|
|
(135 |
) |
Other |
|
|
(193 |
) |
|
|
(148 |
) |
|
|
(323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,088 |
|
|
$ |
65 |
|
|
$ |
3,129 |
|
|
|
|
|
|
|
|
|
|
|
90
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
8. Note Payable
At December 31, 2003, the Company had a note payable with an outstanding balance of
$6,000,000, bearing interest at the Federal Funds Rate plus 0.75% (1.91%). The note matured on
April 1, 2004, and the Company made a final payment of $6,000,000, plus accrued interest.
9. Subordinated Debt Securities
On December 16, 2003, the Company entered into a trust preferred securities transaction
pursuant to which it issued $10,310,000 aggregate principal amount of subordinated debt securities
due in 2034. To effect the transaction, the Company formed a Delaware statutory trust, Amerisafe
Capital Trust I (ACT I). ACT I issued $10,000,000 of preferred securities to investors and
$310,000 of common securities to the Company. ACT I used the proceeds from these issuances to
purchase the subordinated debt securities. The Company pays interest on its ACT I subordinated
debt securities quarterly at a rate equal to LIBOR plus 4.10% per annum (9.47% at December 31,
2006). ACT I pays interest on its preferred securities at the same rate. The Company subordinated
debt securities and ACT I preferred securities are repayable on or after January 8, 2009. Payments
of principal, interest and premium, if any, on the ACT I preferred securities are guaranteed by the
Company.
On April 29, 2004, the Company entered into a second trust preferred securities transaction
pursuant to which it issued $25,780,000 aggregate principal amount of subordinated debt securities
due in 2034. To effect the transaction, the Company formed a Delaware statutory trust, Amerisafe
Capital Trust II (ACT II). ACT II issued $25,000,000 of preferred securities to investors and
$780,000 of common securities to the Company. ACT II used the proceeds from these issuances to
purchase the subordinated debt securities. The Company pays interest on its ACT II subordinated
debt securities quarterly at a rate equal to LIBOR plus 3.80% per annum (9.17% at December 31,
2006). ACT II pays interest on its preferred securities at the same rate. The Company
subordinated debt securities and ACT II preferred securities are repayable on or after April 29,
2009. Payments of principal, interest and premium, if any, on the ACT II preferred securities are
guaranteed by the Company.
91
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
10. Loss and Loss Adjustment Expenses
The following table provides a reconciliation of the beginning and ending reserve balances,
net of related amounts recoverable from reinsurers, for 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Reserves for loss and loss adjustment expenses (LAE) |
|
$ |
484,485 |
|
|
$ |
432,880 |
|
|
$ |
377,559 |
|
Less amounts
recoverable from reinsurers on unpaid loss and LAE |
|
|
120,232 |
|
|
|
189,624 |
|
|
|
194,558 |
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and LAE, net of related amounts
recoverable from reinsurers, at beginning of year |
|
|
364,253 |
|
|
|
243,256 |
|
|
|
183,001 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loss and LAE for claims occurring in
the current year, net of reinsurance |
|
|
201,711 |
|
|
|
182,174 |
|
|
|
160,773 |
|
Change in estimated loss and LAE for claims
occurring in prior years, net of reinsurance |
|
|
(2,227 |
) |
|
|
8,673 |
|
|
|
13,413 |
|
Loss on Converium commutation |
|
|
|
|
|
|
13,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred losses during the current year, net of
reinsurance |
|
|
199,484 |
|
|
|
204,056 |
|
|
|
174,186 |
|
Less loss and LAE payments for claims, net of
reinsurance, occurring during: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
41,002 |
|
|
|
42,545 |
|
|
|
40,312 |
|
Prior years |
|
|
110,367 |
|
|
|
96,620 |
|
|
|
73,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,369 |
|
|
|
139,165 |
|
|
|
113,931 |
|
|
|
|
|
|
|
|
|
|
|
Add effect of Converium commutation (1) |
|
|
|
|
|
|
56,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and LAE, net of related amounts
recoverable from reinsurers, at end of year |
|
|
412,368 |
|
|
|
364,253 |
|
|
|
243,256 |
|
Add amounts recoverable from reinsurers on unpaid
loss and LAE |
|
|
106,810 |
|
|
|
120,232 |
|
|
|
189,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and LAE |
|
$ |
519,178 |
|
|
$ |
484,485 |
|
|
$ |
432,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The total payment from Converium was $61.3 million, of which $56.1 million was for ceded
reserves and $5.2 million was for paid recoverables as of June 30, 2005. |
The Companys reserves for loss and loss adjustment expenses, net of amounts recoverable
from reinsurers, at December 31, 2005 were decreased in 2006 by $2,227,000, and at December 31,
2004 and 2003 were increased during the subsequent year by $21,882,000 and $13,413,000,
respectively. Over 75% of the 2005 prior year development occurred in accident years 1999 through
2002. The unfavorable development was the result of settlements above the established case
reserves or upward revisions to the estimated settlements on an individual case basis, totaling
$7.9 million, and the commutation with our largest reinsurer, Converium Reinsurance North America
(Converium), as discussed in the following paragraph. The revisions to the Companys case
reserves reflect new information gained by claims adjusters in the normal course of adjusting
claims and then reflected in the financial statements when the information becomes available. It
is typical for more serious claims to take several years 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.
92
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
During 2004, Converium was downgraded by A.M Best Company, from A to B, as a result of the
emergence of significant and previously unrecorded losses. While this downgrade had no immediate
impact on the Companys consolidated financial statements, it caused a decrease in the Companys
A.M. Best Capital Adequacy Ratio due to the increase in the credit risk capital charge sustained
against the Converium recoverable. Effective June 30, 2005, the Company entered into a commutation
agreement with Converium pursuant to which the Company received cash payments totaling $61,297,000
in exchange for a full termination and release of three of the five reinsurance agreements between
Converium and the Company. The commutation agreement provides that all liabilities of the Company
reinsured with Converium under these three reinsurance agreements revert back to the Company in
exchange for these cash payments. As a result of the termination of the three reinsurance
agreements, the Company recognized a pretax loss of $13,209,000 in June 2005. Converium remains
obligated to the Company under the remaining two reinsurance agreements. As of December 31, 2006,
the amount recoverable from Converium under these two agreements was $6.2 million. Converium
continues to reimburse the Company for its portion of reinsured paid losses, and no amounts are
past due. In December 2006, Converium was acquired by National Indemnity Company, a subsidiary of
Berkshire Hathaway Company, which has a A.M. Best rating of A++. Converiums rating was upgraded
from B to B+.
The anticipated effect of inflation is implicitly considered when estimating liabilities for
loss and loss adjustment expenses. Average severities are projected based on historical trends
adjusted for implemented changes in underwriting standards, policy provisions and general economic
trends. These anticipated trends are monitored based on actual development and are modified if
necessary.
11. Statutory Accounting and Regulatory Requirements
The Companys insurance subsidiaries file financial statements prepared in accordance with
statutory accounting principles prescribed or permitted by the insurance regulatory authorities of
the states in which the subsidiaries are domiciled. Statutory-basis shareholders capital and
surplus at December 31, 2006, 2005 and 2004 of the directly owned insurance subsidiary, American
Interstate Insurance Company, and the combined statutory-basis net income and realized investment
gains for all AMERISAFEs insurance subsidiaries for the three years in the period ended December
31, 2006, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Capital and surplus |
|
$ |
196,017 |
|
|
$ |
157,740 |
|
|
$ |
112,334 |
|
Net income (loss) |
|
|
38,591 |
|
|
|
(4,208 |
) |
|
|
7,828 |
|
Realized investment gains |
|
|
7,389 |
|
|
|
2,272 |
|
|
|
1,421 |
|
Property and casualty insurance companies are subject to certain risk-based capital (RBC)
requirements specified by the National Association of Insurance Commissioners. Under these
requirements, a target minimum amount of capital and surplus maintained by a property/casualty
insurance company is determined based on the various risk factors related to it. At December 31,
2006, the capital and surplus of AIIC and its subsidiaries exceeded the minimum RBC requirement.
Pursuant to regulatory requirements, AIIC cannot pay dividends to the Company in excess of the
lesser of 10% of statutory surplus, or statutory net income, excluding realized investment gains,
for the preceding 12-month period, without the prior approval of the Louisiana Commissioner of
Insurance. However, for purposes of this dividend calculation, net income from the previous two
calendar years may be carried forward to the extent that it has not already been paid out as
dividends. No such dividends were paid to the Company in 2006, 2005 or 2004. Based upon the above
described calculation, AIIC could pay to the Company dividends up to $19,602,000 in 2007 without
seeking regulatory approval.
93
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
12. Capital Stock
Common Stock
The Company is authorized to issue 50,000,000 shares of common stock, par value $0.01 per
share. On November 23, 2005, the Company completed the initial public offering of its common stock
with the sale of 8,000,000 shares at $9.00 per share. In connection with the offering, the Company
also issued 9,120,948 shares of common stock in exchange for all then-outstanding shares of Series
A preferred stock. At December 31, 2006, there were 18,705,098 shares of common stock issued and
outstanding.
At December 31, 2006, 1,214,770 shares of common stock were issuable upon conversion of all
outstanding shares of Series C and Series D convertible preferred stock, based on the conversion
price on that date of $20.58.
Non-Voting Common Stock
The Company is authorized to issue 5,000,000 shares of convertible non-voting common stock,
par value $0.01 per share. Shares of non-voting common stock are issuable upon conversion of
outstanding shares of the Companys Series D convertible preferred stock at the option of the
holder of the Series D convertible preferred stock. At the option of the holder, each share of
non-voting common stock may be converted at any time into one share of common stock. There were no
shares of non-voting common stock outstanding at December 31, 2006 and 2005 or issued during the
three-year period ended December 31, 2006.
Series A Preferred Stock
The Company is authorized to issue 1,500,000 shares of Series A preferred stock, par value
$0.01 per share, of which 862,924 shares have been canceled and retired and cannot be reissued. No
shares of Series A preferred stock were outstanding at December 31, 2006 and 2005. The following
table summarizes the activity in the Series A preferred stock for the two years in the period ended
December 31, 2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption |
|
|
|
Shares |
|
|
Amount |
|
Balance at January 1, 2004 |
|
|
764,243 |
|
|
$ |
76,424 |
|
Series A preferred stock dividends |
|
|
54,918 |
|
|
|
5,492 |
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
819,161 |
|
|
|
81,916 |
|
Series A preferred stock dividends accrued |
|
|
43,763 |
|
|
|
4,376 |
|
Series A preferred stock dividends redeemed |
|
|
(50,410 |
) |
|
|
(5,041 |
) |
Series A preferred stock exchanged for common stock |
|
|
(812,514 |
) |
|
|
(81,251 |
) |
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
In connection with the initial public offering in November 2005 and in accordance with the
terms of its articles of incorporation, the Company used $5.1 million of the proceeds from the
offering to redeem 50,410 outstanding shares of Series A preferred stock. The redemption price for
the Series A preferred stock was $100 plus the cash value (calculated at the rate of $100 per
share) of all accrued and unpaid dividends per share from the most recent quarterly dividend
payment date to the redemption date (the Redemption Price).
In accordance with the terms of the Series A preferred stock set forth in the Companys
articles of incorporation, holders of not less than two-thirds of the Series A preferred stock
elected to exchange all then-outstanding shares of Series A preferred stock for shares of common
stock. The exchange rate for each share of Series A preferred stock was $100 divided by the price
per share to the public in the public offering. The Company issued 9,120,948 shares of common
stock in connection with the exchange of all then-outstanding shares of Series A preferred stock.
94
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
Prior to the exchange of Series A preferred stock for common stock effective upon the
completion of the initial public offering, holders of Series A preferred stock were entitled to
cumulative dividends at the rate of $7 per year payable quarterly in shares of Series A preferred
stock.
There were no shares of Series A preferred stock outstanding at December 31, 2006.
Series B Preferred Stock
The Company is authorized to issue 1,500,000 shares of Series B preferred stock, par value
$0.01 per share. There were no shares of Series B preferred stock outstanding at December 31, 2006
and 2005 or issued during the three-year period ended December 31, 2006.
Series C and Series D Convertible Preferred Stock
The Company is authorized to issue 500,000 shares of convertible preferred stock, par value
$0.01 per share, of which 300,000 shares are designated as Series C convertible deferred pay
preferred stock and 200,000 shares are designated as Series D non-voting convertible deferred pay
preferred stock (collectively, the Convertible Preferred Stock). The terms of the Series C and
Series D convertible preferred stock are identical, except that holders of Series C convertible
preferred stock are entitled to vote (on an as-converted to common stock basis) on all matters to
be voted on by shareholders of the Company.
Prior to the completion of the Companys initial public offering in November 2005, holders of
the Convertible Preferred Stock were entitled to cumulative dividends at the rate of $7 per year
payable quarterly in shares of Series E preferred stock. Under the terms of the Companys articles
of incorporation, holders of the Convertible Preferred Stock are no longer entitled to receive
these pay-in-kind dividends as a result of the redemption and exchange of all outstanding shares of
Series A preferred stock. However, if holders of two-thirds of the outstanding shares of
Convertible Preferred Stock consent to the payment of a dividend by the Company to the holders of
common stock or non-voting common stock, holders of Convertible Preferred Stock will receive (on an
as-converted to common stock or non-voting common stock basis) a dividend equal to the dividend
paid to holders of common stock and non-voting common stock.
The Series C convertible preferred stock is convertible at the option of the holder into
shares of common stock at a rate of $100 per share divided by the then-applicable conversion price.
The Series D convertible preferred stock is convertible at the option of the holder into shares of
non-voting common stock at a rate of $100 per share divided by the then-applicable conversion
price. In turn, each share of non-voting common stock is convertible at the option of the holder
into one share of common stock. As of December 31, 2006, the conversion price was $20.58 per share
and the outstanding shares of Convertible Preferred Stock were convertible into 1,214,770 shares of
common stock.
Subject to certain exceptions, the conversion price will be adjusted if the Company issues or
sells shares of common stock or non-voting common stock (including options to acquire shares and
securities convertible into or exchangeable for shares of common stock or non-voting common stock)
without consideration or for a consideration per share less than the market price of the common
stock or non-voting common stock in effect immediately prior to the issuance or sale. In that
event, the conversion price will be reduced to a conversion price (calculated to the nearest cent)
determined by dividing (1) an amount equal to the sum of (a) the number of shares of common stock
and non-voting common stock outstanding immediately prior to the issuance or sale (including as
outstanding all shares of common stock and non-voting common stock issuable upon conversion of
outstanding Convertible Preferred Stock) multiplied by the then-existing market price of the common
stock; plus (b) the consideration, if any, received by the Company upon the issuance or sale, by
(2) the total number of shares of common stock and non-voting common stock outstanding immediately
after such issuance or sale (including as outstanding all shares of common stock and non-voting
common stock issuable upon conversion of outstanding Convertible Preferred Stock, without giving
effect to any adjustment in the number of shares issuable by reason of such issue and sale).
95
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
If the Company issues or sells shares of common stock or non-voting common stock for cash, the
cash consideration received will be deemed to be the amount received by the Company, without
deduction for any
expenses incurred or any underwriting commissions or concessions paid or allowed by the
Company. If the Company issues or sells shares of common stock or non-voting common stock for a
consideration other than cash, the amount of the consideration other than cash received shall be
deemed to be the fair value of such consideration as determined in good faith by the board, without
deduction for any expenses incurred or any underwriting commissions or concessions paid or allowed
by the Company.
No adjustments to the conversion price are required for issuances of shares of common stock or
non-voting common stock upon any conversion of Convertible Preferred Stock, under the Companys
equity incentive plans or in connection with any acquisition by the Company.
The Convertible Preferred Stock is automatically convertible into shares of common stock upon
consummation of a public offering of shares of common stock with gross proceeds of at least
$40,000,000 to the Company at a price to the public of at least $651.60 per share (subject to
adjustment to reflect stock splits, combinations and stock dividends). In addition, the
Convertible Preferred Stock is convertible at the Companys option upon consummation of a public
offering of its equity securities if the closing price of the common stock for the 20 trading days
prior to consummation results in, or concurrently with the disposition of substantially all of the
assets of the Company or a change of control of more than 50% of the voting power of all
outstanding shares of voting stock, other than through a public offering of equity securities
(collectively, a Change of Control), if the proceeds from the transaction result in, a value for
the outstanding common stock of at least $651.60 per share.
The Company may redeem all, but not less than all, of the outstanding shares of Convertible
Preferred Stock at a price per share of $103.50 plus accrued and unpaid dividends. The Convertible
Preferred Stock is mandatorily redeemable at the Redemption Price upon a Change of Control.
The Convertible Preferred Stock is classified outside of permanent equity because the shares
are mandatorily redeemable upon the occurrence of certain events that are deemed to be outside the
control of the Company.
No shares of Convertible Preferred Stock were issued during the three-year period ended
December 31, 2006. On November 21, 2006, 250,000 shares of Series C convertible preferred stock
were converted into 1,214,771 shares of common stock. The 250,000 shares of Series C preferred
stock exchanged were canceled and retired and cannot be reissued.
At December 31, 2006, there were 50,000 shares of Series C convertible preferred stock and
200,000 shares of Series D convertible preferred stock issued and outstanding.
Series E Preferred Stock
The Company is authorized to issue 500,000 shares of Series E preferred stock, par value $0.01
per share, of which 317,744 shares have been redeemed by the Company. Theses shares have been
canceled and retired and cannot be reissued.
Prior to the completion of the Companys initial public offering in November 2005, holders of
Series E preferred stock were entitled to cumulative dividends at the rate of $7 per year payable
quarterly in shares of Series E preferred stock. In connection with the offering and in accordance
with the terms of its articles of incorporation, the Company used $5.1 million of the proceeds from
the offering to redeem all then-outstanding shares of Series E preferred stock, at the Redemption
Price. The Company made cash redemptions of Series E preferred stock on May 28, 2004, June 8, 2004
and June 30, 2004.
There were no outstanding shares of Series E preferred stock as of December 31, 2006 and 2005.
96
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
Junior Preferred Stock
The Companys board has the authority, without further action by the shareholders, to issue up
to 10,000,000 shares of junior preferred stock, par value $0.01 per share, in one or more series.
In addition, the board may fix the
rights, preferences and privileges of any series of junior preferred stock it may determine to
issue, subject to the rights, preferences and privileges of the Convertible Preferred Stock. There
were no shares of junior preferred stock outstanding at December 31, 2006 and 2005 or issued during
the three-year period ended December 31, 2006.
Liquidation Provisions
In the event of any liquidation or dissolution of the Company, the holders of Convertible
Preferred Stock will receive $100 for each outstanding share before any distributions are made to
holders of any other then-outstanding series of preferred stock, junior preferred stock, common
stock or non-voting common stock. Any remaining net assets will be distributed first to holders of
common stock and non-voting common stock, subject to any other preferential amounts payable to
holders of any then-outstanding series of preferred stock or junior preferred stock.
13. Stock Options and Restricted Stock
2005 Incentive Plan
In connection with the initial public offering, the Companys shareholders approved the
AMERISAFE 2005 Equity Incentive Plan (the 2005 Incentive Plan).
The 2005 Incentive Plan is administered by the Compensation Committee of the Board and is
designed to provide incentive compensation to executive officers and other key management
personnel. The 2005 Incentive Plan permits awards in the form of incentive stock options, as
defined in Section 422(b) of the Internal Revenue Code of 1986, non-qualified stock options,
restricted shares of common stock and restricted stock units. The maximum number of shares of
common stock that may be issued pursuant to option grants and restricted stock and restricted stock
unit awards under the 2005 Incentive Plan is 1,900,000 shares, subject to the authority of the
Board to adjust this amount in the event of a merger, consolidation, reorganization, stock
dividend, stock split, combination of shares, recapitalization or similar transaction affecting the
common stock. Officers, other key employees, consultants and other persons performing services for
the Company that are equivalent to those typically provided by Company employees are eligible to
participate in the 2005 Incentive Plan. However, only employees (including Company officers) can
receive grants of incentive stock options.
Stock options granted under the 2005 Incentive Plan have an exercise price of not less than
100% of the fair value of the common stock on the date of grant. However, any stock options
granted to holders of more than 10% of the Companys voting stock will have an exercise price of
not less than 110% of the fair value of the common stock on the date of grant. Stock option grants
are exercisable, subject to vesting requirements determined by the Compensation Committee, for
periods of up to ten years from the date of grant, except for any grants to holders of more than
10% of the Companys voting stock, which will have exercise periods limited to a maximum of five
years. Stock options generally expire 90 days after the cessation of an optionees service as an
employee. However, in the case of an optionees death or disability, the unexercised portion of a
stock option remains exercisable for up to one year after the optionees death or disability.
Stock options granted under the 2005 Incentive Plan are not transferable, except by will or the
laws of descent and distribution.
97
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
Upon the completion of the initial public offering, the Board approved grants of options to
officers and employees to purchase an aggregate of 1,548,500 shares of common stock in November
2005. These options have an exercise price equal to the initial public offering price of $9.00 and
are subject to pro rata vesting over a five-year period. In September 2006, the Company granted
options to purchase an aggregate of 100,000 shares of the Companys common stock at a per-share
exercise price equal to the fair market value of the Companys common stock on the date of grant.
At December 31, 2006, 447,837 shares of common stock were available for future awards under the
2005 Incentive Plan.
The Company uses the Black-Scholes-Merton option pricing model to estimate the fair value of
each option on the date of grant. The expected terms of options are developed by considering the
Companys historical attrition rate for those employees at the officer level, who are eligible to
receive options. Further, the Company aggregates individual awards into homogenous groups based
upon grant date. Expected volatility is estimated using daily historical volatility for six
companies within the property and casualty insurance sector that had at least seven years of
publicly available trading history as of the date on which the Company completed its initial public
offering. The Company believes that historical volatility of this peer group is currently the best
estimate of expected volatility of the market price of the Companys common shares. The dividend
yield is assumed to be zero as the Company has not historically paid cash dividends nor expects to
pay cash dividends in the near future. The risk-free interest rate is the yield on the grant date
of U.S. Treasury zero coupon securities with a maturity comparable to the expected term of the
options.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R)
Share-Based Payment, as of January 1, 2005. At that time, all share-based payments previously
issued by the Company were fully vested. In 2005, the Company approved the 2005 Incentive Plan and
made the initial awards of stock options under that Plan concurrent with the effective date of the
Companys Registration Statement on November 17, 2005. Since that date, the Company made
additional awards of stock options under the 2005 Equity Incentive Plan on September 1, 2006 and
September 25, 2006. The assumptions used in the Black-Scholes-Merton pricing model for options
granted on the above option grant dates were as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
Expected Volatility |
|
|
28.0% 28.2 |
% |
|
|
29.3 |
% |
Weighted-Average Risk-Free Interest Rate |
|
|
4.5% 4.7 |
% |
|
|
4.4 |
% |
Weighted-Average Expected Life |
|
6.5 years |
|
6.5 years |
Expected Dividend Yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
98
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
The following table summarizes information about the stock options outstanding under the 2005
Incentive Plan at December 31, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
Average |
|
|
|
|
|
|
Average |
|
Remaining |
|
|
|
|
|
|
Exercise |
|
Contractual Life |
|
|
Shares |
|
Price |
|
(in years) |
Outstanding at January 1, 2005 |
|
|
|
|
|
$ |
|
|
|
|
|
|
Granted |
|
|
1,548,500 |
|
|
|
9.00 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
Canceled, forfeited, or expired |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
1,548,500 |
|
|
|
9.00 |
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2006 |
|
|
1,548,500 |
|
|
|
9.00 |
|
|
|
9.9 |
|
Granted |
|
|
100,000 |
|
|
|
10.46 |
|
|
|
|
|
Exercised |
|
|
47,500 |
|
|
|
9.00 |
|
|
|
|
|
Canceled, forfeited, or expired |
|
|
(209,000 |
) |
|
|
9.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
1,392,000 |
|
|
|
9.10 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006 |
|
|
258,400 |
|
|
|
9.00 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair values of options granted during 2006 and 2005 were $4.06
and $3.57, respectively. Cash received from option exercises was $428,000 in 2006. Total tax
benefits realized for tax deductions from option exercises was $10,500 in 2006.
On March 10, 2006, the compensation committee of the Board approved incentive compensation
awards to each of the Companys executive officers for services rendered in 2005. The awards were
composed of cash bonuses and grants of restricted common stock. The restricted stock awards were
made pursuant to the Companys 2005 Incentive Plan and vest on the first anniversary of the date of
grant. The fair value of the restricted stock at the date of grant was $170,000.
The following table summarizes information about the restricted stock outstanding under the
2005 Incentive Plan at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Grant-Date |
|
|
Shares |
|
Fair Value per Share |
Nonvested balance at beginning of year |
|
|
|
|
|
$ |
|
|
Granted |
|
|
15,946 |
|
|
|
10.66 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(3,283 |
) |
|
|
10.66 |
|
Nonvested balance at end of year |
|
|
12,663 |
|
|
|
10.66 |
|
|
|
|
|
|
|
|
|
|
The Company recognized compensation expenses of $850,000 in 2006 and $53,000 in 2005 related
to the 2005 Incentive Plan.
99
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
2005 Restricted Stock Plan
In connection with the initial public offering, the Companys shareholders approved the
AMERISAFE 2005 Non-Employee Director Restricted Stock Plan (the 2005 Restricted Stock Plan). The
2005 Restricted Stock Plan is administered by the Compensation Committee of the Board and provides
for the automatic grant of restricted stock awards to non-employee directors of the Company.
Restricted stock awards to non-employee directors are generally subject to terms including
non-transferability, immediate vesting upon death or total disability of a director, forfeiture of
unvested shares upon termination of service by a director and acceleration of vesting upon a change
of control of the Company. The maximum number of shares of common stock that may be issued
pursuant to restricted stock awards under the 2005 Restricted Stock Plan is 50,000 shares, subject
to the authority of the Board to adjust this amount in the event of a merger, consolidation,
reorganization, stock split, combination of shares, recapitalization or similar transaction
affecting the common stock. At December 31, 2006, 40,558 shares of common stock were available for
future awards under the 2005 Restricted Stock Plan.
Under the 2005 Restricted Stock Plan, each non-employee Director is automatically granted a
restricted stock award for a number of shares equal to $15,000 divided by the closing price of the
Companys common stock on the date of the annual meeting of shareholders at which the non-employee
Director is elected or is continuing as a member of the Board. Each restricted stock award vests
on the date of the next annual meeting of shareholders following the date of grant, subject to the
continued service of the non-employee Director.
As of December 31, 2006, there were 6,110 shares of restricted stock outstanding under the
2005 Restricted Stock Plan, all of which will vest on the date of the annual meeting of
shareholders in 2007.
The following table summarizes information about the restricted stock outstanding under the
2005 Restricted Stock Plan at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Grant-Date |
|
|
Shares |
|
Fair Value per Share |
Nonvested balance at beginning of year |
|
|
3,332 |
|
|
$ |
9.00 |
|
Granted |
|
|
6,110 |
|
|
|
10.66 |
|
Vested |
|
|
(3,332 |
) |
|
|
9.00 |
|
Forfeited |
|
|
|
|
|
|
|
|
Nonvested balance at end of year |
|
|
6,110 |
|
|
|
10.66 |
|
|
|
|
|
|
|
|
|
|
The Company recognized compensation expense of $72,000 in 2006 related to the 2005 Restricted
Stock Plan. No compensation expense was recognized in 2005 related to the 2005 Restricted Stock
Plan. Total tax benefits realized for tax deductions from vesting of restricted stock was $4,000
in 2006.
1998 Plan
The AMERISAFE 1998 Amended and Restated Stock Option and Restricted Stock Purchase Plan (the
1998 Plan) was terminated on June 20, 2005. The 1998 Plan was administered by the Board of
Directors and provided for grants of incentive stock options, nonqualified stock options and
restricted stock to selected employees, officers and directors. Each option granted under the 1998
Plan was exercisable for one share of common stock. Options could have been granted under the 1998
Plan for a number of shares not to exceed, in the aggregate, 2,500,000
shares of common stock.
100
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
Exercise prices for the incentive stock options could be no less than 100% of the fair value
of a share of common stock on the date the option was granted. If the option was granted to any
owner of 10% or more of the total combined voting power of the Company, the exercise price was to
be at least 110% of the fair value of a share of common stock on the date the option was granted.
Exercise prices for the nonqualified stock options could be no less than 100% of the fair value of
a share of common stock on the date the option was granted. Each option vested ratably over a
period of five years and was exercisable during a period not to exceed ten years from the date such
option was granted. Exercise prices for non-employee Director stock options could be no less than
100% of the fair value of a share of common stock on the date the option was granted.
The non-employee Director stock options, granted when a Director became a Board member, were
exercisable in increments of one-third of the total grant on each anniversary of the grant date and
became fully exercisable three years after the grant date. The non-employee Director options
awarded at the re- election of the Director became fully exercisable at the award date.
A summary of the Companys 1998 Plan as of December 31, 2005 and 2004, and changes during each
of the years then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
|
|
Shares |
|
Price |
|
Shares |
|
Price |
Outstanding at the beginning of the year |
|
|
20,098 |
|
|
$ |
215.28 |
|
|
|
20,140 |
|
|
$ |
216.72 |
|
Granted |
|
|
167 |
|
|
|
360.00 |
|
|
|
167 |
|
|
|
360.00 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled, forfeited, or expired |
|
|
(20,265 |
) |
|
|
216.72 |
|
|
|
(209 |
) |
|
|
360.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year |
|
|
|
|
|
|
|
|
|
|
20,098 |
|
|
|
215.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the end of the year |
|
|
|
|
|
|
|
|
|
|
20,098 |
|
|
|
215.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 20, 2005, the Company entered into agreements with the holders of all its outstanding
options to purchase shares of the Companys common stock granted under the 1998 Plan pursuant to
which all outstanding options of the Company were cancelled in exchange for $0.072 for each share
of common stock issuable upon exercise of the options. Options to acquire a total of 20,265 shares
of the Companys common stock were canceled in exchange for aggregate cash payments of $1,459.
14. Warrants
In 2004, warrants for 119,649 shares of common stock were exercised at a price of $0.72 per
share. The warrants were issued in 1997 and 1998. No warrants were outstanding during 2006 or
2005. The following table depicts warrant activity for the one-year period ended December 31,
2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
Shares |
|
|
Number |
|
Price |
|
Purchased |
Warrants outstanding at January 1, 2004 |
|
|
119,849 |
|
|
$ |
0.72 |
|
|
|
|
|
Issued |
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
119,649 |
|
|
|
0.72 |
|
|
|
119,649 |
|
Expired |
|
|
200 |
|
|
|
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
15. Earnings Per Share
Diluted earnings per share includes common shares assumed issued under the treasury stock
method, which reflects the potential dilution that would occur if any outstanding options are
exercised. Diluted earnings per share also includes the if converted method for participating
securities if the result is dilutive. The two-class method of calculating diluted earnings per
share is used whether the if converted result is dilutive or anti-dilutive.
The calculation of basic and diluted EPS for the years ended December 31, 2006, 2005 and 2004
are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands, except per share amounts) |
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
37,358 |
|
|
$ |
5,930 |
|
|
$ |
10,557 |
|
Preferred stock dividends |
|
|
|
|
|
|
(8,593 |
) |
|
|
(9,781 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders |
|
$ |
37,358 |
|
|
$ |
(2,663 |
) |
|
$ |
776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount allocable to common shareholders |
|
|
88.6 |
% |
|
|
100 |
% |
|
|
70.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocable to common shareholders |
|
$ |
33,099 |
|
|
$ |
(2,663 |
) |
|
$ |
545 |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
17,580 |
|
|
|
2,129 |
|
|
|
225 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
1.88 |
|
|
$ |
(1.25 |
) |
|
$ |
2.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocable to common shareholders |
|
$ |
37,358 |
|
|
$ |
(2,663 |
) |
|
$ |
545 |
|
Dividends on participating securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocable to common shareholders
after assumed conversions |
|
$ |
37,358 |
|
|
$ |
(2,663 |
) |
|
$ |
545 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
17,580 |
|
|
|
2,129 |
|
|
|
225 |
|
Diluted effect: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock |
|
|
15 |
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
30 |
|
Conversion of participating securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
17,595 |
|
|
|
2,129 |
|
|
|
255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
$ |
1.88 |
|
|
$ |
(1.25 |
) |
|
$ |
2.14 |
|
|
|
|
|
|
|
|
|
|
|
102
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
The table below sets forth the calculation of the percentage of net income allocable to
common shareholders, or the portion allocable to common shareholders. Under the two-class
method, unvested stock options, and out-of-money vested stock options are not considered to be
participating securities. For the periods presented, the Company did not have any in-the-money,
vested stock options outstanding. As a result, the Companys outstanding stock options are not
included in this calculation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
2006 |
|
2005 |
|
2004 |
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares |
|
|
17,579,829 |
|
|
|
2,129,492 |
|
|
|
225,367 |
|
Add: Other common shares eligible for common
dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average restricted shares (including tax
benefit component) |
|
|
14,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average participating common shares |
|
|
17,594,736 |
|
|
|
2,129,492 |
|
|
|
225,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average participating common shares |
|
|
17,594,736 |
|
|
|
2,129,492 |
|
|
|
225,367 |
|
Add: Other classes of securities, including contingently
issuable common shares and convertible preferred
shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares issuable upon
conversion of Series C preferred shares |
|
|
1,301,301 |
|
|
|
|
(1) |
|
|
57,524 |
|
Weighted average common shares issuable upon
conversion of Series D preferred shares |
|
|
971,817 |
|
|
|
|
(1) |
|
|
38,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average participating shares |
|
|
19,867,854 |
|
|
|
2,129,492 |
|
|
|
321,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Not applicable as impact is antidilutive. |
Portion allocable to common shareholders for 2006 was 88.6%, or 17,594,736 divided by
19,867,854 Portion allocable to common shareholders for 2005 was 100%. Portion allocable to
common shareholders for 2004 was 70.2%, or 225,367 divided by 321,241.
103
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
16. Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Tax |
|
|
|
|
|
|
Net-of-Tax |
|
|
|
Amount |
|
|
Tax Expense |
|
|
Amount |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
$ |
1,983 |
|
|
$ |
694 |
|
|
$ |
1,289 |
|
Less amortization of differences between fair value
and amortized cost for fixed maturity security
transfer |
|
|
(1,637 |
) |
|
|
(573 |
) |
|
|
(1,064 |
) |
Less reclassification adjustment for losses realized
in net income |
|
|
(3,860 |
) |
|
|
(1,351 |
) |
|
|
(2,509 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized loss |
|
|
(3,514 |
) |
|
|
(1,230 |
) |
|
|
(2,284 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
(3,514 |
) |
|
$ |
(1,230 |
) |
|
$ |
(2,284 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
$ |
3,057 |
|
|
$ |
1,070 |
|
|
$ |
1,987 |
|
Less amortization of differences between fair value
and amortized cost for fixed maturity security
transfer |
|
|
(1,969 |
) |
|
|
(689 |
) |
|
|
(1,280 |
) |
Less reclassification adjustment for losses realized
in net income |
|
|
(2,228 |
) |
|
|
(780 |
) |
|
|
(1,448 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized loss |
|
|
(1,140 |
) |
|
|
(399 |
) |
|
|
(741 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
(1,140 |
) |
|
$ |
(399 |
) |
|
$ |
(741 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
$ |
1,993 |
|
|
$ |
698 |
|
|
$ |
1,295 |
|
Less amortization of differences between fair value
and amortized cost for fixed maturity security
transfer |
|
|
(2,413 |
) |
|
|
(845 |
) |
|
|
(1,568 |
) |
Less reclassification adjustment for gains realized
in net income |
|
|
242 |
|
|
|
86 |
|
|
|
156 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss |
|
|
(178 |
) |
|
|
(61 |
) |
|
|
(117 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
(178 |
) |
|
$ |
(61 |
) |
|
$ |
(117 |
) |
|
|
|
|
|
|
|
|
|
|
17. Employee Benefit Plan
The Companys 401(k) benefit plan is available to all employees. The Company matches up to 2%
of employee compensation for participating employees, subject to certain limitations. Employees
are fully vested in employer contributions to this plan after five years. Contributions to this
plan were $275,000 in 2006, $294,000 in 2005 and $276,000 in 2004.
18. Commitments and Contingencies
The Company is a party to various legal actions arising principally from claims made under
insurance policies and contracts. Those actions are considered by the Company in estimating
reserves for loss and loss adjustment expenses. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the Companys consolidated
financial position or results of operations.
The Company provides workers compensation insurance in several states that maintain
second-injury funds. Incurred losses on qualifying claims that exceed certain amounts may be
recovered from these state funds. There is no assurance that the applicable states will continue
to provide funding under these programs.
104
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
The Company manages risk on certain long-duration claims by settling these claims through the
purchase of annuities from unaffiliated carriers. In the event these carriers are unable to meet
their obligations under these contracts, the Company could be liable to the claimants. The
following table summarizes (in thousands) the fair value of the annuities at December 31, 2006,
that the Company has purchased to satisfy its obligations. The A.M. Best Company rating is shown
parenthetically.
|
|
|
|
|
|
|
Statement Value |
|
|
|
of Annuities Exceeding |
|
Life Insurance Company |
|
1% of Statutory Surplus |
|
|
|
|
|
|
American General Life Insurance (A++) |
|
$ |
23,007 |
|
New York Life Insurance Company (A++) |
|
|
4,463 |
|
First Colony Life Insurance Company (A+) |
|
|
3,806 |
|
Monumental Life Insurance Company (A+) |
|
|
3,300 |
|
Pacific Life and Annuity Company (A++) |
|
|
3,081 |
|
John Hancock Life Insurance Company (A++) |
|
|
2,941 |
|
Liberty Life Assurance Company of Boston (A) |
|
|
2,594 |
|
Transamerica Life Insurance and Annuity (A+) |
|
|
2,522 |
|
Massachusetts Mutual Life Insurance Company (A++) |
|
  |