AMERISAFE - 10-Q quarterly report FY2019 Q2

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019

Commission File Number:

001-12251

AMERISAFE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Texas		75-2069407
(State of Incorporation)		(I.R.S. Employer Identification Number)

2301 Highway 190 West, DeRidder, Louisiana		70634
(Address of Principal Executive Offices)		(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common

AMSF

NASDAQ

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

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

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

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

As of July 30, 2019, there were 19,298,261 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

TABLE OF CONTENTS

		Page
		No.

FORWARD-LOOKING STATEMENTS		3

PART I - FINANCIAL INFORMATION

Item 1	Financial Statements	4

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4	Controls and Procedures	27

PART II - OTHER INFORMATION

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 6	Exhibits	28

FORWARD-LOOKING STATEMENTS

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

•

the cyclical nature of the workers’ compensation insurance industry;

•

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

•

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

•

changes in relationships with independent agencies;

•

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

•

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

•

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

•

greater frequency or severity of claims and loss activity than our underwriting, reserving or investment practices anticipate based on historical experience or industry data;

•

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

•

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

•

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

•

changes in current accounting standards or new accounting standards;

•

changes in legal theories of liability under our insurance policies;

•

changes in rating agency policies, practices or ratings;

•

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

•

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

•

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

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements in this report, and under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018. 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.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	June 30, 2019			December 31, 2018
	(unaudited)
Assets
Investments:
Fixed maturity securities—held-to-maturity, at amortized cost (fair value $629,207 and $616,772 in 2019 and 2018, respectively)	$	610,950		$	613,878
Fixed maturity securities—available-for-sale, at fair value (cost $445,117 and $479,772 in 2019 and 2018, respectively)		457,893			478,730
Equity securities, at fair value (cost $22,582 and $19,962 in 2019 and 2018, respectively)		24,070			18,651
Short-term investments		70,146			14,231
Total investments		1,163,059			1,125,490
Cash and cash equivalents		51,246			40,344
Amounts recoverable from reinsurers		103,695			112,006
Premiums receivable, net of allowance		175,020			162,478
Deferred income taxes		19,461			21,852
Accrued interest receivable		10,086			10,197
Property and equipment, net		5,957			6,258
Deferred policy acquisition costs		20,550			19,734
Other assets		22,019			17,572
Total assets	$	1,571,093		$	1,515,931
Liabilities and shareholders’ equity
Liabilities:
Reserves for loss and loss adjustment expenses	$	795,046		$	798,409
Unearned premiums		156,889			149,296
Amounts held for others		44,064			41,388
Policyholder deposits		46,095			46,795
Insurance-related assessments		30,253			28,258
Federal income tax payable		1,325			3,412
Accounts payable and other liabilities		38,325			38,611
Payable for investments purchased		9,653			—
Total liabilities		1,121,650			1,106,169
Shareholders’ equity:
Common stock: voting—$0.01 par value authorized shares—50,000,000 in 2019 and 2018; 20,556,511 and 20,528,230 shares issued and 19,298,261 and 19,269,980 shares outstanding in 2019 and 2018, respectively		205			205
Additional paid-in capital		212,493			211,431
Treasury stock, at cost (1,258,250 shares in 2019 and 2018)		(22,370	)		(22,370	)
Accumulated earnings		248,975			221,328
Accumulated other comprehensive income (loss), net		10,140			(832	)
Total shareholders’ equity		449,443			409,762
Total liabilities and shareholders’ equity	$	1,571,093		$	1,515,931

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share data)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Revenues
Gross premiums written	$	87,018		$	93,702		$	180,125		$	191,044
Ceded premiums written		(2,204	)		(2,369	)		(4,634	)		(4,699	)
Net premiums written	$	84,814		$	91,333		$	175,491		$	186,345
Net premiums earned	$	82,951		$	88,995		$	167,899		$	176,305
Net investment income		8,169			7,303			16,184			14,512
Net realized losses on investments		(82	)		(1,111	)		(23	)		(1,142	)
Net unrealized gains (losses) on equity securities		642			76			2,800			(314	)
Fee and other income		73			117			83			194
Total revenues		91,753			95,380			186,943			189,555
Expenses
Loss and loss adjustment expenses incurred		48,868			52,076			98,482			105,238
Underwriting and certain other operating costs		7,416			7,985			14,968			15,831
Commissions		6,243			6,616			12,611			13,110
Salaries and benefits		6,059			6,681			12,806			12,607
Policyholder dividends		998			1,092			2,098			2,425
Total expenses		69,584			74,450			140,965			149,211
Income before income taxes		22,169			20,930			45,978			40,344
Income tax expense		4,279			3,974			8,688			7,219
Net income	$	17,890		$	16,956		$	37,290		$	33,125
Earnings per share
Basic	$	0.93		$	0.88		$	1.94		$	1.73
Diluted	$	0.93		$	0.88		$	1.93		$	1.72
Shares used in computing earnings per share
Basic		19,245,592			19,208,601			19,237,401			19,197,925
Diluted		19,306,953			19,266,735			19,316,276			19,275,883
Cash dividends declared per common share	$	0.25		$	0.22		$	0.50		$	0.44

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Net income	$	17,890	$	16,956	$	37,290	$	33,125
Other comprehensive income:
Unrealized gain (loss) on debt securities, net of tax		4,980		153		10,972		(5,695	)
Change in deferred tax valuation allowance		198		—		—		—
Comprehensive income	$	23,068	$	17,109	$	48,262	$	27,430

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Three Months Ended June 30, 2019 and 2018

(in thousands, except share data)

(unaudited)

	Common Stock					Additional Paid-In		Treasury Stock						Accumulated			Accumulated Other Comprehensive
	Shares		Amounts			Capital		Shares			Amounts			Earnings			Income			Total
Balance at March 31, 2019		20,533,230	$	205		$	211,700		(1,258,250	)	$	(22,370	)	$	235,908		$	4,962		$	430,405
Comprehensive income:
Net income		—		—			—		—			—			17,890			—			17,890
Other comprehensive income:
Change in unrealized gains, net of tax		—		—			—		—			—			—			4,980			4,980
Change in deferred tax valuation allowance		—		—			—		—			—			—			198			198
Comprehensive income:																					23,068
Common stock issued		23,281		—			560		—			—			—			—			560
Share-based compensation		—		—			233		—			—			—			—			233
Dividends to shareholders		—		—			—		—			—			(4,823	)		—			(4,823	)
Balance at June 30, 2019		20,556,511	$	205		$	212,493		(1,258,250	)	$	(22,370	)	$	248,975		$	10,140		$	449,443

	Common Stock					Additional Paid-In		Treasury Stock						Accumulated			Accumulated Other Comprehensive
	Shares		Amounts			Capital		Shares			Amounts			Earnings			Loss			Total
Balance at March 31, 2018		20,519,165	$	205		$	210,441		(1,258,250	)	$	(22,370	)	$	246,028		$	(2,236	)	$	432,068
Comprehensive income:
Impact of adoption of ASU 2016-01		—		—			—		—			—			(1	)		—			(1	)
Net income		—		—			—		—			—			16,956			—			16,956
Other comprehensive income:
Change in unrealized losses, net of tax		—		—			—		—			—			—			153			153
Comprehensive income:																					17,109
Common stock issued upon exercise of options		—		(1	)		—		—			—			—			—			(1	)
Common stock issued		9,065		1			195		—			—			—			—			196
Share-based compensation		—		—			259		—			—			—			—			259
Dividends to shareholders		—		—			—		—			—			(4,239	)		—			(4,239	)
Balance at June 30, 2018		20,528,230	$	205		$	210,895		(1,258,250	)	$	(22,370	)	$	258,744		$	(2,083	)	$	445,391

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Six Months Ended June 30, 2019 and 2018

(in thousands, except share data)

(unaudited)

	Common Stock				Additional Paid-In		Treasury Stock						Accumulated			Accumulated Other Comprehensive
	Shares		Amounts		Capital		Shares			Amounts			Earnings			Income (Loss)			Total
Balance at December 31, 2018		20,528,230	$	205	$	211,431		(1,258,250	)	$	(22,370	)	$	221,328		$	(832	)	$	409,762
Comprehensive income:
Impact of adoption of ASU 2016-02		—		—		—		—			—			(1	)		—			(1	)
Net income		—		—		—		—			—			37,290			—			37,290
Other comprehensive income:
Change in unrealized losses, net of tax		—		—		—		—			—			—			10,972			10,972
Comprehensive income:																				48,262
Common stock issued upon exercise of options		5,000		—		20		—			—			—			—			20
Common stock issued		23,281		—		560		—			—			—			—			560
Share-based compensation		—		—		482		—			—			—			—			482
Dividends to shareholders		—		—		—		—			—			(9,642	)		—			(9,642	)
Balance at June 30, 2019		20,556,511	$	205	$	212,493		(1,258,250	)	$	(22,370	)	$	248,975		$	10,140		$	449,443

	Common Stock				Additional Paid-In		Treasury Stock						Accumulated			Accumulated Other Comprehensive
	Shares		Amounts		Capital		Shares			Amounts			Earnings			Income (Loss)			Total
Balance at December 31, 2017		20,504,165	$	204	$	210,081		(1,258,250	)	$	(22,370	)	$	233,896		$	3,612		$	425,423
Comprehensive income:
Impact of adoption of ASU 2016-01		—		—		—		—			—			614			—			614
Impact of adoption of ASU 2018-02		—		—		—		—			—			(414	)		—			(414	)
Net income		—		—		—		—			—			33,125			—			33,125
Other comprehensive income:
Change in unrealized gains, net of tax		—		—		—		—			—			—			(5,695	)		(5,695	)
Comprehensive income:																				27,430
Common stock issued upon exercise of options		15,000		—		67		—			—			—			—			67
Common stock issued		9,065		1		195		—			—			—			—			196
Share-based compensation		—		—		552		—			—			—			—			552
Dividends to shareholders		—		—		—		—			—			(8,477	)		—			(8,477	)
Balance at June 30, 2018		20,528,230	$	205	$	210,895		(1,258,250	)	$	(22,370	)	$	258,744		$	(2,083	)	$	445,391

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2019			2018
Operating activities
Net income	$	37,290		$	33,125
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		449			488
Net amortization of investments		4,483			5,979
Deferred income taxes		(526	)		831
Net realized losses on investments		23			1,142
Net unrealized (gains) losses on equity securities		(2,800	)		314
Share-based compensation		509			782
Changes in operating assets and liabilities:
Premiums receivable, net		(12,542	)		(15,658	)
Accrued interest receivable		111			177
Deferred policy acquisition costs		(816	)		(1,350	)
Amounts held by others		1			(7,855	)
Other assets		(947	)		942
Reserves for loss and loss adjustment expenses		(3,363	)		11,756
Unearned premiums		7,593			10,040
Reinsurance balances		8,317			(8,828	)
Amounts held for others and policyholder deposits		1,976			1,787
Accounts payable and other liabilities		(189	)		3,312
Net cash provided by operating activities		39,569			36,984
Investing activities
Purchases of investments held-to-maturity		(67,571	)		(38,129	)
Purchases of investments available-for-sale		(27,356	)		(52,211	)
Purchases of equity securities		(2,620	)		(4,339	)
Purchases of short-term investments		(79,224	)		(100,059	)
Proceeds from maturities of investments held-to-maturity		73,865			52,584
Proceeds from sales and maturities of investments available-for-sale		60,494			66,480
Proceeds from sales of equity securities		—			282
Proceeds from sales and maturities of short-term investments		23,679			13,465
Proceeds from redemptions of other investments		—			130
Purchases of property and equipment		(148	)		(1,004	)
Net cash used in investing activities		(18,881	)		(62,801	)
Financing activities
Proceeds from stock option exercises		20			67
Finance lease purchases		(23	)		—
Dividends to shareholders		(9,783	)		(8,633	)
Net cash used in financing activities		(9,786	)		(8,566	)
Change in cash and cash equivalents		10,902			(34,383	)
Cash and cash equivalents at beginning of period		40,344			55,559
Cash and cash equivalents at end of period	$	51,246		$	21,176

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Basis of Presentation

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

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

The Company provides workers’ compensation insurance for small to mid-sized employers engaged in hazardous industries, principally construction, trucking, logging and lumber, manufacturing, and agriculture. Assets and revenues of AIIC and its subsidiaries represent at least 95% of comparable consolidated amounts of the Company for each of the six months ended June 30, 2019 and 2018.

In the opinion of management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, the results of operations and cash flows for the periods presented. The unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q under the Securities Exchange Act of 1934 and therefore do not include all information and footnotes to be in conformity with accounting principles generally accepted in the United States (“GAAP”). The results for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited consolidated financial statements contained herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues and expenses and related disclosures. Some of the estimates result from judgments that can be subjective and complex and, consequently, actual results in future periods might differ from these estimates.

Adopted Accounting Guidance

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new guidance requires a lessee to recognize a lease liability and a right of use asset for all leases extending beyond twelve months. This standard was effective for us beginning in the first quarter of 2019. We elected the new transition method under the transition guidance within the new standard. Therefore, prior comparative periods are not adjusted. We also elected the package of practical expedients, which among other things, allows us to carryforward the historical lease classification. We made an accounting policy election not to recognize lease assets and lease liabilities for short-term operating leases. Adoption of the new guidance resulted in the Company recognizing right-of-use assets of $0.4 million and lease liabilities of $0.3 million. The cumulative effect adjustment to the opening balance of retained earnings was minimal. Adoption of this new guidance did not have a material effect on the Company’s consolidated financial statements as the Company does not have any significant leases.

Prospective Accounting Guidance

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses. The current guidance delays the recognition of credit losses until a probable loss has occurred. The new guidance requires credit losses for securities measured at amortized cost to be determined using current expected credit loss estimates. These estimates are to be derived from historical, current and reasonable supporting forecasts, including prepayments and estimates, and will be recorded through a valuation account. The same method will be used for available-for-sale securities, but the valuation account will be limited to the amount by which the fair value is below amortized cost. The standard is effective for us in the first quarter of 2020. Implementation of the new guidance requires a modified retrospective approach without restatement, which means the first cumulative adjustment required will be a charge to retained earnings, with subsequent changes in the valuation account reported in the income statement. The financial statement impact will be determined by the nature of the portfolio held and the economic conditions at the time of implementation.

The Company has formed an internal working group to evaluate the new standard and develop an implementation strategy. The group has researched data, developed models and methodologies and is working toward implementation. The Company will continue to monitor and evaluate the financial impact as the implementation date approaches.

All other issued but not yet effective accounting and reporting standards as of June 30, 2019 are either not applicable to the Company or are not expected to have a material impact on the Company.

Note 2. Stock Options and Restricted Stock

As of June 30, 2019, the Company has two equity incentive plans: the AMERISAFE Non-Employee Director Restricted Stock Plan (the “Restricted Stock Plan”) and the AMERISAFE 2012 Equity and Incentive Compensation Plan (the “2012 Incentive Plan”). In connection with the approval of the 2012 Incentive Plan by the Company’s shareholders, no further grants were made under the AMERISAFE 2005 Incentive Plan. There are no outstanding options or restricted stock awards under the 2005 Incentive Plan. See Note 12 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information regarding the Company’s incentive plans.

During the six months ended June 30, 2019, the Company issued 9,391 shares of common stock pursuant to vested performance awards and 9,000 shares of restricted common stock to executive officers. During the six months ended June 30, 2019, the Company issued 4,890 shares of restricted common stock to non-employee directors. The market value of the shares issued totaled $1.4 million. During the six months ended June 30, 2018, the Company issued 3,304 shares of common stock pursuant to vested performance awards to executive officers and 5,761 shares of restricted common stock to non-employee directors. The market value of the shares issued totaled $0.5 million.

During the six months ended June 30, 2019 and 2018, options to purchase 5,000 and 15,000 shares of common stock were exercised, respectively. In connection with these exercises, the Company received $20 thousand of stock option proceeds in the current year and $67 thousand of stock option proceeds in the same period of 2018.

The Company recognized a negative share-based compensation expense of $0.1 million in the quarter ended June 30, 2019 due to lower estimates of variable share price based incentive compensation costs. The Company recognized an expense of $0.8 million for the same period in 2018. The Company recognized share-based compensation expense of $0.5 million in the six months ended June 30, 2019 and $0.8 million for the same period in 2018.

Note 3. Earnings Per Share

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

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

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(in thousands, except share and per share amounts)
Basic EPS:
Net income	$	17,890	$	16,956	$	37,290	$	33,125
Basic weighted average common shares		19,245,592		19,208,601		19,237,401		19,197,925
Basic earnings per common share	$	0.93	$	0.88	$	1.94	$	1.73
Diluted EPS:
Net income	$	17,890	$	16,956	$	37,290	$	33,125
Diluted weighted average common shares:
Weighted average common shares		19,245,592		19,208,601		19,237,401		19,197,925
Stock options and restricted stock		61,361		58,134		78,875		77,958
Diluted weighted average common shares		19,306,953		19,266,735		19,316,276		19,275,883
Diluted earnings per common share	$	0.93	$	0.88	$	1.93	$	1.72

Note 4. Investments

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as held-to-maturity at June 30, 2019 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
States and political subdivisions	$	439,103	$	15,966	$	(36	)	$	455,033
Corporate bonds		108,756		1,425		(17	)		110,164
U.S. agency-based mortgage-backed securities		12,465		523		(12	)		12,976
U.S. Treasury securities and obligations of U.S. government agencies		49,677		430		(29	)		50,078
Asset-backed securities		949		10		(3	)		956
Totals	$	610,950	$	18,354	$	(97	)	$	629,207

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as available-for-sale at June 30, 2019 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
States and political subdivisions	$	220,385	$	9,852	$	(15	)	$	230,222
Corporate bonds		151,705		2,953		(39	)		154,619
U.S. agency-based mortgage-backed securities		11,904		6		(58	)		11,852
U.S. Treasury securities and obligations of U.S. government agencies		61,123		301		(224	)		61,200
Totals	$	445,117	$	13,112	$	(336	)	$	457,893

The gross unrealized gains and losses on, and the cost of equity securities at June 30, 2019 are summarized as follows:

	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Equity securities:
Domestic common stock	$	22,582	$	1,488	$	—	$	24,070
Total equity securities	$	22,582	$	1,488	$	—	$	24,070

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as held-to-maturity at December 31, 2018 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
States and political subdivisions	$	445,922	$	5,109	$	(2,084	)	$	448,947
Corporate bonds		91,762		62		(455	)		91,369
U.S. agency-based mortgage-backed securities		8,102		327		(80	)		8,349
U.S. Treasury securities and obligations of U.S. government agencies		67,042		340		(339	)		67,043
Asset-backed securities		1,050		22		(8	)		1,064
Totals	$	613,878	$	5,860	$	(2,966	)	$	616,772

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as available-for-sale at December 31, 2018 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
States and political subdivisions	$	231,848	$	3,515	$	(2,118	)	$	233,245
Corporate bonds		173,904		243		(933	)		173,214
U.S. agency-based mortgage-backed securities		12,835		—		(320	)		12,515
U.S. Treasury securities and obligations of U.S. government agencies		61,185		—		(1,429	)		59,756
Totals	$	479,772	$	3,758	$	(4,800	)	$	478,730

The gross unrealized gains and losses on, and the cost of equity securities at December 31, 2018 are summarized as follows:

	Cost		Gross Gains		Gross Losses			Fair Value
	(in thousands)
Equity securities:
Domestic common stock	$	19,962	$	30	$	(1,341	)	$	18,651
Total equity securities	$	19,962	$	30	$	(1,341	)	$	18,651

A summary of the amortized cost and fair value of investments in fixed maturity securities, classified as held-to-maturity at June 30, 2019, by contractual maturity, is as follows:

	Amortized Cost		Fair Value
	(in thousands)
Maturity:
Within one year	$	79,934	$	80,374
After one year through five years		216,626		220,476
After five years through ten years		84,179		87,047
After ten years		216,797		227,378
U.S. agency-based mortgage-backed securities		12,465		12,976
Asset-backed securities		949		956
Totals	$	610,950	$	629,207

A summary of the amortized cost and fair value of investments in fixed maturity securities, classified as available-for-sale at June 30, 2019, by contractual maturity, is as follows:

	Amortized Cost		Fair Value
	(in thousands)
Maturity:
Within one year	$	49,966	$	50,018
After one year through five years		158,125		159,944
After five years through ten years		46,069		47,983
After ten years		179,053		188,096
U.S. agency-based mortgage-backed securities		11,904		11,852
Totals	$	445,117	$	457,893

The following table summarizes the fair value and gross unrealized losses on securities, aggregated by major investment category and length of time that the individual securities have been in a continuous unrealized loss position:

	Less Than 12 Months				12 Months or Greater				Total
	Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses		Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses		Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses
	(in thousands)
June 30, 2019
Held-to-Maturity
Fixed maturity securities:
States and political subdivisions	$	6,038	$	19	$	11,835	$	17	$	17,873	$	36
Corporate bonds		—		—		15,306		17		15,306		17
U.S. agency-based mortgage-backed securities		—		—		2,201		12		2,201		12
U.S. Treasury securities and obligations of U.S. government agencies		—		—		8,362		29		8,362		29
Asset-backed securities		—		—		177		3		177		3
Total held-to-maturity securities		6,038		19		37,881		78		43,919		97
Available-for-Sale
Fixed maturity securities:
States and political subdivisions	$	—	$	—	$	7,008	$	15	$	7,008	$	15
Corporate bonds		—		—		22,346		39		22,346		39
U.S. agency-based mortgage-backed securities		—		—		10,588		58		10,588		58
U.S. Treasury securities and obligations of U.S. government agencies		—		—		39,120		224		39,120		224
Total available-for-sale securities		—		—		79,062		336		79,062		336
Total	$	6,038	$	19	$	116,943	$	414	$	122,981	$	433

	Less Than 12 Months				12 Months or Greater				Total
	Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses		Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses		Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses
	(in thousands)
December 31, 2018
Held-to-Maturity
Fixed maturity securities:
States and political subdivisions	$	28,369	$	59	$	180,550	$	2,025	$	208,919	$	2,084
Corporate bonds		17,448		36		48,315		419		65,763		455
U.S. agency-based mortgage-backed securities		—		—		2,287		80		2,287		80
U.S. Treasury securities and obligations of U.S. government agencies		2,865		4		46,486		335		49,351		339
Asset-backed securities		—		—		525		8		525		8
Total held-to-maturity securities		48,682		99		278,163		2,867		326,845		2,966
Available-for-Sale
Fixed maturity securities:
States and political subdivisions	$	16,109	$	81	$	76,255	$	2,037	$	92,364	$	2,118
Corporate bonds		59,099		279		70,306		654		129,405		933
U.S. agency-based mortgage-backed securities		—		—		12,515		320		12,515		320
U.S. Treasury securities and obligations of U.S. government agencies		—		—		59,756		1,429		59,756		1,429
Total available-for-sale securities		75,208		360		218,832		4,440		294,040		4,800
Total	$	123,890	$	459	$	496,995	$	7,307	$	620,885	$	7,766

At June 30, 2019, we held 66 individual fixed maturity securities that were in an unrealized loss position, of which 61 individual fixed maturity securities were in a continuous unrealized loss position for longer than 12 months.

During the second quarter of 2019, we recognized through income $0.6 million of net unrealized gains on equity securities held as of June 30, 2019. During the second quarter of 2018, we recognized through income $0.1 million of net unrealized gains on equity securities held as of June 30, 2018.

During the six months ended June 30, 2019, we recognized through income $2.8 million of net unrealized gains on equity securities held as of June 30, 2019. During the six months ended June 30, 2018, we recognized through income $0.3 million of net unrealized losses on equity securities held as of June 30, 2018.

Investment income is recognized as it is earned. The discount or premium on fixed maturity securities is amortized using the “constant yield” method. Anticipated prepayments, where applicable, are considered when determining the amortization of premiums or discounts. Realized investment gains and losses are determined using the specific identification method.

We regularly review our investment portfolio to evaluate the existence of other-than-temporary declines in the fair value of investments. We consider various factors in determining if a decline in the fair value of an individual security is other-than-temporary. The key factors we consider are:

•

any reduction or elimination of preferred dividends, or nonpayment of scheduled principal or interest payments;

•

the financial condition and near-term prospects of the issuer of the applicable security, including any specific events that may affect its operations or earnings;

•

how long and by how much the fair value of the security has been below its cost or amortized cost;

•

any downgrades of the security by a rating agency;

•

our intent not to sell the security for a sufficient time period for it to recover its value;

•

the likelihood of being required to sell the security before the recovery of its value; and

•

an evaluation as to whether there are any credit losses on debt securities.

We reviewed all securities with unrealized losses in accordance with the impairment policy described above. We determined that the unrealized losses in the fixed maturity securities portfolio related primarily to changes in market interest rates since the date of purchase, current conditions in the capital markets and the impact of those conditions on market liquidity and prices generally. We expect to recover the carrying value of these securities as it is not more likely than not that we will be required to sell the securities before the recovery of its amortized cost basis.

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

Net realized losses in the quarter ended June 30, 2019 were $0.1 million resulting from the call of fixed maturity securities. Net realized losses in the quarter ended June 30, 2018 were $1.1 million resulting from the sale of fixed maturity securities classified as available-for-sale.

Net realized losses in the six months ended June 30, 2019 were immaterial. Net realized losses in the six months ended June 30, 2018 were $1.1 million resulting from the sale of fixed maturity securities classified as available-for-sale.

Note 5. Income Taxes

In accordance with FASB ASC Topic 740, “Income Taxes,” we provide for the recognition and measurement of deferred income tax benefits based on the likelihood of their realization in future years. As of June 30, 2019, the Company established a valuation allowance of $0.2 million against its deferred income tax benefits.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no uncertain tax positions recognized for the periods ended June 30, 2019 and 2018.

Tax years 2015 through 2018 are subject to examination by the federal and state taxing authorities.

Note 6. Loss Reserves

We record reserves for estimated losses under insurance policies that we write and for loss adjustment expenses related to the investigation and settlement of policy claims. Our reserves for loss and loss adjustment expenses represent the estimated cost of all reported and unreported loss and loss adjustment expenses incurred and unpaid as of a given point in time. The reserves for loss and loss adjustment expenses are estimated using individual case-basis valuations, statistical analyses and estimates based upon experience for unreported claims and their associated loss and loss adjustment expenses. Such estimates may be more or less than the amounts ultimately paid when the claims are settled. The estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in these estimates, management believes that the reserves for loss and loss adjustment expenses are adequate. The estimates are continually reviewed internally and periodically evaluated with our independent actuary. Adjustments are made as experience develops and new information becomes known. Any such adjustments are included in income from current operations. See Note 9 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information regarding the Company’s loss and loss adjustment expense development.

The following table provides the Company’s liability for unpaid loss and loss adjustment expenses, net of related amounts recoverable from reinsurers, for the six months ended June 30, 2019 and 2018:

	Six Months Ended June 30,
	2019			2018
	(in thousands)
Balance, beginning of period	$	798,409		$	771,845
Less amounts recoverable from reinsurers on unpaid loss and loss adjustment expenses		107,216			84,889
Net balance, beginning of period		691,193			686,956
Add incurred related to:
Current accident year		121,727			126,060
Prior accident years		(23,245	)		(20,822	)
Total incurred		98,482			105,238
Less paid related to:
Current accident year		15,926			18,386
Prior accident years		77,362			84,194
Total paid		93,288			102,580
Net balance, end of period		696,387			689,614
Add amounts recoverable from reinsurers on unpaid loss and loss adjustment expenses		98,659			93,987
Balance, end of period	$	795,046		$	783,601

The foregoing reconciliation reflects favorable development of the net reserves at June 30, 2019 and June 30, 2018. The favorable development reduced loss and loss adjustment expenses incurred by $23.2 million and $20.8 million in 2019 and 2018, respectively. The revisions to the Company’s reserves reflect new information gained by claims adjusters in the normal course of adjusting claims and is reflected in the financial statements when the information becomes available. It is typical for more serious claims to take several years or longer to settle and the Company continually revises estimates as more information about claimants’ medical conditions and potential disability becomes known and the claims get closer to being settled. Multiple factors can cause loss development both unfavorable and favorable. The favorable loss development we experienced across accident years was largely due to favorable case reserve development from closed claims and claims where the worker had reached maximum medical improvement.

Note 7. Comprehensive Income and Accumulated Other Comprehensive Income

Comprehensive income was $23.1 million for the three months ended June 30, 2019, compared to $17.1 million for the three months ended June 30, 2018. Comprehensive income was $48.3 million for the six months ended June 30, 2019, compared to $27.4 million for the same period in 2018. The difference between net income as reported and comprehensive income was due to changes in unrealized gains and losses, net of tax on available-for-sale debt securities.

Comprehensive income includes net income plus unrealized gains (losses) on our available-for-sale investment securities, net of tax. In reporting comprehensive income on a net basis in the statements of comprehensive income, we used a 21 percent tax rate in 2019 and 2018. The following table illustrates the changes in the balance of each component of accumulated other comprehensive income for each period presented in the interim financial statements.

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands)
Beginning balance	$	4,962		$	(2,236	)	$	(832	)	$	3,612
Other comprehensive income (loss) before reclassification		5,001			(449	)		10,889			(5,863	)
Amounts reclassified from accumulated other comprehensive income		(21	)		602			83			168
Change in deferred tax valuation allowance		198			—			—			—
Net current period other comprehensive income (loss)		5,178			153			10,972			(5,695	)
Ending balance	$	10,140		$	(2,083	)	$	10,140		$	(2,083	)

The sale or other-than-temporary impairment of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive income to current period net income. The effects of reclassifications out of accumulated other comprehensive income by the respective line items of net income are presented in the following table.

Component of Accumulated Other	Three Months Ended						Six Months Ended						Affected line item in the
Comprehensive Income	June 30,						June 30,						statement of income
	2019			2018			2019			2018
	(in thousands)
Unrealized gains (losses) on available-for-sale securities	$	26		$	(762	)	$	(105	)	$	(466	)	Net realized losses on investments
		26			(762	)		(105	)		(466	)	Income before income taxes
		(5	)		160			22			44		Income tax expense
	$	21		$	(602	)	$	(83	)	$	(422	)	Net income

Note 8. Fair Value Measurements

The Company carries available-for-sale securities at fair value in our consolidated financial statements and determines fair value measurements and disclosure in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures.

The Company determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard defines fair value, describes three levels of inputs that may be used to measure fair value, and expands disclosures about fair value measurements.

Fair value is defined in ASC Topic 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is the price to sell an asset or transfer a liability and, therefore, represents an exit price, not an entry price. Fair value is the exit price in the principal market (or, if lacking a principal market, the most advantageous market) in which the reporting entity would transact. Fair value is a market-based measurement, not an entity-specific measurement, and, as such, is determined based on the assumptions that market participants would use in pricing the asset or liability. The exit price objective of a fair value measurement applies regardless of the reporting entity’s intent and/or ability to sell the asset or transfer the liability at the measurement date.

ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset, also known as current replacement cost. Valuation techniques used to measure fair value are to be consistently applied.

In ASC Topic 820, inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable:

•

Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity.

•

Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

Valuation techniques used to measure fair value are intended to maximize the use of observable inputs and minimize the use of unobservable inputs. ASC Topic 820 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:

•

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

•

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data.

•

Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are to be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters.

The fair values of the Company’s investments are based upon prices provided by an independent pricing service. The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider. Securities reported at fair value utilizing Level 1 inputs represent assets whose fair value is determined based upon observable unadjusted quoted market prices for identical assets in active markets. Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2019.

At June 30, 2019, assets measured at fair value on a recurring basis are summarized below:

	June 30, 2019
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(in thousands)
Financial instruments carried at fair value, classified as a part of:
Securities available-for-sale—fixed maturity:
States and political subdivisions	$	—	$	230,222	$	—	$	230,222
Corporate bonds		—		154,619		—		154,619
U.S. agency-based mortgage-backed securities		—		11,852		—		11,852
U.S. Treasury securities		61,200		—		—		61,200
Total securities available-for-sale—fixed maturity		61,200		396,693		—		457,893
Equity securities:
Domestic common stock		24,070		—		—		24,070
Total	$	85,270	$	396,693	$	—	$	481,963

At June 30, 2019, assets measured at amortized cost are summarized below:

	June 30, 2019
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(in thousands)
Securities held-to-maturity—fixed maturity:
States and political subdivisions	$	—	$	455,033	$	—	$	455,033
Corporate bonds		—		110,164		—		110,164
U.S. agency-based mortgage-backed securities		—		12,976		—		12,976
U.S. Treasury securities		7,882		—		—		7,882
Obligations of U.S. government agencies		—		42,196		—		42,196
Asset-backed securities		—		956		—		956
Total held-to-maturity	$	7,882	$	621,325	$	—	$	629,207

At December 31, 2018, assets measured at fair value on a recurring basis are summarized below:

	December 31, 2018
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(in thousands)
Financial instruments carried at fair value, classified as part of:
Securities available-for-sale—fixed maturity:
States and political subdivisions	$	—	$	233,245	$	—	$	233,245
Corporate bonds		—		173,214		—		173,214
U.S. agency-based mortgage-backed securities		—		12,515		—		12,515
U.S. Treasury securities and obligations of U.S. government agencies		59,756		—		—		59,756
Total securities available-for-sale—fixed maturity	$	59,756	$	418,974	$	—	$	478,730
Equity securities:
Domestic common stock		18,651		—		—		18,651
Total	$	78,407	$	418,974	$	—	$	497,381

At December 31, 2018, assets measured at amortized cost are summarized below:

	December 31, 2018
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(in thousands)
Securities held-to-maturity—fixed maturity:
States and political subdivisions	$	—	$	448,947	$	—	$	448,947
Corporate bonds		—		91,369		—		91,369
U.S. agency-based mortgage-backed securities		—		8,349		—		8,349
U.S. Treasury securities		7,111		—		—		7,111
Obligations of U.S. government agencies		—		59,932		—		59,932
Asset-backed securities		—		1,064		—		1,064
Total held-to-maturity	$	7,111	$	609,661	$	—	$	616,772

The Company determines fair value amounts for financial instruments using available third-party market information. When such information is not available, the Company determines the fair value amounts using appropriate valuation methodologies. Nonfinancial instruments such as real estate, property and equipment, deferred policy acquisition costs, deferred income taxes and loss and loss adjustment expense reserves are excluded from the fair value disclosure.

At June 30, 2019, the Company did not hold any securities measured at fair value on a nonrecurring basis due to impairment.

Cash and Cash Equivalents —The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair values, which are characterized as Level 1 assets.

Investments —The fair values for fixed maturity and equity securities are based on prices obtained from an independent pricing service. Equity and treasury securities are characterized as Level 1 assets, as their fair values are based on quoted prices in active markets. Fixed maturity securities, other than treasury securities, are characterized as Level 2 assets, as their fair values are determined using observable market inputs.

Short Term Investments —The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair values. These securities are characterized as Level 2 assets in the fair value hierarchy.

The following table summarizes the carrying values and corresponding fair values for financial instruments:

	As of June 30, 2019				As of December 31, 2018
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Assets:
Fixed maturity securities—held-to-maturity	$	610,950	$	629,207	$	613,878	$	616,772
Fixed maturity securities—available-for-sale		457,893		457,893		478,730		478,730
Equity securities		24,070		24,070		18,651		18,651
Short-term investments		70,146		70,146		14,231		14,231
Cash and cash equivalents		51,246		51,246		40,344		40,344

Note 9. Treasury Stock

The Company’s Board of Directors initiated a share repurchase program in February 2010. In October 2016, the Board reauthorized this program with a limit of $25.0 million with no expiration date. There were no shares repurchased under this program in the six months ended June 30, 2019 and 2018.

Note 10. Leases

The Company has operating and finance leases for office space and equipment. Our leases have remaining lease terms of 2 months to 55 months, some of which include options to extend the leases for up to 5 years. The Company, in determining the present value of lease payments, utilizes either the rate implicit in the lease if that rate is readily determinable or the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease.

Supplemental balance sheet information related to leases is as follows:

	June 30, 2019			Balance Sheet Classification
	(in thousands)
Operating leases:
Operating lease right-of-use assets	$	501		Other assets

Operating lease liabilities	$	501		Accounts payable and other liabilities

Finance leases:
Finance lease right-of-use assets	$	185
Finance lease accumulated amortization right-of-use assets		(149	)
Property and equipment, net	$	36		Property and equipment, net

Finance lease liabilities	$	78		Accounts payable and other liabilities

Note 11. Subsequent Events

On July 30, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.25 per share payable on September 20, 2019 to shareholders of record as of September 6, 2019. The Board considers the payment of a regular cash dividend each calendar quarter.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the accompanying unaudited consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q, together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2018.

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

Business Overview

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

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

Critical Accounting Policies

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

Management believes that the most critical accounting policies relate to the reporting of reserves for loss and loss adjustment expenses, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from reinsurers, premiums receivable, assessments, deferred policy acquisition costs, deferred income taxes, the impairment of investment securities and share-based compensation. These critical accounting policies are more fully described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2018.

Results of Operations

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(dollars in thousands, except per share data)
	(unaudited)
Gross premiums written	$	87,018		$	93,702		$	180,125		$	191,044
Net premiums earned		82,951			88,995			167,899			176,305
Net investment income		8,169			7,303			16,184			14,512
Total revenues		91,753			95,380			186,943			189,555
Total expenses		69,584			74,450			140,965			149,211
Net income		17,890			16,956			37,290			33,125
Diluted earnings per common share	$	0.93		$	0.88		$	1.93		$	1.72
Other Key Measures
Net combined ratio (1)		83.9	%		83.6	%		84.0	%		84.7	%
Return on average equity (2)		16.3	%		15.5	%		17.4	%		15.2	%
Book value per share (3)	$	23.29		$	23.11		$	23.29		$	23.11

(1)	The net combined ratio is calculated by dividing the sum of loss and loss adjustment expenses incurred, underwriting and certain other operating costs, commissions, salaries and benefits, and policyholder dividends by net premiums earned in the current period.

(2)	Return on average equity is calculated by dividing the annualized net income by the average shareholders’ equity for the applicable period.

(3)	Book value per share is calculated by dividing shareholders’ equity by total outstanding shares, as of the end of the period.

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

Gross Premiums Written. Gross premiums written for the quarter ended June 30, 2019 were $87.0 million, compared to $93.7 million for the same period in 2018, a decrease of 7.1%. The decrease was attributable to a $4.6 million decrease in annual premiums on voluntary policies written during the period and a $2.0 million decrease in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters. The effective loss cost multiplier, or ELCM, for our voluntary business was 1.61 for the second quarter ended June 30, 2019 compared to 1.66 for the same period in 2018.

Net Premiums Written. Net premiums written for the quarter ended June 30, 2019 were $84.8 million, compared to $91.3 million for the same period in 2018, a decrease of 7.1%. The decrease was primarily attributable to the decrease in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 2.6% for the second quarter of 2019 and 2018. For additional information, see Item 1, “Business—Reinsurance” in our Annual Report on Form 10-K for the year ended December 31, 2018.

Net Premiums Earned. Net premiums earned for the second quarter of 2019 were $83.0 million, compared to $89.0 million for the same period in 2018, a decrease of 6.8%. The decrease was primarily attributable to the decrease in net premiums written during the period.

Net Investment Income. Net investment income for the quarter ended June 30, 2019 was $8.2 million, compared to $7.3 million for the same period in 2018, an increase of 11.9%. The increase was due to slightly higher investment yields on fixed-income securities. Average invested assets, including cash and cash equivalents, were $1.2 billion in the quarter ended June 30, 2019 and 2018. The pre-tax investment yield on our investment portfolio was 2.7% per annum during the quarter ended June 30, 2019 compared to 2.5% per annum during the same period in 2018. The tax-equivalent yield on our investment portfolio was 3.1% per annum for the quarter ended June 30, 2019 and 2.9% for the same period in 2018. The tax-equivalent yield is calculated using the effective interest rate and the appropriate marginal tax rate.

Net Realized Gains (Losses) on Investments. Net realized losses on investments for the three months ended June 30, 2019 totaled $0.1 million compared to net realized losses of $1.1 million for the same period in 2018. Net realized losses in the second quarter of 2019 were attributable to the call of fixed maturity securities. Net realized losses in the second quarter of 2018 were attributable to the sale of fixed maturity securities classified as available-for-sale.

Net Unrealized Gains (Losses) on Equity Securities. Net unrealized gains on equity securities for the three months ended June 30, 2019 were $0.6 million compared to net unrealized gains of $0.1 million for the same period in 2018.

Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses (“LAE”) incurred totaled $48.9 million for the three months ended June 30, 2019, compared to $52.1 million for the same period in 2018, a decrease of $3.2 million, or 6.2%. The current accident year loss and LAE incurred were $60.1 million, or 72.5% of net premiums earned, compared to $63.6 million, or 71.5% of net premiums earned for the same period in 2018. We recorded favorable prior accident year development of $11.3 million in the second quarter of 2019, compared to favorable prior accident year development of $11.6 million in the same period of 2018, as further discussed below in “Prior Year Development.” Our net loss ratio was 58.9% in the second quarter of 2019, compared to 58.5% for the same period of 2018.

Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for the quarter ended June 30, 2019 were $19.7 million, compared to $21.3 million for the same period in 2018, a decrease of 7.3%. This decrease was primarily due to a $0.9 million decrease in insurance related assessments, a $0.6 million decrease in compensation expense due to lower estimates of variable share price based incentive compensation costs and a $0.4 million decrease in commission expense. Our expense ratio was 23.8% in the second quarter of 2019 compared to 23.9% in the second quarter of 2018.

Income Tax Expense. Income tax expense for the three months ended June 30, 2019 was $4.3 million, compared to $4.0 million for the same period in 2018. The increase was attributable to an increase in the pre-tax income to $22.2 million in the quarter ended June 30, 2019 from $20.9 million in the same period in 2018. The effective tax rate for the Company increased to 19.3% in the quarter ended June 30, 2019 from 19.0% in the same period in 2018. The increase in the effective tax rate is due to a lower proportion of tax-exempt income to underwriting income in the quarter relative to the second quarter of 2018.

Consolidated Results of Operations for Six Months Ended June 30, 2019 Compared to June 30, 2018

Gross Premiums Written. Gross premiums written for the first six months of 2019 were $180.1 million, compared to $191.0 million for the same period in 2018, a decrease of 5.7%. The decrease was primarily attributable to a $9.8 million decrease in annual premiums on voluntary policies written during the period and a $0.8 million decrease in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters. The ELCM for our voluntary business was 1.60 for the six months ended June 30, 2019 compared to 1.64 for the same period in 2018.

Net Premiums Written. Net premiums written for the six months ended June 30, 2019 were $175.5 million, compared to $186.3 million for the same period in 2018, a decrease of 5.8%. The decrease was primarily attributable to the decrease in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 2.7% for the first six months of 2019 compared to 2.6% for the same period in 2018. For additional information, see Item 1, “Business—Reinsurance” in our Annual Report on Form 10-K for the year ended December 31, 2018.

Net Premiums Earned. Net premiums earned for the first six months of 2019 were $167.9 million, compared to $176.3 million for the same period in 2018, a decrease of 4.8%. The decrease was primarily attributable to the decrease in net premiums written during the period.

Net Investment Income. Net investment income for the first six months of 2019 was $16.2 million, compared to $14.5 million for the same period in 2018, an increase of 11.5%. The increase was due to slightly higher investment yields on fixed-income securities. Average invested assets, including cash and cash equivalents were $1.2 billion in the six months ended June 30, 2019 and 2018. The pre-tax investment yield on our investment portfolio was 2.7% per annum during the six months ended June 30, 2019 compared to 2.4% per annum for the same period in 2018. The tax-equivalent yield on our investment portfolio was 3.1% per annum for the first six months of 2019 compared to 2.9% in the same period in 2018. The tax-equivalent yield is calculated using the effective interest rate and the appropriate marginal tax rate.

Net Realized Gains (Losses) on Investments. Net realized losses on investments for the six months ended June 30, 2019 were immaterial compared to net realized losses of $1.1 million for the same period in 2018. Net realized losses in the first six months of 2019 were attributable to calls of fixed maturity securities. Net realized losses in the first six months of 2018 were attributable to the sale of fixed maturity securities classified as available-for-sale.

Net Unrealized Gains (Losses) on Equity Securities. Net unrealized gains on equity securities for the six months ended June 30, 2019 were $2.8 million compared to net unrealized losses of $0.3 million for the same period in 2018.

Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled $98.5 million for the six months ended June 30, 2019, compared to $105.2 million for the same period in 2018, a decrease of $6.8 million, or 6.4%. The current accident year loss and LAE incurred were $121.7 million, or 72.5% of net premiums earned, compared to $126.1 million, or 71.5% of net premiums earned, for the same period in 2018. We recorded favorable prior accident year development of $23.2 million in the first six months of 2019, compared to favorable prior accident year development of $20.8 million in the same period of 2018, as further discussed below in “Prior Year Development.” Our net loss ratio was 58.7% in the first six months of 2019, compared to 59.7% for the same period of 2018.

Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for the six months ended June 30, 2019 were $40.4 million, compared to $41.5 million for the same period in 2018, a decrease of 2.8%. This decrease was primarily due to a $0.7 million decrease in insurance related assessments, a $0.5 million decrease in commission expense and a $0.4 million decrease in premium tax expense. Offsetting these decreases was a $0.3 million increase in accounts receivable write-offs. Our expense ratio was 24.1% in the first six months of 2019 compared to 23.6% in the same period of 2018.

Income Tax Expense. Income tax expense for the six months ended June 30, 2019 was $8.7 million, compared to $7.2 million for the same period in 2018. The increase was attributable to an increase in pre-tax income to $46.0 million in the first six months of 2019 from $40.3 million in the first six months of 2018. The effective tax rate for the Company increased to 18.9% for the six months ended June 30, 2019 from 17.9% for the six months ended June 30, 2018. The increase in the effective tax rate is due to a lower proportion of tax-exempt income to underwriting income and an increase of $0.2 million for the change in valuation allowance for deferred tax assets for the six months ended June 30, 2019 compared with the six months ended June 30, 2018.

Liquidity and Capital Resources

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

Net cash provided by operating activities was $39.6 million for the six months ended June 30, 2019, which represented a $2.6 million increase from $37.0 million in net cash provided by operating activities for the six months ended June 30, 2018. This increase in operating cash flow was attributable to a $9.2 million decrease in loss and loss adjustment expenses paid and a $7.9 million decrease in the change in amounts held by others. Offsetting these amounts were a $7.7 million decrease in premiums collected, a $5.4 million increase in federal income taxes paid, a $0.7 million increase in underwriting and other operating expenses paid, and a $0.6 million increase in dividends paid to policyholders.

Net cash used in investing activities was $18.9 million for the six months ended June 30, 2019, compared to net cash used in investment activities of $62.8 million for the same period in 2018. Cash provided by sales and maturities of investments totaled $158.0 million for the six months ended June 30, 2019, compared to $132.8 million for the same period in 2018. A total of $176.8 million in cash was used to purchase investments in the six months ended June 30, 2019, compared to $194.7 million in purchases for the same period in 2018.

Net cash used in financing activities in the six months ended June 30, 2019 was $9.8 million compared to net cash used in financing activities of $8.6 million for the same period in 2018. In the six months ended June 30, 2019, $9.8 million of cash was used for dividends paid to shareholders compared to $8.6 million in the same period of 2018.

Investment Portfolio

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

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

	Carrying Value		Percentage of Portfolio
	(in thousands)
Fixed maturity securities—held-to-maturity:
States and political subdivisions	$	439,103		36.1	%
Corporate bonds		108,756		9.0	%
U.S. agency-based mortgage-backed securities		12,465		1.0	%
U.S. Treasury securities and obligations of U.S. government agencies		49,677		4.1	%
Asset-backed securities		949		0.1	%
Total fixed maturity securities—held-to-maturity		610,950		50.3	%
Fixed maturity securities—available-for-sale:
States and political subdivisions		230,222		19.0	%
Corporate bonds		154,619		12.7	%
U.S. agency-based mortgage-backed securities		11,852		1.0	%
U.S. Treasury securities and obligations of U.S. government agencies		61,200		5.0	%
Total fixed maturity securities—available-for-sale		457,893		37.7	%
Equity securities		24,070		2.0	%
Short-term investments		70,146		5.8	%
Cash and cash equivalents		51,246		4.2	%
Total investments, including cash and cash equivalents	$	1,214,305		100.0	%

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

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

Prior Year Development

The Company recorded favorable prior accident year development of $11.3 million in the three months ended June 30, 2019. The table below sets forth the favorable development for the three and six months ended June 30, 2019 and 2018 for accident years 2014 through 2018 and, collectively, for all accident years prior to 2014.

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in millions)
Accident Year
2018	$	—	$	—	$	—	$	—
2017		1.3		—		1.3		—
2016		3.3		3.2		9.3		3.2
2015		2.9		3.4		5.0		9.4
2014		2.3		1.4		4.3		4.3
Prior to 2014		1.5		3.6		3.3		3.9
Total net development	$	11.3	$	11.6	$	23.2	$	20.8

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Open claims at beginning of period		4,963			4,943			5,190			4,982
Claims reported		1,339			1,386			2,560			2,645
Claims closed		(1,324	)		(1,307	)		(2,772	)		(2,605	)
Open claims at end of period		4,978			5,022			4,978			5,022

The number of open claims at June 30, 2019 decreased by 44 claims as compared to the number of open claims at June 30, 2018. At June 30, 2019, our incurred amounts for certain accident years, particularly 2017, 2016, 2015 and 2014, developed more favorably than management previously expected. The revisions to the Company’s reserves reflect new information gained by claims adjusters in the normal course of adjusting claims and is reflected in the financial statements when the information becomes available. It is typical for more serious claims to take several years or longer to settle and the Company continually revises estimates as more information about claimants’ medical conditions and potential disability becomes known and the claims get closer to being settled. Multiple factors can cause both favorable and unfavorable loss development. The favorable loss development we experienced across accident years was largely due to favorable case reserve development from closed claims and claims where the worker had reached maximum medical improvement.

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

Our reserves for loss and loss adjustment expenses are inherently uncertain and our focus on providing workers’ compensation insurance to employers engaged in hazardous industries results in our receiving relatively fewer but more severe claims than many other workers’ compensation insurance companies. As a result of this focus on higher severity, lower frequency business, our reserve for loss and loss adjustment expenses may have greater volatility than other workers’ compensation insurance companies. For additional information, see Item 1, “Business—Loss Reserves” in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 3. 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.

Since December 31, 2018, there have been no material changes in the quantitative or qualitative aspect of our market risk profile. For additional information regarding the Company’s exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 4. Controls and Procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information we are required to disclose in reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms specified by the SEC. We note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving the stated goals under all potential future conditions.

Because of its inherent limitations, management does not expect that our disclosure controls and procedures and our internal controls over financial reporting will prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate. Any control system, no matter how well designed and operated, is based upon certain assumptions and can only provide reasonable, not absolute assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to errors or fraud will not occur or that all control issues and instances of fraud, if any within the Company, have been detected.

There have not been any changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The Board of Directors initially authorized the Company’s share repurchase program in February 2010. In October 2016, the Board reauthorized this program with no expiration date. As of June 30, 2019, we had repurchased a total of 1,258,250 shares of our outstanding common stock for $22.4 million. The Company had $25.0 million available for future purchases at June 30, 2019 under this program. There were no shares repurchased during the three months ended June 30, 2019 and 2018. The purchases may be effected from time to time depending upon market conditions and subject to applicable regulatory considerations. It is anticipated that future purchases will be funded from available capital.

Item 6. Exhibits.

Exhibit No.		Description

10.1		Employment Agreement effective as of May 20, 2019 by and between the Company and Andrew McCray

31.1		Certification of G. Janelle Frost filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Neal A. Fuller filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of G. Janelle Frost and Neal A. Fuller filed pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		AMERISAFE, INC.

August 2, 2019		/s/ G. Janelle Frost
		G. Janelle Frost
		President, Chief Executive Officer and Director
		(Principal Executive Officer)

August 2, 2019		/s/ Neal A. Fuller
		Neal A. Fuller
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

AMERISAFE - 10-Q quarterly report FY2019 Q2

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