Item 1. Financial Statements.
See accompanying notes.
See accompanying notes.
See accompanying notes.
See accompanying notes.
See accompanying notes.
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, agriculture, manufacturing, telecommunications, and maritime. 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, 2022 and 2021.
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, 2021.
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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year presentation.
Adopted Accounting Guidance
The Company has not adopted any new accounting guidance in 2022.
Prospective Accounting Guidance
All issued but not yet effective accounting and reporting standards as of June 30, 2022 are either not applicable to the Company or are not expected to have a material impact on the Company.
Note 2. Restricted Stock and Stock Options
As of June 30, 2022, the Company has three equity incentive plans: the AMERISAFE Non-Employee Director Restricted Stock Plan (the Restricted Stock Plan), the AMERISAFE 2012 Equity and Incentive Compensation Plan (the 2012 Incentive Plan) and the 2022 Equity and Incentive Compensation Plan (the 2022 Incentive Plan). In connection with the approval of the 2022 Incentive Plan by the Company’s shareholders at the annual meeting of shareholders in June 2022, no further grants will be made under the 2012 Incentive Plan. All grants made under the 2012 Incentive Plan will continue in effect, subject to the terms and conditions of the 2012 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, 2021 for additional information regarding the Company’s incentive plans.
During the six months ended June 30, 2022, the Company issued 40,959 shares of common stock pursuant to vested performance awards. During the six months ended June 30, 2022, the Company issued 13,211 shares of restricted common stock to
10
officers and non-employee directors. The market value of these shares totaled $2.6 million. During the six months ended June 30, 2021, the Company issued 24,288 shares of common stock pursuant to vested performance awards and 8,707 shares of restricted common stock to non-employee directors. The market value of these shares totaled $2.2 million.
The Company had no stock options outstanding as of June 30, 2022.
The Company recognized share-based compensation expense of $0.8 million in the quarter ended June 30, 2022 and $0.7 million in the same period in 2021. The Company recognized share-based compensation expense of $0.8 million in the six months ended June 30, 2022 and $1.3 million in the same period in 2021.
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 restricted stock becomes vested.
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands, except share and per share amounts) |
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,132 |
|
|
$ |
23,767 |
|
|
$ |
23,463 |
|
|
$ |
43,079 |
|
Basic weighted average common shares |
|
|
19,273,934 |
|
|
|
19,327,422 |
|
|
|
19,302,805 |
|
|
|
19,319,608 |
|
Basic earnings per common share |
|
$ |
0.32 |
|
|
$ |
1.23 |
|
|
$ |
1.22 |
|
|
$ |
2.23 |
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,132 |
|
|
$ |
23,767 |
|
|
$ |
23,463 |
|
|
$ |
43,079 |
|
Diluted weighted average common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares |
|
|
19,273,934 |
|
|
|
19,327,422 |
|
|
|
19,302,805 |
|
|
|
19,319,608 |
|
Restricted stock |
|
|
58,234 |
|
|
|
53,189 |
|
|
|
64,280 |
|
|
|
64,470 |
|
Diluted weighted average common shares |
|
|
19,332,168 |
|
|
|
19,380,611 |
|
|
|
19,367,085 |
|
|
|
19,384,078 |
|
Diluted earnings per common share |
|
$ |
0.32 |
|
|
$ |
1.23 |
|
|
$ |
1.21 |
|
|
$ |
2.22 |
|
Note 4. Investments
The amortized cost, allowance for credit losses, carrying amount, gross unrecognized gains and losses, and the fair value of those investments classified as held-to-maturity at June 30, 2022 are summarized as follows:
|
|
Amortized
Cost |
|
|
Allowance for Credit Losses |
|
|
Carrying
Amount |
|
|
Gross
Unrecognized
Gains |
|
|
Gross
Unrecognized
Losses |
|
|
Fair
Value |
|
|
|
(in thousands) |
|
States and political subdivisions |
|
$ |
453,781 |
|
|
$ |
(44 |
) |
|
$ |
453,737 |
|
|
$ |
2,160 |
|
|
$ |
(14,707 |
) |
|
$ |
441,190 |
|
Corporate bonds |
|
|
66,419 |
|
|
|
(228 |
) |
|
|
66,191 |
|
|
|
37 |
|
|
|
(3,073 |
) |
|
|
63,155 |
|
U.S. agency-based mortgage-backed securities |
|
|
4,102 |
|
|
|
— |
|
|
|
4,102 |
|
|
|
106 |
|
|
|
(57 |
) |
|
|
4,151 |
|
U.S. Treasury securities and obligations
of U.S. government agencies |
|
|
17,182 |
|
|
|
— |
|
|
|
17,182 |
|
|
|
67 |
|
|
|
(196 |
) |
|
|
17,053 |
|
Asset-backed securities |
|
|
89 |
|
|
|
(4 |
) |
|
|
85 |
|
|
|
4 |
|
|
|
(1 |
) |
|
|
88 |
|
Totals |
|
$ |
541,573 |
|
|
$ |
(276 |
) |
|
$ |
541,297 |
|
|
$ |
2,374 |
|
|
$ |
(18,034 |
) |
|
$ |
525,637 |
|
11
The amortized cost, gross unrealized gains and losses, fair value, and the allowance for credit losses of those investments classified as available-for-sale at June 30, 2022 are summarized as follows:
|
|
Amortized
Cost |
|
|
Gross
Unrealized
Gains |
|
|
Gross
Unrealized
Losses |
|
|
Fair
Value |
|
|
Allowance for
Credit Losses |
|
|
|
(in thousands) |
|
States and political subdivisions |
|
$ |
198,330 |
|
|
$ |
1,150 |
|
|
$ |
(6,933 |
) |
|
$ |
192,547 |
|
|
$ |
— |
|
Corporate bonds |
|
|
118,677 |
|
|
|
76 |
|
|
|
(4,155 |
) |
|
|
114,598 |
|
|
|
— |
|
U.S. agency-based mortgage-backed securities |
|
|
6,555 |
|
|
|
— |
|
|
|
(307 |
) |
|
|
6,248 |
|
|
|
— |
|
U.S. Treasury securities and obligations
of U.S. government agencies |
|
|
17,735 |
|
|
|
— |
|
|
|
(993 |
) |
|
|
16,742 |
|
|
|
— |
|
Totals |
|
$ |
341,297 |
|
|
$ |
1,226 |
|
|
$ |
(12,388 |
) |
|
$ |
330,135 |
|
|
$ |
— |
|
The cost, gross unrealized gains and losses, and the fair value of equity securities at June 30, 2022 are summarized as follows:
|
|
Cost |
|
|
Gross
Unrealized
Gains |
|
|
Gross
Unrealized
Losses |
|
|
Fair
Value |
|
|
|
(in thousands) |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic common stock |
|
$ |
49,422 |
|
|
$ |
11,063 |
|
|
$ |
— |
|
|
$ |
60,485 |
|
Total equity securities |
|
$ |
49,422 |
|
|
$ |
11,063 |
|
|
$ |
— |
|
|
$ |
60,485 |
|
The amortized cost, allowance for credit losses, carrying amount, gross unrecognized gains and losses, and the fair value of those investments classified as held-to-maturity at December 31, 2021 are summarized as follows:
|
|
Amortized
Cost |
|
|
Allowance for Credit Losses |
|
|
Carrying
Amount |
|
|
Gross
Unrecognized
Gains |
|
|
Gross
Unrecognized
Losses |
|
|
Fair
Value |
|
|
|
(in thousands) |
|
States and political subdivisions |
|
$ |
471,688 |
|
|
$ |
(48 |
) |
|
$ |
471,640 |
|
|
$ |
25,175 |
|
|
$ |
(263 |
) |
|
$ |
496,552 |
|
Corporate bonds |
|
|
56,756 |
|
|
|
(143 |
) |
|
|
56,613 |
|
|
|
1,344 |
|
|
|
(114 |
) |
|
|
57,843 |
|
U.S. agency-based mortgage-backed securities |
|
|
4,623 |
|
|
|
— |
|
|
|
4,623 |
|
|
|
377 |
|
|
|
— |
|
|
|
5,000 |
|
U.S. Treasury securities and obligations
of U.S. government agencies |
|
|
16,251 |
|
|
|
— |
|
|
|
16,251 |
|
|
|
132 |
|
|
|
(36 |
) |
|
|
16,347 |
|
Asset-backed securities |
|
|
108 |
|
|
|
(4 |
) |
|
|
104 |
|
|
|
4 |
|
|
|
— |
|
|
|
108 |
|
Totals |
|
$ |
549,426 |
|
|
$ |
(195 |
) |
|
$ |
549,231 |
|
|
$ |
27,032 |
|
|
$ |
(413 |
) |
|
$ |
575,850 |
|
The amortized cost, gross unrealized gains and losses, fair value, and the allowance for credit losses of those investments classified as available-for-sale at December 31, 2021 are summarized as follows:
|
|
Amortized
Cost |
|
|
Gross
Unrealized
Gains |
|
|
Gross
Unrealized
Losses |
|
|
Fair
Value |
|
|
Allowance for
Credit Losses |
|
|
|
(in thousands) |
|
States and political subdivisions |
|
$ |
202,008 |
|
|
$ |
14,538 |
|
|
$ |
(240 |
) |
|
$ |
216,306 |
|
|
$ |
— |
|
Corporate bonds |
|
|
93,947 |
|
|
|
2,751 |
|
|
|
(272 |
) |
|
|
96,426 |
|
|
|
— |
|
U.S. agency-based mortgage-backed securities |
|
|
7,944 |
|
|
|
158 |
|
|
|
(13 |
) |
|
|
8,089 |
|
|
|
— |
|
U.S. Treasury securities and obligations
of U.S. government agencies |
|
|
20,698 |
|
|
|
382 |
|
|
|
(132 |
) |
|
|
20,948 |
|
|
|
— |
|
Totals |
|
$ |
324,597 |
|
|
$ |
17,829 |
|
|
$ |
(657 |
) |
|
$ |
341,769 |
|
|
$ |
— |
|
12
The cost, gross unrealized gains and losses, and the fair value of equity securities at December 31, 2021 are summarized as follows:
|
|
Cost |
|
|
Gross
Unrealized
Gains |
|
|
Gross
Unrealized
Losses |
|
|
Fair
Value |
|
|
|
(in thousands) |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic common stock |
|
$ |
44,175 |
|
|
$ |
19,965 |
|
|
$ |
— |
|
|
$ |
64,140 |
|
Total equity securities |
|
$ |
44,175 |
|
|
$ |
19,965 |
|
|
$ |
— |
|
|
$ |
64,140 |
|
A summary of the carrying amounts and fair value of investments in fixed maturity securities classified as held-to-maturity, by contractual maturity, is as follows:
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
|
Carrying
Amount |
|
|
Fair
Value |
|
|
Carrying
Amount |
|
|
Fair
Value |
|
|
|
(in thousands) |
|
Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year |
|
$ |
66,348 |
|
|
$ |
66,309 |
|
|
$ |
70,859 |
|
|
$ |
71,455 |
|
After one year through five years |
|
|
172,853 |
|
|
|
170,260 |
|
|
|
174,157 |
|
|
|
180,376 |
|
After five years through ten years |
|
|
111,775 |
|
|
|
105,557 |
|
|
|
100,543 |
|
|
|
104,851 |
|
After ten years |
|
|
186,134 |
|
|
|
179,272 |
|
|
|
198,945 |
|
|
|
214,060 |
|
U.S. agency-based mortgage-backed securities |
|
|
4,102 |
|
|
|
4,151 |
|
|
|
4,623 |
|
|
|
5,000 |
|
Asset-backed securities |
|
|
85 |
|
|
|
88 |
|
|
|
104 |
|
|
|
108 |
|
Totals |
|
$ |
541,297 |
|
|
$ |
525,637 |
|
|
$ |
549,231 |
|
|
$ |
575,850 |
|
A summary of the amortized cost and fair value of investments in fixed maturity securities classified as available-for-sale, by contractual maturity, is as follows:
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
|
Amortized
Cost |
|
|
Fair
Value |
|
|
Amortized
Cost |
|
|
Fair
Value |
|
|
|
(in thousands) |
|
Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year |
|
$ |
40,763 |
|
|
$ |
40,363 |
|
|
$ |
30,925 |
|
|
$ |
31,258 |
|
After one year through five years |
|
|
80,218 |
|
|
|
78,350 |
|
|
|
97,830 |
|
|
|
100,716 |
|
After five years through ten years |
|
|
80,396 |
|
|
|
75,876 |
|
|
|
58,050 |
|
|
|
60,137 |
|
After ten years |
|
|
133,365 |
|
|
|
129,298 |
|
|
|
129,848 |
|
|
|
141,569 |
|
U.S. agency-based mortgage-backed securities |
|
|
6,555 |
|
|
|
6,248 |
|
|
|
7,944 |
|
|
|
8,089 |
|
Totals |
|
$ |
341,297 |
|
|
$ |
330,135 |
|
|
$ |
324,597 |
|
|
$ |
341,769 |
|
The following table summarizes the fair value and gross unrealized losses on securities classified as available-for-sale, aggregated by major investment category and length of time that the individual securities have been in a continuous unrealized loss position as of June 30, 2022:
|
|
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, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
124,916 |
|
|
$ |
6,933 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
124,916 |
|
|
$ |
6,933 |
|
Corporate bonds |
|
|
95,865 |
|
|
|
4,155 |
|
|
|
— |
|
|
|
— |
|
|
|
95,865 |
|
|
|
4,155 |
|
U.S. agency-based mortgage-backed securities |
|
|
6,248 |
|
|
|
307 |
|
|
|
— |
|
|
|
— |
|
|
|
6,248 |
|
|
|
307 |
|
U.S. Treasury securities and obligations
of U.S. government agencies |
|
|
13,741 |
|
|
|
993 |
|
|
|
— |
|
|
|
— |
|
|
|
13,741 |
|
|
|
993 |
|
Total available-for-sale securities |
|
$ |
240,770 |
|
|
$ |
12,388 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
240,770 |
|
|
$ |
12,388 |
|
13
At June 30, 2022, we held 178 individual fixed maturity securities classified as available-for-sale that were in an unrealized loss position, of which none were in a continuous unrealized loss position for longer than 12 months.
The following table summarizes the fair value and gross unrealized losses on securities classified as available-for-sale, aggregated by major investment category and length of time that the individual securities have been in a continuous unrealized loss position as of December 31, 2021:
|
|
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, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
23,465 |
|
|
$ |
240 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
23,465 |
|
|
$ |
240 |
|
Corporate bonds |
|
|
36,443 |
|
|
|
272 |
|
|
|
— |
|
|
|
— |
|
|
|
36,443 |
|
|
|
272 |
|
U.S. agency-based mortgage-backed securities |
|
|
1,146 |
|
|
|
13 |
|
|
|
— |
|
|
|
— |
|
|
|
1,146 |
|
|
|
13 |
|
U.S. Treasury securities and obligations
of U.S. government agencies |
|
|
6,771 |
|
|
|
132 |
|
|
|
— |
|
|
|
— |
|
|
|
6,771 |
|
|
|
132 |
|
Total available-for-sale securities |
|
$ |
67,825 |
|
|
$ |
657 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
67,825 |
|
|
$ |
657 |
|
The following table illustrates the changes in the allowance for credit losses by major security type of the investments classified as held-to-maturity for the quarter ended June 30, 2022.
|
|
States and
Political
Subdivisions |
|
|
Corporate
Bonds |
|
|
U.S. Agency
-Based
Mortgage-
Backed
Securities |
|
|
U.S.
Treasury
Securities
and
Obligations
of U.S.
Government
Agencies |
|
|
Asset-Backed
Securities |
|
|
Totals |
|
|
|
(in thousands) |
|
Balance at March 31, 2022 |
|
$ |
45 |
|
|
$ |
241 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4 |
|
|
$ |
290 |
|
Provision for credit loss benefit |
|
|
(1 |
) |
|
|
(13 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14 |
) |
Balance at June 30, 2022 |
|
$ |
44 |
|
|
$ |
228 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4 |
|
|
$ |
276 |
|
The following table illustrates the changes in the allowance for credit losses by major security type of the investments classified as held-to-maturity for the six months ended June 30, 2022.
|
|
States and
Political
Subdivisions |
|
|
Corporate
Bonds |
|
|
U.S. Agency
-Based
Mortgage-
Backed
Securities |
|
|
U.S.
Treasury
Securities
and
Obligations
of U.S.
Government
Agencies |
|
|
Asset-Backed
Securities |
|
|
Totals |
|
|
|
(in thousands) |
|
Balance at December 31, 2021 |
|
$ |
48 |
|
|
$ |
143 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4 |
|
|
$ |
195 |
|
Provision for credit loss expense (benefit) |
|
|
(4 |
) |
|
|
85 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
81 |
|
Balance at June 30, 2022 |
|
$ |
44 |
|
|
$ |
228 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4 |
|
|
$ |
276 |
|
The Company has established an allowance for credit losses on 353 held-to-maturity securities totaling $0.3 million. The majority of those securities were issued by states and political subdivisions (325 securities) and corporate bonds (25 securities).
14
The Company has no allowance for credit losses on investments classified as available-for-sale for the period ended June 30, 2022.
The credit rating used for held-to-maturity fixed income securities is the rating for each security as published by Moody’s, S&P, and Fitch to determine the probability of default. If there are two ratings, the lower rating is used. If there are three ratings, the median rating is used. If there is one rating, that rating is used. For corporate fixed income securities (given a rating), the probability of default comes from Moody’s annual study of corporate bond defaults published each February. The maximum maturity using the default rate is 20 years (any maturity greater than 20 years will use the 20-year rate). For municipal fixed income securities (given a rating), the probability of default comes from Moody’s annual study of municipal bond defaults published each July/August.
The calculation of the credit loss allowance takes the amortized cost of the fixed income security and assumes default and recovery based on the average recovery rates from the Moody’s default studies. The amortized cost of the security, minus the amount recovered, is the estimated full amount the Company could lose in a default scenario. Then this amount is multiplied by the probability of default to determine the allowance for credit loss. The lower the security is rated, the higher likelihood of default, and therefore a higher allowance for credit loss. The longer to the maturity date of a security, the higher the default risk.
The table below presents the amortized cost of held-to-maturity securities aggregated by credit quality indicator as of June 30, 2022.
|
|
States and
Political
Subdivisions |
|
|
Corporate
Bonds |
|
|
U.S. Agency
-Based
Mortgage-
Backed
Securities |
|
|
U.S.
Treasury
Securities
and
Obligations
of U.S.
Government
Agencies |
|
|
Asset-Backed
Securities |
|
|
Totals |
|
|
|
Amortized cost |
|
|
|
(in thousands) |
|
AAA/AA/A ratings |
|
$ |
450,801 |
|
|
$ |
26,995 |
|
|
$ |
4,102 |
|
|
$ |
17,182 |
|
|
$ |
62 |
|
|
$ |
499,142 |
|
Baa/BBB ratings |
|
|
2,980 |
|
|
|
39,424 |
|
|
|
— |
|
|
|
— |
|
|
|
12 |
|
|
|
42,416 |
|
B ratings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
|
15 |
|
Total |
|
$ |
453,781 |
|
|
$ |
66,419 |
|
|
$ |
4,102 |
|
|
$ |
17,182 |
|
|
$ |
89 |
|
|
$ |
541,573 |
|
Net realized gains in the quarter ended June 30, 2022 were $1.1 million resulting from the sale of equity securities. Net realized gains in the quarter ended June 30, 2021 were $1.2 million resulting from the sale of fixed maturity securities classified as available-for-sale.
Net realized gains in the six months ended June 30, 2022 were $1.8 million resulting primarily from the sale of equity and fixed maturity securities classified as available-for-sale. Net realized gains in the six months ended June 30, 2021 were $1.5 million resulting primarily from the sale of fixed maturity securities classified as available-for-sale and from called fixed maturity securities.
During the second quarter of 2022, we recognized through income $9.9 million of net unrealized losses on equity securities. During the second quarter of 2021, we recognized through income $3.3 million of net unrealized gains on equity securities.
During the six months ended June 30, 2022, we recognized through income $8.9 million of net unrealized losses on equity securities. During the six months ended June 30, 2021, we recognized through income $8.8 million of net unrealized gains on equity securities.
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.
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, 2022, the Company had no valuation allowance against its deferred income tax assets and liabilities. As of June 30, 2021, the Company had a valuation allowance of $1.3 million against its deferred income tax benefits.
15
Income tax expense from operations is different from the amount computed by applying the U.S. federal income tax statutory rate of 21% to income before income taxes primarily due to the impact of tax-exempt investment income and state income tax accruals.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no uncertain tax positions for the periods ended June 30, 2022 and 2021.
Tax years 2018 through 2022 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, 2021 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, 2022 and 2021:
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Balance, beginning of period |
|
$ |
745,278 |
|
|
$ |
760,561 |
|
Less amounts recoverable from reinsurers
on unpaid loss and loss adjustment expenses |
|
|
119,266 |
|
|
|
105,707 |
|
Net balance, beginning of period |
|
|
626,012 |
|
|
|
654,854 |
|
Add incurred related to: |
|
|
|
|
|
|
|
|
Current accident year |
|
|
97,863 |
|
|
|
101,257 |
|
Prior accident years |
|
|
(19,796 |
) |
|
|
(29,317 |
) |
Total incurred |
|
|
78,067 |
|
|
|
71,940 |
|
Less paid related to: |
|
|
|
|
|
|
|
|
Current accident year |
|
|
14,063 |
|
|
|
12,786 |
|
Prior accident years |
|
|
82,473 |
|
|
|
79,814 |
|
Total paid |
|
|
96,536 |
|
|
|
92,600 |
|
Net balance, end of period |
|
|
607,543 |
|
|
|
634,194 |
|
Add amounts recoverable from reinsurers
on unpaid loss and loss adjustment expenses |
|
|
117,348 |
|
|
|
110,775 |
|
Balance, end of period |
|
$ |
724,891 |
|
|
$ |
744,969 |
|
The foregoing reconciliation reflects favorable development of the net reserves at June 30, 2022 and June 30, 2021. The favorable development reduced loss and loss adjustment expenses incurred by $19.8 million and $29.3 million in 2022 and 2021, 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.
16
The table below presents the change in the allowance for credit losses on amounts recoverable from reinsurers for the three and six months ended June 30, 2022 and 2021.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Balance, beginning of period |
|
$ |
388 |
|
|
$ |
452 |
|
|
$ |
440 |
|
|
$ |
452 |
|
Provision for credit loss benefit |
|
|
(19 |
) |
|
|
(3 |
) |
|
|
(71 |
) |
|
|
(3 |
) |
Balance, end of period |
|
$ |
369 |
|
|
$ |
449 |
|
|
$ |
369 |
|
|
$ |
449 |
|
Note 7. Comprehensive Income and Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) includes net income plus unrealized gains (losses) on our available-for-sale investment securities, net of tax. In reporting comprehensive income (loss) on a net basis in the statements of comprehensive income (loss), we used a 21 percent tax rate in 2022 and 2021. The difference between net income as reported and comprehensive income (loss) was due primarily to changes in unrealized gains and losses, net of tax on available-for-sale debt securities.
The following table illustrates the changes in the balance of each component of accumulated other comprehensive income (loss) for each period presented in the interim financial statements.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) |
|
Balance, beginning of period |
|
$ |
57 |
|
|
$ |
15,971 |
|
|
$ |
13,537 |
|
|
$ |
21,019 |
|
Other comprehensive income (loss) before
reclassification |
|
|
(8,248 |
) |
|
|
2,139 |
|
|
|
(21,705 |
) |
|
|
(2,596 |
) |
Amounts reclassified from accumulated other
comprehensive income (loss) |
|
|
(683 |
) |
|
|
(1,248 |
) |
|
|
(706 |
) |
|
|
(1,561 |
) |
Net current period other comprehensive
income (loss) |
|
|
(8,931 |
) |
|
|
891 |
|
|
|
(22,411 |
) |
|
|
(4,157 |
) |
Balance, end of period |
|
$ |
(8,874 |
) |
|
$ |
16,862 |
|
|
$ |
(8,874 |
) |
|
$ |
16,862 |
|
The sale or credit loss allowance adjustment of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive income (loss) to current period net income. The effects of reclassifications out of accumulated other comprehensive income (loss) 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 (Loss) |
|
June 30, |
|
|
June 30, |
|
|
statement of income |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
|
|
(in thousands) |
|
|
|
Unrealized gains on debt
securities, net of tax |
|
$ |
865 |
|
|
$ |
1,580 |
|
|
$ |
894 |
|
|
$ |
1,976 |
|
|
Net realized gains
on investments |
|
|
|
865 |
|
|
|
1,580 |
|
|
|
894 |
|
|
|
1,976 |
|
|
Income before income taxes |
Unrealized gains on debt
securities, net of tax |
|
|
(182 |
) |
|
|
(332 |
) |
|
|
(188 |
) |
|
|
(415 |
) |
|
Income tax expense |
|
|
$ |
683 |
|
|
$ |
1,248 |
|
|
$ |
706 |
|
|
$ |
1,561 |
|
|
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.
17
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, 2022.
18
At June 30, 2022, assets measured at fair value on a recurring basis are summarized below:
|
|
June 30, 2022 |
|
|
|
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 |
|
$ |
— |
|
|
$ |
192,547 |
|
|
$ |
— |
|
|
$ |
192,547 |
|
Corporate bonds |
|
|
— |
|
|
|
114,598 |
|
|
|
— |
|
|
|
114,598 |
|
U.S. agency-based mortgage-backed securities |
|
|
— |
|
|
|
6,248 |
|
|
|
— |
|
|
|
6,248 |
|
U.S. Treasury securities |
|
|
16,742 |
|
|
|
— |
|
|
|
— |
|
|
|
16,742 |
|
Total securities available-for-sale—fixed maturity |
|
|
16,742 |
|
|
|
313,393 |
|
|
|
— |
|
|
|
330,135 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic common stock |
|
|
60,485 |
|
|
|
— |
|
|
|
— |
|
|
|
60,485 |
|
Total |
|
$ |
77,227 |
|
|
$ |
313,393 |
|
|
$ |
— |
|
|
$ |
390,620 |
|
At June 30, 2022, assets measured at amortized cost net of allowance for credit losses are summarized below:
|
|
June 30, 2022 |
|
|
|
Level 1
Inputs |
|
|
Level 2
Inputs |
|
|
Level 3
Inputs |
|
|
Total Fair
Value |
|
|
|
(in thousands) |
|
Securities held-to-maturity—fixed maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
— |
|
|
$ |
441,190 |
|
|
$ |
— |
|
|
$ |
441,190 |
|
Corporate bonds |
|
|
— |
|
|
|
63,155 |
|
|
|
— |
|
|
|
63,155 |
|
U.S. agency-based mortgage-backed securities |
|
|
— |
|
|
|
4,151 |
|
|
|
— |
|
|
|
4,151 |
|
U.S. Treasury securities |
|
|
17,053 |
|
|
|
— |
|
|
|
— |
|
|
|
17,053 |
|
Asset-backed securities |
|
|
— |
|
|
|
88 |
|
|
|
— |
|
|
|
88 |
|
Total held-to-maturity |
|
$ |
17,053 |
|
|
$ |
508,584 |
|
|
$ |
— |
|
|
$ |
525,637 |
|
At December 31, 2021, assets measured at fair value on a recurring basis are summarized below:
|
|
December 31, 2021 |
|
|
|
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 |
|
$ |
— |
|
|
$ |
216,306 |
|
|
$ |
— |
|
|
$ |
216,306 |
|
Corporate bonds |
|
|
— |
|
|
|
96,426 |
|
|
|
— |
|
|
|
96,426 |
|
U.S. agency-based mortgage-backed securities |
|
|
— |
|
|
|
8,089 |
|
|
|
— |
|
|
|
8,089 |
|
U.S. Treasury securities |
|
|
20,948 |
|
|
|
— |
|
|
|
— |
|
|
|
20,948 |
|
Total securities available-for-sale—fixed maturity |
|
$ |
20,948 |
|
|
$ |
320,821 |
|
|
$ |
— |
|
|
$ |
341,769 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic common stock |
|
|
64,140 |
|
|
|
— |
|
|
|
— |
|
|
|
64,140 |
|
Total |
|
$ |
85,088 |
|
|
$ |
320,821 |
|
|
$ |
— |
|
|
$ |
405,909 |
|
19
At December 31, 2021, assets measured at amortized cost net of allowance for credit losses are summarized below:
|
|
December 31, 2021 |
|
|
|
Level 1
Inputs |
|
|
Level 2
Inputs |
|
|
Level 3
Inputs |
|
|
Total Fair
Value |
|
|
|
(in thousands) |
|
Securities held-to-maturity—fixed maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
— |
|
|
$ |
496,552 |
|
|
$ |
— |
|
|
$ |
496,552 |
|
Corporate bonds |
|
|
— |
|
|
|
57,843 |
|
|
|
— |
|
|
|
57,843 |
|
U.S. agency-based mortgage-backed securities |
|
|
— |
|
|
|
5,000 |
|
|
|
— |
|
|
|
5,000 |
|
U.S. Treasury securities |
|
|
16,347 |
|
|
|
— |
|
|
|
— |
|
|
|
16,347 |
|
Asset-backed securities |
|
|
— |
|
|
|
108 |
|
|
|
— |
|
|
|
108 |
|
Total held-to-maturity |
|
$ |
16,347 |
|
|
$ |
559,503 |
|
|
$ |
— |
|
|
$ |
575,850 |
|
The Company determines fair value amounts for financial instruments using available third-party market information. When such information is not available, the Company determines the fair value amounts using appropriate valuation methodologies. Nonfinancial instruments such as real estate, property and equipment, deferred policy acquisition costs, deferred income taxes and loss and loss adjustment expense reserves are excluded from the fair value disclosure.
Cash and Cash Equivalents —The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair values, which are characterized as Level 1 assets.
Investments —The fair values for fixed maturity and equity securities are based on prices obtained from an independent pricing service. Equity and treasury securities are characterized as Level 1 assets, as their fair values are based on quoted prices in active markets. Fixed maturity securities, other than treasury securities, are characterized as Level 2 assets, as their fair values are determined using observable market inputs.
Short Term Investments —The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair values. These securities are characterized as Level 2 assets in the fair value hierarchy.
The following table summarizes the carrying amounts and corresponding fair values for financial instruments:
|
|
As of June 30, 2022 |
|
|
As of December 31, 2021 |
|
|
|
Carrying
Amount |
|
|
Fair
Value |
|
|
Carrying
Amount |
|
|
Fair
Value |
|
|
|
(in thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities—held-to-maturity |
|
$ |
541,297 |
|
|
$ |
525,637 |
|
|
$ |
549,231 |
|
|
$ |
575,850 |
|
Fixed maturity securities—available-for-sale |
|
|
330,135 |
|
|
|
330,135 |
|
|
|
341,769 |
|
|
|
341,769 |
|
Equity securities |
|
|
60,485 |
|
|
|
60,485 |
|
|
|
64,140 |
|
|
|
64,140 |
|
Short-term investments |
|
|
34,483 |
|
|
|
34,483 |
|
|
|
57,431 |
|
|
|
57,431 |
|
Cash and cash equivalents |
|
|
85,318 |
|
|
|
85,318 |
|
|
|
70,722 |
|
|
|
70,722 |
|
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. As of June 30, 2022, $19.3 million was available for future purchases. Repurchases of shares may be made pursuant to pre-established trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934.
During the three months ended June 30, 2022, 77,699 shares were purchased for $3.6 million, or an average price of $46.88 per share (including commissions). During the six months ended June 30, 2022, 121,592 shares were purchased for $5.7 million, or an average price of $46.88 per share (including commissions). There were no shares purchased in the three or six months ended June 30, 2021.
Note 10. Subsequent Events
On July 26, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.31 per share payable on September 23, 2022 to shareholders of record as of September 9, 2022. The Board considers the payment of a regular cash dividend each calendar quarter.
20