AMERISAFE, INC. The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included in Item 8 of this report. This discussion includes forward-looking statements that are subject to risks, uncertainties and other factors described in Item 1A of this report. These factors could cause our actual results in 2020 and beyond to differ materially from those expressed in, or implied by, those forward-looking statements.
Overview
AMERISAFE is a holding company that markets and underwrites workers' compensation insurance through its 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, agriculture, maritime, and oil and gas. 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
Two of the key financial measures that we use to evaluate our performance are return on average equity and growth in book value per share adjusted for dividends paid to shareholders. We calculate return on average equity by dividing annual net income by the average of annual shareholders' equity. Our return on average equity was 22.1% in 2019, 17.2% in 2018 and 10.5% in 2017. We calculate book value per share by dividing ending shareholders' equity by the number of common shares outstanding. Our book value per share was$22.29 atDecember 31, 2019 ,$21.26 atDecember 31, 2018 and$22.10 atDecember 31, 2017 . We paid cash dividends of$4.50 per share in 2019,$4.38 per share in 2018 and$4.30 per share in 2017. Investment income is an important element of our net income. Because the period of time between our receipt of premiums and the ultimate settlement of claims is often several years or longer, we are able to invest cash from premiums for significant periods of time. As a result, we are able to generate more investment income from our premiums as compared to insurance companies that operate in other lines of business that pay claims more quickly. AtDecember 31, 2019 , our investment portfolio, including cash and cash equivalents, was$1.2 billion and produced net investment income of$32.5 million in 2019,$30.5 million in 2018 and$29.3 million in 2017. The use of reinsurance is an important component of our business strategy. We purchase reinsurance to reduce our net liability on individual risks and to protect against catastrophic losses. Our reinsurance program for 2020 includes 16 reinsurers that provide coverage to us in excess of a certain specified loss amount, or retention level. Our 2020 reinsurance program provides us with reinsurance coverage for each loss occurrence up to$70.0 million , subject to applicable limitations, deductibles, retentions and aggregate limits. However, for any loss occurrence involving only one claimant, our reinsurance coverage is limited to$10.0 million for any single claimant, subject to applicable deductibles, retentions and aggregate limits. Losses in the layer between$2.0 million and$10.0 million are ceded to a multi-year reinsurance treaty with an aggregate annual deductible of approximately$9.5 million and an aggregate limit of coverage of approximately$28.6 million for 2020. As losses are incurred and recorded, we record amounts recoverable from reinsurers for the portion of the losses ceded to our reinsurers. Our most significant balance sheet liability is our reserve for loss and loss adjustment expenses. We record reserves for estimated losses under insurance policies that we write and for loss adjustment expenses related to the investigation and settlement of claims. Our reserves for loss and loss adjustment expenses represent the estimated cost of all reported and unreported loss and loss adjustment expenses incurred and unpaid at any given point in time based on known facts and circumstances. Reserves are based on estimates of the most likely ultimate cost of individual claims. These estimates are inherently uncertain. In addition, there are no policy limits on the liability for workers' compensation claims as there are for other forms of insurance. Therefore, estimating reserves for workers' compensation claims may be more uncertain than estimating reserves for other types of insurance claims with shorter or more definite periods between occurrence of the claim and final determination of the loss and with policy limits on liability for claim amounts. 37 -------------------------------------------------------------------------------- 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. Severe claims, which we define as claims having an estimated ultimate cost of more than$1.0 million , usually have a material effect on each accident year's loss reserves (and our reported results of operations) as a result of both the number of severe claims reported in any year and the timing of claims in the year. As a result of our 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 example, for the five-year period endedDecember 31, 2019 we had recorded 70 severe claims, or an average of 14 severe claims per year for accident years 2015 through 2019. The number of severe claims reported in any one accident year in this five-year period ranged from a low of 9 in 2015 to a high of 16 in 2017 and 2019. The average reported case severity for these claims ranged from$2.2 million for the 2015 accident year to$2.9 million for the 2019 accident year. For the five accident years, the case incurred for these severe claims accounted for an average of 10.4 percentage points of our overall loss and loss adjustment expense, or LAE, ratio, measured atDecember 31, 2019 . Further, the ultimate cost of severe claims is more difficult to estimate, principally due to uncertainties as to medical treatment and outcome and the length and degree of disability. Because of these uncertainties, the estimate of the ultimate cost of severe claims can vary significantly as more information becomes available. As a result, at year end, the case reserve for a severe claim reported early in the year may be more accurate than the case reserve established for a severe claim reported late in the year. A key assumption used by management in establishing loss reserves is that average per claim case incurred loss and loss adjustment expenses will increase year over year. We believe this increase primarily reflects medical and wage inflation and utilization. However, changes in per average claim case incurred loss and loss adjustment expenses can also be affected by frequency of severe claims in the applicable accident years. As more fully described in "Business-Loss Reserves" in Item 1 of this report, the estimate for loss and loss adjustment expenses is established based upon management's analysis of historical data, and factors and trends derived from that data, including claims reported, average claim amount incurred, case development, duration, severity and payment patterns, as well as subjective assumptions. This analysis includes reviews of case reserves for individual open severe claims in the current and prior years. Management reviews the outcomes from actuarial analyses to confirm the reasonableness of its reserve estimate. Substantial judgment is required to determine the relevance of our historical experience and industry information under current facts and circumstances. The interpretation of this historical and industry data can be impacted by external forces, principally frequency and severity of unreported claims, length of time to achieve ultimate settlement of claims, utilization, inflation in medical costs and wages, insurance policy coverage interpretations, jury determinations and legislative changes. Accordingly, our reserves may prove to be inadequate to cover our actual losses. If we change our estimates, these changes would be reflected in our results of operations during the period in which the changes occurred, with increases in our reserves resulting in decreases in our earnings. Additional information regarding our reserves for loss and loss adjustment expenses and the actuarial methods and other factors used in establishing these reserves can be found under the caption "Business-Loss Reserves" in Item 1 of this report. Our gross reserves for loss and loss adjustment expenses atDecember 31, 2019 , 2018 and 2017 were$772.9 million ,$798.4 million and$771.8 million , respectively. As a percentage of gross reserves at year end, IBNR represented 17.6% in 2019, 20.1% in 2018 and 16.8% in 2017. In 2019, we decreased our estimates for prior year loss reserves by$65.0 million . In 2018, we decreased our estimates for prior year loss reserves by$45.6 million . In 2017, we decreased our estimates for prior year loss reserves by$34.8 million . The workers' compensation insurance industry is cyclical in nature and influenced by many factors, including price competition, medical cost increases, natural and man-made disasters, changes in interest rates, changes in state laws and regulations, and general economic conditions. A hard market in our industry is characterized by decreased competition that results in higher premium rates, more restrictive policy coverage terms, and lower commissions paid to agencies. In contrast, a soft market is characterized by increased competition that results in lower premium rates, expanded policy coverage terms, and higher commissions paid to agencies. Our strategy is to focus on maintaining underwriting profitability throughout the cycle.
For additional information regarding our loss reserves and the analyses and methodologies used by management to establish these reserves, see the information under the caption "Business-Loss Reserves" in Item 1 of this report.
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--------------------------------------------------------------------------------Principal Revenue and Expense Items
Our revenues consist primarily of the following:
Net Premiums Earned. Net premiums earned is the earned portion of our net premiums written. Net premiums written is equal to gross premiums written less premiums ceded to reinsurers. Gross premiums written includes the estimated annual premiums from each insurance policy we write in our voluntary and assigned risk businesses during a reporting period based on the policy effective date or the date the policy is bound, whichever is later. Premiums are earned on a daily pro rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Our insurance policies typically have a term of one year. Thus, for a one-year policy written onJuly 1, 2019 for an employer with constant payroll during the term of the policy, we would earn half of the premiums in 2019 and the other half in 2020. On a monthly basis, we also recognize net premiums earned from mandatory pooling arrangements. We estimate the annual premiums to be paid by our policyholders when we issue the policies and record those amounts on our balance sheet as premiums receivable. We conduct premium audits on all of our voluntary business policyholders annually, upon the expiration of each policy, including when the policy is renewed. The purpose of these audits is to verify that policyholders have accurately reported their payroll expenses and employee job classifications, and therefore have paid us the premium required under the terms of the policies. The difference between the estimated premium and the ultimate premium is referred to as "earned but unbilled" premium, or EBUB premium. EBUB premium is subject to significant variability and can either increase or decrease earned premium based upon several factors, including changes in premium growth, industry mix and economic conditions. Due to the timing of audits and other adjustments, the ultimate premium earned is generally not determined for several months after the expiration of the policy. We review the estimate of EBUB premiums on a quarterly basis using historical data and applying various assumptions based on the current market and economic conditions, and we record an adjustment to premium, related losses, and expenses as warranted. Net Investment Income and Net Realized Gains and Losses on Investments. We invest our statutory surplus funds and the funds supporting our insurance liabilities in fixed maturity securities, equity securities and alternative investments. In addition, a portion of these funds are held in cash and cash equivalents to pay current claims. Our net investment income includes interest and dividends earned on our invested assets and amortization of premiums and discounts on our fixed maturity securities. We assess the performance of our investment portfolio using a standard tax equivalent yield metric. Investment income that is tax-exempt is increased by our marginal federal tax rate to express yield on tax-exempt securities on the same basis as taxable securities. Net realized gains and losses on our investments are reported separately from our net investment income. Net realized gains occur when our investment securities are sold for more than their cost or amortized cost, as applicable. Net realized losses occur when our investment securities are sold for less than their cost or amortized cost, as applicable, or are written down as a result of other-than-temporary impairment. We classify the majority of our fixed maturity securities as held-to-maturity. The remainder of our fixed maturity securities are classified as available-for-sale. Net unrealized gains or losses on our securities classified as available-for-sale are reported separately within accumulated other comprehensive income on our balance sheet. Changes in net unrealized gains or losses on our equity securities are recognized in net income. Fee and Other Income. We recognize commission income earned on policies issued by other carriers that are sold by our wholly owned insurance agency subsidiary as the related services are performed. We also recognize a small portion of interest income from mandatory pooling arrangements in which we participate.
Our expenses consist primarily of the following:
Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses
incurred represents our largest expense item and, for any given reporting
period, includes estimates of future claim payments, changes in those estimates
from prior reporting periods and costs associated with investigating, defending,
and administering claims. These expenses fluctuate based on the amount and types
of risks we insure. We record loss and loss adjustment expenses related to
estimates of future claim payments based on case-by-case valuations and
statistical analyses. We seek to establish all reserves at the most likely
ultimate exposure based on our historical claims experience. It is typical for
our more serious claims to take several years to settle and we revise our
estimates as we receive additional information about the condition of the
injured employees. Our ability to estimate loss and loss adjustment expenses
accurately at the time of pricing our insurance policies is a critical factor in
our profitability. Additional information regarding our reserves for loss and
loss adjustment expenses and the actuarial methods and other factors used in
establishing these reserves can be found under the caption "Business-Loss
Reserves" in Item 1 of this report.
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Underwriting and Certain Other Operating Costs. Underwriting and certain other
operating costs are those expenses that we incur to underwrite and maintain the
insurance policies we issue. These expenses include state and local premium
taxes and fees and other operating costs, offset by commissions we receive from
reinsurers under our reinsurance treaty programs. We pay state and local taxes,
licenses and fees, assessments, and contributions to state workers' compensation
security funds based on premiums. In addition, other operating costs include
general and administrative expenses, excluding commissions and salaries and
benefits, incurred at both the insurance company and corporate level.
Commissions. We pay commissions to our subsidiary insurance agency and to the
independent agencies that sell our insurance based on premiums collected from
policyholders.
Salaries and Benefits. We pay salaries and provide benefits to our employees.
Policyholder Dividends. In limited circumstances, we pay dividends to policyholders in particular states as an underwriting incentive.
Income Tax Expense. We incur federal, state, and local income tax expense. OnDecember 22, 2017 , the Tax Act was signed into law making significant changes to the Internal Revenue Code. The reduction of theU.S. corporate tax rate from 35% to 21% resulted in a non-cash charge related to a revaluation of our net deferred tax assets. This charge amounted to$12.6 million of additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. 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 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. 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.
The following is a description of our critical accounting policies.
Reserves for Loss and Loss Adjustment Expenses. We record reserves for estimated
losses under insurance policies that we write and for loss adjustment expenses,
which include defense and cost containment, or DCC, and adjusting and other, or
AO expenses, related to the investigation and settlement of policy claims. Our
reserves for loss and loss adjustment expenses represent the estimated cost of
all reported and unreported loss and loss adjustment expenses incurred and
unpaid at any given point in time based on known facts and circumstances.
Our reserves for loss and DCC expenses are estimated using case-by-case
valuations based on our estimate of the most likely outcome of the claim at that
time. In addition to these case reserves, we establish reserves on an aggregate
basis that have been incurred but not reported, or IBNR. Our IBNR reserves are
also intended to provide for aggregate changes in case incurred amounts as well
as for recently reported claims which an initial case reserve has not been
established. The third component of our reserves for loss and loss adjustment
expenses is our AO reserve. Our AO reserve is established for those future
claims administration costs that cannot be allocated directly to individual
claims. The final component of our reserves for loss and loss adjustment
expenses is the reserve for mandatory pooling arrangements.
In establishing our reserves, we review the results of analyses using actuarial
methods that utilize historical loss data from our more than 34 years of
underwriting workers' compensation insurance. The actuarial analysis of our
historical data provides the factors we use in estimating our loss reserves.
These factors are primarily measures over time of the number of claims paid and
reported, average paid and incurred claim amounts, claim closure rates and claim
payment patterns. In evaluating the results of our analyses, management also
uses substantial judgment in considering other factors that are not considered
in these actuarial analyses, including changes in business mix, claims
management, regulatory issues, medical trends, employment and wage patterns,
insurance policy coverage interpretations, judicial determinations and other
subjective factors. Due to the inherent uncertainty associated with these
estimates, and the cost of incurred but unreported claims, our actual
liabilities may vary significantly from our original estimates.
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On a quarterly basis, we review our reserves for loss and loss adjustment
expenses to determine whether adjustments are required. Any resulting
adjustments are included in the results for the current period. In establishing
our reserves, we do not use loss discounting, which would involve recognizing
the time value of money and offsetting estimates of future payments by future
expected investment income. Additional information regarding our reserves for
loss and loss adjustment expenses and the actuarial methods and other factors
used in establishing these reserves can be found under the caption
"Business-Loss Reserves" in Item 1 of this report.
Amounts Recoverable from Reinsurers. Amounts recoverable from reinsurers
represent the portion of our paid and unpaid loss and loss adjustment expenses
that are assumed by reinsurers and related commissions due from reinsurers.
These amounts are separately reported on our balance sheet as assets and do not
reduce our reserves for loss and loss adjustment expenses because reinsurance
does not relieve us of liability to our policyholders. We are required to pay
claims even if a reinsurer fails to pay us under the terms of a reinsurance
contract. We calculate amounts recoverable from reinsurers based on our
estimates of the underlying loss and loss adjustment expenses, as well as the
terms and conditions of our reinsurance contracts, which could be subject to
interpretation. In addition, we bear credit risk with respect to our reinsurers,
which can be significant because some of the unpaid loss and loss adjustment
expenses for which we have reinsurance coverage remain outstanding for extended
periods of time.
Premiums Receivable. Premiums receivable represents premium-related balances due
from our policyholders based on annual premiums for policies written, including
surcharges and deposits and adjustments for premium audits, endorsements,
cancellations, cash transactions and charge offs. The balance is shown net of
the allowance for doubtful accounts and includes an estimate for EBUB. The EBUB
estimate is subject to significant variability and can either increase or
decrease premiums receivable and earned premiums based upon several factors,
including changes in premium growth, industry mix and economic conditions. EBUB
assumptions include historical development factors, current economic outlook and
current trends in particular sectors of our business.
Assessments. We are subject to various assessments and premium surcharges
related to our insurance activities, including assessments and premium
surcharges for state guaranty funds and second injury funds. Our accrual is
based on historical assessments as well as updated assessment rates. Assessments
based on premiums are recorded as an expense as premiums are earned and
generally paid one year after the calendar year in which the policies are
written. Assessments based on losses are recorded as an expense as losses are
incurred and are generally paid within one year of the calendar year in which
the claims are paid by us. State guaranty fund assessments are used by state
insurance oversight agencies to pay claims of policyholders of impaired,
insolvent or failed insurance companies and the operating expenses of those
agencies. Second injury funds are used by states to reimburse insurers and
employers for claims paid to injured employees for aggravation of prior
conditions or injuries. In some states, these assessments and premium surcharges
may be partially recovered through a reduction in future premium taxes.
Deferred Policy Acquisition Costs. We defer commission expenses, premium taxes
and certain marketing, sales, underwriting and safety costs that vary with and
primarily relate to the successful acquisition of insurance policies. These
acquisition costs are capitalized and charged to expense ratably as premiums are
earned. In calculating deferred policy acquisition costs, these costs are
limited to their estimated realizable value, which gives effect to the premiums
to be earned, anticipated losses and settlement expenses and certain other costs
we expect to incur as the premiums are earned, less related net investment
income. Judgments as to the ultimate recoverability of these deferred policy
acquisition costs are highly dependent upon estimated future profitability of
unearned premiums. If the unearned premiums were less than our expected claims
and expenses after considering investment income, we would reduce the deferred
costs.
Deferred Income Taxes. We use the liability method of accounting for income
taxes. Under this method, deferred income tax assets and liabilities are
recognized for the future tax consequences attributed to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities resulting from a tax rate change impacts our
net income or loss in the reporting period that includes the enactment date of
the tax rate change.
In assessing whether our deferred tax assets will be realized, management
considers whether it is more likely than not that we will generate future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, tax planning strategies and projected future taxable income in
making this assessment. If necessary, we establish a valuation allowance to
reduce the deferred tax assets to the amounts that are more likely than not to
be realized.
On December 22, 2017 , the Tax Act was signed into law making significant changes
to the Internal Revenue Code. The reduction of the U.S. corporate tax rate from
35% to 21% caused us to adjust our deferred tax assets and liabilities to the
lower federal base rate of 21%. The impact resulted in a net deferred tax
expense of $12.6 million in the fourth quarter of 2017, the period in which the
legislation was enacted.
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-------------------------------------------------------------------------------- Impairment ofInvestment Securities . Impairment of an investment security results in a reduction of the carrying value of the security and the realization of a loss when the fair value of the security declines below our cost or amortized cost, as applicable, for the security, and the impairment is deemed to be other-than-temporary. We regularly review our investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of specific investments. We consider various factors in determining if a decline in the fair value of an individual security is other-than-temporary. Some of the factors we consider include:
• any reduction or elimination of preferred stock dividends, or nonpayment
of scheduled principal or interest payments;
• the financial condition and near-term prospects of the issuer of the
applicable security, including any specific events that may affect its
operations or earnings;
• how long and by how much the fair value of the security has been below its
cost or amortized cost;
• any downgrades of the security by a rating agency;
• our intent not to sell the security for a sufficient time period for it to
recover its value;
• the likelihood of being forced to sell the security before the recovery of
its value; and
• an evaluation as to whether there are any credit losses on debt securities.
Share-Based Compensation. In accordance with
Results of Operations
The table below summarizes certain operating results and key measures we use in monitoring and evaluating our operations.
Year Ended December 31,
2019 2018 2017
(in thousands)
Income Statement Data
Gross premiums written $ 333,460 $ 351,696 $ 350,267
Ceded premiums written (8,995 ) (9,344 ) (8,869 )
Net premiums written $ 324,465 $ 342,352 $ 341,398
Net premiums earned $ 332,888 $ 350,326 $ 346,156
Net investment income 32,483 30,452 29,281
Net realized losses on investments (80 ) (1,536 ) (647 )
Net unrealized gains (losses) on equity securities 4,758 (2,088 ) -
Fee and other income 321 599 418
Total revenues 370,370 377,753 375,208
Loss and loss adjustment expenses incurred 176,342 204,891 209,324
Underwriting and certain other operating costs (1) 22,221 28,981 28,333
Commissions 25,010 26,160 24,812
Salaries and benefits 27,120 25,992 25,631
Policyholder dividends 4,160 4,148 4,868
Total expenses 254,853 290,172 292,968
Income before taxes 115,517 87,581 82,240
Income tax expense (2) 22,827 15,949 36,009
Net income $ 92,690 $ 71,632 $ 46,231
Selected Insurance Ratios
Current accident year loss ratio (3) 72.5 % 71.5 % 70.5 %
Prior accident year loss ratio (4) (19.5 )% (13.0 )% (10.0 )%
Net loss ratio 53.0 % 58.5 % 60.5 %
Net underwriting expense ratio (5) 22.3 % 23.2 % 22.8 %
Net dividend ratio (6) 1.3 % 1.2 % 1.4 %
Net combined ratio (7) 76.6 % 82.9 % 84.7 %
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As of December 31,
2019 2018 2017
(in thousands)
Balance Sheet Data
Cash and cash equivalents $ 43,813 $ 40,344 $ 55,559
Investments 1,125,018 1,125,490 1,130,314
Amounts recoverable from reinsurers 95,913 112,006 90,133
Premiums receivable, net 157,953 162,478 174,234
Deferred income taxes 17,513 21,852 19,262
Deferred policy acquisition costs 19,048 19,734 20,251
Total assets (8) 1,492,906 1,515,931 1,518,236
Reserves for loss and loss adjustment expenses 772,887 798,409 771,845
Unearned premiums 140,873 149,296 157,270
Insurance-related assessments 22,967 28,258 28,246
Shareholders' equity 430,215 409,762 425,423
(1) Includes policy acquisition expenses, and other general and administrative
expenses, excluding commissions and salaries and benefits, related to
insurance operations and corporate operating expenses.
(2) On
changes to the Internal Revenue Code. Changes include, but are not limited
to, a corporate tax rate decrease from 35% to 21% effective for tax years
beginning after
additional income tax expense related to our net deferred tax assets revalued
at the new lower rate of 21% in the fourth quarter of 2017, the period in
which the legislation was enacted.
(3) The current accident year loss ratio is calculated by dividing loss and loss
adjustment expenses incurred for the current accident year by the current
year's net premiums earned.
(4) The prior accident year loss ratio is calculated by dividing the change in
loss and loss adjustment expenses incurred for prior accident years by the
current year's net premiums earned.
(5) The net underwriting expense ratio is calculated by dividing underwriting and
certain other operating costs, commissions and salaries, and benefits by the
current year's net premiums earned.
(6) The net dividend ratio is calculated by dividing policyholder dividends by
the current year's net premiums earned.
(7) The net combined ratio is the sum of the net loss ratio, the net underwriting
expense ratio and the net dividend ratio.
(8) We adopted ASU 2016-02, Leases (Topic 842), 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.
Overview of Operating Results
Year Ended
Gross Premiums Written. Gross premiums written for 2019 were$333.5 million , compared to$351.7 million for 2018, a decrease of 5.2%. The decrease was attributable to a$22.9 million decrease in annual premiums on voluntary policies written during the period which was offset by a$5.0 million increase in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters. Related premium adjustments in 2019 include a$1.0 million increase in "earned but unbilled", or EBUB, premium.
Net Premiums Written. Net premiums written for 2019 were
Net Premiums Earned. Net premiums earned for 2019 were$332.9 million , compared to$350.3 million for 2018, a decrease of 5.0%. The decrease was attributable to the decrease in net premiums written during the period. Net Investment Income. Net investment income in 2019 was$32.5 million , an increase of 6.7% from the$30.5 million reported in 2018. The pre-tax investment yield on our investment portfolio was 2.8% per annum for 2019 versus 2.6% per annum for 2018. The tax-equivalent yield on our investment portfolio was 3.1% per annum for 2019, compared to 3.2% per annum for 2018. The tax-equivalent yield is calculated using the effective interest rate and the appropriate marginal tax rate. Average invested assets, including cash and cash equivalents, increased 0.5%, from an average of$1,195.1 million for 2018 to an average of$1,200.6 million for 2019. 43
-------------------------------------------------------------------------------- Net Realized Gains (Losses) on Investments. Net realized losses on investments in 2019 totaled$0.1 million , compared to losses of$1.5 million in 2018. In 2019, net realized losses of$0.2 million resulted from redemptions of fixed maturity securities offset by$0.1 million of realized gains on the sale of fixed maturity securities classified as available-for-sale. In 2018, net realized losses of$1.1 million resulted from the sale of equity securities and fixed maturity securities classified as available-for-sale. Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled$176.3 million for 2019, compared to$204.9 million for 2018, a decrease of$28.5 million , or 13.9%. The current accident year losses and LAE incurred were$241.3 million , or 72.5% of net premiums earned, compared to$250.5 million , or 71.5% of net premiums earned for 2018. We recorded favorable prior accident year development of$65.0 million in 2019, compared to$45.6 million in 2018. This is discussed in more detail below in "PriorYear Development ." Our net loss ratio was 53.0% for 2019 and 58.5% for 2018. Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for 2019 were$74.4 million , compared to$81.1 million for 2018, a decrease of$6.8 million , or 8.4%. This decrease was primarily due to a$6.8 million decrease in insurance related assessments, a$1.2 million decrease in commission expense, and a$0.6 million decrease in premium taxes. The decrease in insurance related assessments included a benefit of$3.5 million from the elimination of a state assessment for a multiple injury fund. The decreases above were partially offset by an increase of$1.1 million in compensation expense and an increase of$0.4 million in accounts receivable write-offs. Our underwriting expense ratio decreased to 22.3% in 2019 from 23.2% in 2018. Income tax expense. Income tax expense for 2019 was$22.8 million , compared to$15.9 million for 2018. The effective tax rate also increased to 19.8% for 2019, compared to 18.2% for 2018. This increase in the effective tax rate is due to a lower proportion of tax-exempt income to underwriting income in 2019 relative to 2018.
Year Ended
Gross Premiums Written. Gross premiums written for 2018 were$351.7 million , compared to$350.3 million for 2017, an increase of 0.4%. The increase was attributable to a$6.8 million increase in premiums resulting from payroll audits and related premium adjustments which was offset by a$5.2 million decrease in annual premiums on voluntary policies written during the period. Related premium adjustments in 2018 include a$1.2 million increase in "earned but unbilled", or EBUB, premium.
Net Premiums Written. Net premiums written for 2018 were
Net Premiums Earned. Net premiums earned for 2018 were$350.3 million , compared to$346.2 million for 2017, an increase of 1.2%. The increase was attributable to the increase in net premiums written during the period. Net Investment Income. Net investment income in 2018 was$30.5 million , an increase of 4.0% from the$29.3 million reported in 2017. The pre-tax investment yield on our investment portfolio was 2.6%per annum for 2018 versus 2.5% per annum for 2017. The tax-equivalent yield on our investment portfolio was 3.2% per annum for 2018, compared to 2.9% per annum for 2017. The tax-equivalent yield is calculated using the effective interest rate and the appropriate marginal tax rate as ofJanuary 1, 2019 . Average invested assets, including cash and cash equivalents, increased 0.5%, from an average of$1,188.7 million for 2017 to an average of$1,195.1 million for 2018. Net Realized Gains (Losses) on Investments. Net realized losses on investments in 2018 totaled$1.5 million , compared to losses of$0.6 million in 2017. In 2018, net realized losses of$1.1 million resulted from sale of equity and fixed maturity securities classified as available-for-sale. The remaining$0.4 million of realized losses resulted from redemptions of fixed maturity securities. In 2017, net realized losses of$1.1 million resulted from the redemption of fixed maturity securities. These losses were partially offset by realized gains of$0.5 million on the sale of equity and fixed maturity securities classified as available-for-sale. Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled$204.9 million for 2018, compared to$209.3 million for 2017, a decrease of$4.4 million , or 2.1%. The current accident year losses and LAE incurred were$250.5 million , or 71.5% of net premiums earned, compared to$244.1 million , or 70.5% of net premiums earned for 2017. We recorded favorable prior accident year development of$45.6 million in 2018, compared to$34.8 million in 2017. This is discussed in more detail below in "PriorYear Development ." Our net loss ratio was 58.5%for 2018 and 60.5% for 2017. 44 -------------------------------------------------------------------------------- Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for 2018 were$81.1 million , compared to$78.8 million for 2017, an increase of$2.4 million , or 3.0%. This increase was primarily due to a$1.5 million increase in premium taxes, a$1.3 million increase in commission expense, a$0.4 million increase in compensation expense and a$0.3 million increase in legal and professional fees. These increases were partially offset by a decrease of$0.7 million in accounts receivable write-offs and a decrease of$0.6 million in insurance related assessments. Our underwriting expense ratio increased to 23.2% in 2018 from 22.8% in 2017. Income tax expense. Income tax expense for 2018 was$15.9 million , compared to$36.0 million for 2017. The effective tax rate also decreased to 18.2% for 2018, compared to 43.8% for 2017. This decrease is mainly due to the impact of tax reform legislation which reduced theU.S. corporate tax rate from 35% to 21% in 2018 and resulted in a revaluation of our net deferred tax assets in the prior year. The impact resulted in a net deferred tax expense of$12.6 million in the fourth quarter of 2017, the period in which the legislation was enacted.
Prior
The Company recorded favorable prior accident year loss and loss adjustment expense development of$65.0 million in calendar year 2019,$45.6 million in calendar year 2018 and$34.8 million in calendar year 2017. The table below sets forth the favorable development for accident years 2014 through 2018 and, collectively, all accident years prior to 2014. Favorable/(Unfavorable) Development for Year Ended December 31, 2019 2018 2017 (in millions) 2018 $ - $ - $ - 2017 9.5 - - 2016 23.4 9.1 - 2015 14.5 17.0 10.1 2014 8.6 8.1 14.0 Prior to 2014 9.0 11.4 10.7 Total net development $ 65.0 $ 45.6$ 34.8 The table below sets forth the number of open claims as ofDecember 31, 2019 , 2018 and 2017, and the numbers of claims reported and closed during the years then ended. Twelve Months Ended December 31, 2019 2018 2017 Open claims at beginning of period 5,190 4,982 5,195 Claims reported 5,452 5,440 5,155 Claims closed (5,589 ) (5,232 ) (5,368 ) Open claims at end of period 5,053 5,190 4,982 AtDecember 31, 2019 , our incurred amounts for certain accident years, particularly 2015 and 2016, developed more favorably than management previously expected. Multiple factors can cause loss development both unfavorable and favorable. The favorable loss development we experienced across accident years was largely due to two factors: (1) lower than expected severity of injuries in these accident years compared to our original and revised estimates; and (2) favorable case reserve development from closed claims and claims where the worker had reached maximum medical improvement. We believe the favorable case reserve development resulted primarily from an intensive claims management focus with the Company actively seeking to settle claims, leading to favorable development. The assumptions we used in establishing our reserves for these accident years were based on our historical claims data. However, as ofDecember 31, 2019 , actual results for these 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. 45
-------------------------------------------------------------------------------- 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. Additional information regarding our reserves for loss and loss adjustment expenses and the actuarial methods and other factors used in establishing these reserves can be found under the caption "Business-Loss Reserves" in Item 1 of this report.
Liquidity and Capital Resources
Our principal sources of operating funds are premiums, investment income, and proceeds from maturities of investments. Our primary uses of operating funds include payments for claims and operating expenses. We pay claims, operating expenses and shareholder dividends using cash flow from operations and invest our excess cash in fixed maturity and equity securities. We expect that our projected cash flow from operations will provide us sufficient liquidity to fund future operations, including payment of claims and operating expenses and other holding company expenses, for at least the next 18 months. We forecast claim payments based on our historical trends. We seek to manage the funding of claim payments by actively managing available cash and forecasting cash flows on a short- and long-term basis. Cash payments, net of reinsurance, for claims were$190.0 million in 2019,$200.7 million in 2018 and$186.9 million in 2017. We fund claim payments out of cash flow from operations, principally premiums, net of amounts ceded to our reinsurers, and net investment income. Our investment portfolio atDecember 31, 2019 was$1.2 billion . As discussed above under "Overview," We purchase reinsurance to reduce our net liability on individual risks and to protect against catastrophic losses. Based on our estimates of future claims, we believe we are sufficiently capitalized to satisfy the deductibles and retentions in our 2020 reinsurance program. We reevaluate our reinsurance program at least annually, taking into consideration a number of factors, including cost of reinsurance, our liquidity requirements, operating leverage and coverage terms. Even if we maintain our existing retention levels, if the cost of reinsurance increases, our cash flow from operations would decrease as we would cede a greater portion of our written premiums to our reinsurers. Conversely, our cash flow from operations would increase if the cost of reinsurance declined relative to our retention. InDecember 2019 , the Company commuted reinsurance agreements withHannover Reinsurance (Ireland) Limited ("Hannover") covering portions of accident years 2009 through 2011. The Company received an$8.5 million payment effectuated solely through offset against the balance of the funds withheld and recoverable from reinsurers accounts under the reinsurance agreements in exchange for releasing Hannover from their reinsurance obligations under the commuted agreements. Hannover remains obligated to the subsidiaries of the Company under other reinsurance agreements. There was no effect on the Company's net income in the year endedDecember 31, 2019 as a result of the commutation. Net cash provided by operating activities was$78.8 million in 2019, as compared to$98.3 million in 2018, and$130.8 million in 2017. Major components of cash provided by operating activities in 2019 were net premiums collected of$329.0 million and investment income collected of$41.6 million . These increases were offset in-part by claim payments of$189.8 million ,$75.9 million of operating expenditures, federal taxes paid of$20.9 million , and dividends to policyholders paid of$3.5 million . Major components of cash provided by operating activities in 2018 were net premiums collected of$354.0 million and investment income collected of$41.7 million . These increases were offset in-part by claim payments of$200.5 million ,$74.2 millionof operating expenditures, federal taxes paid of$11.2 million , a$7.9 million increase in amounts held by others, and dividends to policyholders paid of$2.9 million . Major components of cash provided by operating activities in 2017 were net premiums collected of$349.6 million , investment income collected of$44.0 million and a decrease of$27.8 million in amounts held by others. These increases were offset in-part by claim payments of$188.1 million ,$74.0 million of operating expenditures, federal taxes paid of$28.3 million and dividends to policyholders paid of$1.5 million . Net cash provided by investing activities was$11.7 million in 2019, as compared to net cash used in investing activities of$29.1 million in 2018 and$51.5 million in 2017. In 2019, major components of net cash provided by investing activities included proceeds from sales and maturities of investments of$358.6 million , offset by investment purchases of$345.9 million . 46 -------------------------------------------------------------------------------- In 2018, major components of net cash used in investing activities included investment purchases of$368.3 million and net purchases of furniture, fixtures and equipment of$1.1 million , offset by proceeds from sales and maturities of investments of$340.2 million . In 2017, major components of net cash used in investing activities included investment purchases of$401.8 million and net purchases of furniture, fixtures and equipment of$0.5 million , offset by proceeds from sales and maturities of investment of investments of$350.7 million . Net cash used in financing activities was$87.0 million in 2019, as compared to$84.4 million in 2018 and$82.6 million in 2017. Major components of cash used in financing activities in 2019 included cash used for dividends paid to shareholders of$87.0 million . Major components of cash used in financing activities in 2018 and 2017 included cash used for dividends paid to shareholders of$84.5 million and$82.6 million , respectively. The Company has a line of credit agreement withFrost Bank for borrowings up to a maximum of$20.0 million . Under the agreement, advances may be made either in the form of loans or letters of credit. Borrowings under the agreement accrue at interest rates based upon prime rate or LIBOR (or equivalent) and are unsecured. Under the agreement, the Company pays a fee of 0.25% on the unused portion of the loan in arrears quarterly, for a fee of$50,000 annually. AtDecember 31, 2019 , there were no outstanding borrowings. Unless renewed, the agreement will expire inDecember 2022 . The Board of Directors initially authorized the Company's share repurchase program inFebruary 2010 . InOctober 2016 , the Board reauthorized this program with no expiration date. As ofDecember 31, 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 atDecember 31, 2019 under this program. There were no share repurchases in 2019, 2018 or 2017. 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.AMERISAFE is a holding company that transacts business through its operating subsidiaries, including AIIC, SOCI and AIICTX.AMERISAFE's primary assets are the capital stock of these insurance subsidiaries. The ability ofAMERISAFE to fund its operations depends upon the surplus and earnings of its subsidiaries and their ability to pay dividends toAMERISAFE . Payment of dividends by our insurance subsidiaries is restricted by state insurance laws, including laws establishing minimum solvency and liquidity thresholds. Based upon the prescribed calculation, the insurance subsidiaries could pay toAMERISAFE dividends of up to$88.6 million in 2020 without seeking regulatory approval. See "Business-Regulation-Dividend Limitations" in Item 1 of this report.
The Company paid regular quarterly cash dividends of
OnFebruary 18, 2020 , the Company declared a regular quarterly cash dividend of$0.27 per share payable onMarch 27, 2020 to shareholders of record as ofMarch 13, 2020 . The Board intends to continue to consider the payment of a regular cash dividend each calendar quarter. On an annualized basis, the cash dividend is expected to be$1.08 per share in 2020.
Investment Portfolio
The principal objectives of our investment portfolio are to preserve capital and surplus and to maintain appropriate liquidity for corporate requirements. Additional objectives are to support ourA.M. Best rating of "A" (Excellent) and to maximize after-tax income and total return. We presently expect to maintain sufficient liquidity from funds generated by operations to meet our anticipated insurance obligations and operating and capital expenditure needs. Excess funds from operations will be invested in accordance with our investment policy and statutory requirements. We allocate our portfolio into four categories: cash and cash equivalents, short-term investments, fixed maturity securities and equity securities. Cash and cash equivalents include cash on deposit, money market funds and municipal securities, corporate securities and certificates of deposit with an original maturity of less than 90 days. Short-term investments include municipal securities, corporate securities and certificates of deposit with an original maturity greater than 90 days but less than one year. Our fixed maturity securities include obligations of theU.S. Treasury orU.S. agencies, obligations of states and their subdivisions,U.S. Dollar-denominated obligations of theU.S. or Canadian corporations,U.S. agency-based mortgage-backed securities, commercial mortgage-backed securities and asset-backed securities. 47
-------------------------------------------------------------------------------- UnderNebraska andTexas law, as applicable, each of AIIC, SOCI and AIICTX is required to invest only in securities that are either interest-bearing, interest-accruing or eligible for dividends, and must limit its investment in the securities of any single issuer, other than direct obligations ofthe United States , to five percent of the insurance company's assets. As ofDecember 31, 2019 , we were in compliance with these requirements.
We employ diversification policies and balance investment credit risk and related underwriting risks to minimize our total potential exposure to any one business sector or security.
As ofDecember 31, 2019 , our investment portfolio, including cash and cash equivalents, totaled$1.2 billion , an increase of 0.3% fromDecember 31, 2018 . The majority of our fixed maturity securities are classified as held-to-maturity, as defined by FASB ASC Topic 320,Investments-Debt and Equity Securities . As such, the reported value of those securities is equal to their amortized cost, and is not impacted by changing interest rates. The remainder of our fixed maturity securities are classified as available-for-sale and reported at fair value. Investments in equity securities are reported at fair value. We follow FASB ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As disclosed in Note 18 of the financial statements, our securities available-for-sale are classified using Level 1, 2 and 3 inputs. We did not elect the fair value option prescribed under FASB ASC Topic 825, Financial Instruments, for any financial assets in 2018 or 2019.
The composition of our investment portfolio, including cash and cash
equivalents, as of
Carrying Percentage Effective
Value of Portfolio Interest Rate
(in thousands)
Fixed maturity securities-held-to-maturity:
State and political subdivisions $ 466,270 39.9 % 2.8 %
Corporate bonds 109,241 9.4 % 3.0 %
U.S. agency-based mortgage-backed securities 10,967 0.9 % 3.9 %
U.S. Treasury securities and obligations of
U.S.
Government agencies 12,723 1.1 % 3.4 %
Asset-backed securities 220 0.0 % 2.8 %
Total fixed maturity
securities-held-to-maturity 599,421 51.3 % 2.9 %
Fixed maturity securities-available-for-sale:
State and political subdivisions 237,775 20.3 % 3.1 %
Corporate bonds 133,778 11.5 % 3.1 %
U.S. agency-based mortgage-backed securities 29,467 2.5 % 2.9 %
U.S. Treasury securities and obligations of
U.S.
Government agencies 40,126 3.4 % 1.7 %
Total fixed maturity
securities-available-for-sale 441,146 37.7 % 3.0 %
Equity securities 27,903 2.4 % 2.3 %
Short-term investments 56,548 4.8 % 1.7 %
Cash and cash equivalents 43,813 3.8 % 1.4 %
Total Investments, including cash and cash
equivalents $ 1,168,831 100.0 % 2.8 %
For our fixed maturity securities classified as available-for-sale, the
securities are "marked to market" as of the end of each calendar quarter. As of
that date, unrealized gains and losses are recorded in Other Comprehensive
Income (Loss), except when such securities are deemed to be
other-than-temporarily impaired. For our fixed maturity 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. Equity securities are measured at
fair value with changes in the fair value recognized in net income.
48
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We regularly review our investment portfolio to evaluate the necessity of
recording impairment losses for other-than-temporary declines in the fair value
of our investments. We consider various factors in determining if a decline in
the fair value of an individual security is other-than-temporary. The key
factors we consider are:
• any reduction or elimination of preferred stock dividends, or nonpayment
of scheduled principal or interest payments;
• the financial condition and near-term prospects of the issuer of the
applicable security, including any specific events that may affect its
operations or earnings;
• how long and by how much the fair value of the security has been below its
cost or amortized cost;
• any downgrades of the security by a rating agency;
• our intent not to sell the security for a sufficient time period for it to
recover its value;
• the likelihood of being forced to sell the security before the recovery of
its value; and
• an evaluation as to whether there are any credit losses on debt securities.
The following table summarizes the gross unrealized losses and fair value of
fixed income securities by the length of time that individual securities have
been in a continuous unrealized loss position.
Less Than Twelve Months Twelve Months or Longer
Fair Unrealized Fair Unrealized
Value Losses Value Losses
(in thousands)
December 31, 2019 :
Fixed maturity securities $ 44,647 $ (315 ) $ 21,531 $ (56 )
December 31, 2018:
Fixed maturity securities $ 123,890 $ (459 ) $ 496,995 $ (7,307 )
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. 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 security before the
recovery of its amortized cost basis. In addition, none of the unrealized losses
on debt securities are considered credit losses.
During 2019 and 2018, the Company had no impairment losses recognized for other-than-temporary declines in the fair value of our investments.
The pre-tax investment yield on our investment portfolio was 2.8% and 2.6% per
annum during the twelve months ended
Contractual Obligations and Commitments
We manage risk on certain long-duration claims by settling these claims through the purchase of annuities from unaffiliated life insurance companies. In the event these companies are unable to meet their obligations under these annuity contracts, we could be liable to the claimants, but our reinsurers remain obligated to indemnify us for all or part of these obligations in accordance with the terms of our reinsurance contracts. As ofDecember 31, 2019 , the present value of these annuities was$100.3 million , as estimated by our annuity providers. Substantially all of the annuities are issued or guaranteed by life insurance companies that have anA.M. Best rating of "A" (Excellent) or better. For additional information, see Note 16 to our consolidated financial statements in Item 8 of this report. The Company has operating and finance leases for office space and equipment. Our leases have remaining lease terms of one month to 49 months, some of which include options to extend the leases for up to five 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. 49
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Supplemental balance sheet information related to leases is as follows:
December 31, 2019 Balance Sheet Classification
(in thousands)
Operating leases:
Operating lease right-of-use assets $ 430 Other assets
Operating lease liabilities Accounts payable and other
$ 430 liabilities
Finance leases:
Finance lease right-of-use assets $ 185
Finance lease accumulated amortization
right-of-use assets (179 )
Property and equipment, net $ 6 Property and equipment, net
Finance lease liabilities Accounts payable and other
$ 54 liabilities
Future minimum lease payments at
Year Operating Leases Finance Leases
(in thousands)
2020 $ 137 $ 51
2021 120 5
2022 110 -
2023 75 -
2024 6 -
Total lease payments 448 56
Less imputed interest 18 2
Total $ 430 $ 54
Rental expense was
The table below provides information with respect to our contractual obligations as ofDecember 31, 2019 . Payment Due By Period Less Than 1 More Than 5 Contractual Obligations Total Year 1-3 Years 3-5 Years Years (in thousands)
Loss and loss adjustment expenses (1)
3,885 4,931 1,428 2,480
Operating lease obligations 430 130 294 6 -
Finance lease obligations 54 49 5 - -
Purchase obligations 7,373 2,896 4,477 - -
Total $ 793,468 $ 242,938 $ 309,239 $ 88,191 $ 153,100 (1) The loss and loss adjustment expense payments due by period in the table
above are based upon the loss and loss adjustment expense estimates as of
not contractual liabilities as to a time certain. Our contractual liability
is to provide benefits under the policy. As a result, our calculation of loss
and loss adjustment expense payments due by period is subject to the same
uncertainties associated with determining the level of loss and loss
adjustment expenses generally and to the additional uncertainties arising
from the difficulty of predicting when claims (including claims that have not
yet been reported to us) will be paid. For a discussion of our loss and loss
adjustment expense process, see "Business-Loss Reserves" in Item 1 of this
report. Actual payments of loss and loss adjustment expenses by period will
vary, perhaps materially, from the amounts shown in the table above to the
extent that current estimates of loss and loss adjustment expenses vary from
actual ultimate claims amounts and as a result of variations between expected
and actual payout patterns. See "Risk Factors- Risks Related to Our
Business-Our loss reserves are based on estimates and may be inadequate to
cover our actual losses" in Item 1A of this report for a discussion of the
uncertainties associated with estimating loss and loss adjustment expenses.
50
--------------------------------------------------------------------------------(2) We are subject to various annual assessments imposed by certain of the states
in which we write insurance policies. These assessments are generally based
upon the amount of premiums written or losses paid during the applicable
year. Assessments based on premiums are generally paid within one year after
the calendar year in which the policies are written, while assessments based
on losses are generally paid within one year after calendar year in which the
loss is paid. When we establish a reserve for loss and loss adjustment
expenses for a reported claim, we accrue our obligation to pay any applicable
assessments. If settlement of the claim is to be paid out over more than one
year, our obligation to pay any related loss-based assessments extends for
the same period of time. Because our reserves for loss and loss adjustment
expenses are based on estimates, our accruals for loss-based insurance
assessments are also based on estimates. Actual payments of loss and loss
adjustment expenses may differ, perhaps materially, from our reserves.
Accordingly, our actual loss-based insurance assessments may vary, perhaps
materially, from our accruals.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
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