AMERISAFE INC - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number:

001-12251

AMERISAFE, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common		AMSF		NASDAQ

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

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

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

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

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

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

As of July 27, 2021, there were 19,364,054 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

TABLE OF CONTENTS

		Page
		No.

FORWARD-LOOKING STATEMENTS		3

PART I - FINANCIAL INFORMATION

Item 1	Financial Statements	4

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4	Controls and Procedures	28

PART II - OTHER INFORMATION

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 6	Exhibits	29

FORWARD-LOOKING STATEMENTS

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

•

the cyclical nature of the workers’ compensation insurance industry;

•

the impact of pandemics on the business operations of our insurance subsidiaries and policyholders, the value of our investments, and our revenues, results of operations and cash flows;

•

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

•

changes in relationships with independent agencies (including retail and wholesale brokers and agents);

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

changes in current accounting standards or new accounting standards;

•

changes in legal theories of liability under our insurance policies;

•

changes in rating agency policies, practices or ratings;

•

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

•

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

•

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

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements in this report, and under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	June 30, 2021			December 31, 2020
	(unaudited)
Assets
Investments:
Fixed maturity securities—held-to-maturity, at amortized cost net of allowance for credit losses of $157 and $274 in 2021 and 2020, respectively, (fair value $589,601 and $621,654 in 2021 and 2020, respectively)	$	558,431		$	585,130
Fixed maturity securities—available-for-sale, at fair value (amortized cost $348,567, allowance for credit losses of $0 in 2021 and amortized cost $387,665, allowance for credit losses of $0 in 2020)		369,890			414,279
Equity securities, at fair value (cost $38,928 and $35,787 in 2021 and 2020, respectively)		55,375			43,437
Short-term investments		129,109			45,898
Total investments		1,112,805			1,088,744
Cash and cash equivalents		57,541			61,757
Amounts recoverable from reinsurers (net of allowance for credit losses of $449 and $452 in 2021 and 2020, respectively)		110,912			105,803
Premiums receivable (net of allowance for credit losses of $4,655 and $4,791 in 2021 and 2020, respectively)		165,158			156,760
Deferred income taxes		14,219			13,665
Accrued interest receivable		9,355			9,274
Property and equipment, net		6,259			6,182
Deferred policy acquisition costs		18,857			17,810
Other assets		11,157			10,860
Total assets	$	1,506,263		$	1,470,855
Liabilities and shareholders’ equity
Liabilities:
Reserves for loss and loss adjustment expenses	$	744,969		$	760,561
Unearned premiums		138,861			129,260
Amounts held for others		46,883			43,402
Policyholder deposits		40,426			41,524
Insurance-related assessments		18,688			17,995
Federal income tax payable		2,244			417
Accounts payable and other liabilities		40,833			38,880
Payable for investments purchased		4,993			—
Total liabilities		1,037,897			1,032,039
Shareholders’ equity:
Common stock: voting—$0.01 par value authorized shares—50,000,000 in 2021 and 2020; 20,622,304 and 20,589,309 shares issued; and 19,364,054 and 19,331,059 shares outstanding in 2021 and 2020, respectively		206			206
Additional paid-in capital		217,165			215,316
Treasury stock, at cost (1,258,250 shares in 2021 and 2020)		(22,370	)		(22,370	)
Accumulated earnings		256,503			224,645
Accumulated other comprehensive income, net		16,862			21,019
Total shareholders’ equity		468,366			438,816
Total liabilities and shareholders’ equity	$	1,506,263		$	1,470,855

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share data)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2021			2020			2021			2020
Revenues
Gross premiums written	$	73,724		$	80,289		$	155,238		$	167,360
Ceded premiums written		(2,486	)		(2,672	)		(5,003	)		(5,455	)
Net premiums written	$	71,238		$	77,617		$	150,235		$	161,905
Net premiums earned	$	69,888		$	75,964		$	140,634		$	154,954
Net investment income		6,730			7,324			13,313			15,073
Net realized gains on investments		1,179			163			1,498			1,155
Net unrealized gains (losses) on equity securities		3,286			5,570			8,797			(3,193	)
Gain (loss) on disposal of assets		(2	)		(29	)		21			(29	)
Fee and other income		76			90			245			291
Total revenues		81,157			89,082			164,508			168,251
Expenses
Loss and loss adjustment expenses incurred		32,423			37,530			71,940			81,177
Underwriting and certain other operating costs		6,339			7,786			13,266			16,003
Commissions		5,309			5,812			10,783			11,867
Salaries and benefits		6,807			7,533			13,373			14,545
Policyholder dividends		1,117			948			2,467			1,971
Provision for investment related credit loss expense (benefit)		(9	)		82			(117	)		56
Total expenses		51,986			59,691			111,712			125,619
Income before income taxes		29,171			29,391			52,796			42,632
Income tax expense		5,404			5,443			9,717			7,884
Net income	$	23,767		$	23,948		$	43,079		$	34,748
Earnings per share
Basic	$	1.23		$	1.24		$	2.23		$	1.80
Diluted	$	1.23		$	1.24		$	2.22		$	1.80
Shares used in computing earnings per share
Basic		19,327,422			19,280,684			19,319,608			19,273,347
Diluted		19,380,611			19,335,707			19,384,078			19,335,748
Cash dividends declared per common share	$	0.29		$	0.27		$	0.58		$	0.54

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021			2020
Net income	$	23,767	$	23,948	$	43,079		$	34,748
Other comprehensive income:
Unrealized gain (loss) on debt securities, net of tax		891		5,483		(4,157	)		6,967
Comprehensive income	$	24,658	$	29,431	$	38,922		$	41,715

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Three Months Ended June 30, 2021 and 2020

(in thousands, except share data)

(unaudited)

	Common Stock				Additional Paid-In		Treasury Stock						Accumulated			Accumulated Other Comprehensive
	Shares		Amounts		Capital		Shares			Amounts			Earnings			Income		Total
Balance at March 31, 2021		20,589,309	$	206	$	215,468		(1,258,250	)	$	(22,370	)	$	238,351		$	15,971	$	447,626
Comprehensive income:
Net income		—		—		—		—			—			23,767			—		23,767
Other comprehensive income:
Change in unrealized gains, net of tax		—		—		—		—			—			—			891		891
Comprehensive income:																			24,658
Common stock issued		32,995		—		1,563		—			—			—			—		1,563
Share-based compensation		—		—		134		—			—			—			—		134
Dividends to shareholders		—		—		—		—			—			(5,615	)		—		(5,615	)
Balance at June 30, 2021		20,622,304	$	206	$	217,165		(1,258,250	)	$	(22,370	)	$	256,503		$	16,862	$	468,366

	Common Stock				Additional Paid-In		Treasury Stock						Accumulated			Accumulated Other Comprehensive
	Shares		Amounts		Capital		Shares			Amounts			Earnings			Income		Total
Balance at March 31, 2020		20,561,034	$	205	$	213,267		(1,258,250	)	$	(22,370	)	$	232,159		$	13,695	$	436,956
Comprehensive income:
Net income		—		—		—		—			—			23,948			—		23,948
Other comprehensive income:
Change in unrealized gains, net of tax		—		—		—		—			—			—			5,483		5,483
Comprehensive income:																			29,431
Common stock issued		28,275		1		1,359		—			—			—			—		1,360
Share-based compensation		—		—		268		—			—			—			—		268
Dividends to shareholders		—		—		—		—			—			(5,219	)		—		(5,219	)
Balance at June 30, 2020		20,589,309	$	206	$	214,894		(1,258,250	)	$	(22,370	)	$	250,888		$	19,178	$	462,796

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Six Months Ended June 30, 2021 and 2020

(in thousands, except share data)

(unaudited)

	Common Stock				Additional Paid-In		Treasury Stock						Accumulated			Accumulated Other Comprehensive
	Shares		Amounts		Capital		Shares			Amounts			Earnings			Income			Total
Balance at December 31, 2020		20,589,309	$	206	$	215,316		(1,258,250	)	$	(22,370	)	$	224,645		$	21,019		$	438,816
Comprehensive income:
Net income		—		—		—		—			—			43,079			—			43,079
Other comprehensive income:
Change in unrealized gains, net of tax		—		—		—		—			—			—			(4,157	)		(4,157	)
Comprehensive income:																				38,922
Common stock issued		32,995		—		1,563		—			—			—			—			1,563
Share-based compensation		—		—		286		—			—			—			—			286
Dividends to shareholders		—		—		—		—			—			(11,221	)		—			(11,221	)
Balance at June 30, 2021		20,622,304	$	206	$	217,165		(1,258,250	)	$	(22,370	)	$	256,503		$	16,862		$	468,366

	Common Stock				Additional Paid-In		Treasury Stock						Accumulated			Accumulated Other Comprehensive
	Shares		Amounts		Capital		Shares			Amounts			Earnings			Income			Total
Balance at December 31, 2019		20,560,833	$	205	$	213,004		(1,258,250	)	$	(22,370	)	$	227,165		$	12,211		$	430,215
Impact of adoption of ASU 2016-13		—		—		—		—			—			(594	)		—			(594	)
Comprehensive income:
Net income		—		—		—		—			—			34,748			—			34,748
Other comprehensive income:
Change in unrealized gains, net of tax		—		—		—		—			—			—			6,967			6,967
Comprehensive income:																				41,715
Common stock issued		28,476		1		1,359		—			—			—			—			1,360
Share-based compensation		—		—		531		—			—			—			—			531
Dividends to shareholders		—		—		—		—			—			(10,431	)		—			(10,431	)
Balance at June 30, 2020		20,589,309	$	206	$	214,894		(1,258,250	)	$	(22,370	)	$	250,888		$	19,178		$	462,796

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2021			2020
Operating activities
Net income	$	43,079		$	34,748
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		510			496
Net amortization of investments		4,702			4,198
Change in investment related allowance for credit losses		(117	)		56
Deferred income taxes		552			(893	)
Net realized gains on investments		(1,498	)		(1,155	)
Net unrealized (gains) losses on equity securities		(8,797	)		3,193
Net realized (gains) losses on disposal of assets		(21	)		29
Share-based compensation		1,307			1,778
Changes in operating assets and liabilities:
Premiums receivable, net		(8,398	)		(17,288	)
Accrued interest receivable		(81	)		433
Deferred policy acquisition costs		(1,047	)		(717	)
Amounts held by others		70			7,855
Other assets		(729	)		(248	)
Reserves for loss and loss adjustment expenses		(15,592	)		(4,120	)
Unearned premiums		9,601			6,951
Reinsurance balances		(5,109	)		(8,054	)
Amounts held for others and policyholder deposits		2,383			2,131
Federal income taxes payable		1,827			8,878
Accounts payable and other liabilities		3,352			3,899
Net cash provided by operating activities		25,994			42,170
Investing activities
Purchases of investments held-to-maturity		(8,946	)		(38,658	)
Purchases of investments available-for-sale		(27,899	)		(29,303	)
Purchases of equity securities		(3,141	)		(8,770	)
Purchases of short-term investments		(94,448	)		(68,787	)
Proceeds from maturities of investments held-to-maturity		38,165			59,543
Proceeds from sales and maturities of investments available-for-sale		67,669			68,430
Proceeds from sales and maturities of short-term investments		10,288			52,959
Purchases of property and equipment		(589	)		(579	)
Proceeds from sales of property and equipment		23			—
Net cash provided by (used in) investing activities		(18,878	)		34,835
Financing activities
Finance lease purchases		(21	)		(25	)
Dividends to shareholders		(11,311	)		(10,512	)
Net cash used in financing activities		(11,332	)		(10,537	)
Change in cash and cash equivalents		(4,216	)		66,468
Cash and cash equivalents at beginning of period		61,757			43,813
Cash and cash equivalents at end of period	$	57,541		$	110,281

See accompanying notes.

AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Basis of Presentation

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

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

The Company provides workers’ compensation insurance for small to mid-sized employers engaged in hazardous industries, principally construction, trucking, logging and lumber, manufacturing, agriculture, maritime, and oil and gas. 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, 2021 and 2020.

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, 2020.

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 2021.

Prospective Accounting Guidance

All issued but not yet effective accounting and reporting standards as of June 30, 2021 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, 2021, the Company has two equity incentive plans: the AMERISAFE Non-Employee Director Restricted Stock Plan (the “Restricted Stock Plan”) and the AMERISAFE 2012 Equity and Incentive Compensation Plan (the “2012 Incentive Plan”). See Note 12 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information regarding the Company’s incentive plans.

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 officers and non-employee directors. The market value of these shares totaled $2.2 million. During the six months ended June 30, 2020, the Company issued 23,207 shares of common stock pursuant

to vested performance awards and 5,269 shares of restricted common stock to non-employee directors. The market value of these shares totaled $1.8 million.

During the six months ended June 30, 2021 and 2020, there were no exercises of options to purchase common stock. The Company had no stock options outstanding as of June 30, 2021.

The Company recognized share-based compensation expense of $0.7 million in the quarter ended June 30, 2021 and $1.0 million in the same period in 2020. The Company recognized share-based compensation expense of $1.3 million in the six months ended June 30, 2021 and $1.8 million in the same period in 2020.

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,
	2021		2020		2021		2020
	(in thousands, except share and per share amounts)
Basic EPS:
Net income	$	23,767	$	23,948	$	43,079	$	34,748
Basic weighted average common shares		19,327,422		19,280,684		19,319,608		19,273,347
Basic earnings per common share	$	1.23	$	1.24	$	2.23	$	1.80
Diluted EPS:
Net income	$	23,767	$	23,948	$	43,079	$	34,748
Diluted weighted average common shares:
Weighted average common shares		19,327,422		19,280,684		19,319,608		19,273,347
Restricted stock and stock options		53,189		55,023		64,470		62,401
Diluted weighted average common shares		19,380,611		19,335,707		19,384,078		19,335,748
Diluted earnings per common share	$	1.23	$	1.24	$	2.22	$	1.80

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, 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	$	483,630	$	(41	)	$	483,589	$	28,512	$	(172	)	$	511,929
Corporate bonds		54,344		(111	)		54,233		2,144		—			56,377
U.S. agency-based mortgage-backed securities		5,646		—			5,646		506		—			6,152
U.S. Treasury securities and obligations of U.S. government agencies		14,838		—			14,838		181		(7	)		15,012
Asset-backed securities		130		(5	)		125		6		—			131
Totals	$	558,588	$	(157	)	$	558,431	$	31,349	$	(179	)	$	589,601

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, 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	$	218,857	$	16,676	$	(93	)	$	235,440	$	—
Corporate bonds		89,352		4,036		(51	)		93,337		—
U.S. agency-based mortgage-backed securities		11,685		249		(13	)		11,921		—
U.S. Treasury securities and obligations of U.S. government agencies		28,673		622		(103	)		29,192		—
Totals	$	348,567	$	21,583	$	(260	)	$	369,890	$	—

The cost, gross unrealized gains and losses, and the fair value of equity securities at June 30, 2021 are summarized as follows:

	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Equity securities:
Domestic common stock	$	38,928	$	16,447	$	—	$	55,375
Total equity securities	$	38,928	$	16,447	$	—	$	55,375

	Amortized Cost		Allowance for Credit Losses			Carrying Amount		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(in thousands)
States and political subdivisions	$	494,374	$	(42	)	$	494,332	$	32,489	$	—	$	526,821
Corporate bonds		69,981		(225	)		69,756		3,144		—		72,900
U.S. agency-based mortgage-backed securities		7,261		—			7,261		645		—		7,906
U.S. Treasury securities and obligations of U.S. government agencies		13,626		—			13,626		239		—		13,865
Asset-backed securities		162		(7	)		155		7		—		162
Totals	$	585,404	$	(274	)	$	585,130	$	36,524	$	—	$	621,654

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, 2020 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Allowance for Credit Losses
	(in thousands)
States and political subdivisions	$	256,492	$	20,050	$	—		$	276,542	$	—
Corporate bonds		83,646		5,256		(3	)		88,899		—
U.S. agency-based mortgage-backed securities		18,654		400		(2	)		19,052		—
U.S. Treasury securities and obligations of U.S. government agencies		28,873		913		—			29,786		—
Totals	$	387,665	$	26,619	$	(5	)	$	414,279	$	—

The cost, gross unrealized gains and losses, and the fair value of equity securities at December 31, 2020 are summarized as follows:

	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Equity securities:
Domestic common stock	$	35,787	$	7,650	$	—	$	43,437
Total equity securities	$	35,787	$	7,650	$	—	$	43,437

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, 2021				December 31, 2020
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Maturity:
Within one year	$	52,814	$	53,202	$	54,316	$	54,794
After one year through five years		188,923		196,297		195,706		204,289
After five years through ten years		99,220		104,090		107,347		113,643
After ten years		211,703		229,729		220,345		240,860
U.S. agency-based mortgage-backed securities		5,646		6,152		7,261		7,906
Asset-backed securities		125		131		155		162
Totals	$	558,431	$	589,601	$	585,130	$	621,654

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, 2021				December 31, 2020
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in thousands)
Maturity:
Within one year	$	38,699	$	38,958	$	69,177	$	69,938
After one year through five years		97,168		101,648		80,593		85,829
After five years through ten years		57,149		59,641		53,835		57,829
After ten years		143,866		157,722		165,406		181,631
U.S. agency-based mortgage-backed securities		11,685		11,921		18,654		19,052
Totals	$	348,567	$	369,890	$	387,665	$	414,279

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, 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)
June 30, 2021
Available-for-Sale
States and political subdivisions	$	4,492	$	93	$	—	$	—	$	4,492	$	93
Corporate bonds		7,132		51		—		—		7,132		51
U.S. agency-based mortgage-backed securities		1,927		13		—		—		1,927		13
U.S. Treasury securities and obligations of U.S. government agencies		6,842		103		—		—		6,842		103
Total available-for-sale securities	$	20,393	$	260	$	—	$	—	$	20,393	$	260

At June 30, 2021, we held 16 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.

	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, 2020
Available-for-Sale
Corporate bonds	$	2,515	$	3	$	—	$	—	$	2,515	$	3
U.S. agency-based mortgage-backed securities		2,133		2		—		—		2,133		2
Total available-for-sale securities	$	4,648	$	5	$	—	$	—	$	4,648	$	5

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, 2021.

	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, 2021	$	44		$	116		$	—	$	—	$	6		$	166
Provision for credit loss benefit		(3	)		(5	)		—		—		(1	)		(9	)
Balance at June 30, 2021	$	41		$	111		$	—	$	—	$	5		$	157

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, 2021.

	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, 2020	$	42		$	225		$	—	$	—	$	7		$	274
Provision for credit loss benefit		(1	)		(114	)		—		—		(2	)		(117	)
Balance at June 30, 2021	$	41		$	111		$	—	$	—	$	5		$	157

The Company has established an allowance for credit losses on 389 held-to-maturity securities totaling $0.2 million. The majority of those securities were issued by states and political subdivisions (365 securities) and corporate bonds (21 securities).

The Company has no allowance for credit losses on investments classified as available-for-sale for the period ended June 30, 2021.

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, 2021.

	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	$	478,934	$	21,525	$	5,646	$	14,838	$	89	$	521,032
Baa/BBB ratings		4,696		32,819		—		—		16		37,531
B ratings		—		—		—		—		25		25
Total	$	483,630	$	54,344	$	5,646	$	14,838	$	130	$	558,588

Net realized gains in the quarter ended June 30, 2021 were $1.2 million resulting primarily from the sale of fixed maturity securities classified as available-for-sale. Net realized gains in the quarter ended June 30, 2020 were $0.2 million resulting from the call of 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. Net realized gains in the six months ended June 30, 2020 were $1.2 million resulting primarily from the sale of fixed maturity securities classified as available-for-sale.

During the second quarter of 2021, we recognized through income $3.3 million of net unrealized gains on equity securities held as of June 30, 2021. During the second quarter of 2020, we recognized through income $5.6 million of net unrealized gains on equity securities held as of June 30, 2020.

During the six months ended June 30, 2021, we recognized through income $8.8 million of net unrealized gains on equity securities held as of June 30, 2021. During the six months ended June 30, 2020, we recognized through income $3.2 million of net unrealized losses on equity securities held as of June 30, 2020.

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. The Company had a valuation allowance of $1.3 million and $1.9 million against its deferred income tax benefits as of June 30, 2021 and 2020, respectively.

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, 2021 and 2020.

Tax years 2017 through 2021 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, 2020 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, 2021 and 2020:

	Six Months Ended June 30,
	2021			2020
	(in thousands)
Balance, beginning of period	$	760,561		$	772,887
Less amounts recoverable from reinsurers on unpaid loss and loss adjustment expenses		105,707			95,343
Net balance, beginning of period		654,854			677,544
Add incurred related to:
Current accident year		101,257			112,342
Prior accident years		(29,317	)		(31,165	)
Total incurred		71,940			81,177
Less paid related to:
Current accident year		12,786			13,629
Prior accident years		79,814			78,303
Total paid		92,600			91,932
Net balance, end of period		634,194			666,789
Add amounts recoverable from reinsurers on unpaid loss and loss adjustment expenses		110,775			101,978
Balance, end of period	$	744,969		$	768,767

The foregoing reconciliation reflects favorable development of the net reserves at June 30, 2021 and June 30, 2020. The favorable development reduced loss and loss adjustment expenses incurred by $29.3 million and $31.2 million in 2021 and 2020, 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.

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, 2021 and 2020.

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	(in thousands)
Balance, beginning of period	$	452		$	449		$	452		$	444
Provision for credit loss benefit		(3	)		(61	)		(3	)		(56	)
Balance, end of period	$	449		$	388		$	449		$	388

Note 7. Comprehensive Income and Accumulated Other Comprehensive Income

Comprehensive income includes net income plus unrealized gains (losses) on our available-for-sale investment securities, net of tax. In reporting comprehensive income on a net basis in the statements of comprehensive income, we used a 21 percent tax rate in 2021 and 2020.

Comprehensive income was $24.7 million for the three months ended June 30, 2021, compared to $29.4 million for the three months ended June 30, 2020. Comprehensive income was $38.9 million for the six months ended June 30, 2021, compared to $41.7 million for the same period in 2020. The difference between net income as reported and comprehensive income 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 for each period presented in the interim financial statements.

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	(in thousands)
Balance, beginning of period	$	15,971		$	13,695		$	21,019		$	12,211
Other comprehensive income (loss) before reclassification		2,139			5,588			(2,596	)		7,373
Amounts reclassified from accumulated other comprehensive income		(1,248	)		(105	)		(1,561	)		(406	)
Net current period other comprehensive income (loss)		891			5,483			(4,157	)		6,967
Balance, end of period	$	16,862		$	19,178		$	16,862		$	19,178

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

Component of Accumulated Other	Three Months Ended						Six Months Ended						Affected line item in the
Comprehensive Income	June 30,						June 30,						statement of income
	2021			2020			2021			2020
	(in thousands)
Unrealized gains on available-for-sale securities	$	1,580		$	133		$	1,976		$	514		Net realized gains on investments
		1,580			133			1,976			514		Income before income taxes
		(332	)		(28	)		(415	)		(108	)	Income tax expense
	$	1,248		$	105		$	1,561		$	406		Net income

Note 8. Fair Value Measurements

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

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

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

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

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

•

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

•

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

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

•

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

•

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

•

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

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

The fair values of the Company’s investments are based upon prices provided by an independent pricing service. The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider. Securities reported at fair value utilizing Level 1 inputs represent assets whose fair value is determined based upon observable unadjusted quoted market prices for identical assets in active markets. Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2021.

At June 30, 2021, assets measured at fair value on a recurring basis are summarized below:

	June 30, 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	$	—	$	235,440	$	—	$	235,440
Corporate bonds		—		93,337		—		93,337
U.S. agency-based mortgage-backed securities		—		11,921		—		11,921
U.S. Treasury securities		29,192		—		—		29,192
Total securities available-for-sale—fixed maturity		29,192		340,698		—		369,890
Equity securities:
Domestic common stock		55,375		—		—		55,375
Total	$	84,567	$	340,698	$	—	$	425,265

At June 30, 2021, assets measured at amortized cost net of allowance for credit losses are summarized below:

	June 30, 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	$	—	$	511,929	$	—	$	511,929
Corporate bonds		—		56,377		—		56,377
U.S. agency-based mortgage-backed securities		—		6,152		—		6,152
U.S. Treasury securities		15,012		—		—		15,012
Asset-backed securities		—		131		—		131
Total held-to-maturity	$	15,012	$	574,589	$	—	$	589,601

At December 31, 2020, assets measured at fair value on a recurring basis are summarized below:

	December 31, 2020
	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	$	—	$	276,542	$	—	$	276,542
Corporate bonds		—		88,899		—		88,899
U.S. agency-based mortgage-backed securities		—		19,052		—		19,052
U.S. Treasury securities		29,786		—		—		29,786
Total securities available-for-sale—fixed maturity	$	29,786	$	384,493	$	—	$	414,279
Equity securities:
Domestic common stock		43,437		—		—		43,437
Total	$	73,223	$	384,493	$	—	$	457,716

At December 31, 2020, assets measured at amortized cost net of allowance for credit losses are summarized below:

	December 31, 2020
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(in thousands)
Securities held-to-maturity—fixed maturity:
States and political subdivisions	$	—	$	526,821	$	—	$	526,821
Corporate bonds		—		72,900		—		72,900
U.S. agency-based mortgage-backed securities		—		7,906		—		7,906
U.S. Treasury securities		13,865		—		—		13,865
Asset-backed securities		—		162		—		162
Total held-to-maturity	$	13,865	$	607,789	$	—	$	621,654

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, 2021				As of December 31, 2020
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Assets:
Fixed maturity securities—held-to-maturity	$	558,431	$	589,601	$	585,130	$	621,654
Fixed maturity securities—available-for-sale		369,890		369,890		414,279		414,279
Equity securities		55,375		55,375		43,437		43,437
Short-term investments		129,109		129,109		45,898		45,898
Cash and cash equivalents		57,541		57,541		61,757		61,757

Note 9. Treasury Stock

The Company’s Board of Directors initiated a share repurchase program in February 2010. In October 2016, the Board reauthorized this program with a limit of $25.0 million with no expiration date. There were no shares repurchased under this program in the six months ended June 30, 2021 and 2020.

Note 10. Subsequent Events

On July 27, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.29 per share payable on September 24, 2021 to shareholders of record as of September 10, 2021. The Board considers the payment of a regular cash dividend each calendar quarter.

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

The following discussion should be read in conjunction with the accompanying unaudited consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q, together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2020.

We begin our discussion with an overview of our Company to give you an understanding of our business and the markets we serve. We then discuss our critical accounting policies. This is followed with a discussion of our results of operations for the three and six months ended June 30, 2021 and 2020. This discussion includes an analysis of certain significant period-to-period variances in our consolidated statements of operations. Our cash flows and financial condition are discussed under the caption “Liquidity and Capital Resources.”

Business Overview

AMERISAFE is a holding company that markets and underwrites workers’ compensation insurance through its insurance subsidiaries. Workers’ compensation insurance covers statutorily prescribed benefits that employers are obligated to provide to their employees who are injured in the course and scope of their employment. Our business strategy is focused on providing this coverage to small to mid-sized employers engaged in hazardous industries, principally construction, trucking, logging and lumber, manufacturing, 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 (including retail and wholesale brokers and agents), as well as through our wholly owned insurance agency subsidiary. We are also licensed in an additional 20 states, the District of Columbia and the U.S. Virgin Islands.

Critical Accounting Policies

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

Management believes that the most critical accounting policies relate to the reporting of reserves for loss and loss adjustment expenses, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from reinsurers, premiums receivable, assessments, deferred policy acquisition costs, deferred income taxes, credit losses on investment securities and share-based compensation. These critical accounting policies are more fully described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2020.

Results of Operations

The following table summarizes our consolidated financial results for the three and six months ended June 30, 2021 and 2020.

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	(dollars in thousands, except per share data)
	(unaudited)
Gross premiums written	$	73,724		$	80,289		$	155,238		$	167,360
Net premiums earned		69,888			75,964			140,634			154,954
Net investment income		6,730			7,324			13,313			15,073
Total revenues		81,157			89,082			164,508			168,251
Total expenses		51,986			59,691			111,712			125,619
Net income		23,767			23,948			43,079			34,748
Diluted earnings per common share	$	1.23		$	1.24		$	2.22		$	1.80
Other Key Measures
Net combined ratio (1)		74.4	%		78.5	%		79.6	%		81.1	%
Return on average equity (2)		20.8	%		21.3	%		19.0	%		15.6	%
Book value per share (3)	$	24.19		$	23.94		$	24.19		$	23.94

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

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

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

Consolidated Results of Operations for Three Months Ended June 30, 2021 Compared to June 30, 2020

Gross Premiums Written. Gross premiums written for the quarter ended June 30, 2021 were $73.7 million, compared to $80.3 million for the same period in 2020, a decrease of 8.2%. The decrease was attributable to a $6.9 million decrease in annual premiums on voluntary policies written during the period. This decrease was partially offset by a $0.2 million increase in assumed premium from mandatory pooling arrangements. Premium resulting from payroll audits and related premium adjustments in the current quarter included a $0.9 million increase in anticipated future audit premiums compared to a reduction of $1.4 million in the same period in 2020. This increase was offset by payroll audits completed this year which included periods of activity impacted by COVID-19. The effective loss cost multiplier, or ELCM, for our voluntary business was 1.52 for the quarter ended June 30, 2021 compared to 1.58 for the same period in 2020.

Net Premiums Written. Net premiums written for the quarter ended June 30, 2021 were $71.2 million, compared to $77.6 million for the same period in 2020, a decrease of 8.2%. The decrease was primarily attributable to the decrease in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 3.4% for the second quarter of both 2021 and 2020. For additional information, see Item 1, “Business—Reinsurance” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Net Premiums Earned. Net premiums earned for the second quarter of 2021 were $69.9 million, compared to $76.0 million for the same period in 2020, a decrease of 8.0%. The decrease was primarily attributable to the decrease in net premiums written during the period.

Net Investment Income. Net investment income for the quarter ended June 30, 2021 was $6.7 million, compared to $7.3 million for the same period in 2020, a decrease of 8.1%. The decrease was due to lower investment yields on fixed income securities and cash balances. Average invested assets, including cash and cash equivalents, were $1.2 billion in the quarter ended June 30, 2021 and 2020. The pre-tax investment yield on our investment portfolio was 2.3% per annum during the quarter ended June 30, 2021 compared to 2.5% per annum during the same period in 2020. The tax-equivalent yield on our investment portfolio was 2.6% per annum for the quarter ended June 30, 2021 and 2.9% for the same period in 2020. The tax-equivalent yield is calculated using the effective interest rate and the appropriate marginal tax rate.

Net Realized Gains (Losses) on Investments. Net realized gains on investments for the three months ended June 30, 2021 totaled $1.2 million compared to net realized gains of $0.2 million for the same period in 2020. Net realized gains in the second quarter of 2021 were attributable to the sale of fixed maturity securities classified as available-for-sale.

Net Unrealized Gains (Losses) on Equity Securities. Net unrealized gains on equity securities for the three months ended June 30, 2021 were $3.3 million compared to net unrealized gains of $5.6 million for the same period in 2020.

Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses (“LAE”) incurred totaled $32.4 million for the three months ended June 30, 2021, compared to $37.5 million for the same period in 2020, a decrease of $5.1 million, or 13.6%. The current accident year loss and LAE incurred were $50.3 million compared to $55.1 million for the same period in 2020. Our loss and LAE ratio for accident year 2021 is set at 72.0% of net premiums earned, down from 72.5% for accident year 2020, and is based on long-term claim frequency and severity trends, as well as medical inflation. We recorded favorable prior accident year development of $17.9 million in the second quarter of 2021, compared to favorable prior accident year development of $17.5 million in the same period of 2020, as further discussed below in “Prior Year Development.” Our net loss ratio was 46.4% in the second quarter of 2021, compared to 49.4% for the same period of 2020.

Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for the quarter ended June 30, 2021 were $18.5 million, compared to $21.1 million for the same period in 2020, a decrease of 12.7%. This decrease was primarily due to a decrease in insurance related assessments of $1.5 million, a $0.7 million decrease in compensation expense and a $0.5 million decrease in commission expense. Offsetting these decreases was an increase of $0.3 million in travel and travel related expenses. Our expense ratio was 26.4% in the second quarter of 2021 compared to 27.8% in the second quarter of 2020.

Income Tax Expense. Income tax expense for the three months ended June 30, 2021 and 2020 was $5.4 million. The effective tax rate for the Company was 18.5% in the quarters ended June 30, 2021 and 2020.

Consolidated Results of Operations for Six Months Ended June 30, 2021 Compared to June 30, 2020

Gross Premiums Written. Gross premiums written for the six months ended June 30, 2021 were $155.2 million, compared to $167.4 million for the same period in 2020, a decrease of 7.2%. The decrease was attributable to a $9.3 million decrease in annual premiums on voluntary policies written during the period and a $3.3 million decrease in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters. Premium resulting from payroll audits and related premium adjustments in the current year included a $1.4 million increase in anticipated future audit premiums compared to a reduction of $1.9 million in the prior year. While payroll audits completed this year resulted in positive audit premiums, amounts were lower than the same period of 2020. This year’s payroll audits included periods of activity impacted by COVID-19. The ELCM for our voluntary business was 1.53 for the six months ended June 30, 2021 compared to 1.57 for the same period in 2020.

Net Premiums Written. Net premiums written for the six months ended June 30, 2021 were $150.2 million, compared to $161.9 million for the same period in 2020, a decrease of 7.2%. The decrease was primarily attributable to the decrease in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 3.4% for the first six months of 2021 and 2020. For additional information, see Item 1, “Business—Reinsurance” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Net Premiums Earned. Net premiums earned for the six months ended June 30, 2021 were $140.6 million, compared to $155.0 million for the same period in 2020, a decrease of 9.2%. The decrease was primarily attributable to the decrease in net premiums written during the period.

Net Investment Income. Net investment income for the first six months of 2021 was $13.3 million, compared to $15.1 million for the same period in 2020, a decrease of 11.7%. The decrease was due to lower investment yields on fixed income securities and cash balances. Average invested assets, including cash and cash equivalents were $1.2 billion in the six months ended June 30, 2021 and 2020. The pre-tax investment yield on our investment portfolio was 2.3% per annum during the six months ended June 30, 2021 compared to 2.5% per annum for the same period in 2020. The tax-equivalent yield on our investment portfolio was 2.6% per annum for the first six months of 2021 compared to 2.9% in the same period in 2020. The tax-equivalent yield is calculated using the effective interest rate and the appropriate marginal tax rate.

Net Realized Gains (Losses) on Investments. Net realized gains on investments for the six months ended June 30, 2021 were $1.5 million compared to net realized gains of $1.2 million for the same period in 2020. Net realized gains in the first six months of 2021 were attributable to sales of fixed maturity securities classified as available-for-sale. Net realized gains in the first six months of 2020 were attributable to sales and calls of fixed maturity securities classified as available-for-sale.

Net Unrealized Gains (Losses) on Equity Securities. Net unrealized gains on equity securities for the six months ended June 30, 2021 were $8.8 million compared to net unrealized losses of $3.2 million for the same period in 2020.

Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled $71.9 million for the six months ended June 30, 2021, compared to $81.2 million for the same period in 2020, a decrease of $9.2 million, or 11.4%. The current accident year loss and LAE incurred were $101.3 million compared to $112.3 million for the same period in 2020. Our loss and LAE ratio for accident year 2021 is set at 72.0% of net premiums earned, down from 72.5% for accident year 2020, and is based on long-term claim frequency and severity trends, as well as medical inflation. We recorded favorable prior accident year development of $29.3 million in the first six months of 2021, compared to favorable prior accident year development of $31.2 million in the same period of 2020, as further discussed below in “Prior Year Development.” Our net loss ratio was 51.2% in the first six months of 2021, compared to 52.4% for the same period of 2020.

Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for the six months ended June 30, 2021 were $37.4 million, compared to $42.4 million for the same period in 2020, a decrease of 11.8%. This decrease was primarily due to a decrease in insurance related assessments of $2.8 million, a $1.2 million decrease in compensation expense, a $1.1 million decrease in commission expense and a $0.5 million decrease in premium taxes. Partially offsetting these decreases was a $0.4 million increase in accounts receivable write-offs. Our expense ratio was 26.6% in the first six months of 2021 compared to 27.4% for the same period in 2020.

Income Tax Expense. Income tax expense for the six months ended June 30, 2021 was $9.7 million, compared to $7.9 million for the same period in 2020. The increase was attributable to an increase in pre-tax income to $52.8 million in the first six months of 2021 from $42.6 million in the first six months of 2020. The effective tax rate for the Company decreased to 18.4% for the six months ended June 30, 2021 from 18.5% for the six months ended June 30, 2020. The decrease in the effective tax rate is due to a higher proportion of tax-exempt income to underwriting income for the six months ended June 30, 2021 compared with the six months ended June 30, 2020.

Liquidity and Capital Resources

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

Net cash provided by operating activities was $26.0 million for the six months ended June 30, 2021, which represented an $16.2 million decrease from $42.2 million in net cash provided by operating activities for the six months ended June 30, 2020. This decrease in operating cash flow was due to a $7.8 million increase in amounts held by others, a $7.4 million increase in federal taxes paid, a $2.6 million decrease in premium collections and a $1.8 million decrease in investment income. Offsetting these amounts were a $2.5 million decrease in underwriting expenses paid and a $1.0 million decrease in losses paid.

Net cash used in investing activities was $18.9 million for the six months ended June 30, 2021, compared to net cash provided by investment activities of $34.8 million for the same period in 2020. Cash provided by sales and maturities of investments totaled $116.1 million for the six months ended June 30, 2021, compared to $180.9 million for the same period in 2020. A total of $134.4 million in cash was used to purchase investments in the six months ended June 30, 2021, compared to $145.5 million in purchases for the same period in 2020.

Net cash used in financing activities in the six months ended June 30, 2021 was $11.3 million compared to net cash used in financing activities of $10.5 million for the same period in 2020. In the six months ended June 30, 2021, $11.3 million of cash was used for dividends paid to shareholders compared to $10.5 million in the same period of 2020.

Investment Portfolio

Our investment portfolio, including cash and cash equivalents, totaled $1.2 billion at June 30, 2021 and December 31, 2020. Purchases of fixed maturity securities are classified as available-for-sale or held-to-maturity at the time of purchase based on the individual security. The Company has the ability and positive intent to hold certain investments until maturity. Therefore, fixed maturity securities classified as held-to-maturity, as defined by FASB ASC Topic 320, Investments-Debt and Equity Securities, are recorded at amortized cost net of allowance for credit losses. Our equity securities and fixed maturity securities classified as available-for-sale were reported at fair value.

The composition of our investment portfolio, including cash and cash equivalents, as of June 30, 2021, is shown in the following table:

	Carrying Amount		Percentage of Portfolio
	(in thousands)
Fixed maturity securities—held-to-maturity:
States and political subdivisions	$	483,589		41.3	%
Corporate bonds		54,233		4.7	%
U.S. agency-based mortgage-backed securities		5,646		0.5	%
U.S. Treasury securities and obligations of U.S. government agencies		14,838		1.3	%
Asset-backed securities		125		—
Total fixed maturity securities—held-to-maturity		558,431		47.8	%
Fixed maturity securities—available-for-sale:
States and political subdivisions		235,440		20.1	%
Corporate bonds		93,337		8.0	%
U.S. agency-based mortgage-backed securities		11,921		1.0	%
U.S. Treasury securities and obligations of U.S. government agencies		29,192		2.5	%
Total fixed maturity securities—available-for-sale		369,890		31.6	%
Equity securities		55,375		4.7	%
Short-term investments		129,109		11.0	%
Cash and cash equivalents		57,541		4.9	%
Total investments, including cash and cash equivalents	$	1,170,346		100.0	%

Our debt securities classified as available-for-sale are “marked to market” as of the end of each calendar quarter. As of that date, unrealized gains and losses that are not credit related are recorded to Accumulated Other Comprehensive Income (Loss). Any available-for-sale credit related losses would be recognized as a credit loss allowance on the balance sheet with a corresponding adjustment to earnings, limited by the amount that the fair value is less than the amortized cost basis. Both the credit loss allowance and adjustment to net income can be reversed if conditions change.

For our debt securities classified as held-to-maturity, non-credit related unrecognized gains and losses are not recorded in the financial statements until realized. Effective upon the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses, management is required to estimate held-to-maturity expected credit related losses and recognize a credit loss allowance on the balance sheet with a corresponding adjustment to earnings. Any adjustment to the estimated expected credit related losses are recognized through earnings and adjustment to the credit loss allowance.

Prior Year Development

The Company recorded favorable prior accident year development of $17.9 million in the three months ended June 30, 2021. The table below sets forth the favorable development for the three and six months ended June 30, 2021 and 2020 for accident years 2016 through 2020 and, collectively, for all accident years prior to 2016.

	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(in millions)
Accident Year
2020	$	—	$	—	$	—	$	—
2019		4.5		—		4.5		—
2018		4.0		5.9		8.5		5.9
2017		4.4		2.8		6.9		5.7
2016		2.3		2.8		3.8		5.9
Prior to 2016		2.7		6.0		5.6		13.7
Total net development	$	17.9	$	17.5	$	29.3	$	31.2

The table below sets forth the number of open claims as of June 30, 2021 and 2020, and the number of claims reported and closed during the three and six months then ended.

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Open claims at beginning of period		4,607			4,910			4,758			5,053
Claims reported		1,078			1,004			2,127			2,106
Claims closed		(1,112	)		(1,293	)		(2,312	)		(2,538	)
Open claims at end of period		4,573			4,621			4,573			4,621

The number of open claims at June 30, 2021 decreased by 48 claims as compared to the number of open claims at June 30, 2020. At June 30, 2021, our incurred amounts for certain accident years, particularly 2015 through 2019, developed more favorably than management previously expected. The revisions to the Company’s reserves reflect new information gained by claims adjusters in the normal course of adjusting claims and is reflected in the financial statements when the information becomes available. It is typical for more serious claims to take several years or longer to settle and the Company continually revises estimates as more information about claimants’ medical conditions and potential disability becomes known and the claims get closer to being settled. Multiple factors can cause both favorable and unfavorable loss development. The favorable loss development we experienced across accident years was largely due to favorable case reserve development from closed claims and claims where the worker had reached maximum medical improvement.

The assumptions we used in establishing our reserves were based on our historical claims data. However, as of June 30, 2021, actual results for certain accident years have been better than our assumptions would have predicted. We do not presently intend to modify our assumptions for establishing reserves in light of recent results. However, if actual results for current and future accident years are consistent with, or different than, our results in these recent accident years, our historical claims data will reflect this change and, over time, will impact the reserves we establish for future claims.

Our reserves for loss and loss adjustment expenses are inherently uncertain and our focus on providing workers’ compensation insurance to employers engaged in hazardous industries results in our receiving relatively fewer but more severe claims than many other workers’ compensation insurance companies. As a result of this focus on higher severity, lower frequency business, our reserve for loss and loss adjustment expenses may have greater volatility than other workers’ compensation insurance companies. For additional information, see Item 1, “Business—Loss Reserves” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are credit risk, interest rate risk, and equity price risk. We currently have no exposure to foreign currency risk.

Since December 31, 2020, there have been no material changes in the quantitative or qualitative aspect of our market risk profile. For additional information regarding the Company’s exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 4. Controls and Procedures.

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

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

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

PART II—OTHER INFORMATION

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

The Board of Directors initially authorized the Company’s share repurchase program in February 2010. In October 2016, the Board reauthorized this program with no expiration date. As of June 30, 2021, we had repurchased a total of 1,258,250 shares of our outstanding common stock for $22.4 million. The Company had $25.0 million available for future purchases at June 30, 2021 under this program. There were no shares repurchased during the three months ended June 30, 2021 and 2020. The purchases may be effected from time to time depending upon market conditions and subject to applicable regulatory considerations. It is anticipated that future purchases will be funded from available capital.

Item 6. Exhibits.

Exhibit No.		Description

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

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

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

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SIGNATURES

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

		AMERISAFE, INC.

July 30, 2021		/s/ G. Janelle Frost
		G. Janelle Frost
		President, Chief Executive Officer and Director
		(Principal Executive Officer)

July 30, 2021		/s/ Neal A. Fuller
		Neal A. Fuller
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)