As filed with the Securities and Exchange Commission on
October 31, 2005
Registration No. 333-127133
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-Effective Amendment No. 3
to
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AMERISAFE, Inc.
(Exact name of registrant as specified in its charter)
|
|
|
|
|
|
Texas
(State or other jurisdiction of
incorporation or organization)
|
|
6331
(Primary Standard Industrial
Classification Code Number)
|
|
75-2069407
(I.R.S. Employer
Identification No.)
|
2301 Highway 190 West
DeRidder, Louisiana 70634
(337) 463-9052
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)
Arthur L. Hunt
Executive Vice President and General Counsel
2301 Highway 190 West
DeRidder, Louisiana 70634
(337) 463-9052
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
|
|
|
|
James E. O’Bannon
Lisa K. Durham
Jones Day
2727 North Harwood Street
Dallas, Texas 75201
(214) 220-3939
|
|
J. Brett Pritchard
Lord, Bissell & Brook LLP
115 South LaSalle Street
Chicago, Illinois 60603
(312) 443-0700
|
Approximate date of commencement of proposed sale to the
public:
As soon as practicable after the Registration
Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box.
o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box.
o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on the date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in this preliminary
prospectus is not complete and may be changed. We may not sell
these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and is not a
solicitation of an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
|
SUBJECT TO COMPLETION, DATED
OCTOBER 31, 2005
8,000,000 Shares
AMERISAFE, Inc.
Common Stock
This is the initial public offering of our common stock. We are
offering 8,000,000 shares of common stock.
Prior to this offering, there has been no public market for our
common stock. We currently estimate that the initial public
offering price will be between $9.00 and $11.00 per share.
See “Underwriting” for a discussion of the factors to
be considered in determining the initial public offering price.
We have applied to have our shares of common stock approved for
listing on the Nasdaq National Market under the symbol
“AMSF.”
Investing in our common stock involves risks. See
“Risk Factors” beginning on page 11 to read about
factors you should consider before buying our common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Initial public offering price
|
|
$
|
|
|
|
$
|
|
|
|
Underwriting discount*
|
|
$
|
|
|
|
$
|
|
|
|
Proceeds, before expenses, to us
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
*
|
See “Underwriting” on page 113 for a description
of the underwriters’ compensation.
|
To the extent that the underwriters sell more than
8,000,000 shares of common stock, the selling shareholders
have granted the underwriters a 30-day option to purchase up to
1,200,000 additional shares of common stock at the initial
public offering price, less the underwriting discount, to cover
over-allotments, if any. We will not receive any of the proceeds
from the sale of shares by the selling shareholders.
Neither the Securities and Exchange Commission nor any state
securities commission or other regulatory body has approved or
disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
The underwriters expect to deliver the shares of our common
stock to purchasers on or
about ,
2005.
|
|
|
|
Friedman Billings Ramsey
|
William Blair & Company
|
The date of this prospectus
is ,
2005.
TABLE OF CONTENTS
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in
this prospectus. Before making a decision to purchase our common
stock, you should read the entire prospectus carefully,
including the “Risk Factors” and “Forward-Looking
Statements” sections and our consolidated financial
statements and the notes to those financial statements. On
October 27, 2005, we completed a 72-for-one reverse stock
split of our common stock. All share and per share amounts
disclosed in this prospectus have been adjusted to give effect
to the reverse stock split.
Who We Are
We are a specialty provider of workers’ compensation
insurance focused on small to mid-sized employers engaged in
hazardous industries, principally construction, trucking,
logging, agriculture, oil and gas, maritime and sawmills. Since
commencing operations in 1986, we have gained significant
experience underwriting the complex workers’ compensation
exposures inherent in these industries. We provide coverage to
employers under state and federal workers’ compensation
laws. These laws prescribe wage replacement and medical care
benefits that employers are obligated to provide to their
employees who are injured in the course and scope of their
employment.
Employers engaged in hazardous industries tend to have less
frequent but more severe claims as compared to employers in
other industries due to the nature of their businesses. We
employ a proactive, disciplined approach in underwriting
employers and providing comprehensive services, including safety
services and intensive claims management practices, intended to
lessen the overall incidence and cost of workplace injuries.
Hazardous industry employers 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. Our policyholders paid an average rate of
$7.76 per $100 of payroll for workers’ compensation
insurance in 2004, which was approximately three times the
average for all reported occupational class codes, according to
the most recent market analyses provided by the National Council
on Compensation Insurance, Inc., or NCCI.
We believe the workers’ compensation market in the
hazardous industries we target is underserved and competition is
fragmented. We compete on the basis of coverage availability,
claims management, safety services, payment terms and premium
rates. According to the most recent market data reported by the
NCCI, which is the official ratings bureau in the majority of
states in which we are licensed, total premiums reported for the
specific occupational class codes for which we underwrite
business was $17 billion. Total premiums reported for all
occupational class codes reported by the NCCI for these same
jurisdictions was $37 billion.
What We Do
We provide workers’ compensation insurance primarily to
employers in the following targeted hazardous industries:
|
|
|
|
|
|
•
|
Construction.
Includes a broad range of operations
such as highway and bridge construction, building and
maintenance of pipeline and powerline networks, excavation,
commercial construction, roofing, iron and steel erection, tower
erection and numerous other specialized construction operations.
Our gross premiums written in 2004 for employers in the
construction industry were $101.3 million, or 38.3% of
total gross premiums written in 2004.
|
|
|
|
|
•
|
Trucking.
Includes a large spectrum of diverse
operations including contract haulers, regional and local
freight carriers, special equipment transporters and other
trucking companies that conduct a variety of short- and
long-haul operations. Our gross premiums written in 2004 for
employers in the trucking industry were $57.8 million, or
21.8% of total gross premiums written in 2004.
|
1
|
|
|
|
|
|
•
|
Logging.
Includes tree harvesting operations ranging
from labor intensive chainsaw felling and trimming to
sophisticated mechanized operations using heavy equipment. Our
gross premiums written in 2004 for employers in the logging
industry were $30.3 million, or 11.5% of total gross
premiums written in 2004.
|
We also provide workers’ compensation insurance to
employers in the agriculture, oil and gas, maritime, sawmill and
other hazardous industries. Our operations are geographically
diverse, with no more than 11.0% of our gross premiums written
in 2004 derived from any one state. In 2004, our largest states
in terms of gross premiums written were Louisiana (10.6%),
Georgia (9.5%), Texas (6.5%), Illinois (6.4%), North Carolina
(6.3%) and Virginia (5.2%). No other state had gross premiums
written in excess of 5.0% of our total gross premiums written in
2004. As of September 30, 2005, we had approximately 6,500
voluntary business policyholders with an average annual premium
per workers’ compensation policy of approximately $38,000.
We are rated “A-” (Excellent) by A.M. Best Company,
which rating is the fourth highest of 15 rating levels. In June
2005, A.M. Best placed our rating under review with negative
implications, citing concerns about our risk adjusted capital,
credit risk associated with amounts recoverable from our
reinsurers and the somewhat limited financial flexibility of our
holding company, AMERISAFE. Effective June 30, 2005, we
entered into a commutation agreement with one of our reinsurers,
Converium Reinsurance (North America), pursuant to which
Converium paid us $61.3 million in exchange for a
termination and release of three of our five reinsurance
agreements with Converium. We believe this commutation agreement
substantially addresses the concern expressed by A.M. Best
regarding the credit risk associated with our reinsurance
recoverables. Following the application of the net proceeds of
this offering, we expect that our under review status will be
returned to stable and that A.M. Best will affirm our
“A-” (Excellent) rating in late 2005. A.M. Best
ratings are directed toward the concerns of policyholders and
insurance agencies and are not intended for the protection of
investors or as a recommendation to buy, hold or sell our
securities.
As of September 30, 2005, we had total assets of
$830.3 million and shareholders’ equity (deficit) plus
redeemable preferred stock of $89.3 million. For the year
ended December 31, 2004, we produced total revenues of
$249.0 million and net income of $10.6 million. For
the nine months ended September 30, 2005, we produced total
revenues of $203.1 million and net income of $526,000. Our
results for the nine months ended September 30, 2005
included a $13.2 million pre-tax charge related to our
commutation with Converium and an $8.7 million pre-tax
charge to increase our reserves for loss and loss adjustment
expenses.
Our gross premiums are derived from direct premiums and assumed
premiums. Direct premiums include premiums from employers who
purchase insurance directly from us and who we voluntarily agree
to insure, which we refer to as our voluntary business, as well
as employers assigned to us under residual market programs
implemented by some of the states in which we operate, which we
refer to as our assigned risk business. Assumed premiums include
premiums from our participation in mandatory pooling
arrangements under residual market programs implemented by some
of the states in which we operate. For the year ended
December 31, 2004, our voluntary business accounted for
93.4% of our gross premiums written.
2
Our Competitive Strengths
We believe we enjoy the following competitive strengths:
|
|
|
|
|
|
•
|
Focus on Hazardous Industries.
We have extensive
experience insuring employers engaged in hazardous industries
and have a history of profitable underwriting in these
industries. Our specialized knowledge of these hazardous
industries helps us better serve our policyholders, which leads
to greater employer loyalty and policy retention. Our policy
renewal rate on voluntary business that we elected to quote for
renewal was 87.9% in 2002, 91.4% in 2003 and 93.0% in 2004.
|
|
|
|
|
•
|
Focus on Small to Mid-Sized Employers.
We believe
large insurance companies generally do not target small to
mid-sized employers in hazardous industries due to their smaller
premium size, type of operations, mobile workforce and extensive
service needs. We provide enhanced customer services to our
policyholders. For example, unlike many of our competitors, our
premium payment plans enable our policyholders to better match
their premium payments with their payroll costs.
|
|
|
|
|
|
|
•
|
Specialized Underwriting Expertise.
Based on our
19-year underwriting history of insuring employers engaged in
hazardous industries, we have developed industry specific risk
analysis and rating tools to assist our underwriters in risk
selection and pricing. Our 17 underwriting professionals average
approximately 11 years of experience underwriting
workers’ compensation insurance, most of which has focused
on hazardous industries. We are highly disciplined when quoting
and binding new business. In 2004, we offered quotes on
approximately one out of every five applications submitted. We
do not delegate underwriting authority to agencies that sell our
insurance or to any other third party.
|
|
|
|
|
|
|
|
|
•
|
Comprehensive Safety Services.
We provide proactive
safety reviews of employers’ workplaces, which are often
located in rural areas. These safety reviews are a vital
component of our underwriting process and also assist our
policyholders in loss prevention and encourage the safest
workplaces possible by deploying experienced field safety
professionals, or FSPs, to our policyholders’ worksites.
Our 48 FSPs have an average of approximately 15 years of
workplace safety or related industry experience. From
January 1, 2004 through September 30, 2005,
approximately 87% of our new voluntary business policyholders
were subject to pre-quotation safety inspections. We perform
periodic on-site safety surveys on all of our voluntary business
policyholders.
|
|
|
|
|
|
|
|
|
•
|
Proactive Claims Management.
As of
September 30, 2005, our employees managed more than 98% of
our open claims in-house utilizing our intensive claims
management practices that emphasize a personal approach and
quality, cost-effective medical treatment. Our claims management
staff includes 88 field case managers, or FCMs, who average
approximately 18 years of experience in the workers’
compensation insurance industry, and six medical-only case
managers. We currently average approximately 60 open indemnity
claims per FCM, which we believe is significantly less than the
industry average. We believe our claims management practices
allow us to achieve a more favorable claim outcome, accelerate
an employee’s return to work and more rapidly close claims,
all of which ultimately lead to lower overall costs. In
addition, we believe our practices lessen the likelihood of
litigation. Only 7.9% of all claims reported for accident year
2003 were open as of September 30, 2005.
|
|
|
3
Our Strategy
We believe the net proceeds from this offering will provide us
with the additional capital necessary to increase the amount of
insurance we are able to write. We will scrutinize the potential
for achieving underwriting profits and adequate returns on
capital as we expand our business. We plan to pursue profitable
growth and favorable returns on equity using the following
strategies:
|
|
|
|
|
|
•
|
Expand in our Existing Markets.
Our market share in
our six largest states in terms of premiums written did not
exceed 3.0% of the workers’ compensation market in any one
state, according to NCCI’s most recent market analyses.
Competition in our target markets is fragmented by state and
employer industry focus. We believe that our specialized
underwriting expertise and safety, claims and audit services
position us to profitably increase our market share in our
existing principal markets, with minimal increase in field
service employees.
|
|
|
|
|
|
|
•
|
Prudent and Opportunistic Geographic
Expansion.
While we actively market our insurance in
27 states and the District of Columbia, approximately 42.3%
of our voluntary in-force premiums were generated in six states
as of September 30, 2005. We are licensed in an additional
18 states and the U.S. Virgin Islands. Our existing
licenses and rate filings will expedite our ability to write
policies in these markets when we decide it is prudent to do so.
|
|
|
|
|
|
|
•
|
Focus on Underwriting Profitability.
We intend to
maintain our underwriting discipline and profitability
throughout market cycles. Our strategy is to focus on
underwriting workers’ compensation insurance in hazardous
industries and to maintain adequate rate levels commensurate
with the risks we underwrite. We will also continue to strive
for improved risk selection and pricing, as well as reduced
frequency and severity of claims through comprehensive workplace
safety reviews, rapid closing of claims through personal, direct
contact with our policyholders and their employees, and
effective medical cost containment measures.
|
|
|
|
|
•
|
Leverage Investments in Information Technology.
In
October 2000, we launched our customized information system,
ICAMS, that we believe significantly enhances our ability to
select risk, write profitable business and cost-effectively
administer our billing, claims and audit functions. Since the
launch, we have introduced automated analytical tools and have
continued to improve and enhance our ICAMS system and tools. We
believe our technology is scalable and can be modified at
minimal cost to accommodate our growth. In addition, we believe
this scalability has lowered, and will continue to lower, our
expense ratio as we continue to achieve premium growth over time.
|
|
|
|
|
•
|
Maintain Capital Strength.
We plan to manage our
capital to achieve our growth and profitability goals while
maintaining a prudent operating leverage for our insurance
company subsidiaries. To accomplish this objective, we intend to
maintain underwriting profitability throughout market cycles,
deploy a portion of the proceeds of this offering toward the
judicious growth of our business, optimize our use of
reinsurance, reduce our current financial leverage, and maximize
an appropriate risk adjusted return on our growing investment
portfolio.
|
4
Our Challenges
As part of your evaluation of our business, you should consider
the following challenges we face in implementing our business
strategies:
|
|
|
|
|
|
•
|
Adequacy of Premiums and Loss Reserves.
Our loss
reserves are based upon estimates that are inherently uncertain.
These estimates may be inadequate to cover our actual losses, in
which case we would need to increase our estimates and recognize
a corresponding decrease in pre-tax net income for the period in
which the change in our estimates occurs.
|
|
|
|
|
•
|
Downgrade of our A.M. Best Rating.
Our A.M. Best
rating is subject to periodic review and, if it is downgraded,
our business could be negatively affected by the loss of certain
existing and potential policyholders and the loss of
relationships with independent agencies.
|
|
|
|
|
•
|
Cyclical Nature of the Workers’ Compensation
Industry.
The workers’ compensation insurance
industry has historically fluctuated with periods of low premium
rates and excess underwriting capacity resulting from increased
competition followed by periods of high premium rates and
shortages of underwriting capacity resulting from decreased
competition. This cyclicality may cause our revenues and net
income to fluctuate.
|
|
|
|
|
•
|
Availability of Reinsurance.
The availability,
amount and cost of reinsurance are subject to market conditions
and our experience with insured losses. If we are unable to
obtain reinsurance on favorable terms, our ability to write new
policies and renew existing policies could be adversely affected.
|
|
|
|
|
•
|
Ability to Recover from Reinsurers.
If any of our
reinsurers is unable to meet any of its obligations to us, we
would be responsible for all claims and claim settlement
expenses that would otherwise be covered by our reinsurer. An
inability to recover amounts due from our reinsurers would
adversely affect our financial condition and results of
operations.
|
For further discussion of these and other challenges we face,
see “Risk Factors.”
Operating History
We commenced operations in 1986 to underwrite workers’
compensation insurance for employers engaged in the logging
industry. Beginning in 1994, we expanded our customer base by
insuring employers in other hazardous occupation industries.
Beginning in 1997 and into 2000, we employed a strategy to
increase revenue through rapid geographic expansion and
underwriting workers’ compensation insurance for employers
engaged in non-hazardous industries, such as service and retail
businesses. This strategy did not produce the results
anticipated, and as a result our weighted average gross accident
year loss ratio for the period 1997 through 2000 was 120.2%, as
compared to 57.7% for the period 1994 through 1996. An accident
year loss ratio measures loss and loss adjustment expenses for
insured events occurring during a particular year, regardless of
when they are reported, as a percentage of the premium earned
during that year.
In September 2000, we undertook several strategic initiatives to
improve the profitability of our existing in-force book of
business and new business. These initiatives included the
following:
|
|
|
|
|
|
•
|
Renewed focus on core hazardous classes of business by
non-renewing policies with employers engaged in non-hazardous
industries that have higher frequency claims characteristics.
|
|
|
|
|
•
|
Commenced re-underwriting our book of business to improve our
risk selection and establish rates commensurate with the risks
we were underwriting.
|
|
|
|
|
•
|
Reduced or ceased underwriting in states where we lacked a
sufficient level of premium production to effectively deploy our
field resources or where we believed the operating environment
was unfavorable.
|
5
|
|
|
|
|
|
•
|
Increased pre-quotation safety inspection of employers on new
business.
|
|
|
|
|
•
|
Took action to manage substantially all claims in-house and
limit reliance on third-party administrators.
|
|
|
|
|
•
|
Implemented an incentive program to align the compensation of
our underwriters and field safety professionals with
underwriting performance.
|
We believe these actions have contributed to improved
underwriting profitability, as measured on an accident year
basis. Our accident year gross loss ratio improved to 67.8% for
2004 from 121.2% for 2000, as developed through
December 31, 2004.
Recent Developments
Effective June 30, 2005, we entered into a commutation
agreement with Converium Reinsurance (North America), one of our
reinsurers. Under this agreement, Converium paid us
$61.3 million in exchange for a termination and release of
three of our five reinsurance agreements with Converium. Under
this agreement, all liabilities reinsured with Converium under
these three reinsurance agreements reverted back to us. We
recorded a pre-tax loss of $13.2 million in the nine-month
period ended September 30, 2005 in connection with the
commutation agreement with Converium. Converium remains
obligated to us under the remaining two reinsurance agreements.
As of September 30, 2005, the amount recoverable from
Converium under the remaining two agreements was
$6.3 million.
Hurricane Katrina struck the Gulf Coast of the United States on
August 29, 2005, followed by Hurricane Rita on
September 24, 2005. These storms caused substantial damage
in Louisiana, Texas, Mississippi and Alabama. We anticipate that
we may incur some delay in receipt of premiums, and reduction of
premiums, from policyholders directly affected by the
hurricanes. Because of the geographic diversity of our
operations, we do not expect a material impact on our cash flows
or results of operations as a result of any such delay or
reduction. Due to the redundancy of our systems, no
policyholder, claimant or other data was lost as a result of the
hurricanes. Over the next several months, as the areas affected
by the hurricanes begin to recover, we anticipate that we may
see an increase in revenue due primarily to increased
construction activity.
AMERISAFE is an insurance holding company and was incorporated
in Texas in 1985. Our principal subsidiary is American
Interstate Insurance Company. Our executive offices are located
at 2301 Highway 190 West, DeRidder, Louisiana 70634, and our
telephone number at that location is (337) 463-9052. Our
website is
www.amerisafe.com.
The information on our
website is not part of this prospectus.
6
The Offering
|
|
|
|
|
|
Shares of common stock
offered by us
|
|
8,000,000 shares
|
|
|
|
|
|
|
Over-allotment shares of
common stock offered by
selling shareholders
|
|
1,200,000 shares
|
|
|
|
|
|
|
Shares of common stock to be
issued upon exchange of
outstanding Series A
preferred
stock
|
|
8,112,423 shares
|
|
|
|
|
|
|
Shares of common stock to be
outstanding after the offering
|
|
16,415,197 shares
|
|
|
|
|
|
|
|
Use of proceeds
|
|
We estimate that our net proceeds from this offering will be
approximately $71.2 million, based on an assumed initial
public offering price of $10.00 per share, which is the
mid-point of the price range set forth on the cover page of this
prospectus, and after deducting the underwriting discounts and
commissions and our estimated offering expenses. We intend to
retain $60 million of our net proceeds from this offering.
Approximately $45 million of this amount will be
contributed to our insurance company subsidiaries promptly
following completion of this offering, and approximately
$15 million will be used to make additional capital
contributions to our insurance company subsidiaries as necessary
to support our anticipated growth and for general corporate
purposes. We will use approximately $5.1 million of the
proceeds from this offering to redeem all of our outstanding
Series E preferred stock and approximately
$6.1 million to redeem shares of our outstanding
Series A preferred stock.
|
|
|
|
|
|
Dividend policy
|
|
We currently intend to retain any additional future earnings to
finance our operations and growth. As a result, we do not expect
to pay any cash dividends on our common stock for the
foreseeable future.
|
|
|
|
|
|
Our ability to pay dividends is subject to restrictions in our
articles of incorporation that prohibit us from paying dividends
on our common stock (other than in additional shares of common
stock) without the consent of the holders of two-thirds of the
outstanding shares of our convertible preferred stock. In
addition, because AMERISAFE is a holding company and has no
direct operations, our ability to pay dividends in the future
may be limited by regulatory restrictions on the payment of
dividends to AMERISAFE by our insurance company subsidiaries.
|
|
|
|
Proposed Nasdaq National
Market symbol
|
|
“AMSF”
|
The number of shares of common stock shown to be outstanding
upon completion of the offering excludes:
|
|
|
|
|
|
|
|
•
|
2,246,179 shares issuable upon conversion of our
outstanding Series C and Series D convertible
preferred stock, subject to adjustment in certain circumstances;
|
|
|
|
|
|
|
|
|
•
|
1,567,500 shares that may be issued pursuant to stock
options we intend to grant to our executive officers and other
employees upon completion of this offering, at an exercise price
equal to the initial public offering price; and
|
|
|
|
|
|
|
|
|
•
|
379,500 additional shares available for future issuance
under our equity incentive plans.
|
|
|
7
Summary Financial Information
The following income statement data for the years ended
December 31, 2002, 2003 and 2004 and the balance sheet data
as of December 31, 2003 and 2004 were derived from our
consolidated financial statements included elsewhere in this
prospectus. The income statement data for the years ended
December 31, 2000 and 2001 and the balance sheet data as of
December 31, 2000, 2001 and 2002 were derived from our
audited consolidated financial statements, which are not
included in this prospectus. The income statement data for the
nine-month periods ended September 30, 2004 and 2005 and
the balance sheet data as of September 30, 2004 and 2005
were derived from our unaudited condensed consolidated financial
statements included elsewhere in this prospectus, which include
all adjustments, consisting of normal recurring adjustments,
that management considers necessary for a fair presentation of
our financial position and results of operations for the periods
presented. These historical results are not necessarily
indicative of results to be expected from any future period. You
should read the following summary financial information together
with the other information contained in this prospectus,
including “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the
financial statements and related notes included elsewhere in
this prospectus. Also presented below is summary unaudited
consolidated financial information for each of the three-month
periods ended March 31, 2005, June 30, 2005 and
September 30, 2005, which was derived from our unaudited
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
345,027
|
|
|
$
|
204,752
|
|
|
$
|
185,093
|
|
|
$
|
223,590
|
|
|
$
|
264,962
|
|
|
$
|
214,248
|
|
|
$
|
231,182
|
|
|
Ceded premiums written
|
|
|
(80,076
|
)
|
|
|
(49,342
|
)
|
|
|
(26,563
|
)
|
|
|
(27,600
|
)
|
|
|
(21,951
|
)
|
|
|
(16,100
|
)
|
|
|
(14,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
264,951
|
|
|
$
|
155,410
|
|
|
$
|
158,530
|
|
|
$
|
195,990
|
|
|
$
|
243,011
|
|
|
$
|
198,148
|
|
|
$
|
216,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
187,106
|
|
|
$
|
170,782
|
|
|
$
|
163,257
|
|
|
$
|
179,847
|
|
|
$
|
234,733
|
|
|
$
|
172,417
|
|
|
$
|
189,370
|
|
|
Net investment income
|
|
|
9,372
|
|
|
|
9,935
|
|
|
|
9,419
|
|
|
|
10,106
|
|
|
|
12,217
|
|
|
|
8,660
|
|
|
|
11,985
|
|
|
Net realized gains (losses) on investments
|
|
|
(773
|
)
|
|
|
491
|
|
|
|
(895
|
)
|
|
|
316
|
|
|
|
1,421
|
|
|
|
543
|
|
|
|
1,337
|
|
|
Fee and other income
|
|
|
2,520
|
|
|
|
1,367
|
|
|
|
2,082
|
|
|
|
462
|
|
|
|
589
|
|
|
|
389
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
198,225
|
|
|
|
182,575
|
|
|
|
173,863
|
|
|
|
190,731
|
|
|
|
248,960
|
|
|
|
182,009
|
|
|
|
203,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses incurred
|
|
|
109,536
|
|
|
|
123,386
|
|
|
|
121,062
|
|
|
|
129,250
|
|
|
|
174,186
|
|
|
|
128,304
|
|
|
|
155,625
|
|
|
Underwriting and certain other operating costs(1)
|
|
|
23,334
|
|
|
|
23,364
|
|
|
|
22,674
|
|
|
|
23,062
|
|
|
|
28,987
|
|
|
|
21,128
|
|
|
|
24,478
|
|
|
Commissions
|
|
|
16,121
|
|
|
|
14,351
|
|
|
|
9,189
|
|
|
|
11,003
|
|
|
|
14,160
|
|
|
|
10,556
|
|
|
|
11,869
|
|
|
Salaries and benefits
|
|
|
20,253
|
|
|
|
17,148
|
|
|
|
16,541
|
|
|
|
15,037
|
|
|
|
15,034
|
|
|
|
11,367
|
|
|
|
10,068
|
|
|
Interest expense
|
|
|
797
|
|
|
|
735
|
|
|
|
498
|
|
|
|
203
|
|
|
|
1,799
|
|
|
|
1,215
|
|
|
|
2,061
|
|
|
Policyholder dividends
|
|
|
7,156
|
|
|
|
2,717
|
|
|
|
156
|
|
|
|
736
|
|
|
|
1,108
|
|
|
|
930
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
177,197
|
|
|
|
181,701
|
|
|
|
170,120
|
|
|
|
179,291
|
|
|
|
235,274
|
|
|
|
173,500
|
|
|
|
204,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
21,028
|
|
|
|
874
|
|
|
|
3,743
|
|
|
|
11,440
|
|
|
|
13,686
|
|
|
|
8,509
|
|
|
|
(1,434
|
)
|
|
Income tax expense (benefit)
|
|
|
7,001
|
|
|
|
(395
|
)
|
|
|
(1,438
|
)
|
|
|
2,846
|
|
|
|
3,129
|
|
|
|
1,763
|
|
|
|
(1,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
14,027
|
|
|
|
1,269
|
|
|
|
5,181
|
|
|
|
8,594
|
|
|
|
10,557
|
|
|
|
6,746
|
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment-in-kind preferred dividends
|
|
|
(8,229
|
)
|
|
|
(8,820
|
)
|
|
|
(9,453
|
)
|
|
|
(10,133
|
)
|
|
|
(9,781
|
)
|
|
|
(7,481
|
)
|
|
|
(7,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
5,798
|
|
|
$
|
(7,551
|
)
|
|
$
|
(4,272
|
)
|
|
$
|
(1,539
|
)
|
|
$
|
776
|
|
|
$
|
(735
|
)
|
|
$
|
(6,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion allocable to common shareholders(2)
|
|
|
65.3%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
70.2%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
Net income (loss) allocable to common shareholders
|
|
$
|
3,784
|
|
|
$
|
(7,551
|
)
|
|
$
|
(4,272
|
)
|
|
$
|
(1,539
|
)
|
|
$
|
545
|
|
|
$
|
(735
|
)
|
|
$
|
(6,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Diluted earnings per common share equivalent
|
|
$
|
12.62
|
|
|
$
|
(41.93
|
)
|
|
$
|
(23.72
|
)
|
|
$
|
(8.55
|
)
|
|
$
|
2.14
|
|
|
$
|
(3.67
|
)
|
|
$
|
(22.07
|
)
|
|
Diluted weighted average of common share equivalents outstanding
|
|
|
299,974
|
|
|
|
180,125
|
|
|
|
180,125
|
|
|
|
180,125
|
|
|
|
255,280
|
|
|
|
200,301
|
|
|
|
299,774
|
|
|
Selected Insurance Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year loss ratio(3)
|
|
|
57.1%
|
|
|
|
66.9%
|
|
|
|
71.8%
|
|
|
|
70.6%
|
|
|
|
68.5%
|
|
|
|
65.9%
|
|
|
|
70.6%
|
|
|
Prior accident year loss ratio(4)
|
|
|
1.4%
|
|
|
|
5.3%
|
|
|
|
2.4%
|
|
|
|
1.3%
|
|
|
|
5.7%
|
|
|
|
8.5%
|
|
|
|
11.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
|
|
58.5%
|
|
|
|
72.2%
|
|
|
|
74.2%
|
|
|
|
71.9%
|
|
|
|
74.2%
|
|
|
|
74.4%
|
|
|
|
82.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net underwriting expense ratio(5)
|
|
|
31.9%
|
|
|
|
32.1%
|
|
|
|
29.7%
|
|
|
|
27.3%
|
|
|
|
24.8%
|
|
|
|
25.0%
|
|
|
|
24.5%
|
|
|
Net dividend ratio(6)
|
|
|
3.8%
|
|
|
|
1.6%
|
|
|
|
0.1%
|
|
|
|
0.4%
|
|
|
|
0.5%
|
|
|
|
0.5%
|
|
|
|
0.2%
|
|
|
Net combined ratio(7)
|
|
|
94.2%
|
|
|
|
105.9%
|
|
|
|
104.0%
|
|
|
|
99.6%
|
|
|
|
99.5%
|
|
|
|
99.9%
|
|
|
|
106.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
44,914
|
|
|
$
|
44,270
|
|
|
$
|
44,677
|
|
|
$
|
49,815
|
|
|
$
|
25,421
|
|
|
$
|
52,780
|
|
|
$
|
28,843
|
|
|
Investments
|
|
|
145,439
|
|
|
|
148,305
|
|
|
|
205,315
|
|
|
|
257,729
|
|
|
|
364,868
|
|
|
|
313,677
|
|
|
|
469,316
|
|
|
Amounts recoverable from reinsurers
|
|
|
327,172
|
|
|
|
298,451
|
|
|
|
214,342
|
|
|
|
211,774
|
|
|
|
198,977
|
|
|
|
201,856
|
|
|
|
122,774
|
|
|
Premiums receivable, net
|
|
|
122,450
|
|
|
|
104,907
|
|
|
|
95,291
|
|
|
|
108,380
|
|
|
|
114,141
|
|
|
|
133,632
|
|
|
|
140,061
|
|
|
Deferred income taxes
|
|
|
11,807
|
|
|
|
14,716
|
|
|
|
11,372
|
|
|
|
12,713
|
|
|
|
15,624
|
|
|
|
17,149
|
|
|
|
23,232
|
|
|
Deferred policy acquisition costs
|
|
|
14,038
|
|
|
|
11,077
|
|
|
|
9,505
|
|
|
|
11,820
|
|
|
|
12,044
|
|
|
|
13,808
|
|
|
|
18,189
|
|
|
Deferred charges
|
|
|
3,681
|
|
|
|
2,588
|
|
|
|
1,997
|
|
|
|
2,987
|
|
|
|
3,054
|
|
|
|
3,670
|
|
|
|
3,601
|
|
|
Total assets
|
|
|
685,308
|
|
|
|
645,474
|
|
|
|
603,801
|
|
|
|
678,608
|
|
|
|
754,187
|
|
|
|
756,396
|
|
|
|
830,308
|
|
|
Reserves for loss and loss adjustment expenses
|
|
|
379,824
|
|
|
|
383,032
|
|
|
|
346,542
|
|
|
|
377,559
|
|
|
|
432,880
|
|
|
|
420,785
|
|
|
|
469,894
|
|
|
Unearned premiums
|
|
|
107,418
|
|
|
|
92,047
|
|
|
|
87,319
|
|
|
|
103,462
|
|
|
|
111,741
|
|
|
|
129,193
|
|
|
|
138,623
|
|
|
Insurance-related assessments
|
|
|
25,522
|
|
|
|
25,964
|
|
|
|
23,743
|
|
|
|
26,133
|
|
|
|
29,876
|
|
|
|
29,369
|
|
|
|
33,847
|
|
|
Debt
|
|
|
9,500
|
|
|
|
9,000
|
|
|
|
8,000
|
|
|
|
16,310
|
|
|
|
36,090
|
|
|
|
36,090
|
|
|
|
36,090
|
|
|
Redeemable preferred stock(8)
|
|
|
112,061
|
|
|
|
116,520
|
|
|
|
121,300
|
|
|
|
126,424
|
|
|
|
131,916
|
|
|
|
130,507
|
|
|
|
136,292
|
|
|
Shareholders’ deficit(9)
|
|
|
(26,913
|
)
|
|
|
(10,980
|
)
|
|
|
(25,100
|
)
|
|
|
(20,652
|
)
|
|
|
(42,862
|
)
|
|
|
(46,338
|
)
|
|
|
(46,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
71,575
|
|
|
$
|
88,949
|
|
|
$
|
70,658
|
|
|
Net premiums written
|
|
|
66,740
|
|
|
|
84,087
|
|
|
|
65,425
|
|
|
Net premiums earned
|
|
|
61,917
|
|
|
|
63,115
|
|
|
|
64,338
|
|
|
Net investment income
|
|
|
3,718
|
|
|
|
3,932
|
|
|
|
4,335
|
|
|
Total revenues
|
|
|
66,024
|
|
|
|
67,738
|
|
|
|
69,356
|
|
|
Net income (loss)(10)
|
|
|
3,237
|
|
|
|
(7,521
|
)
|
|
|
4,810
|
|
|
Selected Insurance Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year loss ratio(3)
|
|
|
69.8
|
%
|
|
|
71.9
|
%
|
|
|
70.2
|
%
|
|
Prior accident year loss ratio(4)
|
|
|
4.4
|
%
|
|
|
30.3
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
|
|
74.2
|
%
|
|
|
102.2
|
%
|
|
|
70.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net underwriting expense ratio(5)
|
|
|
24.1
|
%
|
|
|
23.2
|
%
|
|
|
26.2
|
%
|
|
Net dividend ratio(6)
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.1
|
%
|
|
Net combined ratio(7)
|
|
|
98.6
|
%
|
|
|
125.7
|
%
|
|
|
96.5
|
%
|
(footnotes on following page)
9
|
|
|
|
|
|
|
(1)
|
|
Includes policy acquisition expenses, such as assessments,
premium taxes and other general and administrative expenses,
excluding commissions and salaries and benefits, related to
insurance operations and corporate operating expenses.
|
|
|
|
|
|
|
(2)
|
|
Reflects the participation rights of the Series C and
Series D convertible preferred stock. See Note 15 to
our audited financial statements.
|
|
|
|
|
|
|
(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)
|
|
Includes our Series A preferred stock and Series C and
Series D convertible preferred stock, each of which is
mandatorily redeemable upon the occurrence of certain events
that are deemed to be outside the control of our company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9)
|
|
In 1997, we entered into a recapitalization transaction with
Welsh Carson that resulted in a $164.2 million charge to
retained earnings. See Note 1 to our audited financial
statements.
|
|
|
|
|
|
|
|
|
|
|
(10)
|
|
Net income for the three months ended March 31, 2005
includes a $2.7 million pre-tax charge to increase loss and
loss adjustment expenses related to increased estimates for
prior year loss reserves. Net loss for the three months ended
June 30, 2005 includes a $13.2 million pre-tax loss
recorded in connection with our commutation with Converium and a
$6.0 million pre-tax charge to increase loss and loss
adjustment expenses related to increased estimates for prior
year loss reserves.
|
|
|
|
|
10
RISK FACTORS
An investment in our common stock involves a number of risks.
Before making a decision to purchase our common stock, you
should carefully consider the following information about these
risks, together with the other information contained in this
prospectus. Any of the risks described below could result in a
significant or material adverse effect on our business,
financial condition or results of operations, and a decline in
the market price of our common stock. You could lose all or part
of your investment.
Risks Related to Our Business
Our loss reserves are based on estimates and may be
inadequate to cover our actual losses.
We must establish and maintain reserves for our estimated
liability for loss and loss adjustment expenses. We establish
loss reserves that represent an estimate of amounts needed to
pay and administer claims with respect to insured events that
have occurred, including events that have occurred but have not
yet been reported to us. Reserves are based on estimates of the
ultimate cost of individual claims. These estimates are
inherently uncertain. Judgment is required to determine the
relevance of historical payment and claim settlement patterns
under current facts and circumstances. The interpretation of
this historical data can be impacted by external forces,
principally legislative changes, economic fluctuations and legal
trends. If there are unfavorable changes in our assumptions, our
reserves may need to be increased.
Workers’ compensation claims often are paid over a long
period of time. In addition, there are no policy limits on our
liability for workers’ compensation claims as there are for
other forms of insurance. Therefore, estimating reserves for
workers’ compensation claims may be more uncertain than
estimating reserves for other types of insurance claims with
shorter or more definite periods between occurrence of the claim
and final determination of the loss and with policy limits on
liability for claim amounts. Accordingly, our reserves may prove
to be inadequate to cover our actual losses. If we change our
estimates, these changes would result in adjustments to our
reserves and our loss and loss adjustment expenses incurred in
the period in which the estimates are changed. If the estimate
is increased, our pre-tax income for the period in which we make
the change will decrease by a corresponding amount. In addition,
increasing reserves results in a reduction in our surplus and
could result in a downgrade in our A.M. Best rating. Such a
downgrade could, in turn, adversely affect our ability to sell
insurance policies.
A downgrade in our A.M. Best rating would likely reduce the
amount of business we are able to write.
Rating agencies evaluate insurance companies based on their
ability to pay claims. We are currently assigned a group letter
rating of “A-” (Excellent) from A.M. Best, which is
the rating agency that we believe has the most influence on our
business. This rating is assigned to companies that, in the
opinion of A.M. Best, have demonstrated an excellent overall
performance when compared to industry standards. A.M. Best
considers “A-” rated companies to have an excellent
ability to meet their ongoing obligations to policyholders. The
ratings of A.M. Best are subject to periodic review using, among
other things, proprietary capital adequacy models, and are
subject to revision or withdrawal at any time. A.M. Best
ratings are directed toward the concerns of policyholders and
insurance agencies and are not intended for the protection of
investors or as a recommendation to buy, hold or sell
securities. Our competitive position relative to other companies
is determined in part by our A.M. Best rating.
In June 2005, A.M. Best placed our rating under review with
negative implications, citing concerns about our risk adjusted
capital, credit risk associated with amounts recoverable from
our reinsurers and the somewhat limited financial flexibility of
our holding company, AMERISAFE. As a result of our commutation
with Converium Reinsurance (North America), one of our
reinsurers, discussed elsewhere in this document, and the
application of the proceeds from this offering, we expect that
our under
11
review status will be returned to stable and that A.M. Best will
affirm our “A-” (Excellent) rating in late 2005.
However, there can be no assurance that we will be able to
maintain our current rating. Any downgrade in our rating would
likely adversely affect our business through the loss of certain
existing and potential policyholders and the loss of
relationships with independent agencies. For example, we believe
some of our construction contractor policyholders are required
to maintain workers’ compensation coverage with an
insurance company with an A.M. Best rating of “A-”
(Excellent) or better in order to bid on certain contracts. As a
result, if our rating were downgraded, we would not be able to
write this business. Because we do not review or have access to
our policyholders’ construction contracts, we are not able
to quantify the percentage of our business, in terms of premiums
or otherwise, that would be affected by a downgrade in our A.M.
Best rating. In 2004, we derived 38.3% of our gross premiums
written from employers engaged in the construction industry.
Based on industry experience, we believe that our larger
policyholders are more likely to have construction contracts
with this type of ratings requirement.
The workers’ compensation insurance industry is cyclical
in nature, which may affect our overall financial
performance.
The financial performance of the workers’ compensation
insurance industry has historically fluctuated with periods of
low premium rates and excess underwriting capacity resulting
from increased competition followed by periods of high premium
rates and shortages of underwriting capacity resulting from
decreased competition. Although the financial performance of an
individual insurance company is dependent on its own specific
business characteristics, the profitability of most
workers’ compensation insurance companies generally tends
to follow this cyclical market pattern. Beginning in 2000 and
accelerating in 2001, the workers’ compensation insurance
industry experienced a market reflecting increasing premium
rates, more restrictive policy coverage terms and more
conservative risk selection. We believe these trends slowed
beginning in 2004. We also believe the current workers’
compensation insurance market is slowly transitioning to a more
competitive market environment in which underwriting capacity
and price competition may increase. This additional underwriting
capacity may result in increased competition from other
insurance carriers expanding the kinds or amounts of business
they write or seeking to maintain or increase market share at
the expense of underwriting discipline. Because this cyclicality
is due in large part to the actions of our competitors and
general economic factors, we cannot predict the timing or
duration of changes in the market cycle. While we have not
experienced significant increased price competition in our
target markets during the first nine months of 2005, these
cyclical patterns could cause our revenues and net income to
fluctuate, which may cause the price of our common stock to be
volatile.
If we are unable to obtain reinsurance on favorable terms,
our ability to write policies could be adversely affected.
We purchase reinsurance to protect us from the impact of large
losses. Reinsurance is an arrangement in which an insurance
company, called the ceding company, transfers insurance risk by
sharing premiums with another insurance company, called the
reinsurer. Conversely, the reinsurer receives or assumes
reinsurance from the ceding company. We currently participate in
an excess of loss reinsurance treaty program covering all of our
voluntary and assigned risk business, which represented
approximately 97% of our gross premiums written in 2004. Our
current reinsurance program provides us with reinsurance
coverage for each loss occurrence up to $30.0 million,
subject to applicable deductibles and retentions. However, for
any loss occurrence involving only one person, our reinsurance
coverage is limited to a maximum of $10.0 million, subject
to applicable deductibles and retentions. We retain the first
$1.0 million of each loss and are subject to an annual
aggregate deductible of approximately $5.6 million for
losses between $1.0 million and $5.0 million before
our reinsurers are obligated to reimburse us. After the
deductible is satisfied, we retain 10.0% of each loss between
$1.0 million and $5.0 million. See
“Business—Reinsurance.” The availability, amount
and cost of reinsurance are subject to market conditions and our
experience with insured losses.
12
Due to the increased cost of reinsurance, we increased our
levels of retention on a per occurrence basis in 2003, 2004 and
2005. As a result, we are exposed to increased risk of loss
resulting from volatility in the frequency and severity of
claims, which could adversely affect our financial performance.
If any of our current reinsurers were to terminate
participation in our 2005 reinsurance treaty program, we could
be exposed to an increased risk of loss.
The agreements under our 2005 reinsurance treaty program may be
terminated by us or our reinsurers upon 90 days prior
notice on any December 31. If our reinsurance treaty
program is terminated and we enter into a new program, any
decrease in the amount of reinsurance at the time we enter into
a new program, whether caused by the existence of more
restrictive terms and conditions or decreased availability, will
also increase our risk of loss and, as a result, could adversely
affect our business, financial condition and results of
operations. We currently have ten reinsurers participating in
our reinsurance treaty program, and we believe that this is a
sufficient number of reinsurers to provide us with the
reinsurance coverage we require. However, because our
reinsurance treaty program may be terminated on any
December 31, it is possible that one or more of our current
reinsurers could terminate participation in our program. In
addition, we may terminate the participation of one or more of
our reinsurers under certain circumstances as permitted by the
terms of our reinsurance agreements. In either of those events,
if our reinsurance broker is unable to spread the terminated
reinsurance among the remaining reinsurers in the program, it
could take a significant amount of time to identify and
negotiate agreements with a replacement reinsurer. During this
time, we would be exposed to an increased risk of loss, the
extent of which would depend on the volume of terminated
reinsurance.
We may not be able to recover amounts due from our
reinsurers, which would adversely affect our financial
condition.
Reinsurance does not discharge our obligations under the
insurance policies we write. We remain liable to our
policyholders even if we are unable to make recoveries that we
are entitled to receive under our reinsurance contracts. As a
result, we are subject to credit risk with respect to our
reinsurers. Losses are recovered from our reinsurers as claims
are paid. In long-term workers’ compensation claims, the
creditworthiness of our reinsurers may change before we recover
amounts to which we are entitled. Therefore, if a reinsurer is
unable to meet any of its obligations to us, we would be
responsible for all claims and claim settlement expenses for
which we would have otherwise received payment from the
reinsurer.
In the past, we have been unable to recover amounts from our
reinsurers. In 2001, Reliance Insurance Company, one of our
former reinsurers, was placed under regulatory supervision by
the Pennsylvania Insurance Department and was subsequently
placed into liquidation. As a result, between 2001 and 2004, we
recognized losses related to uncollectible amounts due from
Reliance aggregating $20.6 million.
As of September 30, 2005, we had $122.8 million of
recoverables from reinsurers. Of this amount,
$116.0 million was unsecured. As of September 30,
2005, our largest recoverables from reinsurers included
$26.2 million from American Reinsurance Company,
$22.7 million from Odyssey America Reinsurance Company,
$13.2 million from St. Paul Fire and Marine Insurance
Company and $11.8 million from Clearwater Insurance
Company. If we are unable to collect amounts recoverable from
our reinsurers, our financial condition would be adversely
affected.
At December 31, 2004, we had $199.0 million of
recoverables from reinsurers. Of this amount, $83.4 million
was recoverable from Converium Reinsurance (North America).
During 2004, Converium reported a significant loss, resulting in
a downgrade in its A.M. Best rating. Although Converium
continued to indemnify us under the terms of our reinsurance
agreements, we initiated discussions with Converium to seek to
reduce the credit risk associated with the amounts due to us.
Effective as of
13
June 30, 2005, we entered into a commutation agreement with
Converium. Under this agreement, Converium paid us
$61.3 million in exchange for a termination and release of
three of our five reinsurance agreements with Converium. Under
the commutation agreement, all liabilities reinsured with
Converium under these three reinsurance agreements reverted back
to us. The reinsurance agreements have been terminated, and we
and Converium have fully released each other from all
liabilities under or relating to these three reinsurance
agreements. We recorded a pre-tax loss of $13.2 million in
the nine-month period ended September 30, 2005 in
connection with the commutation agreement with Converium.
Converium remains obligated to us under the remaining two
reinsurance agreements. As of September 30, 2005, the
amount recoverable from Converium under the remaining two
agreements was $6.3 million. We cannot assure you that the
cash payment we received from Converium, and any investment
income we may earn on that amount, will be sufficient to cover
all claims for which we would otherwise have been contractually
entitled to recover from Converium under the three reinsurance
agreements subject to the commutation agreement.
If we do not accurately establish our premium rates, our
results of operations will be adversely affected.
In general, the premium rates for our insurance policies are
established when coverage is initiated and, therefore, before
all of the underlying costs are known. Like other workers’
compensation insurance companies, we rely on estimates and
assumptions in setting our premium rates. Establishing adequate
rates is necessary, together with investment income, to generate
sufficient revenue to offset losses, loss adjustment expenses
and other underwriting expenses and to earn a profit. If we fail
to accurately assess the risks that we assume, we may fail to
charge adequate premium rates to cover our losses and expenses,
which could reduce our net income and cause us to become
unprofitable. For example, when initiating coverage on a
policyholder, we estimate future claims expense based, in part,
on prior claims information provided by the policyholder’s
previous insurance carriers. If this prior claims information is
not accurate, we may underprice our policy by using claims
estimates that are too low. As a result, our actual costs for
providing insurance coverage to our policyholders may be
significantly higher than our premiums. In order to set premium
rates accurately, we must:
|
|
|
|
|
|
•
|
collect and properly analyze a substantial volume of data;
|
|
|
|
|
•
|
develop, test and apply appropriate rating formulae;
|
|
|
|
|
•
|
closely monitor and timely recognize changes in trends; and
|
|
|
|
|
•
|
project both frequency and severity of losses with reasonable
accuracy.
|
We must also implement our pricing accurately in accordance with
our assumptions. Our ability to undertake these efforts
successfully, and as a result set premium rates accurately, is
subject to a number of risks and uncertainties, principally:
|
|
|
|
|
|
•
|
insufficient reliable data;
|
|
|
|
|
•
|
incorrect or incomplete analysis of available data;
|
|
|
|
|
•
|
uncertainties generally inherent in estimates and assumptions;
|
|
|
|
|
•
|
our inability to implement appropriate rating formulae or other
pricing methodologies;
|
|
|
|
|
•
|
costs of ongoing medical treatment;
|
|
|
|
|
•
|
our inability to accurately estimate retention, investment
yields and the duration of our liability for loss and loss
adjustment expenses; and
|
|
|
|
|
•
|
unanticipated court decisions, legislation or regulatory action.
|
14
Consequently, we could set our premium rates too low, which
would negatively affect our results of operations and our
profitability, or we could set our premium rates too high, which
could reduce our competitiveness and lead to lower revenues.
Negative developments in the workers’ compensation
insurance industry would adversely affect our financial
condition and results of operations.
We principally offer workers’ compensation insurance. We
have no current plans to focus our efforts on offering other
types of insurance. As a result, negative developments in the
economic, competitive or regulatory conditions affecting the
workers’ compensation insurance industry could have an
adverse effect on our financial condition and results of
operations. Negative developments in the workers’
compensation insurance industry could have a greater effect on
us than on more diversified insurance companies that also sell
other types of insurance.
A decline in the level of business activity of our
policyholders, particularly those engaged in the construction,
trucking and logging industries, could negatively affect our
earnings and profitability.
In 2004, approximately 71.5% of our gross premiums written were
derived from policyholders in the construction, trucking and
logging industries. Because premium rates are calculated, in
general, as a percentage of a policyholder’s payroll
expense, premiums fluctuate depending upon the level of business
activity and number of employees of our policyholders. As a
result, our gross premiums written are primarily dependent upon
the economic conditions in the construction, trucking and
logging industries and upon economic conditions generally.
Unfavorable changes in economic conditions affecting the
states in which we operate could adversely affect our financial
condition or results of operations.
As of September 30, 2005, we provided insurance in
27 states and the District of Columbia. Although we have
expanded our operations into new geographic areas and expect to
continue to do so in the future, approximately 44.5% of our
gross premiums written for the year ended December 31, 2004
were derived from policyholders in Louisiana, Georgia, Texas,
Illinois, North Carolina and Virginia. No other state accounted
for more than 5.0% of gross premiums written in 2004. In the
future, we may be exposed to economic and regulatory risks or
risks from natural perils that are greater than the risks faced
by insurance companies that have a larger percentage of their
gross premiums written diversified over a broader geographic
area. Unfavorable changes in economic conditions affecting the
states in which we write business could adversely affect our
financial condition or results of operations. See
“Business—Policyholders.”
Our revenues and results of operations may fluctuate as a
result of factors beyond our control, which fluctuation may
cause the price of our common stock to be volatile.
The revenues and results of operations of insurance companies
historically have been subject to significant fluctuations and
uncertainties. Our profitability can be affected significantly
by:
|
|
|
|
|
|
•
|
rising levels of claims costs, including medical and
prescription drug costs, that we cannot anticipate at the time
we establish our premium rates;
|
|
|
|
|
•
|
fluctuations in interest rates, inflationary pressures and other
changes in the investment environment that affect returns on
invested assets;
|
|
|
|
|
•
|
changes in the frequency or severity of claims;
|
|
|
|
|
•
|
the financial stability of our reinsurers and changes in the
level of reinsurance capacity and our capital capacity;
|
15
|
|
|
|
|
|
•
|
new types of claims and new or changing judicial interpretations
relating to the scope of liabilities of insurance companies;
|
|
|
|
|
•
|
volatile and unpredictable developments, including man-made,
weather-related and other natural catastrophes or terrorist
attacks; and
|
|
|
|
|
•
|
price competition.
|
If our revenues and results of operations fluctuate as a result
of one or more of these factors, the price of our common stock
may be volatile.
We operate in a highly competitive industry and may lack the
financial resources to compete effectively.
There is significant competition in the workers’
compensation insurance industry. We believe that our competition
in the hazardous industries we target is fragmented and not
dominated by one or more competitors. We compete with other
insurance companies, individual self-insured companies, state
insurance pools and self-insurance funds. Many of our existing
and potential competitors are significantly larger and possess
greater financial, marketing and management resources than we
do. Moreover, a number of these competitors offer other types of
insurance in addition to workers’ compensation and can
provide insurance nationwide. We compete on the basis of many
factors, including coverage availability, claims management,
safety services, payment terms, premium rates, policy terms,
types of insurance offered, overall financial strength,
financial ratings and reputation. If any of our competitors
offer premium rates, policy terms or types of insurance that are
more competitive than ours, we could lose market share. No
assurance can be given that we will maintain our current
competitive position in the markets in which we currently
operate or that we will establish a competitive position in new
markets into which we may expand.
If we cannot sustain our relationships with independent
agencies, we may be unable to operate profitably.
We market a substantial portion of our workers’
compensation insurance through independent agencies. As of
September 30, 2005, independent agencies produced
approximately 81.6% of our voluntary in-force premiums, and no
independent agency accounted for more than 1.2% of our voluntary
in-force premiums at that date. Independent agencies are not
obligated to promote our insurance and may sell insurance
offered by our competitors. As a result, our continued
profitability depends, in part, on the marketing efforts of our
independent agencies and on our ability to offer workers’
compensation insurance and maintain financial strength ratings
that meet the requirements of our independent agencies and their
policyholders.
An inability to effectively manage the growth of our
operations could make it difficult for us to compete and affect
our ability to operate profitably.
Our continuing growth strategy includes expanding in our
existing markets, entering new geographic markets and further
developing our agency relationships. Our growth strategy is
subject to various risks, including risks associated with our
ability to:
|
|
|
|
|
|
•
|
identify profitable new geographic markets for entry;
|
|
|
|
|
•
|
attract and retain qualified personnel for expanded operations;
|
|
|
|
|
•
|
identify, recruit and integrate new independent
agencies; and
|
|
|
|
|
•
|
augment our internal monitoring and control systems as we expand
our business.
|
16
Because we are subject to extensive state and federal
regulation, legislative changes may negatively impact our
business.
We are subject to extensive regulation by the Louisiana
Department of Insurance and the insurance regulatory agencies of
other states in which we are licensed and, to a lesser extent,
federal regulation. State agencies have broad regulatory powers
designed primarily to protect policyholders and their employees,
and not our shareholders. Regulations vary from state to state,
but typically address:
|
|
|
|
|
|
•
|
standards of solvency, including risk-based capital measurements;
|
|
|
|
|
•
|
restrictions on the nature, quality and concentration of our
investments;
|
|
|
|
|
•
|
restrictions on the terms of the insurance policies we offer;
|
|
|
|
|
•
|
restrictions on the way our premium rates are established and
the premium rates we may charge;
|
|
|
|
|
•
|
required reserves for unearned premiums and loss and loss
adjustment expenses;
|
|
|
|
|
•
|
standards for appointing general agencies;
|
|
|
|
|
•
|
limitations on transactions with affiliates;
|
|
|
|
|
•
|
restrictions on mergers and acquisitions;
|
|
|
|
|
•
|
restrictions on the ability of our insurance company
subsidiaries to pay dividends to AMERISAFE;
|
|
|
|
|
•
|
certain required methods of accounting; and
|
|
|
|
|
•
|
potential assessments for state guaranty funds, second injury
funds and other mandatory pooling arrangements.
|
We may be unable to comply fully with the wide variety of
applicable laws and regulations that are continually undergoing
revision. In addition, we follow practices based on our
interpretations of laws and regulations that we believe are
generally followed by our industry. These practices may be
different from interpretations of insurance regulatory agencies.
As a result, insurance regulatory agencies could preclude us
from conducting some or all of our activities or otherwise
penalize us. For example, in order to enforce applicable laws
and regulations or to protect policyholders, insurance
regulatory agencies have relatively broad discretion to impose a
variety of sanctions, including examinations, corrective orders,
suspension, revocation or denial of licenses and the takeover of
one or more of our insurance subsidiaries. The extensive
regulation of our business may increase the cost of our
insurance and may limit our ability to obtain premium rate
increases or to take other actions to increase our profitability.
The effects of emerging claim and coverage issues on our
business are uncertain.
As industry practices and legal, judicial, social and other
environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge. These issues
may adversely affect our business by either extending coverage
beyond our underwriting intent or by increasing the number or
size of claims. In some instances, these changes may not become
apparent until after we have issued insurance policies that are
affected by the changes. As a result, the full extent of our
liability under an insurance policy may not be known until many
years after the policy is issued. For example, medical costs
associated with permanent and partial disabilities may increase
more rapidly or be higher than we currently expect. Changes of
this nature may expose us to higher claims than we anticipated
when we wrote the underlying policy. As of September 30,
2005, approximately 1.2% of the 28,378 claims reported for
accident year 2000 were open, 2.2% of the 13,814 claims reported
for accident year 2001 were open, 4.1% of the 8,007 claims
reported for accident year 2002 were open, 7.9% of the
6,288 claims reported for accident year 2003 were open and
17.5% of the 6,944 claims reported for accident year 2004
were open.
17
Additional capital that we may require in the future may not
be available to us or may be available to us only on unfavorable
terms.
Our future capital requirements will depend on many factors,
including state regulatory requirements, the financial stability
of our reinsurers and our ability to write new business and
establish premium rates sufficient to cover our estimated
claims. We may need to raise additional capital or curtail our
growth if the portion of our net proceeds of this offering to be
contributed to the capital of our insurance subsidiaries is
insufficient to support future operating requirements and/or
cover claims. If we had to raise additional capital, equity or
debt financing may not be available to us or may be available
only on terms that are not favorable. In the case of equity
financings, dilution to our shareholders could result and the
securities sold may have rights, preferences and privileges
senior to the common stock sold in this offering. In addition,
under certain circumstances, the sale of our common stock, or
securities convertible or exchangeable into shares of our common
stock, at a price per share less than the market value of our
common stock may result in an adjustment to the conversion price
at which shares of our existing convertible preferred stock may
be converted into shares of our common stock. If we cannot
obtain adequate capital on favorable terms or at all, we may be
unable to support future growth or operating requirements and,
as a result, our business, financial condition or results of
operations could be adversely affected.
If we are unable to realize our investment objectives, our
financial condition and results of operations may be adversely
affected.
Investment income is an important component of our net income.
As of September 30, 2005, our investment portfolio,
including cash and cash equivalents, had a carrying value of
$498.2 million. For the year ended December 31, 2004,
we had $12.2 million of net investment income. Our
investment portfolio is managed by an independent asset manager
that operates under investment guidelines approved by our board
of directors. Although these guidelines stress diversification
and capital preservation, our investments are subject to a
variety of risks, including risks related to general economic
conditions, interest rate fluctuations and market volatility.
General economic conditions may be adversely affected by
U.S. involvement in hostilities with other countries and
large-scale acts of terrorism, or the threat of hostilities or
terrorist acts.
Interest rates are highly sensitive to many factors, including
governmental monetary policies and domestic and international
economic and political conditions. Changes in interest rates
could have an adverse effect on the value of our investment
portfolio and future investment income. For example, changes in
interest rates can expose us to prepayment risks on
mortgage-backed securities included in our investment portfolio.
When interest rates fall, mortgage-backed securities are prepaid
more quickly than expected and the holder must reinvest the
proceeds at lower interest rates. In periods of increasing
interest rates, mortgage-backed securities are prepaid more
slowly, which may require us to receive interest payments that
are below the interest rates then prevailing for longer than
expected.
These and other factors affect the capital markets and,
consequently, the value of our investment portfolio and our
investment income. Any significant decline in our investment
income would adversely affect our revenues and net income and,
as a result, increase our shareholders’ deficit and
decrease our surplus.
Our business is dependent on the efforts of our executive
officers because of their industry expertise, knowledge of our
markets and relationships with the independent agencies that
sell our insurance.
Our success is dependent on the efforts of our executive
officers because of their industry expertise, knowledge of our
markets and relationships with our independent agencies. Our
executive officers are C. Allen Bradley, Jr., Chairman,
President and Chief Executive Officer; Mark R. Anderson,
Executive Vice President; Geoffrey R. Banta, Executive Vice
President and Chief Financial Officer; Arthur L. Hunt,
Executive Vice President and General Counsel; and Craig P.
Leach, Executive Vice President,
18
Sales and Marketing. Mr. Anderson and Mr. Leach have
been with our company for more than 25 years and
Mr. Bradley and Mr. Hunt have been with us for more
than ten years. We have entered into employment agreements with
each of our executive officers, other than Mr. Anderson,
that will expire on January 1, 2008, unless extended.
Mr. Anderson will retire from our company effective as of
December 31, 2005. We will retain Mr. Anderson’s
services under a five-year consulting agreement that will be
effective upon his retirement. These employment and consulting
agreements are more fully described under “Management—
Employment and Consulting Agreements.” Should any of our
executive officers cease working for us, we may be unable to
find acceptable replacements with comparable skills and
experience in the workers’ compensation insurance industry
and the hazardous industries that we target. As a result, our
operations may be disrupted and our business may be adversely
affected. We do not currently maintain life insurance policies
with respect to our executive officers.
In September 2002, Mr. Banta was diagnosed with prostate
cancer. He was treated at that time and declared cancer-free in
early 2003. In September 2005, the prostate cancer returned.
Mr. Banta began an alternative treatment that is expected
to permit him to continue to substantially perform his current
responsibilities as our Chief Financial Officer. However, due to
the treatment regime, he cannot travel until the treatment is
completed in mid-November 2005. Based on discussions with his
physician, Mr. Banta has advised us that he expects to make
a full recovery.
AMERISAFE is an insurance holding company and does not have
any direct operations.
AMERISAFE is a holding company that transacts business through
its operating subsidiaries, including American Interstate.
AMERISAFE’s primary assets are the capital stock of these
operating subsidiaries. The ability of AMERISAFE to pay
dividends to our shareholders depends upon the surplus and
earnings of our subsidiaries and their ability to pay dividends
to AMERISAFE. Payment of dividends by our insurance subsidiaries
is restricted by state insurance laws, including laws
establishing minimum solvency and liquidity thresholds, and
could be subject to contractual restrictions in the future,
including those imposed by indebtedness we may incur in the
future. See “Business—Regulation—Dividend
Limitations.” As a result, at times, AMERISAFE may not be
able to receive dividends from its insurance subsidiaries and
may not receive dividends in amounts necessary to pay dividends
on our capital stock. Based on reported capital and surplus at
December 31, 2004, American Interstate would have been
permitted under Louisiana insurance law to pay dividends to
AMERISAFE in 2005 in an amount up to $11.2 million without
approval by the Louisiana Department of Insurance.
In addition, our ability to pay dividends is subject to
restrictions in the articles of incorporation of AMERISAFE that
prohibit us from paying dividends on our common stock (other
than in additional shares of common stock) without the consent
of the holders of two-thirds of the outstanding shares of our
convertible preferred stock. If holders of our convertible
preferred stock consent to the payment of a dividend, we must
pay a dividend to the holders of our convertible preferred stock
on an as-converted to common stock basis equal to the dividend
we pay to holders of our common stock. Currently, we do not
intend to pay dividends on our common stock.
Assessments and premium surcharges for state guaranty funds,
second injury funds and other mandatory pooling arrangements may
reduce our profitability.
Most states require insurance companies licensed to do business
in their state to participate in guaranty funds, which require
the insurance companies to bear a portion of the unfunded
obligations of impaired, insolvent or failed insurance
companies. These obligations are funded by assessments, which
are expected to continue in the future. State guaranty
associations levy assessments, up to prescribed limits, on all
member insurance companies in the state based on their
proportionate share of premiums written in the lines of business
in which the impaired, insolvent or failed insurance companies
are engaged. See “Business—Regulation.”
Accordingly, the assessments levied on us may increase as we
increase our written premium. Some states also have laws that
establish second injury funds to
19
reimburse insurers and employers for claims paid to injured
employees for aggravation of prior conditions or injuries. These
funds are supported by either assessments or premium surcharges
based on paid losses.
In addition, as a condition to conducting business in some
states, insurance companies are required to participate in
residual market programs to provide insurance to those employers
who cannot procure coverage from an insurance carrier on a
negotiated basis. Insurance companies generally can fulfill
their residual market obligations by, among other things,
participating in a reinsurance pool where the results of all
policies provided through the pool are shared by the
participating insurance companies. Although we price our
insurance to account for obligations we may have under these
pooling arrangements, we may not be successful in estimating our
liability for these obligations. Accordingly, mandatory pooling
arrangements may cause a decrease in our profits. We currently
participate in mandatory pooling arrangements in 17 states.
Our average annual premiums from mandatory pooling arrangements
were approximately $5.2 million from 2001 through 2004. Our
loss and loss adjustment expenses and assessments for expenses
and losses related to these mandatory pooling arrangements
caused our combined ratio in these years to increase an average
of 0.1%. As we write policies in new states that have mandatory
pooling arrangements, we will be required to participate in
additional pooling arrangements. Further, the impairment,
insolvency or failure of other insurance companies in these
pooling arrangements would likely increase the liability for
other members in the pool. The effect of assessments and premium
surcharges or changes in them could reduce our profitability in
any given period or limit our ability to grow our business.
The outcome of recent insurance industry investigations and
regulatory proposals could adversely affect our financial
condition and results of operations and cause the price of our
common stock to be volatile.
The insurance industry has recently become the focus of
increased scrutiny by regulatory and law enforcement
authorities, as well as class action attorneys and the general
public, relating to allegations of improper special payments,
price-fixing, bid-rigging, improper accounting practices and
other alleged misconduct, including payments made by insurers to
brokers and the practices surrounding the placement of insurance
business. Formal and informal inquiries have been made of a
large segment of the industry, and a number of companies in the
insurance industry have received or may receive subpoenas,
requests for information from regulatory agencies or other
inquiries relating to these and similar matters. These efforts
are expected to result in both enforcement actions and proposals
for new state and federal regulation. It is difficult to predict
the outcome of these investigations, whether they will expand
into other areas not yet contemplated, whether activities and
practices currently thought to be lawful will be characterized
as unlawful, what form new regulations will have when finally
adopted and the impact, if any, of increased regulatory and law
enforcement action and litigation on our business and financial
condition. We have received and responded to requests for
information and other inquiries from the Department of Insurance
in each of Arkansas, Delaware and North Carolina and have
received no further requests for information.
We may have exposure to losses from terrorism for which we
are required by law to provide coverage.
When writing workers’ compensation insurance policies, we
are required by law to provide workers’ compensation
benefits for losses arising from acts of terrorism. The impact
of any terrorist act is unpredictable, and the ultimate impact
on us would depend upon the nature, extent, location and timing
of such an act. Notwithstanding the protection provided by
reinsurance and the Terrorism Risk Insurance Act of 2002, the
risk of severe losses to us from acts of terrorism has not been
eliminated because our reinsurance treaty program includes
various sub-limits and exclusions limiting our reinsurers’
obligation to cover losses caused by acts of terrorism.
Accordingly, events constituting acts of terrorism may not be
covered by, or may exceed the capacity of, our reinsurance and
could adversely affect our business and financial condition. In
addition, the Terrorism Risk Insurance Act is set to
20
expire on December 31, 2005, and the U.S. Department
of the Treasury has recommended that Congress not extend the law
in its current form. If this law is not extended or is extended
in a scaled-back form, which is the current proposal by the
U.S. Department of the Treasury, reinsurance for losses
arising from terrorism may be unavailable or prohibitively
expensive, and we may be further exposed to losses arising from
acts of terrorism.
Risks Related to Our Common Stock and This Offering
There has been no prior public market for our common stock
and, therefore, you cannot be certain that an active trading
market or a specific share price will be established.
Currently, there is no public trading market for our common
stock, and it is possible that an active trading market will not
develop upon completion of this offering or that the market
price of our common stock will decline below the initial public
offering price. We have applied to have our shares of common
stock approved for listing on the Nasdaq National Market under
the symbol “AMSF.” The initial public offering price
per share will be determined by negotiation among us and the
underwriters and may not be indicative of the market price of
our common stock after completion of this offering.
The trading price of our common stock may decline after this
offering.
The trading price of our common stock may decline after this
offering for many reasons, some of which are beyond our control,
including, among others:
|
|
|
|
|
|
•
|
our results of operations;
|
|
|
|
|
•
|
changes in expectations as to our future results of operations,
including financial estimates and projections by securities
analysts and investors;
|
|
|
|
|
•
|
results of operations that vary from those expected by
securities analysts and investors;
|
|
|
|
|
•
|
developments in the healthcare or insurance industries;
|
|
|
|
|
•
|
changes in laws and regulations;
|
|
|
|
|
•
|
announcements of claims against us by third parties; and
|
|
|
|
|
|
|
•
|
future issuances or sales of our common stock, including
issuances upon conversion of our outstanding convertible
preferred stock.
|
|
|
In addition, the stock market in general has experienced
significant volatility that often has been unrelated to the
operating performance of companies whose shares are traded.
These market fluctuations could adversely affect the trading
price of our common stock, regardless of our actual operating
performance. As a result, the trading price of our common stock
may be less than the initial public offering price, and you may
not be able to sell your shares at or above the price you pay to
purchase them.
Public investors will suffer immediate and substantial
dilution as a result of this offering.
The initial public offering price per share is significantly
higher than our pro forma net tangible book value per share of
common stock. Accordingly, if you purchase shares in this
offering, you will suffer immediate and substantial dilution of
your investment. Based upon the issuance and sale of
8,000,000 shares of our common stock at an assumed initial
offering price of $10.00 per share, which is the midpoint
of the price range set forth on the cover page of this
prospectus, you will incur immediate dilution of approximately
$3.95 in the net tangible book value per share if you purchase
common stock in this offering. See “Dilution.” In
addition, if you purchase shares in this offering, you will:
|
|
|
|
|
|
•
|
pay a price per share that substantially exceeds the book value
of our assets after subtracting liabilities; and
|
21
|
|
|
|
|
|
•
|
contribute 74.0% of the total amount invested to date to fund
our company based on an assumed initial offering price to the
public of $10.00 per share, which is the midpoint of the
price range set forth on the cover page of this prospectus, but
will own only 48.7% of the shares of common stock outstanding
after completion of this offering.
|
Securities analysts may not initiate coverage of our common
stock or may issue negative reports, which may adversely affect
the trading price of our common stock.
There is no assurance that securities analysts will cover our
company after completion of this offering. If securities
analysts do not cover our company, this lack of coverage may
adversely affect the trading price of our common stock. The
trading market for our common stock will rely in part on the
research and reports that securities analysts publish about us
or our business. If one or more of the analysts who cover our
company downgrades our common stock, the trading price of our
common stock may decline rapidly. If one or more of these
analysts ceases to cover our company, we could lose visibility
in the market, which, in turn, could also cause the trading
price of our common stock to decline. Because of our small
market capitalization, it may be difficult for us to attract
securities analysts to cover our company, which could adversely
affect the trading price of our common stock.
Upon completion of this offering, our principal shareholders
will still have the ability to significantly influence our
business, which may be disadvantageous to other shareholders and
adversely affect the trading price of our common stock.
Upon completion of this offering and based on the number of
shares outstanding as of September 30, 2005, entities
affiliated with Welsh Carson Anderson & Stowe, or Welsh
Carson, collectively, will beneficially own approximately 44.2%
of our outstanding common stock and will possess approximately
40.9% of the total voting power. As a result, these
shareholders, acting together, will have the ability to exert
substantial influence over all matters requiring approval by our
shareholders, including the election and removal of directors,
any proposed merger, consolidation or sale of all or
substantially all of our assets and other corporate
transactions. In addition, these shareholders may have interests
that are different from ours. For example, entities affiliated
with Welsh Carson own a substantial interest in AmCOMP
Incorporated, which is a workers’ compensation insurance
company. Two members of our board of directors are also
directors of AmCOMP.
Our officers, directors and principal shareholders could delay
or prevent an acquisition or merger of our company even if the
transaction would benefit other shareholders. Moreover, this
concentration of share ownership may make it difficult for
shareholders to replace management. In addition, this
significant concentration of share ownership may adversely
affect the trading price for our common stock because investors
often perceive disadvantages in owning stock in companies with
significant or controlling shareholders. This concentration
could be disadvantageous to other shareholders with interests
different from those of our officers, directors and principal
shareholders and the trading price of our common stock could be
adversely affected. See “Principal and Selling
Shareholders” for a more detailed description of our share
ownership.
Future sales of our common stock may affect the trading price
of our common stock and the future exercise of options or the
exercise of the conversion rights of our convertible preferred
stock may lower our stock price.
We cannot predict what effect, if any, future sales of our
common stock, or the availability of shares for future sale,
will have on the trading price of our common stock. Sales of a
substantial number of shares of our common stock in the public
market after completion of this offering, or the perception that
such sales could occur, may adversely affect the trading price
of our common stock and may make it more difficult for you to
sell your shares at a time and price that you determine
appropriate. See “Shares Eligible for Future Sale” for
further information regarding circumstances under which
additional shares of our common stock may be sold. Upon
completion of this offering,
22
there will be 16,415,197 shares of our common stock
outstanding. Moreover, 2,246,179 additional shares of our
common stock will be issuable upon the conversion of shares of
our outstanding convertible preferred stock. See
“Description of Capital Stock.” We and our current
directors, our officers and the selling shareholders have
entered into 180-day lock-up agreements as described in
“Shares Eligible for Future Sale—Lock-Up
Agreements.” An aggregate of 8,155,551 shares of our
common stock will be subject to these lock-up agreements. In
addition, in accordance with the terms of our registration
rights agreement, the holders of an additional
2,505,102 shares of our common stock (including
2,246,179 shares of our common stock issuable upon
conversion of our convertible preferred stock) are to refrain,
at the written request of the underwriters, from selling any of
our securities during the period of distribution of our common
stock by the underwriters (not to exceed 180 days) and
during the period in which the underwriting syndicate
participates in the after market (not to exceed 90 days).
See “Certain Relationships and Related Transactions—
Registration Rights Agreement.” There will also be
outstanding options exercisable to purchase
1,567,500 shares of our common stock, none of which will be
exercisable until the first anniversary of the completion of
this offering. See “Management— 2005 Equity Incentive
Plans— Equity Incentive Plan.”
Being a public company will increase our expenses and
administrative workload.
As a public company, we will need to comply with additional laws
and regulations, including the Sarbanes-Oxley Act of 2002 and
related rules of the Securities and Exchange Commission, or the
SEC, and requirements of the Nasdaq National Market. We were not
required to comply with these laws and requirements as a private
company. Complying with these laws and regulations will require
the time and attention of our board of directors and management
and will increase our expenses. Among other things, we will need
to:
|
|
|
|
|
|
•
|
design, establish, evaluate and maintain a system of internal
controls over financial reporting in compliance with the
requirements of Section 404 of the Sarbanes-Oxley Act and
the related rules and regulations of the SEC and the Public
Company Accounting Oversight Board;
|
|
|
|
|
•
|
prepare and distribute periodic reports in compliance with our
obligations under the federal securities laws;
|
|
|
|
|
•
|
establish new internal policies, principally those relating to
disclosure controls and procedures and corporate governance;
|
|
|
|
|
•
|
institute a more comprehensive compliance function; and
|
|
|
|
|
•
|
involve to a greater degree our outside legal counsel and
accountants in the above activities.
|
In addition, we also expect that being a public company will
make it more expensive for us to obtain director and officer
liability insurance. We may be required to accept reduced
coverage or incur substantially higher costs to obtain this
coverage. These factors could also make it more difficult for us
to attract and retain qualified executives and members of our
board of directors, particularly directors willing to serve on
our audit committee.
We will be exposed to risks relating to evaluations of our
internal controls over financial reporting required by
Section 404 of the Sarbanes-Oxley Act of 2002.
We are in the process of evaluating our internal control systems
to allow management to report on, and our independent auditors
to assess, our internal controls over financial reporting. We
will be performing the system and process evaluation and testing
(and any necessary remediation) required to comply with the
management certification and auditor attestation requirements of
Section 404 of the Sarbanes-Oxley Act. We are required to
comply with Section 404 by no later than December 31,
2006. However, we cannot be certain as to the timing of
completion of our evaluation, testing and remediation actions or
the impact of the same on our operations. Furthermore, upon
completion of this process, we may identify control deficiencies
of varying degrees of severity under applicable SEC and Public
23
Company Accounting Oversight Board rules and regulations that
remain unremediated. As a public company, we will be required to
report, among other things, control deficiencies that constitute
a “material weakness” or changes in internal controls
that materially affect, or are reasonably likely to materially
affect, internal controls over financial reporting. A
“material weakness” is a significant deficiency, or
combination of significant deficiencies, that results in more
than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or
detected. If we fail to implement the requirements of
Section 404 in a timely manner, we might be subject to
sanctions or investigation by regulatory agencies such as the
SEC. In addition, failure to comply with Section 404 or the
report by us of a material weakness may cause investors to lose
confidence in our financial statements and the trading price of
our common stock may decline. If we fail to remedy any material
weakness, our financial statements may be inaccurate, our access
to the capital markets may be restricted and the trading price
of our common stock may decline.
Our convertible preferred stock will remain outstanding upon
completion of this offering, which could adversely affect the
value of our common stock.
Upon completion of this offering, our outstanding convertible
preferred stock will be convertible into 2,246,179 shares
of common stock. Holders of our convertible preferred stock have
the right to cause us to file a registration statement with the
Securities and Exchange Commission to sell the shares of common
stock issuable upon conversion of the convertible preferred
stock. See “Certain Relationships and Related
Transactions — Registration Rights Agreement.”
Sales of shares of common stock issuable upon conversion of our
convertible preferred stock could adversely affect the trading
price of our common stock.
The conversion price of our convertible preferred stock will be
reduced as a result of the issuance of the shares of common
stock in this offering and the exchange of our Series A
preferred stock for common stock. Based upon an initial public
offering price of $10.00 per share (the mid-point of the
range set forth on the cover page of this prospectus), we expect
the conversion price of our convertible preferred stock will be
$22.26 per share. In order to calculate this conversion
price, our board of directors was required to make a
determination of the fair value of the shares of Series A
preferred stock that we will receive in exchange for shares of
our common stock. Our board of directors determined that the
fair value of the Series A preferred stock is not less than
$100 per share. We have received a letter from a
representative of the holders of a majority of our convertible
preferred stock requesting that we explain how our board of
directors determined the fair value of the Series A
preferred stock. We believe our board of directors made a good
faith determination as to the fair value of the Series A
preferred stock. However, if the determination made by our board
of directors was not made in good faith, and the fair value of
the Series A preferred stock is less than $100 per
share, the conversion price of our convertible preferred stock
would be lower than the $22.26 that we expect the conversion
price to be following this offering. Following this offering and
subject to certain exceptions, the conversion price of our
convertible preferred stock may further decrease if we issue
additional shares of our common stock for less than the market
price of our common stock. See “Description of Capital
Stock — Convertible Preferred Stock.”
We may not pay dividends on our common stock (other than in
additional shares of common stock) without the consent of the
holders of two-thirds of the outstanding shares of our
convertible preferred stock. If holders of our convertible
preferred stock consent to the payment of a dividend by us, we
must pay a dividend to the holders of our convertible preferred
stock on an as-converted to common stock basis equal to the
dividend we pay to holders of our common stock.
The terms of our articles of incorporation relating to our
convertible preferred stock could impede a change of control of
our company. Following a change of control, holders of our
convertible preferred stock have the right to require us to
redeem their shares at a redemption price of $100 per share
plus the cash value of any accrued and unpaid dividends. The
redemption provisions of our convertible
24
preferred stock could have the effect of discouraging a future
change of control of our company. See “Description of
Capital Stock — Convertible Preferred
Stock — Redemption.”
Provisions of our articles of incorporation and bylaws and
under the laws of the states of Louisiana and Texas could impede
an attempt to replace or remove our directors or otherwise
effect a change of control of our company, which could diminish
the value of our common stock.
Our articles of incorporation and bylaws contain provisions that
may make it more difficult for shareholders to replace or remove
directors even if the shareholders consider it beneficial to do
so. In addition, these provisions could delay or prevent a
change of control of our company that shareholders might
consider favorable. Our articles of incorporation and bylaws
contain the following provisions that could have an
anti-takeover effect:
|
|
|
|
|
|
•
|
election of our directors is classified, meaning that the
members of only one of three classes of our directors are
elected each year;
|
|
|
|
|
•
|
shareholders have limited ability to call shareholder meetings
and to bring business before a meeting of shareholders;
|
|
|
|
|
•
|
shareholders may not act by written consent, unless the consent
is unanimous; and
|
|
|
|
|
|
|
•
|
our board of directors may authorize the issuance of junior
preferred stock with such rights, preferences and privileges as
the board deems appropriate.
|
|
|
These provisions may make it difficult for shareholders to
replace management and could have the effect of discouraging a
future takeover attempt that is not approved by our board of
directors, but which individual shareholders might consider
favorable.
We are incorporated in Texas and will be subject to Part 13
of the Texas Business Corporation Act. Under this statute, our
ability to enter into a business combination with any affiliated
shareholder will be limited. See “Description of Capital
Stock—Anti-Takeover Provisions.”
In addition, two of our three insurance company subsidiaries,
American Interstate and Silver Oak Casualty, are incorporated in
Louisiana and the other, American Interstate of Texas, is
incorporated in Texas. Under Louisiana and Texas insurance law,
advance approval by the state insurance department is required
for any change of control of an insurer. “Control” is
presumed to exist through the direct or indirect ownership of
10% or more of the voting securities of a domestic insurance
company or any entity that controls a domestic insurance
company. Obtaining these approvals may result in the material
delay of, or deter, any such transaction.
25
CERTAIN IMPORTANT INFORMATION
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with information that
is different from that contained in this prospectus. If anyone
provides you with different or inconsistent information, you
should not rely on it. We and the underwriters are offering to
sell and seeking offers to buy these securities only in
jurisdictions where offers and sales are permitted. You should
assume that the information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of common
stock. Our business, financial condition, results of operations
and prospects may have changed since that date.
In this prospectus:
|
|
|
|
|
|
•
|
references to the “company,” “we,”
“us” or “our” refer to AMERISAFE, Inc. and
its subsidiaries, unless the context suggests otherwise; and
|
|
|
|
|
•
|
references to “AMERISAFE” refer solely to AMERISAFE,
Inc., unless the context suggests otherwise.
|
Unless otherwise stated, all amounts in this prospectus assume
no exercise of the underwriters’ over-allotment option and
all share amounts for periods following completion of, or giving
effect to, this offering assume:
|
|
|
|
|
|
|
|
•
|
an initial public offering price of $10.00 per share, which
is the mid-point of the price range set forth on the cover page
of this prospectus;
|
|
|
|
|
|
|
|
|
•
|
the use of approximately $5.1 million of our proceeds from
this offering to redeem all of our outstanding Series E
preferred stock (including accrued but unpaid dividends through
the anticipated closing date of this offering) upon completion
of this offering;
|
|
|
|
|
|
|
|
|
•
|
the use of approximately $6.1 million of our proceeds from
this offering to redeem 60,573 shares of our outstanding
Series A preferred stock upon completion of this
offering; and
|
|
|
|
|
|
|
|
|
•
|
the exchange of the remaining 811,243 shares of our
outstanding Series A preferred stock (including accrued but
unpaid dividends through the anticipated closing date of this
offering) for 8,112,423 shares of common stock upon
completion of this offering.
|
|
|
26
FORWARD-LOOKING STATEMENTS
Some of the statements under the captions “Prospectus
Summary,” “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and “Business” and elsewhere in this
prospectus may include forward-looking statements. These
statements reflect the current views of our senior management
with respect to future events and our financial performance.
These statements include forward-looking statements 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 for purposes of the federal
securities laws or otherwise.
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:
|
|
|
|
|
|
•
|
greater frequency or severity of claims and loss activity,
including as a result of natural or man-made catastrophic
events, than our underwriting, reserving or investment practices
anticipate based on historical experience or industry data;
|
|
|
|
|
•
|
changes in rating agency policies or practices;
|
|
|
|
|
•
|
the cyclical nature of the workers’ compensation insurance
industry;
|
|
|
|
|
•
|
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;
|
|
|
|
|
•
|
negative developments in the workers’ compensation
insurance industry;
|
|
|
|
|
•
|
decreased level of business activity of our policyholders;
|
|
|
|
|
•
|
decreased demand for our insurance;
|
|
|
|
|
•
|
increased competition on the basis of coverage availability,
claims management, safety services, payment terms, premium
rates, policy terms, types of insurance offered, overall
financial strength, financial ratings and reputation;
|
|
|
|
|
•
|
changes in regulations or laws applicable to us, our
policyholders or the agencies that sell our insurance;
|
|
|
|
|
•
|
changes in legal theories of liability under our insurance
policies;
|
|
|
|
|
•
|
developments in capital markets that adversely affect the
performance of our investments;
|
|
|
|
|
•
|
loss of the services of any of our senior management or other
key employees;
|
|
|
|
|
•
|
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
|
|
|
|
|
|
|
•
|
changes in general economic conditions, including interest
rates, inflation and other factors.
|
|
|
The foregoing factors should not be construed as exhaustive and
should be read together with the other cautionary statements
included in this prospectus. If one or more of 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. Any forward-looking
statements you read in this prospectus reflect our views as of
the date of this prospectus with respect to future events and
are subject to these and other risks, uncertainties and
assumptions relating to our operations, results of operations,
growth strategy and liquidity. Before making a decision to
purchase our common stock, you should carefully consider all of
the factors identified in this prospectus that could cause
actual results to differ.
27
USE OF PROCEEDS
We estimate that our net proceeds from this offering will be
approximately $71.2 million, based on an assumed initial
public offering price of $10.00 per share, which is the
mid-point of the price range set forth on the cover page of this
prospectus, and after deducting the underwriting discounts and
commissions and our estimated offering expenses. We intend to
retain approximately $60 million of our net proceeds from
this offering. Approximately $45 million of this amount
will be contributed to our insurance company subsidiaries
promptly following completion of this offering. The remaining
$15 million will be used to make additional capital
contributions to our insurance company subsidiaries as necessary
to support our anticipated growth and for general corporate
purposes, including to pay interest on our outstanding
subordinated notes and to fund other holding company operations.
We will use approximately $6.1 million of our net proceeds
to redeem approximately 60,573 shares of our Series A
preferred stock and approximately $5.1 million to redeem
all of our outstanding shares of Series E preferred stock.
If our net proceeds from this offering exceed
$71.2 million, the additional net proceeds will be used to
redeem additional shares of our Series A preferred stock.
DIVIDEND POLICY
We currently intend to retain any future earnings to finance our
operations and growth. As a result, we do not expect to pay any
cash dividends on our common stock for the foreseeable future.
Any future determination to pay cash dividends on our common
stock will be at the discretion of our board of directors and
will be dependent on our earnings, financial condition,
operating results, capital requirements, any contractual,
regulatory or other restrictions on the payment of dividends by
our subsidiaries to AMERISAFE, and other factors that our board
of directors deems relevant.
AMERISAFE is a holding company and has no direct operations. Our
ability to pay dividends in the future depends on the ability of
our operating subsidiaries to pay dividends to us. Our insurance
company subsidiaries are regulated insurance companies and
therefore are subject to significant regulatory restrictions
limiting their ability to declare and pay dividends.
Our ability to pay dividends is also subject to restrictions set
forth in our articles of incorporation, which prohibit us from
paying dividends on our common stock (other than in additional
shares of common stock) without the consent of the holders of
two-thirds of the outstanding shares of our convertible
preferred stock. If holders of our convertible preferred stock
consent to the payment of a dividend by us, we must pay a
dividend to the holders of our convertible preferred stock on an
as-converted to common stock basis equal to the dividend we pay
to holders of our common stock.
For additional information regarding restrictions on the payment
of dividends by us and our insurance company subsidiaries, see
“Business—Regulation—Dividend Limitations.”
28
CAPITALIZATION
The table below sets forth our consolidated capitalization as of
September 30, 2005 on an actual basis and on an as adjusted
basis giving effect to:
|
|
|
|
|
|
|
|
•
|
the sale of 8,000,000 shares of common stock in this
offering at an assumed initial public offering price of
$10.00 per share, which is the mid-point of the price range
set forth on the cover page of this prospectus, and after
deducting underwriting discounts and commissions and our
estimated offering expenses;
|
|
|
|
|
|
|
|
|
•
|
the use of approximately $5.1 million of our proceeds from
this offering to redeem all of our outstanding Series E
preferred stock (including accrued but unpaid dividends through
the anticipated closing date of the offering) upon completion of
this offering;
|
|
|
|
|
|
|
|
|
•
|
the use of approximately $6.1 million of our proceeds from
this offering to redeem 60,573 shares of our outstanding
Series A preferred stock upon completion of this offering;
|
|
|
|
|
|
|
|
|
•
|
the exchange of the remaining 811,243 shares of our
outstanding Series A preferred stock (including accrued but
unpaid dividends through the anticipated closing date of the
offering) for 8,112,423 shares of common stock upon
completion of this offering; and
|
|
|
|
|
|
|
|
|
•
|
3,000 shares of restricted stock that we intend to grant to
our non-employee directors upon completion of this offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(In thousands, except
|
|
|
|
|
share data)
|
|
|
Subordinated debt securities
|
|
$
|
36,090
|
|
|
$
|
36,090
|
|
|
Redeemable preferred stock:
|
|
|
|
|
|
|
|
|
|
Series A preferred stock, par value $0.01 per share,
$100 per share redemption value, 1,500,000 shares
authorized; 862,924 shares issued and outstanding, actual;
no shares issued and outstanding, as adjusted
|
|
|
86,292
|
|
|
|
—
|
|
|
Series C convertible preferred stock, par value
$0.01 per share, $100 per share redemption value,
300,000 shares authorized; 300,000 shares issued and
outstanding, actual and as adjusted
|
|
|
30,000
|
|
|
|
30,000
|
|
|
Series D convertible preferred stock, par value
$0.01 per share, $100 per share redemption value,
200,000 shares authorized; 200,000 shares issued and
outstanding, actual and as adjusted
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
Total redeemable preferred stock
|
|
|
136,292
|
|
|
|
50,000
|
|
|
Shareholders’ deficit:
|
|
|
|
|
|
|
|
|
|
Series E preferred stock, par value $0.01 per share,
$100 per share redemption value, 500,000 shares
authorized; 45,308 shares issued and outstanding, actual;
no shares issued and outstanding, as adjusted
|
|
|
4,531
|
|
|
|
—
|
|
|
Common stock, par value $0.01 per share,
50,000,000 shares authorized; 299,774 shares issued
and outstanding, actual; 16,415,197 shares issued and
outstanding, as adjusted
|
|
|
3
|
|
|
|
164
|
|
|
Additional paid-in capital
|
|
|
—
|
|
|
|
152,143
|
|
|
Deferred stock-based compensation
|
|
|
—
|
|
|
|
(30
|
)
|
|
Retained deficit
|
|
|
(58,299
|
)
|
|
|
(59,750
|
)
|
|
Accumulated other comprehensive income
|
|
|
6,796
|
|
|
|
6,796
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity (deficit)
|
|
|
(46,969
|
)
|
|
|
99,323
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
125,413
|
|
|
$
|
185,413
|
|
|
|
|
|
|
|
|
|
29
DILUTION
Our net tangible book value as of September 30, 2005 is
presented below on a pro forma basis, assuming:
|
|
|
|
|
|
|
|
•
|
the use of approximately $5.1 million of our proceeds from
this offering to redeem all of our outstanding Series E
preferred stock (including accrued but unpaid dividends through
the anticipated closing date of this offering) upon completion
of this offering;
|
|
|
|
|
|
|
|
|
•
|
the use of $6.1 million of our proceeds from this offering
to redeem 60,573 shares of our outstanding Series A
preferred stock upon completion of this offering;
|
|
|
|
|
|
|
|
|
•
|
the exchange of the remaining 811,243 shares of our
outstanding Series A preferred stock (including accrued but
unpaid dividends through the anticipated closing date of this
offering) for 8,112,423 shares of our common stock; and
|
|
|
|
|
|
|
|
|
•
|
the issuance of 3,000 shares of restricted stock to our
non-employee directors upon completion of this offering.
|
|
|
As of September 30, 2005, our pro forma net tangible book
value was $28.2 million, or $3.35 per share of common
stock. Our pro forma net tangible book value per share
represents the amount of our total tangible assets less total
liabilities divided by the number of shares of our common stock
outstanding plus 8,112,423 shares of common stock to be
issued in exchange for our Series A preferred stock and
3,000 shares of common stock to be issued to our
non-employee directors. After giving effect to the issuance of
8,000,000 shares of our common stock at the assumed initial
public offering price of $10.00 per share, which is the
mid-point of the price range set forth on the cover page of this
prospectus, and the application of the estimated net proceeds
therefrom, and after deducting underwriting discounts and
commissions and our estimated offering expenses, our pro forma
net tangible book value as of September 30, 2005 would have
been $99.3 million, or $6.05 per share of common
stock. This amount represents an immediate increase of
$2.70 per share to our existing shareholders and an
immediate dilution of $3.95 per share from the assumed
initial public offering price of $10.00 per share issued to
new investors purchasing shares offered hereby. The table below
illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
10.00
|
|
|
|
Pro forma net tangible book value per share as of
September 30, 2005
|
|
$
|
3.35
|
|
|
|
|
|
|
|
Increase in pro forma net tangible book value per share
attributable to this offering
|
|
$
|
2.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share after this offering
|
|
|
|
|
|
$
|
6.05
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
3.95
|
|
|
|
|
|
|
|
|
|
Assuming the conversion of all outstanding shares of our
convertible preferred stock at a conversion price of $22.26,
which is the expected conversion price upon completion of this
offering, our pro forma net tangible book value as of
September 30, 2005 would be $8.00.
30
The table below sets forth, as of September 30, 2005, the
number of shares of our common stock issued (assuming the use of
approximately $5.1 million to redeem all of our outstanding
Series E preferred stock (including accrued but unpaid
dividends through the anticipated closing date of this
offering), the use of approximately $6.1 million to redeem
60,573 shares of our outstanding Series A preferred
stock, the exchange of the remaining shares of our outstanding
Series A preferred stock (including accrued but unpaid
dividends through the anticipated closing date of this offering)
for 8,112,423 shares of our common stock, and the issuance
of 3,000 shares of restricted stock to our non-employee
directors upon completion of this offering), the total
consideration paid and the average price per share paid by
(a) our existing shareholders, and (b) our new
investors, after giving effect to the issuance of
8,000,000 shares of common stock in this offering at the
assumed initial public offering price of $10.00 per share,
before deducting underwriting discounts and commissions and our
estimated offering expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued
|
|
|
Total Consideration
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Price
|
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing shareholders
|
|
|
8,415,197
|
|
|
|
51.3
|
%
|
|
$
|
28,173,000
|
|
|
|
26.0
|
%
|
|
$
|
3.35
|
|
|
New investors
|
|
|
8,000,000
|
|
|
|
48.7
|
%
|
|
|
80,000,000
|
|
|
|
74.0
|
%
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,415,197
|
|
|
|
100.0
|
%
|
|
|
108,173,000
|
|
|
|
100.0
|
%
|
|
|
6.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This table does not give effect to:
|
|
|
|
|
|
|
|
•
|
2,246,179 shares issuable upon conversion of our
outstanding convertible preferred stock. Following completion of
this offering, the conversion price of our convertible preferred
stock is expected to be $22.26, subject to adjustment in certain
circumstances;
|
|
|
|
|
|
|
|
|
•
|
1,567,500 shares that may be issued pursuant to stock
options we intend to grant to our executive officers and other
employees upon completion of this offering, at an exercise price
equal to the initial public offering price; and
|
|
|
|
|
|
|
|
|
•
|
379,500 additional shares available for future issuance
under our equity incentive plans.
|
|
|
31
SELECTED FINANCIAL INFORMATION
The following income statement data for the years ended
December 31, 2002, 2003 and 2004 and the balance sheet data
as of December 31, 2003 and 2004 were derived from our
consolidated financial statements included elsewhere in this
prospectus. The income statement data for the years ended
December 31, 2000 and 2001 and the balance sheet data as of
December 31, 2000, 2001 and 2002 were derived from our
audited consolidated financial statements, which are not
included in this prospectus. The income statement data for the
nine-month periods ended September 30, 2004 and 2005 and
the balance sheet data as of September 30, 2004 and 2005
were derived from our unaudited condensed consolidated financial
statements included elsewhere in this prospectus, which include
all adjustments, consisting of normal recurring adjustments,
that management considers necessary for a fair presentation of
our financial position and results of operations for the periods
presented. These historical results are not necessarily
indicative of results to be expected from any future period. You
should read the following selected financial information
together with the other information contained in this
prospectus, including “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and the financial statements and related notes included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
345,027
|
|
|
$
|
204,752
|
|
|
$
|
185,093
|
|
|
$
|
223,590
|
|
|
$
|
264,962
|
|
|
$
|
214,248
|
|
|
$
|
231,182
|
|
|
Ceded premiums written
|
|
|
(80,076
|
)
|
|
|
(49,342
|
)
|
|
|
(26,563
|
)
|
|
|
(27,600
|
)
|
|
|
(21,951
|
)
|
|
|
(16,100
|
)
|
|
|
(14,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
264,951
|
|
|
$
|
155,410
|
|
|
$
|
158,530
|
|
|
$
|
195,990
|
|
|
$
|
243,011
|
|
|
$
|
198,148
|
|
|
$
|
216,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
187,106
|
|
|
$
|
170,782
|
|
|
$
|
163,257
|
|
|
$
|
179,847
|
|
|
$
|
234,733
|
|
|
$
|
172,417
|
|
|
$
|
189,370
|
|
|
Net investment income
|
|
|
9,372
|
|
|
|
9,935
|
|
|
|
9,419
|
|
|
|
10,106
|
|
|
|
12,217
|
|
|
|
8,660
|
|
|
|
11,985
|
|
|
Net realized gains (losses) on investments
|
|
|
(773
|
)
|
|
|
491
|
|
|
|
(895
|
)
|
|
|
316
|
|
|
|
1,421
|
|
|
|
543
|
|
|
|
1,337
|
|
|
Fee and other income
|
|
|
2,520
|
|
|
|
1,367
|
|
|
|
2,082
|
|
|
|
462
|
|
|
|
589
|
|
|
|
389
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
198,225
|
|
|
|
182,575
|
|
|
|
173,863
|
|
|
|
190,731
|
|
|
|
248,960
|
|
|
|
182,009
|
|
|
|
203,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses incurred
|
|
|
109,536
|
|
|
|
123,386
|
|
|
|
121,062
|
|
|
|
129,250
|
|
|
|
174,186
|
|
|
|
128,304
|
|
|
|
155,625
|
|
|
Underwriting and certain other operating costs(1)
|
|
|
23,334
|
|
|
|
23,364
|
|
|
|
22,674
|
|
|
|
23,062
|
|
|
|
28,987
|
|
|
|
21,128
|
|
|
|
24,478
|
|
|
Commissions
|
|
|
16,121
|
|
|
|
14,351
|
|
|
|
9,189
|
|
|
|
11,003
|
|
|
|
14,160
|
|
|
|
10,556
|
|
|
|
11,869
|
|
|
Salaries and benefits
|
|
|
20,253
|
|
|
|
17,148
|
|
|
|
16,541
|
|
|
|
15,037
|
|
|
|
15,034
|
|
|
|
11,367
|
|
|
|
10,068
|
|
|
Interest expense
|
|
|
797
|
|
|
|
735
|
|
|
|
498
|
|
|
|
203
|
|
|
|
1,799
|
|
|
|
1,215
|
|
|
|
2,061
|
|
|
Policyholder dividends
|
|
|
7,156
|
|
|
|
2,717
|
|
|
|
156
|
|
|
|
736
|
|
|
|
1,108
|
|
|
|
930
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
177,197
|
|
|
|
181,701
|
|
|
|
170,120
|
|
|
|
179,291
|
|
|
|
235,274
|
|
|
|
173,500
|
|
|
|
204,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
21,028
|
|
|
|
874
|
|
|
|
3,743
|
|
|
|
11,440
|
|
|
|
13,686
|
|
|
|
8,509
|
|
|
|
(1,434
|
)
|
|
Income tax expense (benefit)
|
|
|
7,001
|
|
|
|
(395
|
)
|
|
|
(1,438
|
)
|
|
|
2,846
|
|
|
|
3,129
|
|
|
|
1,763
|
|
|
|
(1,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
14,027
|
|
|
|
1,269
|
|
|
|
5,181
|
|
|
|
8,594
|
|
|
|
10,557
|
|
|
|
6,746
|
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment-in-kind preferred dividends
|
|
|
(8,229
|
)
|
|
|
(8,820
|
)
|
|
|
(9,453
|
)
|
|
|
(10,133
|
)
|
|
|
(9,781
|
)
|
|
|
(7,481
|
)
|
|
|
(7,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
5,798
|
|
|
$
|
(7,551
|
)
|
|
$
|
(4,272
|
)
|
|
$
|
(1,539
|
)
|
|
$
|
776
|
|
|
$
|
(735
|
)
|
|
$
|
(6,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion allocable to common shareholders(2)
|
|
|
65.3%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
70.2%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
Net income (loss) allocable to common shareholders
|
|
$
|
3,784
|
|
|
$
|
(7,551
|
)
|
|
$
|
(4,272
|
)
|
|
$
|
(1,539
|
)
|
|
$
|
545
|
|
|
$
|
(735
|
)
|
|
$
|
(6,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share equivalent
|
|
$
|
12.62
|
|
|
$
|
(41.93
|
)
|
|
$
|
(23.72
|
)
|
|
$
|
(8.55
|
)
|
|
$
|
2.14
|
|
|
$
|
(3.67
|
)
|
|
$
|
(22.07
|
)
|
|
Diluted weighted average of common share equivalents outstanding
|
|
|
299,974
|
|
|
|
180,125
|
|
|
|
180,125
|
|
|
|
180,125
|
|
|
|
255,280
|
|
|
|
200,301
|
|
|
|
299,774
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Insurance Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year loss ratio(3)
|
|
|
57.1%
|
|
|
|
66.9%
|
|
|
|
71.8%
|
|
|
|
70.6%
|
|
|
|
68.5%
|
|
|
|
65.9%
|
|
|
|
70.6%
|
|
|
Prior accident year loss ratio(4)
|
|
|
1.4%
|
|
|
|
5.3%
|
|
|
|
2.4%
|
|
|
|
1.3%
|
|
|
|
5.7%
|
|
|
|
8.5%
|
|
|
|
11.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
|
|
58.5%
|
|
|
|
72.2%
|
|
|
|
74.2%
|
|
|
|
71.9%
|
|
|
|
74.2%
|
|
|
|
74.4%
|
|
|
|
82.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net underwriting expense ratio(5)
|
|
|
31.9%
|
|
|
|
32.1%
|
|
|
|
29.7%
|
|
|
|
27.3%
|
|
|
|
24.8%
|
|
|
|
25.0%
|
|
|
|
24.5%
|
|
|
Net dividend ratio(6)
|
|
|
3.8%
|
|
|
|
1.6%
|
|
|
|
0.1%
|
|
|
|
0.4%
|
|
|
|
0.5%
|
|
|
|
0.5%
|
|
|
|
0.2%
|
|
|
Net combined ratio(7)
|
|
|
94.2%
|
|
|
|
105.9%
|
|
|
|
104.0%
|
|
|
|
99.6%
|
|
|
|
99.5%
|
|
|
|
99.9%
|
|
|
|
106.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
44,914
|
|
|
$
|
44,270
|
|
|
$
|
44,677
|
|
|
$
|
49,815
|
|
|
$
|
25,421
|
|
|
$
|
52,780
|
|
|
$
|
28,843
|
|
|
Investments
|
|
|
145,439
|
|
|
|
148,305
|
|
|
|
205,315
|
|
|
|
257,729
|
|
|
|
364,868
|
|
|
|
313,677
|
|
|
|
469,316
|
|
|
Amounts recoverable from reinsurers
|
|
|
327,172
|
|
|
|
298,451
|
|
|
|
214,342
|
|
|
|
211,774
|
|
|
|
198,977
|
|
|
|
201,856
|
|
|
|
122,774
|
|
|
Premiums receivable, net
|
|
|
122,450
|
|
|
|
104,907
|
|
|
|
95,291
|
|
|
|
108,380
|
|
|
|
114,141
|
|
|
|
133,632
|
|
|
|
140,061
|
|
|
Deferred income taxes
|
|
|
11,807
|
|
|
|
14,716
|
|
|
|
11,372
|
|
|
|
12,713
|
|
|
|
15,624
|
|
|
|
17,149
|
|
|
|
23,232
|
|
|
Deferred policy acquisition costs
|
|
|
14,038
|
|
|
|
11,077
|
|
|
|
9,505
|
|
|
|
11,820
|
|
|
|
12,044
|
|
|
|
13,808
|
|
|
|
18,189
|
|
|
Deferred charges
|
|
|
3,681
|
|
|
|
2,588
|
|
|
|
1,997
|
|
|
|
2,987
|
|
|
|
3,054
|
|
|
|
3,670
|
|
|
|
3,601
|
|
|
Total assets
|
|
|
685,308
|
|
|
|
645,474
|
|
|
|
603,801
|
|
|
|
678,608
|
|
|
|
754,187
|
|
|
|
756,396
|
|
|
|
830,308
|
|
|
Reserves for loss and loss adjustment expenses
|
|
|
379,824
|
|
|
|
383,032
|
|
|
|
346,542
|
|
|
|
377,559
|
|
|
|
432,880
|
|
|
|
420,785
|
|
|
|
469,894
|
|
|
Unearned premiums
|
|
|
107,418
|
|
|
|
92,047
|
|
|
|
87,319
|
|
|
|
103,462
|
|
|
|
111,741
|
|
|
|
129,193
|
|
|
|
138,623
|
|
|
Insurance-related assessments
|
|
|
25,522
|
|
|
|
25,964
|
|
|
|
23,743
|
|
|
|
26,133
|
|
|
|
29,876
|
|
|
|
29,369
|
|
|
|
33,847
|
|
|
Debt
|
|
|
9,500
|
|
|
|
9,000
|
|
|
|
8,000
|
|
|
|
16,310
|
|
|
|
36,090
|
|
|
|
36,090
|
|
|
|
36,090
|
|
|
Redeemable preferred stock(8)
|
|
|
112,061
|
|
|
|
116,520
|
|
|
|
121,300
|
|
|
|
126,424
|
|
|
|
131,916
|
|
|
|
130,507
|
|
|
|
136,292
|
|
|
Shareholders’ deficit(9)
|
|
|
(26,913
|
)
|
|
|
(10,980
|
)
|
|
|
(25,100
|
)
|
|
|
(20,652
|
)
|
|
|
(42,862
|
)
|
|
|
(46,338
|
)
|
|
|
(46,969
|
)
|
|
|
|
|
(1)
|
Includes policy acquisition expenses, such as assessments,
premium taxes and other general and administrative expenses,
excluding commissions and salaries and benefits, related to
insurance operations and corporate operating expenses.
|
|
|
|
(2)
|
Reflects the participation rights of the Series C and
Series D convertible preferred stock. See Note 15 to
our audited financial statements.
|
|
|
|
(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)
|
Includes our Series A preferred stock and Series C and
Series D convertible preferred stock, each of which is
mandatorily redeemable upon the occurrence of certain events
that are deemed to be outside the control of our company.
|
|
|
|
|
|
|
|
(9)
|
In 1997, we entered into a recapitalization transaction with
Welsh Carson that resulted in a $164.2 million charge to
retained earnings. See Note 1 to our audited financial
statements.
|
|
|
33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and
results of operations should be read in conjunction with our
consolidated financial statements and the notes thereto included
elsewhere in this prospectus. This discussion includes
forward-looking statements that are subject to risks,
uncertainties and other factors described under the caption
“Risk Factors.” These factors could cause our actual
results in 2005 and beyond to differ materially from those
expressed in, or implied by, those forward-looking statements.
See “Forward-Looking Statements.”
Overview
AMERISAFE is a holding company that markets and underwrites
workers’ compensation insurance through its subsidiaries.
Workers’ compensation insurance covers statutorily
prescribed benefits that employers are obligated to provide to
their employees who are injured in the course and scope of their
employment. Our business strategy is focused on providing this
coverage to small to mid-sized employers engaged in hazardous
industries, principally construction, trucking and logging.
Employers engaged in hazardous industries pay substantially
higher than average rates for workers’ compensation
insurance compared to employers in other industries, as measured
per payroll dollar. The higher premium rates are due to the
nature of the work performed and the inherent workplace danger
of our target employers. Hazardous industry employers also tend
to have less frequent but more severe claims as compared to
employers in other industries due to the nature of their
businesses. We provide proactive safety reviews of
employers’ workplaces. These safety reviews are a vital
component of our underwriting process and also promote safer
workplaces. We utilize intensive claims management practices
that we believe permit us to reduce the overall cost of our
claims. In addition, our audit services ensure that our
policyholders pay the appropriate premiums required under the
terms of their policies and enable us to monitor payroll
patterns or aberrations that cause underwriting, safety or fraud
concerns. We believe that the higher premiums typically paid by
our policyholders, together with our disciplined underwriting
and safety, claims and audit services, provide us with the
opportunity to earn attractive returns on equity.
We actively market our insurance in 27 states and the
District of Columbia through independent agencies, as well as
through our wholly owned insurance agency subsidiary. We are
also licensed in an additional 18 states and the
U.S. Virgin Islands.
One of the key financial measures that we use to evaluate our
operating performance is return on average equity. We calculate
return on average equity by dividing net income by the average
of shareholders’ equity (deficit) plus redeemable preferred
stock. Our return on average equity was 5.7% in 2002, 8.5% in
2003 and 10.8% in 2004. Our return on average equity for the
nine months ended September 30, 2005 was 0.8%. Our overall
financial objective is to produce a return on equity of at least
15% over the long-term. We target producing a combined ratio of
95% or lower while maintaining optimal operating leverage in our
insurance subsidiaries that is commensurate with our A.M. Best
rating objective. Our combined ratio was 104% in 2002, 99.6% in
2003, 99.5% in 2004 and 106.9% for the nine months ended
September 30, 2005.
Investment income is an important part of our business. Because
the period of time between our receipt of premiums and the
ultimate settlement of claims is often several years or longer,
we are able to invest cash from premiums for significant periods
of time. As a result, we are able to generate more investment
income from our premiums as compared to insurance companies that
operate in many other lines of business. From December 31,
2001 to September 30, 2005, our investment portfolio,
including cash and cash equivalents, increased from
$192.6 million to $498.2 million and produced net
investment income of $9.4 million in 2002,
$10.1 million in 2003, $12.2 million in 2004 and
$12.0 million in the nine months ended September 30,
2005. In the third quarter of 2005, we received a
$61.3 million
34
payment from one of our reinsurers pursuant to a commutation
agreement. These funds were contributed to our investment
portfolio.
The use of reinsurance is an important component of our business
strategy. We purchase reinsurance to protect us from the impact
of large losses. Our reinsurance program for 2005 includes ten
reinsurers that provide coverage to us in excess of a certain
specified loss amount, or retention level. Under our reinsurance
program, we pay our reinsurers a percentage of our gross
premiums earned and, in turn, the reinsurers assume an allocated
portion of losses for the accident year. Under our current
reinsurance program, we retain the first $1.0 million of
each loss occurrence. For losses between $1.0 million and
$5.0 million, we have an annual aggregate deductible of
approximately $5.6 million. After the deductible is
satisfied, we retain 10.0% of each loss occurrence between
$1.0 million and $5.0 million. As losses are incurred
and recorded, we record amounts recoverable from reinsurers for
the portion of the losses ceded to our reinsurers.
With limited exceptions, we historically have retained a
significant amount of losses under our reinsurance programs.
From 1998 through 2000, we substantially lowered our retention
to approximately $18,000 per loss occurrence, which means
that we ceded a greater portion of our premiums to our
reinsurers. The effect of these lower retention levels was a
significant increase in the amount of estimated losses assumed
by our reinsurers. In addition, our amounts recoverable from
reinsurers increased, reaching a high of $360.9 million at
April 30, 2001. In 2001 and 2002, we increased our
retention level to $500,000. In 2003, we increased our retention
to $500,000 plus 20% of each loss occurrence between $500,000
and $5.0 million. In 2004, we further increased our
retention level to $1.0 million. In addition, for losses
between $1.0 million and $2.0 million, we had an
annual aggregate deductible of approximately $300,000 and, after
we satisfied the deductible, retained 10% of each loss
occurrence. For losses between $2.0 million and
$5.0 million, we had an annual aggregate deductible of
approximately $1.3 million and, after we satisfied the
deductible, retained 20% of each loss occurrence. As described
below under “—Liquidity and Capital Resources,”
effective as of June 30, 2005, we entered into a
commutation agreement with one of our reinsurers. Pursuant to
this agreement, we released this reinsurer from all liabilities
to us under certain reinsurance agreements in exchange for a
cash payment of $61.3 million. As a result of increases in
our retention levels, the commutation agreement and collections
from our reinsurers in the normal course of business, our
amounts recoverable from reinsurers have decreased to
$122.8 million as of September 30, 2005.
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 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. Reserves are based on estimates of the most
likely ultimate cost of individual claims. These estimates are
inherently uncertain. Judgment is required to determine the
relevance of our historical experience and industry information
under current facts and circumstances. The interpretation of
this historical and industry data can be impacted by external
forces, principally frequency and severity of future claims,
length of time to achieve ultimate settlement of claims,
inflation of medical costs and wages, insurance policy coverage
interpretations, jury determinations and legislative changes.
Accordingly, our reserves may prove to be inadequate to cover
our actual losses. If we change our estimates, these changes
would be reflected in our results of operations during the
period in which they are made, with increases in our reserves
resulting in decreases in our earnings. We increased our
estimates for prior year loss reserves by $3.9 million in
2002, $2.3 million in 2003, $13.4 million in 2004 and
$8.7 million in the nine months ended September 30,
2005. We also recorded a $13.2 million loss in connection
with our commutation with Converium in the nine months ended
September 30, 2005. These increased estimates and the
commutation decreased our net income approximately
$2.5 million in 2002, $1.5 million in 2003,
$8.7 million in 2004 and $14.2 million in the nine
months ended September 30, 2005.
35
The workers’ compensation insurance industry is cyclical in
nature and influenced by many factors, including price
competition, medical cost increases, natural and man-made
disasters, changes in interest rates, changes in state laws and
regulations and general economic conditions. A hard market cycle
in our industry is characterized by decreased competition that
results in higher premium rates, more restrictive policy
coverage terms and lower commissions paid to agencies. In
contrast, a soft market cycle is characterized by increased
competition that results in lower premium rates, expanded policy
coverage terms and higher commissions paid to agencies. We
believe that the workers’ compensation insurance industry
is slowly transitioning to a more competitive market
environment. Our strategy across market cycles is to maintain
premium rates, deploy capital judiciously, manage our expenses
and focus on underserved markets within our target industries
that we believe will provide opportunities for greater returns.
Principal Revenue and Expense Items
Our revenues consist primarily of the following:
Net Premiums Earned.
Net premiums earned is the
earned portion of our net premiums written. Net premiums written
is equal to gross premiums written less premiums ceded to
reinsurers. Gross premiums written includes the estimated annual
premiums from each insurance policy we write in our voluntary
and assigned risk businesses during a reporting period based on
the policy effective date or the date the policy is bound,
whichever is later, as well as premiums from mandatory pooling
arrangements.
Premiums are earned on a daily pro rata basis over the term of
the policy. At the end of each reporting period, premiums
written that are not earned are classified as unearned premiums
and are earned in subsequent periods over the remaining term of
the policy. Our insurance policies typically have a term of one
year. Thus, for a one-year policy written on July 1, 2004
for an employer with constant payroll during the term of the
policy, we would earn half of the premiums in 2004 and the other
half in 2005.
Net Investment Income and Net Realized Gains and Losses on
Investments.
We invest our statutory surplus funds and
the funds supporting our insurance liabilities in fixed maturity
and equity securities. In addition, a portion of these funds are
held in cash and cash equivalents to pay current claims. Our net
investment income includes interest and dividends earned on our
invested assets. We assess the performance of our investment
portfolio using a standard tax equivalent yield metric.
Investment income that is tax-exempt is grossed up by our
marginal federal tax rate of 35% to express yield on tax-exempt
securities on the same basis as taxable securities. Net realized
gains and losses on our investments are reported separately from
our net investment income. Net realized gains occur when our
investment securities are sold for more than their costs or
amortized costs, as applicable. Net realized losses occur when
our investment securities are sold for less than their costs or
amortized costs, as applicable, or are written down as a result
of an other-than-temporary impairment. We classify all of our
fixed maturity securities, other than redeemable preferred
stock, as held-to-maturity, and all of our equity securities and
redeemable preferred stock as available-for-sale. Net unrealized
gains (losses) on our equity securities and redeemable preferred
stock are reported separately within accumulated other
comprehensive income on our balance sheet.
Fee and Other Income.
We recognize commission income
earned on policies issued by other carriers that are sold by our
wholly owned insurance agency subsidiary as the related services
are performed. We also recognize a small portion of interest
income from mandatory pooling arrangements in which we
participate.
Our expenses consist primarily of the following:
Loss and Loss Adjustment Expenses Incurred.
Loss and
loss adjustment expenses incurred represents our largest expense
item and, for any given reporting period, includes estimates of
future claim payments, changes in those estimates from prior
reporting periods and costs associated with
36
investigating, defending and servicing claims. These expenses
fluctuate based on the amount and types of risks we insure. We
record loss and loss adjustment expenses related to estimates of
future claim payments based on case-by-case valuations and
statistical analyses. We seek to establish all reserves at the
most likely ultimate exposure based on our historical claims
experience. It is typical for our more serious claims to take
several years to settle and we revise our estimates as we
receive additional information about the condition of injured
employees. Our ability to estimate loss and loss adjustment
expenses accurately at the time of pricing our insurance
policies is a critical factor in our profitability.
Underwriting and Certain Other Operating
Costs.
Underwriting and certain other operating costs
are those expenses that we incur to underwrite and maintain the
insurance policies we issue. These expenses include state and
local premium taxes and fees and other operating costs, offset
by commissions we receive from reinsurers under our reinsurance
treaty program. We pay state and local taxes, licenses and fees,
assessments and contributions to state workers’
compensation security funds based on premiums. In addition,
other operating costs include general and administrative
expenses, excluding commissions and salaries and benefits,
incurred at both the insurance company and corporate levels.
Commissions.
We pay commissions to 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.
Interest Expense.
Interest expense represents
amounts we incur on our outstanding indebtedness at the
then-applicable interest rate.
Income Tax Expense.
We incur federal, state and
local income tax expense.
Critical Accounting Policies
It is important to understand our accounting policies in order
to understand our financial statements. Management considers
some of these policies to be very important to the presentation
of our financial results because they require us to make
estimates and assumptions. These estimates and assumptions
affect the reported amounts of our assets, liabilities, revenues
and expenses and the related disclosures. Some of the estimates
result from judgments that can be subjective and complex and,
consequently, actual results in future periods might differ from
these estimates.
Management believes that the most critical accounting policies
relate to the reporting of reserves for loss and loss adjustment
expenses, including losses that have occurred but have not been
reported prior to the reporting date, amounts recoverable from
reinsurers, assessments, deferred policy acquisition costs,
deferred income taxes and the impairment of investment
securities.
The following is a description of our critical accounting
policies.
Reserves for Loss and Loss Adjustment Expenses.
We
record reserves for estimated losses under insurance policies
that we write and for loss adjustment expenses related to the
investigation and settlement of policy claims. Our reserves for
loss and loss adjustment expenses represent the estimated cost
of all reported and unreported loss and loss adjustment expenses
incurred and unpaid at any given point in time based on known
facts and circumstances. Our reserves for loss and loss
adjustment expenses are estimated using case-by-case valuations
and statistical analyses.
In establishing these estimates, we make various assumptions
regarding a number of factors, including frequency and severity
of claims, length of time to achieve ultimate settlement of
claims, projected inflation of medical costs and wages,
insurance policy coverage interpretations and judicial
determinations. Due to the inherent uncertainty associated with
these estimates, and the cost of
37
incurred but unreported claims, our actual liabilities may be
different from our original estimates. On a quarterly basis, we
review our reserves for loss and loss adjustment expenses to
determine whether further adjustments are required. Any
resulting adjustments are included in the current period’s
results. In establishing our reserves, we do not use loss
discounting, which would involve recognizing the time value of
money and offsetting estimates of future payments by future
expected investment income. Additional information regarding our
reserves for loss and loss adjustment expenses can be found in
“Business—Loss Reserves.”
Amounts Recoverable from Reinsurers.
Amounts
recoverable from reinsurers represent the portion of our paid
and unpaid loss and loss adjustment expenses that are assumed by
reinsurers. These amounts are separately reported on our balance
sheet as assets and do not reduce our reserves for loss and loss
adjustment expenses because reinsurance does not relieve us of
liability to our policyholders. We are required to pay claims
even if a reinsurer fails to pay us under the terms of a
reinsurance contract. We calculate amounts recoverable from
reinsurers based on our estimates of the underlying loss and
loss adjustment expenses, as well as the terms and conditions of
our reinsurance contracts, which could be subject to
interpretation. In addition, we bear credit risk with respect to
our reinsurers, which can be significant because some of the
unpaid loss and loss adjustment expenses for which we have
reinsurance coverage remain outstanding for extended periods of
time.
Assessments.
We are subject to various assessments
and premium surcharges related to our insurance activities,
including assessments and premium surcharges for state guaranty
funds and second injury funds. Assessments based on premiums are
generally paid one year after the calendar year in which the
policies are written. Assessments based on losses are generally
paid within one year of when claims are paid by us. State
guaranty fund assessments are used by state insurance oversight
agencies to pay claims of policyholders of impaired, insolvent
or failed insurance companies and the operating expenses of
those agencies. Second injury funds are used by states to
reimburse insurers and employers for claims paid to injured
employees for aggravation of prior conditions or injuries. In
some states, these assessments and premium surcharges may be
partially recovered through a reduction in future premium taxes.
Deferred Policy Acquisition Costs.
We defer
commission expenses, premium taxes and certain marketing, sales,
underwriting and safety costs that vary with and are primarily
related to the acquisition of insurance policies. These
acquisition costs are capitalized and charged to expense ratably
as premiums are earned. In calculating deferred policy
acquisition costs, these costs are limited to their estimated
realizable value, which gives effect to the premiums to be
earned, anticipated losses and settlement expenses and certain
other costs we expect to incur as the premiums are earned, less
related net investment income. Judgments as to the ultimate
recoverability of these deferred policy acquisition costs are
highly dependent upon estimated future profitability of unearned
premiums. If the unearned premiums were less than our expected
claims and expenses after considering investment income, we
would reduce the deferred costs.
Deferred Income Taxes.
We use the liability method
of accounting for income taxes. Under this method, deferred
income tax assets and liabilities are recognized for the future
tax consequences attributed to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using tax rates expected to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred
tax assets and liabilities resulting from a tax rate change
impacts our net income or loss in the reporting period that
includes the enactment date of the tax rate change.
In assessing whether our deferred tax assets will be realized,
management considers whether it is more likely than not that we
will generate future taxable income during the periods in which
those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities,
tax planning strategies and projected future taxable income in
making this assessment. If
38
necessary, we establish a valuation allowance to reduce the
deferred tax assets to the amounts that are more likely than not
to be realized.
Impairment of Investment Securities.
Impairment of
an investment security results in a reduction of the carrying
value of the security and the realization of a loss when the
fair value of the security declines below our cost or amortized
cost, as applicable, for the security and the impairment is
deemed to be other-than-temporary. We regularly review our
investment portfolio to evaluate the necessity of recording
impairment losses for other-than-temporary declines in the fair
value of our investments. We consider various factors in
determining if a decline in the fair value of an individual
security is other-than-temporary. Some of the factors we
consider include:
|
|
|
|
|
|
•
|
how long and by how much the fair value of the security has been
below its cost;
|
|
|
|
|
•
|
the financial condition and near-term prospects of the issuer of
the security, including any specific events that may affect its
operations or earnings;
|
|
|
|
|
•
|
our intent and ability to keep the security for a sufficient
time period for it to recover its value;
|
|
|
|
|
•
|
any downgrades of the security by a rating agency; and
|
|
|
|
|
•
|
any reduction or elimination of dividends, or nonpayment of
scheduled interest payments.
|
39
Results of Operations
The table below summarizes certain operating results and key
measures we use in monitoring and evaluating our operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(In thousands)
|
|
|
Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
185,093
|
|
|
$
|
223,590
|
|
|
$
|
264,962
|
|
|
$
|
214,248
|
|
|
$
|
231,182
|
|
|
Ceded premiums written
|
|
|
(26,563
|
)
|
|
|
(27,600
|
)
|
|
|
(21,951
|
)
|
|
|
(16,100
|
)
|
|
|
(14,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
158,530
|
|
|
$
|
195,990
|
|
|
$
|
243,011
|
|
|
$
|
198,148
|
|
|
$
|
216,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
163,257
|
|
|
$
|
179,847
|
|
|
$
|
234,733
|
|
|
$
|
172,417
|
|
|
$
|
189,370
|
|
|
Net investment income
|
|
|
9,419
|
|
|
|
10,106
|
|
|
|
12,217
|
|
|
|
8,660
|
|
|
|
11,985
|
|
|
Net realized gains (losses) on investments
|
|
|
(895
|
)
|
|
|
316
|
|
|
|
1,421
|
|
|
|
543
|
|
|
|
1,337
|
|
|
Fee and other income
|
|
|
2,082
|
|
|
|
462
|
|
|
|
589
|
|
|
|
389
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
173,863
|
|
|
|
190,731
|
|
|
|
248,960
|
|
|
|
182,009
|
|
|
|
203,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses incurred
|
|
|
121,062
|
|
|
|
129,250
|
|
|
|
174,186
|
|
|
|
128,304
|
|
|
|
155,625
|
|
|
Underwriting and certain other operating costs(1)
|
|
|
22,674
|
|
|
|
23,062
|
|
|
|
28,987
|
|
|
|
21,128
|
|
|
|
24,478
|
|
|
Commissions
|
|
|
9,189
|
|
|
|
11,003
|
|
|
|
14,160
|
|
|
|
10,556
|
|
|
|
11,869
|
|
|
Salaries and benefits
|
|
|
16,541
|
|
|
|
15,037
|
|
|
|
15,034
|
|
|
|
11,367
|
|
|
|
10,068
|
|
|
Interest expense
|
|
|
498
|
|
|
|
203
|
|
|
|
1,799
|
|
|
|
1,215
|
|
|
|
2,061
|
|
|
Policyholder dividends
|
|
|
156
|
|
|
|
736
|
|
|
|
1,108
|
|
|
|
930
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
170,120
|
|
|
|
179,291
|
|
|
|
235,274
|
|
|
|
173,500
|
|
|
|
204,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
3,743
|
|
|
|
11,440
|
|
|
|
13,686
|
|
|
|
8,509
|
|
|
|
(1,434
|
)
|
|
Income tax expense (benefit)
|
|
|
(1,438
|
)
|
|
|
2,846
|
|
|
|
3,129
|
|
|
|
1,763
|
|
|
|
(1,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,181
|
|
|
$
|
8,594
|
|
|
$
|
10,557
|
|
|
$
|
6,746
|
|
|
$
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Insurance Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year loss ratio(2)
|
|
|
71.8%
|
|
|
|
70.6%
|
|
|
|
68.5%
|
|
|
|
65.9%
|
|
|
|
70.6%
|
|
|
Prior accident year loss ratio(3)
|
|
|
2.4%
|
|
|
|
1.3%
|
|
|
|
5.7%
|
|
|
|
8.5%
|
|
|
|
11.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
|
|
74.2%
|
|
|
|
71.9%
|
|
|
|
74.2%
|
|
|
|
74.4%
|
|
|
|
82.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net underwriting expense ratio(4)
|
|
|
29.7%
|
|
|
|
27.3%
|
|
|
|
24.8%
|
|
|
|
25.0%
|
|
|
|
24.5%
|
|
|
Net dividend ratio(5)
|
|
|
0.1%
|
|
|
|
0.4%
|
|
|
|
0.5%
|
|
|
|
0.5%
|
|
|
|
0.2%
|
|
|
Net combined ratio(6)
|
|
|
104.0%
|
|
|
|
99.6%
|
|
|
|
99.5%
|
|
|
|
99.9%
|
|
|
|
106.9%
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands
|
|
|
) (Unaudited)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
44,677
|
|
|
$
|
49,815
|
|
|
$
|
25,421
|
|
|
$
|
52,780
|
|
|
$
|
28,843
|
|
|
Investments
|
|
|
205,315
|
|
|
|
257,729
|
|
|
|
364,868
|
|
|
|
313,677
|
|
|
|
469,316
|
|
|
Amounts recoverable from reinsurers
|
|
|
214,342
|
|
|
|
211,774
|
|
|
|
198,977
|
|
|
|
201,856
|
|
|
|
122,774
|
|
|
Premiums receivable, net
|
|
|
95,291
|
|
|
|
108,380
|
|
|
|
114,141
|
|
|
|
133,632
|
|
|
|
140,061
|
|
|
Deferred income taxes
|
|
|
11,372
|
|
|
|
12,713
|
|
|
|
15,624
|
|
|
|
17,149
|
|
|
|
23,232
|
|
|
Deferred policy acquisition costs
|
|
|
9,505
|
|
|
|
11,820
|
|
|
|
12,044
|
|
|
|
13,808
|
|
|
|
18,189
|
|
|
Deferred charges
|
|
|
1,997
|
|
|
|
2,987
|
|
|
|
3,054
|
|
|
|
3,670
|
|
|
|
3,601
|
|
|
Total assets
|
|
|
603,801
|
|
|
|
678,608
|
|
|
|
754,187
|
|
|
|
756,396
|
|
|
|
830,308
|
|
|
Reserves for loss and loss adjustment expenses
|
|
|
346,542
|
|
|
|
377,559
|
|
|
|
432,880
|
|
|
|
420,785
|
|
|
|
469,894
|
|
|
Unearned premiums
|
|
|
87,319
|
|
|
|
103,462
|
|
|
|
111,741
|
|
|
|
129,193
|
|
|
|
138,623
|
|
|
Insurance-related assessments
|
|
|
23,743
|
|
|
|
26,133
|
|
|
|
29,876
|
|
|
|
29,369
|
|
|
|
33,847
|
|
|
Debt
|
|
|
8,000
|
|
|
|
16,310
|
|
|
|
36,090
|
|
|
|
36,090
|
|
|
|
36,090
|
|
|
Redeemable preferred stock(7)
|
|
|
121,300
|
|
|
|
126,424
|
|
|
|
131,916
|
|
|
|
130,507
|
|
|
|
136,292
|
|
|
Shareholders’ deficit(8)
|
|
|
(25,100
|
)
|
|
|
(20,652
|
)
|
|
|
(42,862
|
)
|
|
|
(46,338
|
)
|
|
|
(46,969
|
)
|
|
|
|
|
(1)
|
Includes policy acquisition expenses, such as assessments,
premium taxes and other general and administrative expenses,
excluding commissions and salaries and benefits, related to
insurance operations and corporate operating expenses.
|
|
|
|
(2)
|
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.
|
|
|
|
(3)
|
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.
|
|
|
|
(4)
|
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.
|
|
|
|
(5)
|
The net dividend ratio is calculated by dividing policyholder
dividends by the current year’s net premiums earned.
|
|
|
|
|
|
(6)
|
The net combined ratio is the sum of the net loss ratio, the net
underwriting expense ratio and the net dividend ratio.
|
|
|
|
|
|
|
|
(7)
|
Includes our Series A preferred stock and Series C and
Series D convertible preferred stock, each of which is
mandatorily redeemable upon the occurrence of certain events
that are deemed to be outside the control of our company.
|
|
|
|
|
|
|
|
(8)
|
In 1997, we entered into a recapitalization transaction with
Welsh Carson that resulted in a $164.2 million charge to
retained earnings. See Note 1 to our audited financial
statements.
|
|
|
Overview of Operating Results
|
|
|
|
|
Nine Months Ended September 30, 2005 Compared to Nine
Months Ended September 30, 2004
|
Gross Premiums Written.
Gross premiums written for
the nine months ended September 30, 2005 were
$231.2 million, compared to $214.2 million for the
same period in 2004, an increase of 7.9%. The increase was
attributable primarily to a $9.6 million increase in annual
premiums on policies written
41
during the period, a $4.1 million increase in premiums
resulting from payroll audits and related premium adjustments
and a $3.1 million increase in assigned risk premiums.
Net Premiums Written.
Net premiums written for the
nine months ended September 30, 2005 were
$216.3 million, compared to $198.1 million for the
same period in 2004, an increase of 9.1%. The increase was
attributable to growth in gross premiums written and a decrease
in premiums ceded to reinsurers from $16.1 million for the
nine months ended September 30, 2004 to $14.9 million
for the same period in 2005 resulting from increased retention
levels under our reinsurance treaty program in 2005 as compared
to 2004. Ceded premiums as a percentage of gross premiums
written were 6.5% for the nine months ended September 30,
2005 compared to 7.5% for the same period in 2004.
Net Premiums Earned.
Net premiums earned for the
nine months ended September 30, 2005 were
$189.4 million, compared to $172.4 million for the
same period in 2004, an increase of 9.8%. This increase was
primarily the result of an increase in premiums written during
the nine months ended September 30, 2004 compared to the
nine months ended September 30, 2003, which resulted in
higher premiums earned in the nine months ended
September 30, 2005 compared to the same period in 2004.
Net Investment Income.
Net investment income for the
nine months ended September 30, 2005 was
$12.0 million, compared to $8.7 million for the same
period in 2004, an increase of 38.4%. The change was
attributable to an increase in our investment portfolio,
including cash and cash equivalents, from an average of
$337.0 million for the nine months ended September 30,
2004 to an average of $444.2 million for the nine months
ended September 30, 2005, an increase of 31.8%. Also
contributing to this change was the increase in the
tax-equivalent yield on our investment portfolio from 3.7% per
annum for the nine months ended September 30, 2004, to
4.8% per annum for the nine months ended September 30,
2005.
Net Realized Gains on Investments.
Net realized
gains on investments for the nine months ended
September 30, 2005 totaled $1.3 million, compared to
$543,000 for the same period in 2004. The increase was
attributable to the timing of the sale of equity securities in
accordance with our investment guidelines.
Loss and Loss Adjustment Expenses Incurred.
Loss and
loss adjustment expenses incurred totaled $155.6 million
for the nine months ended September 30, 2005, as compared
to $128.3 million for the nine months ended
September 30, 2004, an increase of $27.3 million, or
21.3%. Increases in our reserves resulting from our commutation
with Converium, and reserve strengthening for prior accident
years, accounted for $21.9 million, or 80.1%, of this
increase. During the nine-month period ended September 30,
2005, we performed an analysis of our loss and loss adjustment
expenses, which resulted in an increase of our loss reserves
related to prior accident years of $8.7 million, net of
reinsurance. As part of this analysis, we determined that the
amount recoverable from Converium was $6.5 million higher
than we had previously estimated, which increased our loss and
loss adjustment expenses incurred. Our net loss ratio was 82.2%
in the nine-month period ended September 30, 2005 compared
to 74.4% in the same period of 2004.
Underwriting and Certain Other Operating Costs, Commissions
and Salaries and Benefits.
Underwriting and certain other
operating costs, commissions and salaries and benefits for the
nine months ended September 30, 2005 were
$46.4 million, compared to $43.1 million for the same
period in 2004, an increase of 7.8%. This increase was
attributable to a $445,000 increase in bad debt expense and a
$569,000 increase in premium taxes, as well as a
$2.6 million decrease in our reinsurance commissions which
reinsurance commissions act as an offset to underwriting
expenses. Commissions increased 12.4% and salaries and benefits
decreased 11.4% as a result of the transfer of our employee
insurance agents to our insurance agency subsidiary in January
2005, and the corresponding change in their compensation from
salary to commission expense. Our underwriting expense ratio
decreased from 25.0% for the nine months ended
September 30, 2004 to 24.5% for the same period in 2005.
42
Interest expense.
Interest expense for the nine
months ended September 30, 2005 was $2.1 million,
compared to $1.2 million for the same period in 2004. Our
weighted average borrowings increased to $36.1 million for
the first nine months of 2005 from $29.5 million for the
first nine months of 2004. The increase in weighted average
borrowings was attributable to the issuance of
$25.8 million of subordinated notes in April 2004, the
proceeds of which were used to redeem outstanding shares of our
Series E preferred stock. In addition, our weighted average
interest rate increased to 7.0% per annum for the nine months
ended September 30, 2005 from 4.5% per annum for the
same period in 2004.
Income tax expense (benefit).
Our income tax benefit
for the nine months ended September 30, 2005 was
$2.0 million, compared to income tax expense of
$1.8 million for the same period in 2004. The change from
income tax expense to benefit resulted from our pre-tax loss for
the nine months ended September 30, 2005, as compared to
our pre-tax income for the same period in 2004, as well as
increases in tax-exempt interest and deductions for dividends
for the nine months ended September 30, 2005 as compared to
the same period in 2004.
Year Ended December 31,
2004 Compared to Year Ended December 31, 2003
Gross Premiums Written.
Gross premiums written for the
year ended December 31, 2004 were $265.0 million,
compared to $223.6 million in 2003, an increase of 18.5%.
The increase was attributable primarily to a $26.9 million
increase in annual premiums on policies written during the
period, a $10.6 million increase in premiums resulting from
payroll audits and related premium adjustments and a
$3.5 million increase in assumed premiums from mandatory
pooling arrangements.
Net Premiums Written.
Net premiums written for the year
ended December 31, 2004 were $243.0 million, compared
to $196.0 million for the same period in 2003, an increase
of 24.0%. The increase was attributable to growth in gross
premiums written and a decrease in premiums ceded to reinsurers
from $27.6 million in 2003 to $22.0 million in 2004
resulting from increased retention levels under our reinsurance
treaty program in 2004 as compared to 2003. As a percentage of
gross premiums written, ceded premiums were 8.3% in 2004
compared to 12.3% in 2003.
Net Premiums Earned.
Net premiums earned for the year
ended December 31, 2004 were $234.7 million, compared
to $179.8 million for the same period in 2003, an increase
of 30.5%. The increase was attributable to the growth in net
premiums written and an increase in the amount of premiums
written in the first half of 2004 as compared to the first half
of 2003.
Net Investment Income.
Net investment income for the year
ended December 31, 2004 was $12.2 million, compared to
$10.1 million for the same period in 2003, an increase of
20.9%. The increase was attributable to the growth in our
investment portfolio from an average of $278.8 million in
2003 to an average of $348.9 million in 2004, an increase
of 25.2%. The growth in our investment portfolio resulted
primarily from our cash flows from operations, which totaled
$91.9 million in 2004. In addition, the tax-equivalent
yield on our investment portfolio increased to 4.2% per
annum for the year ended December 31, 2004 to 4.0% per
annum for 2003.
Net Realized Gains on Investments.
Net realized gains on
investments for the year ended December 31, 2004 totaled
$1.4 million, compared to $316,000 for the same period in
2003. The increase was due to $1.2 million in gains from
the sale of equity securities in our investment portfolio.
Loss and Loss Adjustment Expenses Incurred.
Loss and loss
adjustment expenses incurred increased to $174.2 million
for the year ended December 31, 2004 from
$129.3 million for the year ended December 31, 2003,
an increase of 34.8%. The increase resulted from a growth in net
premiums earned of 30.5%, and an increase in loss and loss
adjustment expenses incurred of $13.4 million for prior
accident years. The increase for prior accident years related
primarily to the 2002 accident year, which increased by
$9.4 million. The unfavorable development in 2002 was the
result of adverse development in certain existing claims and
increased estimates in our reserves for that accident year. Our
net loss ratio was 74.2% in 2004 compared to 71.9% in 2003.
43
Underwriting and Certain Other Operating Costs, Commissions
and Salaries and Benefits.
Underwriting and certain other
operating costs, commissions and salaries and benefits for the
year ended December 31, 2004 were $58.2 million,
compared to $49.1 million for the same period in 2003, an
increase of 18.5%. The increase was primarily attributable to a
$3.1 million increase in agent commissions, a
$1.9 million increase in premium-based assessments and
premium taxes and a $1.1 million increase in mandatory
pooling arrangement fees. In addition, there was a decrease in
commissions received from our reinsurers related to premiums
ceded, which commissions are netted against our underwriting and
certain other operating costs, from $7.3 million in 2003 to
$4.8 million in 2004. Commissions increased 28.7% from 2003
to 2004 corresponding with our premium growth. Salaries and
benefits remained flat during this period. Our underwriting
expense ratio decreased from 27.3% in 2003 to 24.8% in 2004.
Interest Expense.
Interest expense for the year ended
December 31, 2004 was $1.8 million, compared to
$203,000 for the same period in 2003. Our weighted average
borrowings increased to $29.0 million for the year ended
December 31, 2004 from $7.1 million for the year ended
December 31, 2003 as a result of the issuance of
$25.8 million of subordinated notes in April 2004, offset
by the repayment of $6.0 million of a note payable. Our
weighted average interest rate increased to 4.8% per annum in
2004 from 2.9% per annum in 2003 as a result of the higher
weighted average interest rate on our subordinated notes as
compared to our note payable.
Income Tax Expense.
Income tax expense for the year ended
December 31, 2004 was $3.1 million, compared to
$2.8 million for the same period in 2003, an increase of
9.9%. As a percentage of pre-tax income, our effective income
tax rate decreased from 24.9% in 2003 to 22.9% in 2004. The
decrease in the effective rate resulted from a larger percentage
of tax-exempt fixed maturity securities in our investment
portfolio in 2004 and a positive adjustment to our prior
year’s tax liability.
Year Ended December 31,
2003 Compared to Year Ended December 31, 2002
Gross Premiums Written.
Gross premiums written for the
year ended December 31, 2003 were $223.6 million,
compared to $185.1 million for the same period in 2002, an
increase of 20.8%. The increase was attributable primarily to a
$28.9 million increase in annual premiums on policies
written during the period, an $8.2 million increase in
premiums resulting from payroll audits and related premium
adjustments and a $0.9 million increase in assumed premiums
from mandatory pooling arrangements.
Net Premiums Written.
Net premiums written for the year
ended December 31, 2003 were $196.0 million, compared
to $158.5 million for the same period in 2002, an increase
of 23.6%. The growth in net premiums written is attributable to
the increase in gross premiums written, offset by an increase in
premiums ceded to reinsurers from $26.6 million in 2002 to
$27.6 million in 2003. As a percentage of gross premiums
written, ceded premiums were 12.3% in 2003 compared to 14.4% in
2002.
Net Premiums Earned.
Net premiums earned for the year
ended December 31, 2003 were $179.8 million, compared
to $163.3 million for the same period in 2002, an increase
of 10.2%. The increase was attributable to the growth in net
premiums written, offset by an increase in premiums ceded to
reinsurers and a decrease in the amount of premiums written in
the first half of 2003 as compared to the first half of 2002.
Net Investment Income.
Net investment income for the year
ended December 31, 2003 was $10.1 million, compared to
$9.4 million for the same period in 2002, an increase of
7.3%. The increase was due to an increase in our average
investment portfolio from $221.3 million in 2002 to
$278.8 million in 2003, an increase of 26.0%, resulting
from increased cash flow from operations, and an increase in the
tax-equivalent yield on our investment portfolio from
3.5% per annum in 2002 to 4.0% per annum in 2003.
44
Net Realized Gains (Losses) on Investments.
Net realized
gains on investments for the year ended December 31, 2003
were $316,000, compared to net realized losses on investments of
$895,000 for the same period in 2002.
Loss and Loss Adjustment Expenses Incurred.
Loss and loss
adjustment expenses incurred increased to $129.2 million
for the year ended December 31, 2003 from
$121.1 million for the year ended December 31, 2002,
an increase of 6.8%. The increase was driven primarily by an
$11.9 million, or 10.2%, increase in net premiums earned
and a $973,000 increase in loss and loss adjustment expenses for
prior accident years. Our net loss ratio was 71.9% in 2003
compared to 74.2% in 2002.
Underwriting and Certain Other Operating Costs, Commissions
and Salaries and Benefits.
Underwriting and certain other
operating costs, commissions and salaries and benefits for the
year ended December 31, 2003 were $49.1 million,
compared to $48.4 million for the same period in 2002, an
increase of 1.4%. The increase was primarily attributable to a
$1.7 million increase in loss-based assessments, a
$1.3 million increase in agent commissions and a $382,000
increase in mandatory pooling arrangement fees, as well as a
$1.3 million increase in reinsurance commissions which act
as an offset to underwriting commissions. Offsetting the
increase was a recovery of $800,000 of legal fees through the
settlement of a dispute with a building contractor. Commissions
increased 19.7% corresponding with our premium growth. Salaries
and benefits decreased 9.1% from 2003 to 2002 due to a decrease
in our number of employees. Our underwriting expense ratio
decreased from 29.7% in 2002 to 27.3% in 2003.
Interest Expense.
Interest expense for the year ended
December 31, 2003 was $203,000, compared to $498,000 for
the same period in 2002, a decrease of 59.2%. Our weighted
average borrowings decreased to $7.1 million for the year
ended December 31, 2003 from $8.0 million for the year
ended December 31, 2002. In addition, our weighted average
interest rate decreased to 2.9% per annum in 2003 from 3.9% per
annum in 2002.
Income Tax Expense.
Income tax expense for the year ended
December 31, 2003 was $2.8 million, compared to a
$1.4 million income tax benefit for the same period in
2002. Income tax expense for 2002 was positively impacted by
$1.1 million as a result of tax method changes for prior
years.
Liquidity and Capital Resources
Our principal sources of operating funds are premiums,
investment income and proceeds from sales and maturities of
investments. Our primary uses of operating funds include
payments of claims and operating expenses. Currently, we pay
claims using cash flow from operations and invest our excess
cash in fixed maturity and equity securities. We presently
expect that the net proceeds from this offering, combined with
projected cash flow from operations, will provide us sufficient
liquidity to fund our anticipated growth, including payment of
claims and operating expenses, payment of interest on our
subordinated notes and other holding company expenses, for at
least 24 months following this offering.
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 $87.2 million in 2002, $99.2 million in
2003, $113.9 million in 2004 and $45.5 million in the
nine months ended September 30, 2005. Since
December 31, 2001, we have funded claim payments from cash
flow from operations, principally premiums, net of amounts ceded
to our reinsurers, and net investment income. We presently
expect to maintain sufficient cash flow from operations to meet
our anticipated claim obligations and operating and capital
expenditure needs. Our investment portfolio has increased from
$192.6 million at December 31, 2001 to
$498.2 million at September 30, 2005. We do not
presently anticipate selling securities in our investment
portfolio to pay claims or to fund operating expenses.
Accordingly, we currently classify all fixed maturity
securities, other than redeemable preferred stock, in the
held-to-maturity category. Should circumstances arise that would
require us to do so, we may incur losses on such sales, which
would adversely affect our results of operations and could
reduce investment income
45
in future periods. The fixed maturity securities in our
investment portfolio as of September 30, 2005 had an
effective duration of 3.1 years, with individual maturities
extending to 2035.
We purchase reinsurance to protect us against severe claims and
catastrophic events. Effective January 1, 2005, our
reinsurance program provides us with reinsurance coverage for
each loss occurrence in excess of $1.0 million, up to
$30.0 million, subject to applicable deductibles and
retentions. However, for any loss occurrence involving only one
person, our reinsurance coverage is limited to a maximum of
$10.0 million, subject to applicable deductibles and
retentions. We have an annual aggregate deductible of
approximately $5.6 million for losses between
$1.0 million and $5.0 million. After the deductible is
satisfied, we retain 10.0% of each loss occurrence between
$1.0 million and $5.0 million. Based on our estimates
of future claims, we believe we are sufficiently capitalized to
retain the first $1.0 million of each loss occurrence.
In 2001, we increased the retention under our reinsurance
program to $500,000 per loss occurrence from approximately
$18,000 per loss occurrence in 2000. Our retention was
maintained at $500,000 per loss occurrence in 2002. In 2003, we
increased our retention to $500,000 plus 20% of each loss
occurrence between $500,000 and $5.0 million. In 2004, we
further increased our retention to $1.0 million per loss
occurrence. For losses between $1.0 million and
$2.0 million, we had an annual aggregate deductible of
approximately $300,000 and, after we satisfied the deductible,
retained 10% of each loss occurrence. For losses between
$2.0 million and $5.0 million, we had an annual aggregate
deductible of approximately $1.3 million and, after we
satisfied the deductible, retained 20% of each loss occurrence.
The decisions to increase retentions were made, in part, due to
the increased cost of reinsurance. The increase in our retention
decreased the amount of premiums ceded to our reinsurers and
increased cash flow from operations. However, we retain a
greater portion of potential claims payable in future periods.
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. Following this offering, we may consider
modestly increasing our current reinsurance retention from the
levels in our 2005 program depending on the costs of
reinsurance. Even if we maintain our existing retention levels,
if the cost of reinsurance increases, our cash flow from
operations would decrease as we would cede a greater portion of
our written premiums to our reinsurers. Conversely, our cash
flow from operations would increase if the cost of reinsurance
declined relative to our retention.
Net cash provided by operating activities was
$111.4 million for the nine months ended September 30,
2005, as compared to $69.3 million for the same period in
2004. For the first nine months of 2005, major components of
cash provided by operating activities were net premiums
collected of $187.9 million and amounts recovered from
reinsurers of $78.4 million, offset by claim payments of
$121.3 million and operating expenditures of
$33.6 million. Major components of cash provided by
operating activities for the nine months ended
September 30, 2004 were net premiums collected of
$173.1 million and amounts recovered from reinsurers of
$41.0 million, offset by claim payments of
$116.4 million and operating expenditures of
$28.5 million.
Net cash provided by operating activities was $91.9 million
for the year ended December 31, 2004, $50.5 million
for the year ended December 31, 2003 and $54.3 million
for the year ended December 31, 2002. Major components of
cash provided by operating activities in 2004 were net premiums
collected of $237.8 million and amounts recovered from
reinsurers of $54.1 million, offset by claim payments of
$160.6 million and operating expenditures of
$39.4 million. Major components of cash provided by
operating activities in 2003 were net premiums collected of
$183.2 million and amounts recovered from reinsurers of
$61.0 million, offset by claim payments of
$159.6 million and operating expenditures of
$34.1 million. Major components of cash provided by
operating activities in 2002 were net premiums collected of
$170.2 million and amounts recovered from reinsurers of
$104.7 million, offset by claim payments of
$178.7 million and operating expenditures of
$41.9 million.
46
Net cash used by investing activities was $106.0 million
for the nine months ended September 30, 2005, as compared
to $58.9 million for the same period in 2004. For the nine
months ended September 30, 2005, major components of net
cash used by investing activities included investment purchases
of $168.2 million and purchases of furniture, fixtures and
equipment of $977,000, offset by proceeds from sales and
maturities of investments of $63.1 million. For the nine
months ended September 30, 2004, major components of net
cash used by investing activities included investment purchases
of $82.4 million and purchases of furniture, fixtures and
equipment of $1.5 million, offset by proceeds from sales
and maturities of investments of $22.6 million and
repayment of a mortgage loan receivable of $2.4 million.
Net cash used by investing activities was $109.0 million
for the year ended December 31, 2004, $53.6 million
for the year ended December 31, 2003 and $52.9 million
for the year ended December 31, 2002. In 2004, major
components of net cash used by investing activities included
investment purchases of $145.3 million and net purchases of
furniture, fixtures and equipment of $2.8 million, offset
by proceeds from sales and maturities of investments of
$36.7 million and proceeds of $2.4 million from
repayment of a loan. In 2003, major components of net cash used
by investing activities included investment purchases of
$90.7 million and net purchases of furniture, fixtures and
equipment of $600,000, offset by proceeds from sales and
maturities of investments of $37.6 million. In 2002, major
components of net cash used by investing activities included
investment purchases of $78.2 million and net purchases of
furniture, fixtures and equipment of $1.6 million, offset
by proceeds from sales and maturities of investments of
$26.9 million and proceeds from the sale of a subsidiary
totaling $100,000.
Net cash used by financing activities was $2.0 million for
the nine months ended September 30, 2005, which represents
the costs incurred in connection with this offering through
September 30, 2005. For the nine months ended
September 30, 2004, net cash used in financing activities
totaled $7.4 million. Major components of net cash used in
financing activities included the redemption of
$27.2 million of Series E preferred stock and the
repayment of the remaining $6.0 million of a note payable,
offset by proceeds of $25.8 million from the issuance of
subordinated notes pursuant to a trust preferred securities
transaction.
Net cash provided by financing activities was $8.3 million
for the year ended December 31, 2003. In 2003, AMERISAFE
entered into a trust preferred securities transaction pursuant
to which it issued $10.3 million of subordinated notes. The
proceeds from this issuance were offset by the repayment of
$2.0 million under a bank line of credit.
Net cash used by financing activities was $1.0 million for
the year ended December 31, 2002, resulting from the
repayment of $1.0 million of a note payable.
Interest on the outstanding subordinated notes accrues at a
floating rate equal to the three-month LIBOR plus a marginal
rate. Our $10.3 million issuance of subordinated notes due
2034 has a marginal rate of 4.1%, and, as of September 30,
2005, had an effective rate of 7.7%. These notes are prepayable
at par beginning in January 2009. Our $25.8 million
issuance of subordinated notes due 2034 has a marginal rate of
3.8% and, as of September 30, 2005, had an effective rate
of 7.6%. These notes are prepayable at par beginning in April
2009.
AMERISAFE is a holding company that transacts business through
its operating subsidiaries, including American Interstate,
Silver Oak Casualty and American Interstate of Texas.
AMERISAFE’s primary assets are the capital stock of these
operating subsidiaries. The ability of AMERISAFE to fund its
operations depends upon the surplus and earnings of its
subsidiaries and their ability to pay dividends to AMERISAFE.
Payment of dividends by our insurance subsidiaries is restricted
by state insurance laws, including laws establishing minimum
solvency and liquidity thresholds. See
“Business—Regulation—Dividend Limitations.”
Based on reported capital and surplus at December 31, 2004,
American Interstate would have been permitted under Louisiana
insurance law to pay dividends to AMERISAFE in 2005 in an amount
up to $11.2 million without approval by the Louisiana
Department of Insurance.
47
During 2004, Converium Reinsurance (North America), one of our
reinsurers, reported a significant loss, resulting in a
downgrade in its A.M. Best rating. Although Converium
continued to reimburse us under the terms of our reinsurance
agreements, we initiated discussions with Converium to seek to
reduce the credit risk associated with the amounts due to us.
Effective June 30, 2005, we entered into a commutation
agreement with Converium. In the third quarter of 2005,
Converium paid us $61.3 million pursuant to this agreement
in exchange for a termination and full release of three of our
five reinsurance agreements with Converium. Under the
commutation agreement, all liabilities reinsured with Converium
under these three reinsurance agreements have reverted back to
us. We recorded a pre-tax loss of $13.2 million related to
this commutation agreement. Converium remains obligated to us
under the remaining two agreements. At September 30, 2005,
the amounts recoverable from Converium under the remaining two
reinsurance agreements was $6.3 million. We are continuing
to evaluate alternatives to further reduce the credit risk
associated with these amounts. The $61.3 million we
received in connection with the commutation with Converium was
contributed to our investment portfolio.
Hurricane Katrina struck the Gulf Coast of the United States on
August 29, 2005, followed by Hurricane Rita on
September 24, 2005. These storms caused substantial damage
in Louisiana, Texas Mississippi and Alabama. Two of our 51 field
claims offices suffered significant damage. Our executive
offices were not damaged and our operations were not materially
affected by the hurricanes.
Based upon our analysis of our policyholders likely to be
affected by Hurricane Katrina or Hurricane Rita, we anticipate
that we may incur some delay in receipt of premiums, and
reduction of premiums from policyholders directly affected by
the hurricanes. Because of the geographic diversity of our
operations, we do not expect a material impact on our cash flows
or results of operations as a result of any such delay or
reduction. Over the next several months, as the areas affected
by the hurricanes begin to recover, we anticipate that we may
see an increase in revenue due primarily to increased
construction activity.
We have also performed an assessment of securities held in our
investment portfolio. A substantial percentage of our municipal
bonds were issued by Louisiana public entities, all of which are
either insured and/or backed by the full faith and credit of the
state of Louisiana. Based on this assessment, we do not believe
we have significant additional credit risk associated with our
investment portfolio as a result of Hurricane Katrina or
Hurricane Rita.
Investment Portfolio
The first priority of our investment strategy is capital
preservation, with a secondary focus on maximizing an
appropriate risk adjusted return. We presently expect to
maintain sufficient liquidity from funds generated from
operations to meet our anticipated insurance obligations and
operating and capital expenditure needs, with excess funds
invested in accordance with our investment guidelines. Our
investment portfolio is managed by an independent asset manager
that operates under investment guidelines approved by our board
of directors. We allocate our portfolio into three categories;
cash and cash equivalents, fixed maturity securities and equity
securities. Cash and cash equivalents include cash on deposit,
commercial paper, short-term municipal securities, pooled
short-term money market funds and certificates of deposit. Our
fixed maturity securities include obligations of the
U.S. Treasury or U.S. agencies, obligations of states
and their subdivisions, long-term certificates of deposit,
U.S. dollar-denominated obligations of
U.S. corporations, mortgage-backed securities, mortgages
guaranteed by the Federal National Mortgage Association and the
Government National Mortgage Association, asset-backed
securities and preferred stocks that are mandatorily redeemable
or are redeemable at the option of the holder. Our equity
securities include U.S. dollar-denominated common stocks of
U.S. corporations, master limited partnerships and
nonredeemable preferred stock.
Under Louisiana and Texas law, as applicable, each of American
Interstate, Silver Oak Casualty and American Interstate of Texas
is required to invest only in securities that are either
interest-bearing
48
or eligible for dividends, and must limit its investment in the
securities of any single issuer to five percent of the insurance
company’s assets. As of September 30, 2005, we were in
compliance with these requirements.
We employ diversification policies and balance investment credit
risk and related underwriting risks to minimize our total
potential exposure to any one business sector or security. Our
investment portfolio, including cash and cash equivalents, had a
carrying value of $498.2 million as of September 30,
2005, and is summarized in the table below by type of investment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
Carrying Value
|
|
|
of Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
$
|
242,406
|
|
|
|
48.7%
|
|
|
|
Mortgage-backed securities
|
|
|
88,953
|
|
|
|
17.8%
|
|
|
|
U.S. Treasury securities and obligations of
U.S. Government agencies
|
|
|
56,623
|
|
|
|
11.4%
|
|
|
|
Corporate bonds
|
|
|
22,018
|
|
|
|
4.4%
|
|
|
|
Asset-backed securities
|
|
|
6,946
|
|
|
|
1.4%
|
|
|
|
Redeemable preferred stocks
|
|
|
1,729
|
|
|
|
0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
418,675
|
|
|
|
84.0%
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
47,029
|
|
|
|
9.5%
|
|
|
|
Nonredeemable preferred stocks
|
|
|
3,612
|
|
|
|
0.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
50,641
|
|
|
|
10.2%
|
|
|
|
|
|
|
|
|
|
|
Total investments, excluding cash and cash equivalents
|
|
|
469,316
|
|
|
|
94.2%
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
28,843
|
|
|
|
5.8%
|
|
|
|
|
|
|
|
|
|
|
Total investments, including cash and cash equivalents
|
|
$
|
498,159
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
We regularly evaluate our investment portfolio to identify
other-than-temporary impairments in the fair values of the
securities held in our investment portfolio. We consider various
factors in determining whether a decline in the fair value of a
security is other-than-temporary, including:
|
|
|
|
|
|
•
|
how long and by how much the fair value of the security has been
below its cost;
|
|
|
|
|
•
|
the financial condition and near-term prospects of the issuer of
the security, including any specific events that may affect its
operations or earnings;
|
|
|
|
|
•
|
our intent and ability to keep the security for a sufficient
time period for it to recover its value;
|
|
|
|
|
•
|
any downgrades of the security by a rating agency; and
|
|
|
|
|
•
|
any reduction or elimination of dividends, or nonpayment of
scheduled interest payments.
|
As of September 30, 2005, there were no
other-than-temporary declines in the fair values of the
securities held in our investment portfolio.
49
The gross unrealized losses of our fixed maturity and equity
securities as of September 30, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Fair Value as %
|
|
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
of Cost Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed maturity securities with unrealized losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exceeding $50,000 at September 30, 2005 and for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year (16 issues)
|
|
$
|
71,934
|
|
|
$
|
1,601
|
|
|
|
97.8
|
%
|
|
|
|
Longer than one year (two issues)
|
|
|
3,511
|
|
|
|
116
|
|
|
|
96.8
|
%
|
|
|
Less than $50,000 at September 30, 2005 (162 issues)
|
|
|
178,012
|
|
|
|
2,074
|
|
|
|
98.8
|
%
|
|
Equity securities with unrealized losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exceeding $50,000 at September 30, 2005 and for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year (four issues)
|
|
|
3,668
|
|
|
|
295
|
|
|
|
92.5
|
%
|
|
|
|
Longer than one year (two issues)
|
|
|
1,257
|
|
|
|
323
|
|
|
|
79.5
|
%
|
|
|
Less than $50,000 at September 30, 2005 (52 issues)
|
|
|
13,889
|
|
|
|
803
|
|
|
|
94.5
|
%
|
As of September 30, 2005, we did not hold any fixed
maturity securities with unrealized losses in excess of 20% of
the security’s carrying value as of that date.
Contractual Obligations and Commitments
We manage risk on certain long-duration claims by settling these
claims through the purchase of annuities from unaffiliated life
insurance companies. In the event these companies are unable to
meet their obligations under these annuity contracts, we could
be liable to the claimants, but our reinsurers remain obligated
to indemnify us for all or part of these obligations in
accordance with the terms of our reinsurance contracts. As of
December 31, 2004, the present value of these annuities was
$47.4 million, as estimated by our annuity providers. Each
of the life insurance companies issuing these annuities, or the
entity guaranteeing the life insurance company, has an
A.M. Best rating of “A-” (Excellent) or better.
We lease equipment and office space under noncancelable
operating leases. Future minimum lease payments at
December 31, 2004, were as follows:
|
|
|
|
|
|
|
|
|
Future Minimum
|
|
|
Year
|
|
Lease Payments
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
2005
|
|
$
|
479
|
|
|
2006
|
|
|
303
|
|
|
2007
|
|
|
185
|
|
|
2008
|
|
|
88
|
|
|
2009
|
|
|
58
|
|
|
2010
|
|
|
50
|
|
|
|
|
|
|
|
|
|
$
|
1,163
|
|
|
|
|
|
|
Rental expense was approximately $956,000, $1.1 million and
$1.1 million for the years ended December 31, 2004,
2003 and 2002, respectively.
50
The table below provides information with respect to our
long-term debt and contractual commitments as of
December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due By Period
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
More Than
|
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Subordinated notes(1)
|
|
$
|
36,090
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
36,090
|
|
|
Loss and loss adjustment expenses(2)
|
|
|
432,880
|
|
|
|
100,043
|
|
|
|
95,004
|
|
|
|
38,817
|
|
|
|
199,016
|
|
|
Loss-based insurance assessments(3)
|
|
|
16,724
|
|
|
|
3,865
|
|
|
|
3,670
|
|
|
|
1,500
|
|
|
|
7,689
|
|
|
Capital lease obligations
|
|
|
1,530
|
|
|
|
510
|
|
|
|
1,020
|
|
|
|
0
|
|
|
|
0
|
|
|
Operating lease obligations
|
|
|
1,163
|
|
|
|
479
|
|
|
|
576
|
|
|
|
108
|
|
|
|
0
|
|
|
Purchase obligations
|
|
|
135
|
|
|
|
65
|
|
|
|
70
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
488,522
|
|
|
$
|
104,962
|
|
|
$
|
100,340
|
|
|
$
|
40,425
|
|
|
$
|
242,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts do not include interest payments associated with these
obligations. Interest rates on our subordinated notes are
variable and may change on a quarterly basis. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital
Resources” for further discussion of our subordinated notes.
|
|
|
|
(2)
|
The loss and loss adjustment expense payments due by period in
the table above are based upon the loss and loss adjustment
expense estimates as of December 31, 2004 and actuarial
estimates of expected payout patterns and are not contractual
liabilities as to a time certain. Our contractual liability is
to provide benefits under the policy. As a result, our
calculation of loss and loss adjustment expense payments due by
period is subject to the same uncertainties associated with
determining the level of loss and loss adjustment expenses
generally and to the additional uncertainties arising from the
difficulty of predicting when claims (including claims that have
not yet been reported to us) will be paid. For a discussion of
our loss and loss adjustment expense process, see
“Business—Loss Reserves.” Actual payments of loss
and loss adjustment expenses by period will vary, perhaps
materially, from 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” for a discussion of the uncertainties
associated with estimating loss and loss adjustment expenses.
|
|
|
|
(3)
|
We are subject to various annual assessments imposed by certain
of the states in which we write insurance policies. These
assessments are generally based upon the amount of premiums
written or losses paid during the applicable year. Assessments
based on premiums are generally paid within one year after the
calendar year in which the policies are written, while
assessments based on losses are generally paid within one year
after the loss is paid. When we establish a reserve for loss and
loss adjustment expenses for a reported claim, we accrue our
obligation to pay any applicable assessments. If settlement of
the claim is to be paid out over more than one year, our
obligation to pay any related loss-based assessments extends for
the same period of time. Because our reserves for loss and loss
adjustment expenses are based on estimates, our accruals for
loss-based insurance assessments are also based on estimates.
Actual payments of loss and loss adjustment expenses may differ,
perhaps materially, from our reserves. Accordingly, our actual
loss-based insurance assessments may vary, perhaps materially,
from our accruals.
|
51
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.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of potential economic loss principally
arising from adverse changes in the fair value of financial
instruments. The major components of market risk affecting us
are credit risk, interest rate risk and equity price risk. We
currently have no exposure to foreign currency risk.
Credit Risk.
Credit risk is the potential loss
arising principally from adverse changes in the financial
condition of the issuers of our fixed maturity securities and
the financial condition of our reinsurers. We address the credit
risk related to the issuers of our fixed maturity securities by
investing in fixed maturity securities that are rated
“BBB” or higher by Standard & Poor’s. We
also independently, and through our independent asset manager,
monitor the financial condition of all issuers of our fixed
maturity securities. To limit our risk exposure, we employ
stringent diversification policies that limit the credit
exposure to any single issuer or business sector.
We are subject to credit risk with respect to our reinsurers.
Although our reinsurers are obligated to reimburse us to the
extent we cede risk to them, we are ultimately liable to our
policyholders on all risks we have reinsured. As a result,
reinsurance contracts do not limit our ultimate obligations to
pay claims and we might not collect amounts recoverable from our
reinsurers. We address this credit risk by initially selecting
reinsurers with an A.M. Best rating of “A-”
(Excellent) or better and by performing, along with our
reinsurance broker, quarterly credit reviews of our reinsurers.
If one of our reinsurers suffers a credit downgrade, we may
consider various options to lessen the risk of asset impairment
including commutation, novation and letters of credit. See
“—Liquidity and Capital Resources.”
Interest Rate Risk.
We had fixed maturity securities
with a fair value of $412.6 million and a carrying value of
$418.7 million as of September 30, 2005 that are
subject to interest rate risk. We are also subject to interest
rate risk on our subordinated debt securities, which have
quarterly adjustable interest rates based on LIBOR plus a fixed
margin. Interest rate risk is the risk that we may incur losses
due to adverse changes in interest rates. Fluctuations in
interest rates have a direct impact on the market valuation of
our fixed maturity securities and the cost to service our
subordinated debt securities. We manage our exposure to interest
rate risk through a disciplined asset and liability matching and
capital management process. In the management of this risk, the
characteristics of duration, credit and variability of cash
flows are critical elements. These risks are assessed regularly
and balanced within the context of our liability and capital
position.
The table below summarizes the interest rate risk associated
with our fixed maturity securities by illustrating the
sensitivity of the fair value and carrying value of our fixed
maturity securities as of September 30, 2005 to selected
hypothetical changes in interest rates, and the associated
impact on our shareholders’ deficit. We classify our fixed
maturity securities, other than redeemable preferred stock, as
held-to-maturity and carry them on our balance sheet at cost or
amortized cost, as applicable. Our redeemable preferred stock is
classified as available-for-sale and carried on our balance
sheet at fair value. Temporary changes in the fair value of our
fixed maturity securities that are held-to-maturity, such as
those resulting from interest rate fluctuations, do not impact
the carrying value of these securities and, therefore, do not
affect our shareholders’ deficit. However, temporary
changes in the fair value of our fixed maturity securities that
are held as available-for-sale do impact the carrying value of
these securities and are reported in our shareholders’
deficit as a component of other comprehensive income, net of
deferred taxes. The selected scenarios in the table below are
not predictions of future events, but rather are intended to
illustrate the effect such events may have on the fair value and
carrying value of our fixed maturity securities and on our
shareholders’ deficit.
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
(Increase)
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Change in
|
|
|
Decrease in
|
|
|
Hypothetical Change
|
|
|
|
Change in
|
|
|
|
|
Carrying
|
|
|
Shareholders’
|
|
|
in Interest Rates
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Value
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 basis point increase
|
|
$
|
388,059
|
|
|
$
|
(24,589
|
)
|
|
$
|
418,209
|
|
|
$
|
(466
|
)
|
|
|
(0.34
|
)%
|
|
100 basis point increase
|
|
|
400,887
|
|
|
|
(11,761
|
)
|
|
|
418,410
|
|
|
|
(265
|
)
|
|
|
(0.19
|
)%
|
|
No change
|
|
|
412,648
|
|
|
|
—
|
|
|
|
418,675
|
|
|
|
—
|
|
|
|
—
|
|
|
100 basis point decrease
|
|
|
424,077
|
|
|
|
11,429
|
|
|
|
418,915
|
|
|
|
240
|
|
|
|
0.17
|
%
|
|
200 basis point decrease
|
|
|
435,868
|
|
|
|
23,220
|
|
|
|
419,043
|
|
|
|
368
|
|
|
|
0.27
|
%
|
Equity Price Risk.
Equity price risk is the risk
that we may incur losses due to adverse changes in the market
prices of the equity securities we hold in our investment
portfolio, which include common stocks, nonredeemable preferred
stocks and master limited partnerships. We classify our
portfolio of equity securities as available-for-sale and carry
these securities on our balance sheet at fair value.
Accordingly, adverse changes in the market prices of our equity
securities result in a decrease in the value of our total assets
and an increase in our shareholders’ deficit. As of
September 30, 2005, the equity securities in our investment
portfolio had a fair value of $50.6 million, representing
6.1% of our total assets on that date. In order to minimize our
exposure to equity price risk, we invest primarily in
mid-to-large capitalization issues and seek to diversify our
equity holdings across several business sectors. In addition, we
currently limit the percentage of equity securities held in our
investment portfolio to 12% of the carrying value and 15% of the
market value of our total investment portfolio.
53
BUSINESS
Overview
We are a specialty provider of workers’ compensation
insurance focused on small to mid-sized employers engaged in
hazardous industries, principally construction, trucking,
logging, agriculture, oil and gas, maritime and sawmills. Since
commencing operations in 1986, we have gained significant
experience underwriting the complex workers’ compensation
exposures inherent in these industries. We provide coverage to
employers under state and federal workers’ compensation
laws. These laws prescribe wage replacement and medical care
benefits that employers are obligated to provide to their
employees who are injured in the course and scope of their
employment. Our workers’ compensation insurance policies
provide benefits to injured employees for, among other things,
temporary or permanent disability, death and medical and
hospital expenses. The benefits payable and the duration of
those benefits are set by state or federal law. The benefits
vary by jurisdiction, the nature and severity of the injury and
the wages of the employee. The employer, who is the
policyholder, pays the premiums for coverage.
Hazardous industry employers tend to have less frequent but more
severe claims as compared to employers in other industries due
to the nature of their businesses. Injuries that occur are often
severe in nature including death, dismemberment, paraplegia and
quadriplegia. As a result, employers engaged in hazardous
industries pay substantially higher than average rates for
workers’ compensation insurance compared to employers in
other industries, as measured per payroll dollar. The higher
premium rates are due to the nature of the work performed and
the inherent workplace danger of our target employers. For
example, our construction employers generally paid premium rates
equal to $7.60 per $100 of payroll to obtain workers’
compensation coverage for all of their employees in 2004,
including clerical employees for which the average rate was
$0.37 per $100 of payroll.
We employ a proactive, disciplined approach in underwriting
employers and providing comprehensive services intended to
lessen the overall incidence and cost of work place injuries. We
provide safety services at employers’ workplaces as a vital
component of our underwriting process and to promote safer
workplaces. We utilize intensive claims management practices
that we believe permit us to reduce the overall cost of our
claims. In addition, our audit services ensure that our
policyholders pay the appropriate premiums required under the
terms of their policies and enable us to monitor payroll
patterns or aberrations that cause underwriting, safety or fraud
concerns.
We believe that the higher premiums typically paid by our
policyholders, together with our disciplined underwriting and
safety, claims and audit services, provide us with the
opportunity to earn attractive returns on equity.
We began operations in 1986 by focusing on workers’
compensation insurance for logging contractors in the southeast
United States. In 1994, we expanded our focus to include the
other hazardous industries we serve today. AMERISAFE is an
insurance holding company and was incorporated in Texas in 1985.
Our insurance subsidiaries are domiciled in Louisiana and Texas.
Our Competitive Strengths
We believe we enjoy the following competitive strengths:
Focus on Hazardous Industries.
We focus on providing
workers’ compensation insurance to employers engaged in
hazardous industries. We have extensive experience insuring
these types of employers and have a history of profitable
underwriting in these industries. As a result, we believe we are
able to take advantage of opportunities for continued premium
and market share growth. Our specialized knowledge of these
hazardous industries helps us better serve our policyholders,
which leads to greater employer loyalty and policy retention.
Our policy renewal rate on voluntary business we elected to
quote for renewal was 87.9% in 2002, 91.4% in 2003 and 93.0% in
2004.
54
Focus on Small to Mid-Sized Employers.
We believe
large insurance companies generally do not target small to
mid-sized employers in hazardous industries due to their smaller
premium size, type of operations, mobile workforce and extensive
service needs. We provide enhanced customer services to our
policyholders. For example, unlike many of our competitors, our
premium payment plans enable our policyholders to better match
their premium payments with their payroll costs. Our premium
payment plans are not only attractive to our policyholders but
also allow us to monitor the payroll patterns of our
policyholders and identify any aberrations that may cause
safety, underwriting or fraud concerns. In addition, we believe
that because many of our policyholders are owner-operated small
to mid-sized businesses with more limited resources, they rely
on our services and expertise to assist them in improving
workplace safety and managing workplace injuries when they occur.
Specialized Underwriting Expertise.
Our focus on
employers engaged in hazardous industries has provided us with
an in-depth understanding of our policyholders’ business
operations and the risks of accidents inherent in those
operations. We have developed industry specific risk analysis
and rating tools to assist our underwriters in risk selection
and pricing. For example, when underwriting a trucking employer,
we use these tools to analyze numerous factors, including the
age, condition and types of vehicles used, distances traveled,
whether the trucks are used to transport truckload or less than
truckload cargo, the nature of the cargo and whether trucking
employees are required to load and unload cargo, tarp and secure
their own loads and drive regular or irregular routes. These
factors were developed based on our historical experience in
writing workers’ compensation insurance policies for
trucking employers.
Our 17 underwriting professionals average approximately
11 years of experience underwriting workers’
compensation insurance, most of which has focused on hazardous
industries. In addition, our underwriting professionals serve
specific state markets, thereby gaining valuable knowledge and
expertise in the statutory benefit schemes and market conditions
of their assigned states. We are highly disciplined when quoting
and binding new business. In 2004, we offered quotes on
approximately one out of every five applications submitted. We
believe this disciplined underwriting approach provides us a
competitive advantage in evaluating potential policyholders. We
do not delegate underwriting authority to agencies that sell our
insurance or to any other third party.
Comprehensive Safety Services.
Most of our
policyholders utilize mobile workforces, often located in rural
areas, due to the nature of their business operations. We
provide proactive safety reviews of employers’ workplaces,
regardless of the location. These safety reviews are a vital
component of our underwriting process and also assist our
policyholders in loss prevention and encourage the safest
workplaces possible by deploying experienced field safety
professionals, or FSPs, to their worksites. Our 48 FSPs have an
average of approximately 15 years of workplace safety or
related industry experience. From January 1, 2004 through
September 30, 2005, approximately 87% of our new voluntary
business policyholders were subject to pre-quotation safety
inspections where our FSPs visited the employer worksites to
evaluate working conditions and existing safety procedures. On
an ongoing basis, we perform periodic on-site safety surveys on
all of our voluntary business policyholders. We believe our
proactive safety services are essential in achieving
underwriting profitability in the industries we target.
Our safety services are valuable to our policyholders because we
provide them with the opportunity to reduce their long-term cost
of workers’ compensation insurance by enhancing workplace
safety and reducing the incidence and cost of workplace injuries.
Proactive Claims Management.
As of
September 30, 2005, our employees managed more than 98% of
our claims in-house utilizing intensive claims management
practices that emphasize a personal approach and quality,
cost-effective medical treatment. Our claims management staff
includes 88 field case managers, or FCMs, who average
approximately 18 years of experience in the workers’
compensation insurance industry and six medical-only case
managers. Our FCMs are located in our 51 claims offices in the
geographic areas where our policyholders are located, which
facilitates more immediate, direct contact with our
policyholders and their injured employees. We currently average
approximately 60
55
open indemnity claims per FCM, which we believe is significantly
less than the average for the industry.
We seek to limit the number of claim disputes with injured
employees by intervening early in the claims process. We
encourage immediate notification of workplace injuries using our
toll-free claims reporting system. When a severe injury occurs,
the policyholder’s pre-designated FCM promptly visits the
injured employee or the employee’s family members to
discuss the benefits provided and treatment options. Our focus
is to facilitate a favorable medical outcome for the injured
employee to allow that employee to return to work as quickly as
possible.
Guiding injured workers to appropriate medical providers is an
important part of our approach to claims management. Because of
our experience with similar injuries and our relationships with
local medical providers, we can arrange for quality,
cost-effective medical services to injured employees. We seek to
select and develop relationships with medical providers in each
of the regional and local markets in which our policyholders
operate. We emphasize implementation of the most expeditious and
cost-effective treatment programs for each employer rather than
imposing a single standardized system on all employers and their
employees. In order to support our personal claims approach,
qualified staff nurses are available to our FCMs to assist in
facilitating effective medical outcomes. In coordination with
this process, we use a full complement of medical cost
containment tools to ensure the optimum medical savings
possible. These tools include peer review, utilization review,
provider networks and quantity purchase discounting for durable
medical supplies, pharmacy and diagnostic testing.
We believe our intensive claims management practices allow us to
achieve a more favorable claim outcome, accelerate an
employee’s return to work and more rapidly close claims,
all of which ultimately lead to lower overall costs. In
addition, we believe our practices lessen the likelihood of
litigation. Only 7.9% of all claims reported for accident year
2003 were open as of September 30, 2005.
Strong Distribution Network.
We market our insurance
through approximately 1,700 independent agencies and our wholly
owned insurance agency subsidiary. These agencies are
concentrated in the 27 states and the District of Columbia
where we currently market and sell insurance. We compensate
these agencies by paying a commission based on the premium
collected from the policyholder. As of September 30, 2005,
independent agencies produced approximately 81.6% of our
voluntary in-force premiums. We are selective in establishing
and maintaining relationships with independent agencies. We
establish and maintain relationships only with those agencies
that provide quality applications from prospective policyholders
that are reasonably likely to accept our quotes.
Customized Information Systems.
We have developed
customized information technology that we believe enables our
FSPs, FCMs and field premium auditors to efficiently perform
their duties. In addition, our business intelligence system
enables all of our employees nationwide to seamlessly access,
manage and analyze the data that underlies our business. We
believe these technologies provide us with a significant
advantage in the marketplace.
Experienced Management Team.
The members of our
senior management team average approximately 19 years of
insurance industry experience. The majority of this experience
has been focused on workers’ compensation insurance
exposures in construction, trucking, logging and other hazardous
industries while employed with our company. We believe the
experience, depth and continuity of our management will permit
us to execute our business strategy and earn attractive returns
on equity.
Our Strategy
We believe the net proceeds from this offering will provide us
with the additional capital necessary to increase the amount of
insurance we are able to write. We will scrutinize the potential
for achieving
56
underwriting profits and adequate returns on capital as we
expand our business. We plan to pursue profitable growth and
favorable returns on equity using the following strategies:
Expand in our Existing Markets.
Our current market
share in our six largest states in terms of premiums written
does not exceed 3.0% of the workers’ compensation market in
any one state, according to NCCI’s most recent market
analyses. Competition in our target markets is fragmented by
state and employer industry focus. We believe that our
specialized underwriting expertise and safety, claims and audit
services position us to profitably increase our market share in
our existing principal markets, with minimal increase in field
service employees.
Prudent and Opportunistic Geographic
Expansion.
While we actively market our insurance in
27 states and the District of Columbia, approximately 42.3%
of our voluntary in-force premiums were generated in six states
as of September 30, 2005. We are licensed in an additional
18 states and the U.S. Virgin Islands. Our existing
licenses and rate filings will expedite our ability to write
policies in these markets when we decide it is prudent to do so.
Focus on Underwriting Profitability.
We intend to
maintain our underwriting discipline and profitability
throughout market cycles. Our strategy is to focus on
underwriting workers’ compensation insurance in hazardous
industries and to maintain adequate rate levels commensurate
with the risks we underwrite. We will also continue to strive
for improved risk selection and pricing, as well as reduced
frequency and severity of claims through comprehensive workplace
safety reviews, rapid closing of claims through personal, direct
contact with our policyholders and their employees, and
effective medical cost containment measures.
Leverage Investments in Information Technology.
In
October 2000, we launched our customized information system,
ICAMS, that we believe significantly enhances our ability to
select risk, write profitable business and cost-effectively
administer our billing, claims and audit functions. Since the
launch, we have introduced automated analytical tools and have
continued to improve and enhance our ICAMS system and tools. We
believe our technology is scalable and can be modified at
minimal cost to accommodate our growth. In addition, we believe
this scalability has lowered, and will continue to lower, our
expense ratio as we continue to achieve premium growth over time.
Maintain Capital Strength.
We plan to manage our
capital to achieve our growth and profitability goals while
maintaining a prudent operating leverage for our insurance
company subsidiaries. To accomplish this objective, we intend to
maintain underwriting profitability throughout market cycles,
deploy a portion of the proceeds of this offering toward the
judicious growth of our business, optimize our use of
reinsurance, reduce our current financial leverage, and maximize
an appropriate risk adjusted return on our growing investment
portfolio.
Operating History
We commenced operations in 1986 to underwrite workers’
compensation insurance for employers engaged in the logging
industry. Beginning in 1994, we expanded our customer base by
insuring employers in other hazardous occupation industries. We
believe we were able to operate profitably by applying
disciplined underwriting criteria based on our experience
insuring employers in these hazardous industries. Integral to
our underwriting processes was the implementation of
comprehensive safety reviews, active in-house claims management,
mandatory premium audits and strong relationships with agents
and employers.
Beginning in 1997 and into 2000, we employed a strategy to
increase revenue through rapid geographic expansion and
underwriting workers’ compensation insurance for employers
engaged in non-hazardous industries, such as service and retail
businesses. This strategy did not produce the results
anticipated, and as a result our weighted average gross accident
year loss ratio for the period 1997 through 2000 was 120.2%, as
compared to 57.7% for the period 1994 through 1996.
57
In September 2000, we undertook several strategic initiatives to
improve the profitability of our existing in-force book of
business and new business. These initiatives included the
following:
|
|
|
|
|
|
|
|
•
|
Renewed focus on core hazardous industries.
We undertook
action to non-renew policies with higher frequency,
non-hazardous industries and refocused our efforts on employers
engaged in the hazardous industries that we underwrite today.
These core hazardous industries represented 96.2% of our
voluntary gross premiums written in the nine months ended
September 30, 2005 compared to 81.6% in 2000. Principally
as a result of our renewed focus on hazardous industries, we
have been able to reduce claims frequency sharply. In 2004, we
had 7,015 claims reported compared to 28,509 claims in
2000, while gross earned premiums were $256.7 million in
2004 and $267.2 million in 2000.
|
|
|
|
|
|
|
|
|
•
|
Commenced re-underwriting our book of business.
We
commenced re-underwriting our core hazardous industry book of
business to improve our risk selection and establish rates
commensurate with the risks we were underwriting. Since
January 1, 2000, we have made 63 filings with state
regulatory agencies to increase our loss cost multipliers to
maintain rates at profitable levels. As a result of these
initiatives and our renewed focus on core hazardous industries,
our average policy premium for voluntary workers’
compensation has increased from approximately $18,500 in 2000 to
approximately $38,000 for the nine months ended
September 30, 2005.
|
|
|
|
|
|
|
•
|
Reduced or ceased underwriting in certain states.
We
reduced or ceased underwriting in states where we lacked a
sufficient level of premium production to effectively deploy our
field resources or where we believed the rate environment did
not adequately compensate us for the risks we were underwriting.
|
|
|
|
|
•
|
Increased pre-quotation safety inspection of employers on new
business.
As we expanded geographically and began
underwriting policies for employers engaged in non-hazardous
industries, the ability of our safety services personnel to
review new and existing business became constrained. As a
result, we had difficulty deploying our safety personnel to
inspect employer worksites efficiently and began to outsource
safety inspections. In conjunction with our refocus on core
hazardous industries, we began mandating, with limited
exceptions, a pre-quotation safety inspection of employers for
new business that we utilize today. Our pre-quotation inspection
rate of new voluntary policyholders increased from approximately
29% in 2000 to approximately 84% in 2004.
|
|
|
|
|
•
|
Took action to manage substantially all claims in-house.
We made the strategic decision to take substantially all of our
claims in-house and limit reliance on third-party
administrators. We believe this action has reduced the number of
open claims and improved our ability to close claims promptly
and therefore reduce costs. At December 31, 2004, we
managed 97% of claims in-house utilizing our intensive claims
management practices as compared to 85.0% at December 31,
2000. We have also reduced the number of third-party
administrators that we utilize to seven at year-end 2004 from 44
at the end of 2000.
|
|
|
|
|
•
|
Implemented incentive program.
Effective January 1,
2001, we implemented a new incentive program under which our
underwriters and field safety professionals are compensated in
part based on the achievement of certain loss ratio targets. We
believe this program has contributed to our ability to maintain
underwriting discipline.
|
58
We believe these actions have contributed to improved
underwriting profitability as measured on an accident year
basis. As shown in the table below, during the period 1995
through 2004, our weighted average accident year gross and net
loss ratios were 94.4% and 67.4%, respectively. The weighted
average accident year gross and net loss ratios for this same
time period for the workers’ compensation insurance
industry were 85.2% and 83.6%, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Accident Year Loss Ratio
|
|
1995
|
|
|
1996
|
|
|
1997
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMERISAFE(1)
|
|
|
61.8
|
%
|
|
|
61.1
|
%
|
|
|
84.5
|
%
|
|
|
108.3
|
%
|
|
|
144.5
|
%
|
|
|
121.2
|
%
|
|
|
94.9
|
%
|
|
|
79.5
|
%
|
|
|
71.3
|
%
|
|
|
67.8
|
%
|
|
|
94.4
|
%
|
|
Workers’ Compensation Industry(2)
|
|
|
70.0
|
%
|
|
|
74.2
|
%
|
|
|
87.0
|
%
|
|
|
99.3
|
%
|
|
|
110.0
|
%
|
|
|
107.1
|
%
|
|
|
97.7
|
%
|
|
|
79.5
|
%
|
|
|
72.2
|
%
|
|
|
73.9
|
%
|
|
|
85.2
|
%
|
|
Net Basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMERISAFE(1)
|
|
|
52.0
|
%
|
|
|
56.6
|
%
|
|
|
76.6
|
%
|
|
|
63.0
|
%
|
|
|
65.2
|
%
|
|
|
54.2
|
%
|
|
|
68.5
|
%
|
|
|
83.4
|
%
|
|
|
71.4
|
%
|
|
|
68.5
|
%
|
|
|
67.4
|
%
|
|
Workers’ Compensation Industry(2)
|
|
|
71.1
|
%
|
|
|
75.0
|
%
|
|
|
86.6
|
%
|
|
|
96.1
|
%
|
|
|
101.9
|
%
|
|
|
100.3
|
%
|
|
|
90.0
|
%
|
|
|
79.4
|
%
|
|
|
75.2
|
%
|
|
|
75.8
|
%
|
|
|
83.6
|
%
|
|
|
|
|
(1)
|
Cumulative development through December 31, 2004.
|
|
|
|
(2)
|
Source: A.M. Best, statutory basis.
|
The principal difference between our gross and net loss
experience relates to the policy years 1998 through 2000, during
which we were able to purchase reinsurance on favorable pricing
and other terms.
We believe that the strategic actions taken since September 2000
to refocus our underwriting operations on core hazardous
industries while developing further discipline in underwriting,
safety services, claims management and premium audit has
positioned us to achieve profitable underwriting results and
favorable returns on equity.
Industry
Overview
Workers’ compensation is a statutory system under which an
employer is required to pay for its employees’ medical,
disability, vocational rehabilitation and death benefit costs
for work-related injuries or illnesses. Most employers satisfy
this requirement by purchasing workers’ compensation
insurance. The principal concept underlying workers’
compensation laws is that employees injured in the course and
scope of their employment have only the legal remedies available
under workers’ compensation laws and do not have any other
recourse against their employer. An employer’s obligation
to pay workers’ compensation does not depend on any
negligence or wrongdoing on the part of the employer and exists
even for injuries that result from the negligence or fault of
another person, a co-employee or, in most instances, the injured
employee.
Workers’ compensation insurance policies generally provide
that the insurance carrier will pay all benefits that the
insured employer may become obligated to pay under applicable
workers’ compensation laws. Each state has a regulatory and
adjudicatory system that quantifies the level of wage
replacement to be paid, determines the level of medical care
required to be provided and the cost of permanent impairment and
specifies the options in selecting medical providers available
to the injured employee or the employer. These state laws
generally require two types of benefits for injured employees:
(1) medical benefits, which include expenses related to
diagnosis and treatment of the injury, as well as any required
rehabilitation, and (2) indemnity payments, which consist
of temporary wage replacement, permanent disability payments and
death benefits to surviving family members. To fulfill these
mandated financial obligations, virtually all employers are
required to purchase workers’ compensation insurance or, if
permitted by state law or approved by the U.S. Department
of Labor, to self-insure. The employers may purchase
workers’ compensation insurance from a private insurance
carrier, a state-sanctioned assigned risk pool or a
self-insurance fund, which is an entity that allows employers to
obtain workers’ compensation coverage on a pooled basis,
typically subjecting each employer to joint and several
liability for the entire fund.
59
Workers’ compensation was the fourth-largest property and
casualty insurance line in the United States in 2004, according
to A.M. Best. Direct premiums written in 2004 for the
workers’ compensation insurance industry were approximately
$54 billion, and direct premiums written for the property
and casualty industry as a whole were approximately
$466 billion, according to A.M. Best. Premium volume in the
workers’ compensation insurance industry is estimated to
have increased 11% since 2003, while the property and casualty
industry experienced a 5% increase in net premiums written in
2004 compared to 2003, according to NCCI. According to the most
recent market data reported by the NCCI, which is the official
ratings bureau in the majority of states in which we are
licensed, total premiums reported for the specific occupational
class codes for which we underwrite business was
$17 billion. Total premiums reported for all occupational
class codes reported by the NCCI for these same jurisdictions
was $37 billion.
During the period from 1994 to 2001, we believe that price
competition and rising loss costs, despite declines in the
frequency of losses, severely eroded underwriting profitability
in the workers’ compensation insurance industry. According
to NCCI, the workers’ compensation insurance
industry’s accident year combined ratios rose from 100% in
1995 to a high of 139% in 1999. As a result, NCCI estimated that
workers’ compensation loss reserves for private carriers
were deficient by $12.0 billion at December 31, 2004,
which are significantly up from just $2 billion in 1995,
yet down from a high of $21 billion in 2001. We believe the
workers’ compensation insurance industry is slowly
transitioning to a more competitive market environment.
Rising Medical Claim Costs.
According to NCCI,
workers’ compensation medical claims costs have risen
approximately 137% over the ten-year period ended
December 31, 2004 driven primarily by increased utilization
and prescription drug costs.
Rising Indemnity Claim Costs.
According to NCCI,
indemnity claim costs, which include wage replacement, have
risen 87% for the ten-year period ended December 31, 2004,
which is lower than the rate at which medical claim costs have
risen.
Declining Investment Performance.
Unfavorable
investment conditions have also adversely affected workers’
compensation insurance industry returns on equity. Because
workers’ compensation claims are generally paid over a
longer period of time as compared to other types of insurance
claims, workers’ compensation insurers have the opportunity
to invest premiums received for longer periods of time.
Therefore, the performance of the investments funded with
premiums received is an important part of a workers’
compensation insurance company’s business model. The ratio
of investment gain on insurance transactions (including net
investment income, realized gains and other income) to premiums
for private carriers has declined from a high of 21% in 1998 to
a projected rate of 10% in 2004, according to NCCI.
Reduction in Market Capacity.
We believe that price
competition, rising loss costs and low investment returns in
recent years have led to poor operating results and have caused
some workers’ compensation insurers to suffer severe
capital impairment. These conditions have forced some insurers
to withdraw from the marketplace and enter insolvency
proceedings, precipitating a reduction in market capacity.
Notwithstanding this reduction in market capacity, the volume of
workers’ compensation insurance premiums has shown steady
growth, increasing from $25 billion in 1999 to an estimated
$46 billion of net premiums written in 2004, an 84%
increase, driven mainly by rate increases.
Industry Outlook
We believe the challenges faced by the workers’
compensation insurance industry over the past decade have
created significant opportunity for workers’ compensation
insurers to increase the amount of business that they write. The
year 2002 marked the first year in five years that private
carriers in the property and casualty insurance industry
experienced an increase in annual after-tax returns on surplus,
60
including capital gains, according to NCCI. Workers’
compensation insurance industry calendar year combined ratios
declined for the first time in seven years, falling from 122%
(with 1.9% attributable to the September 11, 2001 terrorist
attacks) to 105% in 2004 as premium rates have increased and
claims frequency has declined. In addition, claims frequency has
declined. From 1990 through 2003, the cumulative decline in
lost-time claims frequency was 42.0%. The NCCI estimates that
lost-time claims frequency declined an additional 3.4% in 2004.
We believe that opportunities remain for us to provide needed
underwriting capacity at attractive rates and upon terms and
conditions more favorable to insurers than in the past.
Policyholders
As of September 30, 2005, we had approximately 6,500
voluntary business policyholders with an average annual
workers’ compensation policy premium of approximately
$38,000. As of September 30, 2005, our ten largest
voluntary business policyholders accounted for approximately
3.0% of our in-force premiums. Our policy renewal rate on
voluntary business that we elected to quote for renewal was
87.9% in 2002, 91.4% in 2003 and 93.0% in 2004.
In addition to our voluntary workers’ compensation
business, we underwrite workers’ compensation policies for
employers assigned to us and assume reinsurance premiums from
mandatory pooling arrangements, in each case to fulfill our
obligations under residual market programs implemented by the
states in which we operate. In addition, we separately
underwrite general liability insurance policies for our
workers’ compensation policyholders in the logging industry
on a select basis. Our assigned risk business fulfills our
statutory obligation to participate in residual market plans in
six states. See “—Regulation—Residual Market
Programs” below. For the year ended December 31, 2004
and the nine months ended September 30, 2005, our assigned
risk business accounted for 3.6% and 5.0%, respectively, of our
gross premiums written, and our assumed premiums from mandatory
pooling arrangements accounted for 3.0% and 2.4%, respectively,
of our gross premiums written. In addition, our general
liability insurance business accounted for only 1.0% and 1.1%,
respectively, of our gross premiums written for the year ended
December 31, 2004 and the nine months ended
September 30, 2005.
Targeted Industries
We provide workers’ compensation insurance primarily to
employers in the following targeted hazardous industries:
Construction.
Includes a broad range of operations such
as highway and bridge construction, building and maintenance of
pipeline and powerline networks, excavation, commercial
construction, roofing, iron and steel erection, tower erection
and numerous other specialized construction operations. In 2004,
our average policy premium for voluntary workers’
compensation within the construction industry was $41,227, or
$7.60 per $100 of payroll.
Trucking.
Includes a large spectrum of diverse operations
including contract haulers, regional and local freight carriers,
special equipment transporters and other trucking companies that
conduct a variety of short- and long-haul operations. In 2004,
our average policy premium for voluntary workers’
compensation within the trucking industry was $46,666 or
$7.29 per $100 of payroll.
Logging.
Includes tree harvesting operations ranging from
labor intensive chainsaw felling and trimming to sophisticated
mechanized operations using heavy equipment. In 2004, our
average policy premium for voluntary workers’ compensation
within the logging industry was $18,468, or $15.16 per $100
of payroll.
Agriculture.
Including crop maintenance and harvesting,
grain and produce operations, nursery operations, meat
processing and livestock feed and transportation. In 2004, our
average policy premium for voluntary workers’ compensation
within the agricultural industry was $29,325, or $9.63 per
$100 of payroll.
61
Oil and Gas.
Including various oil and gas activities
including gathering, transportation, processing, production and
field service operations. In 2004, our average policy premium
for voluntary workers’ compensation within the oil and gas
industry was $65,686, or $6.29 per $100 of payroll.
Maritime.
Including ship building and repair, pier and
marine construction, inter-coastal construction and stevedoring.
In 2004, our average policy premium for voluntary workers’
compensation within the maritime industry was $46,164, or
$9.03 per $100 of payroll.
Sawmills.
Including sawmills and various other
lumber-related operations. In 2004, our average policy premium
for the sawmill industry was $37,105, or $7.32 per $100 of
payroll.
Our gross premiums are derived from:
|
|
|
|
|
|
•
|
Direct Premiums.
Includes premiums from workers’
compensation and general liability insurance policies that we
issue to:
|
|
|
|
|
|
|
•
|
employers who seek to purchase insurance directly from us and
who we voluntarily agree to insure, which we refer to as our
voluntary business; and
|
|
|
|
|
•
|
employers assigned to us under residual market programs
implemented by some of the states in which we operate, which we
refer to as our assigned risk business.
|
|
|
|
|
|
|
•
|
Assumed Premiums.
Includes premiums from our
participation in mandatory pooling arrangements under residual
market programs implemented by some of the states in which we
operate.
|
As of September 30, 2005, only 1.0% of our voluntary
in-force premiums were derived from general liability policies.
Gross premiums written during the years ended December 31,
2002, 2003 and 2004 and the allocation of those premiums among
the hazardous industries we target are presented in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
Gross Premiums Written
|
|
|
of Gross Premiums Written
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Voluntary business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
61,558
|
|
|
$
|
80,693
|
|
|
$
|
101,298
|
|
|
|
33.2%
|
|
|
|
36.1%
|
|
|
|
38.3%
|
|
|
|
Trucking
|
|
|
36,392
|
|
|
|
47,104
|
|
|
|
57,822
|
|
|
|
19.7%
|
|
|
|
21.1%
|
|
|
|
21.8%
|
|
|
|
Logging
|
|
|
32,156
|
|
|
|
32,008
|
|
|
|
30,340
|
|
|
|
17.4%
|
|
|
|
14.3%
|
|
|
|
11.5%
|
|
|
|
Agriculture
|
|
|
6,574
|
|
|
|
8,502
|
|
|
|
11,203
|
|
|
|
3.6%
|
|
|
|
3.8%
|
|
|
|
4.2%
|
|
|
|
Oil and Gas
|
|
|
7,157
|
|
|
|
7,221
|
|
|
|
7,226
|
|
|
|
3.9%
|
|
|
|
3.2%
|
|
|
|
2.7%
|
|
|
|
Maritime
|
|
|
5,326
|
|
|
|
6,076
|
|
|
|
5,909
|
|
|
|
2.9%
|
|
|
|
2.7%
|
|
|
|
2.2%
|
|
|
|
Sawmills
|
|
|
3,760
|
|
|
|
4,009
|
|
|
|
5,566
|
|
|
|
2.0%
|
|
|
|
1.8%
|
|
|
|
2.1%
|
|
|
|
Other
|
|
|
21,164
|
|
|
|
24,239
|
|
|
|
28,117
|
|
|
|
11.4%
|
|
|
|
10.8%
|
|
|
|
10.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total voluntary business
|
|
|
174,087
|
|
|
|
209,852
|
|
|
|
247,481
|
|
|
|
94.1%
|
|
|
|
93.9%
|
|
|
|
93.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assigned risk business
|
|
|
7,414
|
|
|
|
9,216
|
|
|
|
9,431
|
|
|
|
4.0%
|
|
|
|
4.1%
|
|
|
|
3.6%
|
|
|
Assumed premiums
|
|
|
3,592
|
|
|
|
4,522
|
|
|
|
8,050
|
|
|
|
1.9%
|
|
|
|
2.0%
|
|
|
|
3.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
185,093
|
|
|
$
|
223,590
|
|
|
$
|
264,962
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
Distribution
We are licensed to provide workers’ compensation insurance
in 45 states, the District of Columbia and the
U.S. Virgin Islands. We operate on a geographically diverse
basis with no more than 11.0% of our gross premiums written in
2004 derived from any one state. The table below identifies, for
the years
62
ended December 31, 2003 and 2004 and the nine months ended
September 30, 2005, the states in which the percentage of
our gross premiums written exceeded 3.0% for any of the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Gross Premiums Written
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Nine Months
|
|
|
|
|
|
|
|
Ended
|
|
|
State
|
|
2003
|
|
|
2004
|
|
|
September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Georgia
|
|
|
9.4
|
%
|
|
|
9.5
|
%
|
|
|
10.3
|
%
|
|
Louisiana
|
|
|
11.8
|
%
|
|
|
10.6
|
%
|
|
|
8.3
|
%
|
|
North Carolina
|
|
|
5.9
|
%
|
|
|
6.3
|
%
|
|
|
6.6
|
%
|
|
Pennsylvania
|
|
|
3.9
|
%
|
|
|
4.5
|
%
|
|
|
5.8
|
%
|
|
Florida
|
|
|
4.6
|
%
|
|
|
4.9
|
%
|
|
|
5.6
|
%
|
|
Virginia
|
|
|
5.2
|
%
|
|
|
5.2
|
%
|
|
|
5.5
|
%
|
|
Illinois
|
|
|
5.7
|
%
|
|
|
6.4
|
%
|
|
|
5.1
|
%
|
|
South Carolina
|
|
|
3.9
|
%
|
|
|
4.6
|
%
|
|
|
5.1
|
%
|
|
Texas
|
|
|
7.9
|
%
|
|
|
6.5
|
%
|
|
|
4.9
|
%
|
|
Alaska
|
|
|
3.3
|
%
|
|
|
4.4
|
%
|
|
|
4.9
|
%
|
|
Minnesota
|
|
|
3.9
|
%
|
|
|
3.6
|
%
|
|
|
4.3
|
%
|
|
Tennessee
|
|
|
3.5
|
%
|
|
|
3.9
|
%
|
|
|
4.2
|
%
|
|
Oklahoma
|
|
|
3.9
|
%
|
|
|
3.3
|
%
|
|
|
4.2
|
%
|
|
Wisconsin
|
|
|
2.3
|
%
|
|
|
3.3
|
%
|
|
|
3.9
|
%
|
|
Arkansas
|
|
|
5.2
|
%
|
|
|
4.7
|
%
|
|
|
3.8
|
%
|
|
Mississippi
|
|
|
3.6
|
%
|
|
|
3.9
|
%
|
|
|
3.4
|
%
|
|
Alabama
|
|
|
3.2
|
%
|
|
|
2.7
|
%
|
|
|
2.6
|
%
|
Lines of Business
Workers’
Compensation
Workers’ compensation insurance provides coverage to
employers under state and federal workers’ compensation
laws. These laws prescribe benefits that employers are obligated
to provide to their employees who are injured in the course and
scope of their employment. Our workers’ compensation
insurance policies also provide employer liability coverage,
which generally provides coverage for an employer for claims by
non-employees.
Our insurance encompasses a variety of options designed to fit
the needs of our policyholders. The most basic insurance policy,
accounting for more than 99.0% of our gross premiums written for
the year ended December 31, 2004 and the nine months ended
September 30, 2005, is a guaranteed cost contract. Under
our guaranteed cost contracts, policyholders pay premiums based
on a percentage of their payroll determined by job
classification. Our premium rates for these policies vary
depending upon certain factors, including the type of work to be
performed by employees and the general business of the
policyholder. In return for premium payments, we assume
statutorily imposed obligations of the policyholder to provide
workers’ compensation benefits to its employees. There are
no policy limits on our liability for workers’ compensation
claims as there are for other forms of insurance. We conduct a
premium audit at the expiration of the policy to verify that the
policyholder’s correct payroll expense and job
classifications were reported to us.
A policyholder who desires to assume financial risk in exchange
for reduced premiums may elect a deductible that makes the
policyholder responsible for the first portion of any claim. We
also offer loss sensitive plans on a limited basis, including
dividend plans. These plans provide for a portion of the premium
to be returned to the policyholder in the form of a dividend,
based on the policyholder’s losses during the policy period.
63
We have three underwriting insurance subsidiaries, American
Interstate, Silver Oak Casualty and American Interstate of
Texas. Our principal subsidiary, American Interstate, is
licensed to provide workers’ compensation insurance in
45 states, the District of Columbia and the
U.S. Virgin Islands. Silver Oak Casualty is licensed in
eight states and the District of Columbia and American
Interstate of Texas is licensed only in Texas. We utilize Silver
Oak Casualty and American Interstate of Texas to file
alternative workers’ compensation rate structures that
permit us to offer our workers’ compensation insurance to a
broader range of potential policyholders. We currently intend to
pursue licensing of Silver Oak Casualty and American Interstate
of Texas in additional states.
General Liability
General liability insurance is a form of casualty insurance that
covers a policyholder’s liability resulting from its act or
omission that causes bodily injury or property damage to a third
party. With general liability insurance, the amount of a covered
loss is the amount of the claim or payment made on the
policyholder’s behalf, subject to the deductible, limits of
liability and other features of the insurance policy. We offer
general liability insurance coverage only to our workers’
compensation policyholders in the logging industry on a select
basis. As of September 30, 2005, only 1.0% of our voluntary
in-force premiums were derived from general liability policies.
Sales and Marketing
We sell our workers’ compensation insurance through
agencies. As of September 30, 2005, our insurance was sold
through approximately 1,700 independent agencies and our wholly
owned insurance agency subsidiary, Amerisafe General Agency
Insurance, which is licensed in 24 states. We are selective
in establishing and maintaining relationships with independent
agencies. We establish and maintain relationships only with
those agencies that provide quality application flow from
prospective policyholders that are reasonably likely to accept
our quotes. We compensate these agencies by paying a commission
based on the premium collected from the policyholder. Our
average commission rate for our independent agencies was 7.0%
for the year ended December 31, 2004 and 7.1% for the nine
months ended September 30, 2005. Beginning January 1,
2005, we pay our insurance agency subsidiary a commission rate
of 8.0%. Neither our independent agencies nor our insurance
agency subsidiary has authority to underwrite or bind coverage.
We do not pay contingent commissions.
As of September 30, 2005, independent agencies accounted
for approximately 81.6% of our voluntary in-force premiums, and
no independent agency accounted for more than 1.2% of our
voluntary in-force premiums at that date.
Underwriting and Rate Making
Our underwriting strategy is to focus on employers in certain
hazardous industries that operate in those states where our
underwriting efforts are the most profitable and efficient. We
analyze each prospective policyholder on its own merits relative
to known industry trends and statistical data. Our underwriting
guidelines specify that we do not write workers’
compensation insurance for certain hazardous activities,
including sub-surface mining and the use of explosives.
Underwriting is a multi-step process that begins with the
receipt of an application from one of our agencies. We initially
review the application to confirm that the prospective
policyholder meets certain established criteria, including that
it is engaged in one of our targeted hazardous industries and
industry classes and operates in the states we target. If the
application satisfies these criteria, the application is
forwarded to our underwriting department for further review.
Our underwriting department reviews the application to determine
if the application meets our underwriting criteria and whether
all required information has been provided. If additional
information is required, the underwriting department requests
additional information from the agency. This initial review
process is generally completed within three days after the
application is received by us. Once this
64
initial review process is complete, our underwriting department
requests that a pre-quotation safety inspection be performed.
After the pre-quotation safety inspection has been completed,
our underwriting professionals review the results of the
inspection to determine if a rate quote should be made and, if
so, prepare the quote. The rate quote must be reviewed and
approved by our underwriting department before it is delivered
to the agency. All decisions by our underwriting department,
including decisions to decline applications, are subject to
review and approval by our management-level underwriters.
In the majority of states, workers’ compensation insurance
rates are based upon the published “loss costs.” Loss
costs are derived from wage and loss data reported by insurers
to the state’s statistical agent, in most states the NCCI.
The state agent then promulgates loss costs for specific job
descriptions or class codes. Insurers file requests for adoption
of a loss cost multiplier, or LCM, to be applied to the loss
costs to support operating costs and profit margins. In
addition, most states allow pricing flexibility above and below
the filed LCM, within certain limits.
We obtain approval of our rates, including our LCMs, from state
regulatory authorities. To maintain rates at profitable levels,
we regularly monitor and adjust our LCMs. In 2005, we made
5 filings with state regulatory agencies to increase our
LCMs. Similarly, in 2004, 2003, 2002 and 2001, we made
7 filings, 16 filings, 12 filings and
14 filings, respectively. In each instance, our rate
increases were approved. The effective LCM for our voluntary
business has increased from 0.93 for the 2000 policy year to
1.56 for the nine months ended September 30, 2005. For
policy years 2001, 2002, 2003 and 2004 the effective LCM for our
voluntary business was 1.14, 1.37, 1.43 and 1.53, respectively.
If we are unable to charge rates in a particular state or
industry to produce satisfactory results, we seek to control and
reduce our premium volume in that state or industry and redeploy
our capital in other states or industries that offer greater
opportunity to earn an underwriting profit.
Our underwriting department is managed by experienced
underwriting professionals who specialize in the hazardous
industries that we target. As of September 30, 2005, we had
63 employees in our underwriting department, including 17
underwriting professionals and 46 support-level staff members.
The average length of underwriting experience of our
underwriting professionals is approximately 11 years.
Our underwriting professionals participate in an incentive
compensation program under which bonuses are paid quarterly
based upon achieving premium underwriting volume and loss ratio
targets. The determination of whether targets have been
satisfied is made 18 months after the relevant incentive
compensation period.
Safety
Our safety inspection process begins with a request from our
underwriting department to perform a pre-quotation safety
inspection. Our safety inspections focus on a prospective
policyholder’s operations, loss exposures and existing
safety controls to prevent potential losses. The factors
considered in our inspection include employee experience,
turn-over, training, previous loss history and corrective
actions, and workplace conditions, including equipment condition
and, where appropriate, use of fall protection, respiratory
protection or other safety devices. Our FSPs travel to
employers’ worksites to perform these safety inspections.
This initial in-depth analysis allows our underwriting
professionals to make decisions on both insurability and
pricing. In certain circumstances, we will agree to provide
workers’ compensation insurance only if the employer agrees
to implement and maintain the safety management practices that
we recommend. From January 1, 2004 through
September 30, 2005, approximately 87% of our new voluntary
business policyholders were inspected prior to our offering a
premium quote. The remaining voluntary business policyholders
were not inspected prior to a premium quote for a variety of
reasons, including small premium size or the policyholder was
previously a policyholder subject to our safety inspections.
65
After an employer becomes a policyholder, we continue to
emphasize workplace safety through periodic workplace visits,
assisting the policyholder in designing and implementing
enhanced safety management programs, providing current
industry-specific safety-related information and conducting
rigorous post-accident management. Generally, we may cancel or
decline to renew an insurance policy if the policyholder does
not implement or maintain reasonable safety management practices
that we recommend.
Our safety department is comprised of 48 FSPs, including three
field vice presidents. Our FSPs participate in an incentive
compensation program under which bonuses are paid quarterly
based upon an FSP’s production and their
policyholders’ aggregate loss ratios. The results are
measured 18 months after the inception of the subject
policy period.
Claims
We have structured our claims operation to provide immediate,
intensive and personal management of all claims to guide injured
employees through medical treatment, rehabilitation and recovery
with the primary goal of returning the injured employee to work
as promptly as practicable. We seek to limit the number of claim
disputes with injured employees through early intervention in
the claims process.
We have 51 claims offices located throughout the markets we
serve. Our FCMs are located in the geographic areas where our
policyholders are based. We believe the presence of our FCMs in
the field enhances our ability to guide an injured employee to
the appropriate conclusion in a friendly, dignified and
supportive manner. Our FCMs have broad authority to manage
claims from occurrence of a workplace injury through resolution,
including authority to retain many different medical providers
at our expense, including not only our recommended medical
providers but also nurse case managers, independent medical
examiners, vocational specialists, rehabilitation specialists
and other specialty providers of medical services necessary to
achieve a quality outcome.
Following notification of a workplace injury, an FCM will
contact the policyholder, the injured employee and/or the
treating physician to determine the nature and severity of the
injury. If a serious injury occurs, the FCM will promptly visit
the injured employee or the employee’s family members to
discuss the benefits provided and will also visit the treating
physician to discuss the proposed treatment plan. Our FCM
assists the injured employee in receiving appropriate medical
treatment and encourages the use of our recommended medical
providers and facilities. For example, our FCM may suggest that
a treating physician refer an injured worker to another
physician or treatment facility that we believe has had positive
outcomes for other workers with similar injuries. We actively
monitor the number of open cases handled by a single FCM in
order to maintain focus on each specific injured employee. As of
September 30, 2005, we averaged approximately 60 open
indemnity claims per FCM, which we believe is significantly less
than the industry average.
Locating our FCMs in the field also allows us to build
professional relationships with local medical providers. In
selecting medical providers, we rely, in part, on the
recommendations of our FCMs who have developed professional
relationships within their geographic areas. We also seek input
from our policyholders and other contacts in the markets that we
serve. While cost factors are considered in selecting medical
providers, we consider the most important factor in the
selection process to be the medical provider’s ability to
achieve a quality outcome. We define quality outcome as the
injured worker’s rapid, conclusive recovery and return to
sustained, full capacity employment.
While we seek to promptly settle valid claims, we also
aggressively defend against claims we consider to be
non-meritorious. Litigation expenses accounted for less than
5.0% of our gross claims and claim settlement expenses in 2004
and for the nine months ended September 30, 2005. As of
September 30, 2005, we had closed approximately 92.1% of
our 2003 reported claims and approximately 98.9% of our pre-2003
reported claims, thereby substantially reducing the risk of
future adverse claims development. Where possible, we purchase
annuities on longer life claims to close the claim while still
providing an appropriate level of benefits to an injured
employee. We also mitigate against potential
66
losses from improper premium reporting or delinquent premium
payment by collecting from the policyholder a deposit, typically
representing 15% of total premium, at the inception of the
policy, which deposit can be utilized to offset losses from
inadequate premium submissions.
Premium Audits
We conduct premium audits on all of our voluntary business
policyholders annually, upon the expiration of each policy,
including when the policy is renewed. The purpose of these
audits is to verify that policyholders have accurately reported
their payroll expenses and employee job classifications, and
therefore have paid us the premium required under the terms of
their policies. In addition to annual audits, we selectively
perform interim audits on certain classes of business if
significant or unusual claims are filed or if the monthly
reports submitted by a policyholder reflect a payroll pattern or
any aberrations that cause underwriting, safety or fraud
concerns.
Loss Reserves
We record reserves for estimated losses under insurance policies
that we write and for loss adjustment expenses related to the
investigation and settlement of policy claims. Our reserves for
loss and loss adjustment expenses represent the estimated cost
of all reported and unreported loss and loss adjustment expenses
incurred and unpaid at a given point in time. In establishing
our reserves, we do not use loss discounting, which involves
recognizing the time value of money and offsetting estimates of
future payments by future expected investment income. Our
process and methodology for estimating reserves applies to both
our voluntary and assigned risk business and does not include
our reserves for mandatory pooling arrangements. We record
reserves for mandatory pooling arrangements as those reserves
are reported to us by the pool administrators. We use a
consulting actuary to assist in the evaluation of the adequacy
of our reserves for loss and loss adjustment expenses.
When a claim is reported, we establish an initial case reserve
for the estimated amount of our loss based on our estimate of
the most likely outcome of the claim at that time. Generally, a
case reserve is established within 14 days after the claim
is reported and consists of anticipated medical costs, indemnity
costs and specific adjustment expenses, which we refer to as
defense and cost containment expenses, or DCC expenses. At any
point in time, the amount paid on a claim, plus the reserve for
future amounts to be paid, represents the estimated total cost
of the claim, or the case incurred amount. The estimated amount
of loss for a reported claim is based upon various factors,
including:
|
|
|
|
|
|
•
|
type of loss;
|
|
|
|
|
•
|
severity of the injury or damage;
|
|
|
|
|
•
|
age and occupation of the injured employee;
|
|
|
|
|
•
|
estimated length of temporary disability;
|
|
|
|
|
•
|
anticipated permanent disability;
|
|
|
|
|
•
|
expected medical procedures, costs and duration;
|
|
|
|
|
•
|
our knowledge of the circumstances surrounding the claim;
|
|
|
|
|
•
|
insurance policy provisions, including coverage, related to the
claim;
|
|
|
|
|
•
|
jurisdiction of the occurrence; and
|
|
|
|
|
•
|
other benefits defined by applicable statute.
|
The case incurred amount can vary due to uncertainties with
respect to medical treatment and outcome, length and degree of
disability, employment availability and wage levels and judicial
determinations. As changes occur, the case incurred amount is
adjusted. The initial estimate of the case incurred amount can
vary significantly from the amount ultimately paid, especially
in circumstances
67
involving severe injuries with comprehensive medical treatment.
Changes in case incurred amounts, or case development, is an
important component of our historical claim data.
In addition to case reserves, we establish reserves on an
aggregate basis for loss and DCC expenses that have been
incurred but not reported, or IBNR. Our IBNR reserves are also
intended to provide for aggregate changes in case incurred
amounts as well as the unpaid cost of recently reported claims
for which an initial case reserve has not been established.
The third component of our reserves for loss and loss adjustment
expenses is our adjusting and other reserve, or AO reserve. Our
AO reserve is established for the costs of future unallocated
loss adjustment expenses for all known and unknown claims. Our
AO reserve covers primarily the estimated cost of administering
claims. The final component of our reserves for loss and loss
adjustment expenses is the reserve for mandatory pooling
arrangements.
In establishing reserves, we rely on the analysis of our more
than 135,000 claims in our 19-year history. Using statistical
analyses and actuarial methods, we estimate reserves based on
historical patterns of case development, payment patterns, mix
of business, premium rates charged, case reserving adequacy,
operational changes, adjustment philosophy and severity and
duration trends.
We review our reserves by industry and state on a quarterly
basis. Individual open claims are reviewed more frequently by
our field case managers and adjustments to case incurred amounts
are made based on expected outcomes. The number of claims
reported or occurring during a period, combined with a
calculation of average case incurred amounts, and measured over
time, provide the foundation for our reserve estimates. In
establishing our reserve estimates, we use historical trends in
claim reporting timeliness, frequency of claims in relation to
earned premium or covered payroll, premium rate levels charged
and case development patterns. However, the number of variables
and judgments involved in establishing reserve estimates,
combined with some random variation in loss development
patterns, results in uncertainty regarding projected ultimate
losses. As a result, our ultimate liability for loss and loss
adjustment expenses may be more or less than our reserve
estimate.
Our analysis of our historical data provides the factors we use
in our statistical and actuarial analysis in estimating our loss
and DCC expense reserve. These factors are primarily measures
over time of claims reported, average case incurred amounts,
case development, duration, severity and payment patterns.
However, these factors cannot be directly used as these factors
do not take into consideration changes in business mix, claims
management, regulatory issues, medical trends, employment and
wage patterns and other subjective factors. We use this
combination of factors and subjective assumptions in the use of
the following six actuarial methodologies:
|
|
|
|
|
|
•
|
Paid Development Method — uses historical, cumulative
paid losses by accident year and develops those actual losses to
estimated ultimate losses based upon the assumption that each
accident year will develop to estimated ultimate cost in a
manner that is analogous to prior years.
|
|
|
|
|
•
|
Paid Cape Cod Method — multiplies estimated ultimate
claims for each accident year by a weighted average, trended
severity. The estimated ultimate claims used in this method are
based on paid claim count development. The selected severity for
a given accident year is then derived by giving some weight to
all of the accident years in the experience history rather than
treating each accident year independently.
|
|
|
|
|
•
|
Paid Bornhuetter-Ferguson (“BF”) Method — a
combination of the Paid Development Method and the Paid Cape Cod
Method, the Paid BF Method estimates ultimate losses by adding
actual paid losses and projected, future unpaid losses. The
amounts produced are then added to cumulative paid losses to
produce the final estimates of ultimate incurred losses.
|
|
|
|
|
•
|
Incurred Development Method — uses historical,
cumulative incurred losses by accident year and develops those
actual losses to estimated ultimate losses based upon the
assumption that
|
68
|
|
|
|
|
|
|
each accident year will develop to estimated ultimate cost in a
manner that is analogous to prior years.
|
|
|
|
|
•
|
Incurred Cape Cod Method — multiplies estimated
ultimate claims for each accident year by a weighted average,
trended severity. The estimated ultimate claims used in this
method are based on incurred claim count development. The
selected severity for a given accident year is then derived by
giving some weight to all of the accident years in the
experience history rather than treating each accident year
independently.
|
|
|
|
|
•
|
Incurred Bornhuetter-Ferguson Method — a combination
of the Incurred Development Method and the Incurred Cape Cod
Method, the Incurred BF Method estimates ultimate losses by
adding actual incurred losses and projected, future unreported
losses. The amounts produced are then added to cumulative
incurred losses to produce an estimate of ultimate incurred
losses.
|
For each method, we calculate the amount of our total loss and
DCC expenses that we estimate will ultimately be paid by our
reinsurers, which is subtracted from our total gross reserve to
produce our total net reserve. We then analyze the results and
may emphasize or deemphasize some or all of the outcomes to
reflect our judgment of their reasonableness in relation to
supplementary information and operational and industry changes.
These outcomes are then aggregated to produce a single weighted
average point estimate that is the base estimate for net loss
and DCC expense reserves.
In determining the level of emphasis that may be placed on some
or all of the methods, we review statistical information as to
which methods are most appropriate, whether adjustments are
appropriate within the particular methods, and if results
produced by each method include inherent bias reflecting
operational and industry changes. This supplementary information
may include:
|
|
|
|
|
|
•
|
open and closed claim counts;
|
|
|
|
|
•
|
statistics related to open and closed claim count percentages;
|
|
|
|
|
•
|
claim closure rates;
|
|
|
|
|
•
|
changes in average case reserves and average loss and loss
adjustment expenses incurred on open claims;
|
|
|
|
|
•
|
reported and ultimate average case incurred changes;
|
|
|
|
|
•
|
reported and projected ultimate loss ratios; and
|
|
|
|
|
•
|
loss payment patterns.
|
In establishing our AO reserves, we review our past adjustment
expenses in relation to paid claims and estimated future costs
based on expected claims activity and duration.
The sum of our net loss and DCC expense reserve, our AO reserve
and our reserve for mandatory pooling arrangements is our total
net reserve for loss and loss adjustment expenses.
As of September 30, 2005, our best estimate of our ultimate
liability for loss and loss adjustment expenses, net of amounts
recoverable from reinsurers, was $353.4 million, which
includes $9.7 million in reserves for mandatory pooling
arrangements as reported by the pool administrators. This
estimate was derived from the process and methodology described
above which relies on substantial judgment. There is inherent
uncertainty in estimating our reserves for loss and loss
adjustment expenses. It is possible that our actual loss and
loss adjustment expenses incurred may vary significantly from
our estimates.
As noted above, our reserve estimate is developed based upon our
analysis of our historical data, and factors derived from that
data, including claims reported, average claim amount incurred,
case development, duration, severity and payment patterns, as
well as subjective assumptions. We view our estimate of loss and
DCC expenses as the most significant component of our reserve
for loss and loss adjustment expenses.
69
We prepared a sensitivity analysis of our net loss and DCC
expense reserve as of September 30, 2005 by analyzing the
effect of reasonably likely changes to the assumptions used in
deriving our estimates. Since the base estimate for our net loss
and DCC expense reserve is derived from the outcomes of the six
actuarial methodologies discussed above, the most significant
assumption in establishing our reserve is the adjustment of and
emphasis on those methods that we believe are most appropriate.
Of the six actuarial methods we use, three are
“incurred” methods and three are “paid”
methods. The selected development factors within each method are
derived from our data and the design characteristics of the
particular method. The six different methods each have inherent
biases in their respective designs that are more or less
predictive in their use. “Incurred” methods rely on
historical development factors derived from changes in our
incurred estimates of claims paid and reserve amounts over time,
while “paid” methods focus on our claim payment
patterns and ultimate paid costs. “Incurred” methods
focus on the measurement of the adequacy of case reserves at
points in time. As a result, if reserving practices change over
time, the “incurred” methods may produce significant
variation in the estimates of ultimate losses. “Paid”
methods rely on actual claims payment patterns and therefore are
not sensitive to changes in reserving practices.
The low end of the range of our sensitivity analysis was derived
by placing more emphasis (63%) on the outcomes generated by the
three “paid” methods and less emphasis (37%) on the
outcomes generated by the three “incurred” methods.
The high end of the range was derived by placing more emphasis
(63%) on the outcomes generated by the three
“incurred” methods and less emphasis (37%) on the
outcomes generated by the three “paid” methods. We
believe that changing the emphasis on the “incurred”
and “paid” methods better reflects reasonably likely
outcomes than adjusting selected development factors or other
variables used within each method. We believe the results of
this sensitivity analysis, which are summarized in the table
below, constitute a reasonable range of the expected outcomes of
our reserve for net loss and DCC expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Mandatory
|
|
|
|
|
|
|
Loss and
|
|
|
|
|
Pooling
|
|
|
|
|
|
|
DCC Expenses
|
|
|
AO
|
|
|
Arrangements
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Low end of range
|
|
$
|
299,937
|
|
|
$
|
16,338
|
|
|
$
|
9,655
|
|
|
$
|
325,930
|
|
|
Net reserve
|
|
|
327,401
|
|
|
|
16,338
|
|
|
|
9,655
|
|
|
|
353,394
|
|
|
High end of range
|
|
|
341,139
|
|
|
|
16,338
|
|
|
|
9,655
|
|
|
|
367,132
|
|
The resulting range derived from this sensitivity analysis would
have increased net reserves by $13.7 million or decreased
net reserves by $27.5 million, at September 30, 2005.
The increase would have reduced net income and
stockholders’ equity by $8.9 million. The decrease
would have increased net income and stockholders’ equity by
$17.9 million. A change in our net loss and DCC expense
reserve would not have an immediate impact on our liquidity, but
would affect cash flow in future periods as the losses are paid.
Given the numerous factors and assumptions used in our estimate
of reserves, and consequently this sensitivity analysis, we do
not believe that it would be meaningful to provide more detailed
disclosure regarding specific factors and assumptions and the
individual effects of these factors and assumptions on our net
reserves. Furthermore, there is no precise method for
subsequently evaluating the impact of any specific factor or
assumption on the adequacy of reserves, because the eventual
deficiency or redundancy is affected by multiple interdependent
factors.
70
|
|
|
|
|
Reconciliation of Loss Reserves
|
The table below shows the reconciliation of loss reserves on a
gross and net basis for the years ended December 31, 2003
and 2004 and the nine months ended September 30, 2005,
reflecting changes in losses incurred and paid losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
2003
|
|
|
2004
|
|
|
September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of period
|
|
$
|
346,542
|
|
|
$
|
377,559
|
|
|
$
|
432,880
|
|
|
Less amounts recoverable from reinsurers on unpaid loss and loss
adjustment expenses
|
|
|
193,634
|
|
|
|
194,558
|
|
|
|
189,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, beginning of period
|
|
|
152,908
|
|
|
|
183,001
|
|
|
|
243,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
126,977
|
|
|
|
160,773
|
|
|
|
133,743
|
|
|
|
Prior years
|
|
|
2,273
|
|
|
|
13,413
|
|
|
|
8,682
|
|
|
|
Loss on Converium commutation
|
|
|
—
|
|
|
|
—
|
|
|
|
13,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
129,250
|
|
|
|
174,186
|
|
|
|
155,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
32,649
|
|
|
|
40,312
|
|
|
|
24,602
|
|
|
|
Prior years
|
|
|
66,508
|
|
|
|
73,619
|
|
|
|
76,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
99,157
|
|
|
|
113,931
|
|
|
|
101,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add effect of Converium commutation
|
|
|
—
|
|
|
|
—
|
|
|
|
56,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, end of period
|
|
|
183,001
|
|
|
|
243,256
|
|
|
|
353,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add amounts recoverable from reinsurers on unpaid loss and loss
adjustment expenses
|
|
|
194,558
|
|
|
|
189,624
|
|
|
|
116,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
377,559
|
|
|
$
|
432,880
|
|
|
$
|
469,894
|
|
|
|
|
|
|
|
|
|
|
|
|
Our gross reserves for loss and loss adjustment expenses of
$469.9 million as of September 30, 2005 are expected
to cover all unpaid loss and loss adjustment expenses related to
open claims as of that date, as well as IBNR reserves, which
represented 17.5% of our gross reserves on that date. As of
September 30, 2005, we had 6,008 open claims, with an
average of $78,211 in unpaid loss and loss adjustment expenses
per open claim. During the nine months ended September 30,
2005, 5,318 new claims were reported, and 4,994 claims were
closed.
As of December 31, 2004, our gross reserves for loss and
loss adjustment expenses were $432.9 million, of which our
IBNR reserves represented 17.2% of our gross reserves on that
date. The increase in our reserves from December 31, 2004
to September 30, 2005 was due to our premium growth during
this time period, which was offset by an increase in paid loss
and loss adjustment expenses related to prior accident years. As
of December 31, 2004, we had 5,684 open claims, with an
average of $76,158 in unpaid loss and loss adjustment expenses
per open claim. During the year ended December 31, 2004,
7,015 claims were reported and 7,086 claims were closed.
As of December 31, 2003, our gross reserves for loss and
loss adjustment expenses were $377.6 million, of which our
IBNR reserves represented 13.4% of our gross reserves on that
date. The increase in our reserves from December 31, 2003
to December 31, 2004 was due to our premium growth during
this time period and an increase in our reserves for prior
accident years from $2.3 million in 2003 to
$13.4 million in 2004. The increase for prior accident
years related primarily to the 2002 accident year, which
increased by $9.4 million as a result of claim settlements
in excess of our
71
established case reserves and increased estimates in our
reserves for that accident year. As of December 31, 2003,
we had 5,755 open claims, with an average of $65,605 in unpaid
loss and loss adjustment expenses per open claim. During the
year ended December 31, 2003, 6,433 new claims were
reported and 7,566 claims were closed.
Loss Development
The table below shows the net loss development for business
written each year from 1994 through 2004. The table reflects the
changes in our loss and loss adjustment expense reserves in
subsequent years from the prior loss estimates based on
experience as of the end of each succeeding year on a GAAP basis.
The first line of the table shows, for the years indicated, our
liability including the incurred but not reported loss and loss
adjustment expenses as originally estimated, net of amounts
recoverable from reinsurers. For example, as of
December 31, 1996, it was estimated that $44.0 million
would be sufficient to settle all claims not already settled
that had occurred on or prior to December 31, 1996, whether
reported or unreported. The next section of the table sets forth
the re-estimates in later years of incurred losses, including
payments, for the years indicated. The next section of the table
shows, by year, the cumulative amounts of loss and loss
adjustment expense payments, net of amounts recoverable from
reinsurers, as of the end of each succeeding year. For example,
with respect to the net loss reserves of $44.0 million as
of December 31, 1996, by December 31, 2004 (eight
years later) $36.4 million had actually been paid in
settlement of the claims that relate to liabilities as of
December 31, 1996.
The “cumulative redundancy/(deficiency)” represents,
as of December 31, 2004, the difference between the latest
re-estimated liability and the amounts as originally estimated.
A redundancy means that the original estimate was higher than
the current estimate. A deficiency means that the current
estimate is higher than the original estimate.
Analysis of Loss and Loss Adjustment Expense Reserve
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
1994
|
|
|
1995
|
|
|
1996
|
|
|
1997
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Reserve for loss and loss adjustment expenses, net of
reinsurance recoverables
|
|
$
|
31,243
|
|
|
$
|
43,299
|
|
|
$
|
43,952
|
|
|
$
|
55,096
|
|
|
$
|
43,625
|
|
|
$
|
72,599
|
|
|
$
|
86,192
|
|
|
$
|
119,020
|
|
|
$
|
152,908
|
|
|
$
|
183,001
|
|
|
$
|
243,256
|
|
|
Net reserve estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
28,101
|
|
|
|
36,613
|
|
|
|
35,447
|
|
|
|
54,036
|
|
|
|
49,098
|
|
|
|
75,588
|
|
|
|
96,801
|
|
|
|
123,413
|
|
|
|
155,683
|
|
|
|
196,955
|
|
|
|
|
|
|
Two years later
|
|
|
23,757
|
|
|
|
39,332
|
|
|
|
34,082
|
|
|
|
60,800
|
|
|
|
50,764
|
|
|
|
82,633
|
|
|
|
98,871
|
|
|
|
116,291
|
|
|
|
168,410
|
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
21,026
|
|
|
|
28,439
|
|
|
|
34,252
|
|
|
|
63,583
|
|
|
|
57,750
|
|
|
|
86,336
|
|
|
|
92,740
|
|
|
|
119,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
20,510
|
|
|
|
28,700
|
|
|
|
35,193
|
|
|
|
68,754
|
|
|
|
59,800
|
|
|
|
86,829
|
|
|
|
93,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
20,992
|
|
|
|
29,647
|
|
|
|
38,318
|
|
|
|
69,610
|
|
|
|
60,074
|
|
|
|
87,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
21,808
|
|
|
|
31,524
|
|
|
|
38,339
|
|
|
|
70,865
|
|
|
|
61,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
22,518
|
|
|
|
31,185
|
|
|
|
39,459
|
|
|
|
70,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
22,277
|
|
|
|
32,161
|
|
|
|
38,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
23,020
|
|
|
|
31,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
22,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cumulative redundancy (deficiency)
|
|
$
|
8,830
|
|
|
$
|
11,672
|
|
|
$
|
5,064
|
|
|
$
|
(15,588
|
)
|
|
$
|
(17,672
|
)
|
|
$
|
(14,489
|
)
|
|
$
|
(7,136
|
)
|
|
$
|
(794
|
)
|
|
$
|
(15,502
|
)
|
|
$
|
(13,954
|
)
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
1994
|
|
|
1995
|
|
|
1996
|
|
|
1997
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Cumulative amount of reserve paid, net of reserve recoveries,
through:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
10,646
|
|
|
|
17,716
|
|
|
|
19,143
|
|
|
|
35,005
|
|
|
|
26,140
|
|
|
|
45,095
|
|
|
|
51,470
|
|
|
|
51,114
|
|
|
|
66,545
|
|
|
|
73,783
|
|
|
|
|
|
|
Two years later
|
|
|
16,911
|
|
|
|
23,158
|
|
|
|
27,843
|
|
|
|
46,735
|
|
|
|
37,835
|
|
|
|
62,141
|
|
|
|
62,969
|
|
|
|
71,582
|
|
|
|
101,907
|
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
18,567
|
|
|
|
26,058
|
|
|
|
30,766
|
|
|
|
54,969
|
|
|
|
45,404
|
|
|
|
67,267
|
|
|
|
70,036
|
|
|
|
84,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
19,674
|
|
|
|
27,039
|
|
|
|
32,576
|
|
|
|
60,249
|
|
|
|
48,184
|
|
|
|
70,894
|
|
|
|
73,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
20,008
|
|
|
|
28,007
|
|
|
|
34,765
|
|
|
|
62,361
|
|
|
|
50,045
|
|
|
|
72,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
20,626
|
|
|
|
29,394
|
|
|
|
35,313
|
|
|
|
64,296
|
|
|
|
50,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
21,526
|
|
|
|
29,603
|
|
|
|
36,367
|
|
|
|
64,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
21,555
|
|
|
|
30,331
|
|
|
|
36,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
22,162
|
|
|
|
30,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
21,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserve— December 31
|
|
$
|
31,243
|
|
|
$
|
43,299
|
|
|
$
|
43,952
|
|
|
$
|
55,096
|
|
|
$
|
43,625
|
|
|
$
|
72,599
|
|
|
$
|
86,192
|
|
|
$
|
119,020
|
|
|
$
|
152,908
|
|
|
$
|
183,001
|
|
|
$
|
243,256
|
|
|
Reinsurance recoverables
|
|
|
9,699
|
|
|
|
12,127
|
|
|
|
9,525
|
|
|
|
12,463
|
|
|
|
37,086
|
|
|
|
183,818
|
|
|
|
293,632
|
|
|
|
264,013
|
|
|
|
193,634
|
|
|
|
194,558
|
|
|
|
189,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserve— December 31
|
|
$
|
40,942
|
|
|
$
|
55,426
|
|
|
$
|
53,477
|
|
|
$
|
67,559
|
|
|
$
|
80,711
|
|
|
$
|
256,417
|
|
|
$
|
379,824
|
|
|
$
|
383,033
|
|
|
$
|
346,542
|
|
|
$
|
377,559
|
|
|
$
|
432,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-estimated reserve
|
|
$
|
22,413
|
|
|
$
|
31,627
|
|
|
$
|
38,888
|
|
|
$
|
70,684
|
|
|
$
|
61,297
|
|
|
$
|
87,088
|
|
|
$
|
93,328
|
|
|
$
|
119,814
|
|
|
$
|
168,410
|
|
|
$
|
196,955
|
|
|
|
|
|
|
Re-estimated reinsurance recoverables
|
|
|
9,641
|
|
|
|
17,679
|
|
|
|
27,504
|
|
|
|
35,763
|
|
|
|
124,943
|
|
|
|
282,006
|
|
|
|
384,482
|
|
|
|
347,107
|
|
|
|
270,576
|
|
|
|
221,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross re-estimated reserve
|
|
$
|
32,054
|
|
|
$
|
49,306
|
|
|
$
|
66,392
|
|
|
$
|
106,447
|
|
|
$
|
186,240
|
|
|
$
|
369,094
|
|
|
$
|
477,810
|
|
|
$
|
466,921
|
|
|
$
|
438,986
|
|
|
$
|
418,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cumulative redundancy (deficiency)
|
|
$
|
8,888
|
|
|
$
|
6,120
|
|
|
$
|
(12,915
|
)
|
|
$
|
(38,888
|
)
|
|
$
|
(105,529
|
)
|
|
$
|
(112,677
|
)
|
|
$
|
(97,986
|
)
|
|
$
|
(83,888
|
)
|
|
$
|
(92,444
|
)
|
|
$
|
(41,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net cumulative redundancy (deficiency) set forth in the
table above is net of amounts recoverable from our reinsurers,
including Reliance Insurance Company, one of our former
reinsurers. In 2001, Reliance was placed under regulatory
supervision by the Pennsylvania Insurance Department and was
subsequently placed into liquidation. As a result, we recognized
losses related to uncollectible amounts due from Reliance of
$17.0 million in 2001, $2.0 million in 2002 and
$1.3 million in 2003.
Investments
We derive net investment income from our invested assets. As of
September 30, 2005, the carrying value of our investment
portfolio, including cash and cash equivalents, was
$498.2 million and the fair value of the portfolio was
$492.1 million.
Our investment strategy is to maximize after tax income and
total return on invested assets while maintaining high quality
and low risk investments within the portfolio. Our investment
portfolio is managed by Hibernia Asset Management, LLC, a
registered investment advisory firm and a wholly owned
subsidiary of Hibernia National Bank. We pay Hibernia an
investment management fee based on the market value of assets
under management. The investment committee of our board of
directors has established investment guidelines and periodically
reviews portfolio performance for compliance with our guidelines.
See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations— Investments” for
further information on the composition and results of our
investment portfolio.
The table below shows the carrying values of various categories
of securities held in our investment portfolio, the percentage
of the total carrying value of our investment portfolio
represented by each
73
category and the annualized tax-equivalent yield for the nine
months ended September 30, 2005 based on the carrying value
of each category as of September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
Percentage
|
|
|
Tax-Equivalent
|
|
|
|
|
Carrying Value
|
|
|
of Portfolio
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
$
|
242,406
|
|
|
|
48.7%
|
|
|
|
5.4
|
%
|
|
|
Mortgage-backed securities
|
|
|
88,953
|
|
|
|
17.8%
|
|
|
|
5.3
|
%
|
|
|
U.S. Treasury securities and obligations of
U.S. Government agencies
|
|
|
56,623
|
|
|
|
11.4%
|
|
|
|
4.5
|
%
|
|
|
Corporate bonds
|
|
|
22,018
|
|
|
|
4.4%
|
|
|
|
4.9
|
%
|
|
|
Asset-backed securities
|
|
|
6,946
|
|
|
|
1.4%
|
|
|
|
3.7
|
%
|
|
|
Redeemable preferred stocks
|
|
|
1,729
|
|
|
|
0.3%
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
|
418,675
|
|
|
|
84.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
47,029
|
|
|
|
9.5%
|
|
|
|
2.0
|
%
|
|
|
Nonredeemable preferred stocks
|
|
|
3,612
|
|
|
|
0.7%
|
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
50,641
|
|
|
|
10.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, excluding cash and cash equivalents
|
|
|
469,316
|
|
|
|
94.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
28,843
|
|
|
|
5.8%
|
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, including cash and cash equivalents
|
|
$
|
498,159
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005, our fixed maturity securities had
a carrying value of $418.7 million, which represented 84.0%
of the carrying value of our investments, including cash and
cash equivalents. The table below summarizes the credit quality
of our fixed maturity securities as of September 30, 2005,
as rated by Standard and Poor’s.
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
of Total
|
|
|
Credit Rating
|
|
Carrying Value
|
|
|
|
|
|
|
|
“AAA”
|
|
|
87.7
|
%
|
|
“AA”
|
|
|
8.0
|
|
|
“A”
|
|
|
2.3
|
|
|
“BBB”
|
|
|
2.0
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
|
|
74
The table below shows the composition of our fixed maturity
securities by remaining time to maturity as of
September 30, 2005. For securities that are redeemable at
the option of the issuer and have a carrying value that is
greater than par value, the maturity used for the table below is
the earliest redemption date. For securities that are redeemable
at the option of the issuer and have a carrying value that is
less than par value, the maturity used for the table below is
the final maturity date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005
|
|
|
|
|
|
|
|
Remaining Time to Maturity
|
|
Carrying Value
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Less than one year
|
|
$
|
7,183
|
|
|
|
1.7%
|
|
|
One to five years
|
|
|
157,539
|
|
|
|
37.6%
|
|
|
Five to ten years
|
|
|
100,452
|
|
|
|
24.0%
|
|
|
More than ten years
|
|
|
55,932
|
|
|
|
13.4%
|
|
|
Mortgage-backed securities
|
|
|
88,893
|
|
|
|
21.2%
|
|
|
Asset-backed securities
|
|
|
6,946
|
|
|
|
1.7%
|
|
|
Redeemable preferred stocks
|
|
|
1,729
|
|
|
|
0.4%
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
418,675
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
Reinsurance
We purchase reinsurance to reduce our net liability on
individual risks and claims and to protect against catastrophic
losses. Reinsurance involves an insurance company transferring
to, or ceding, a portion of the exposure on a risk to a
reinsurer. The reinsurer assumes the exposure in return for a
portion of our premium. The cost and limits of reinsurance we
purchase can vary from year to year based upon the availability
of quality reinsurance at an acceptable price and our desired
level of retention. Retention refers to the amount of risk that
we retain for our own account. Under excess of loss reinsurance,
covered losses in excess of the retention level up to the limit
of the program are paid by the reinsurer. Our excess of loss
reinsurance is written in layers, in which our reinsurers accept
a band of coverage up to a specified amount. Any liability
exceeding the limit of the program reverts to us as the ceding
company. Reinsurance does not legally discharge us from primary
liability for the full amount due under our policies. However,
our reinsurers are obligated to indemnify us to the extent of
the coverage provided in our reinsurance agreements.
We believe reinsurance is critical to our business. Our
reinsurance purchasing strategy is to protect against unforeseen
and/or catastrophic loss activity that would adversely impact
our income and capital base. We only select financially strong
reinsurers with an A.M. Best rating of “A-”
(Excellent) or better at the time we enter into a reinsurance
contract. In addition, to minimize our exposure to significant
losses from reinsurer insolvencies, we evaluate the financial
condition of our reinsurers and monitor concentrations of credit
risk. We do not purchase finite reinsurance.
2005 Excess of Loss
Reinsurance Treaty Program
Effective January 1, 2005, we entered into a new excess of
loss reinsurance treaty program related to our voluntary and
assigned risk business that applies to losses incurred between
January 1, 2005 and the date on which our reinsurance
agreements are terminated. Our reinsurance treaty program
provides us with reinsurance coverage for each loss occurrence
up to $30.0 million, subject to applicable deductibles and
retentions. However, for any loss occurrence involving only one
person, our reinsurance coverage is limited to a maximum of
$10.0 million, subject to applicable deductibles and
retentions. We currently have ten reinsurers participating in
our 2005 reinsurance treaty program. Under certain
circumstances, including a downgrade of a reinsurer’s A.M.
Best rating to “B++” (Very Good) or below, our
reinsurers may be required to provide us with security for
amounts due under the terms of our reinsurance program. This
security may take the form of, among other things, cash advances
or the
75
issuance of a letter of credit to us. If security is required
because of a ratings downgrade, the form of security must be
mutually agreed between the reinsurer and us.
Our reinsurance treaty program provides coverage in the
following four layers:
|
|
|
|
|
|
•
|
First Layer.
Affords coverage for the first
$5.0 million of each loss occurrence. We retain the first
$1.0 million of each loss and are subject to an annual
aggregate deductible of approximately $5.6 million for
losses between $1.0 million and $5.0 million before
our reinsurers are obligated to reimburse us. The annual
aggregate deductible is calculated as a percentage of net
premiums earned. After the deductible is satisfied, we retain
10.0% of each loss between $1.0 million and
$5.0 million. This layer also affords coverage for up to an
aggregate of $4.0 million for certain losses caused by
terrorism. In addition, with respect to our employers liability
and general liability insurance policies, this layer requires
that we obtain additional reinsurance to limit our ultimate net
loss for each loss occurrence to $2.0 million.
|
|
|
|
|
•
|
Second Layer.
Affords coverage up to
$5.0 million for each loss occurrence in excess of
$5.0 million. The aggregate limit for all claims under this
layer is $10.0 million.
|
|
|
|
|
•
|
Third Layer.
Affords coverage up to
$10.0 million for each loss occurrence in excess of
$10.0 million, with a limit of $5.0 million for any
one person. The aggregate limit for all claims under this layer
is $20.0 million.
|
|
|
|
|
•
|
Fourth Layer.
Affords coverage up to
$10.0 million for each loss occurrence in excess of
$20.0 million, with a limit of $5.0 million for any
one person. The aggregate limit for all claims under this layer
is $20.0 million.
|
The agreements under our 2005 reinsurance treaty program may be
terminated by us or our reinsurers upon 90 days prior
notice on any December 31. In addition, we may terminate
the participation of one or more of our reinsurers under certain
circumstances as permitted by the terms of our reinsurance
agreements.
The table below sets forth the reinsurers participating in our
2005 reinsurance program:
|
|
|
|
|
|
|
|
|
A.M. Best
|
|
|
Reinsurer
|
|
Rating
|
|
|
|
|
|
|
|
Amlin Underwriting
|
|
|
A
|
|
|
Aspen Insurance UK
|
|
|
A
|
|
|
Brit Syndicates
|
|
|
A
|
|
|
Chubb Re/ Federal Insurance Company
|
|
|
A++
|
|
|
Hannover Re
|
|
|
A
|
|
|
IOA Re/ Catlin Insurance Company
|
|
|
A
|
|
|
Liberty Syndicate
|
|
|
A
|
|
|
M.J. Harrington
|
|
|
A
|
|
|
Partner Reinsurance Company
|
|
|
A+
|
|
|
Platinum Underwriters Reinsurance
|
|
|
A
|
|
76
Due to the nature of reinsurance, we have receivables from
reinsurers that apply to accident years prior to 2005. The table
below summarizes our amounts recoverable from reinsurers as of
September 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A.M. Best
|
|
Amount Recoverable as
|
|
Reinsurer
|
|
Rating
|
|
of September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
American Reinsurance Company
|
|
|
A
|
|
|
$
|
26,194
|
|
|
Odyssey America Reinsurance Company
|
|
|
A
|
|
|
|
22,745
|
|
|
St. Paul Fire and Marine Insurance Company
|
|
|
A+
|
|
|
|
13,182
|
|
|
Clearwater Insurance Company
|
|
|
A
|
|
|
|
11,793
|
|
|
SCOR Reinsurance Company
|
|
|
B++
|
|
|
|
7,994
|
|
|
Converium Reinsurance (North America)
|
|
|
B—
|
|
|
|
6,343
|
|
|
Hannover Re(1)
|
|
|
A
|
|
|
|
5,861
|
|
|
Aspen Insurance UK
|
|
|
A
|
|
|
|
4,446
|
|
|
Partner Reinsurance Company(1)
|
|
|
A+
|
|
|
|
3,111
|
|
|
American National Insurance Company
|
|
|
A+
|
|
|
|
2,713
|
|
|
Connecticut General Life Insurance Company
|
|
|
A—
|
|
|
|
2,443
|
|
|
Other (24 reinsurers)
|
|
|
—
|
|
|
|
15,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
122,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Current participant in our 2005 reinsurance program.
|
The Terrorism Risk Insurance Act is effective for the period
from November 26, 2002 until December 31, 2005. The
Terrorism Risk Insurance Act may provide us with reinsurance
coverage under certain circumstances and subject to certain
limitations. The Secretary of the U.S. Department of the
Treasury must certify an act for it to constitute an act of
terrorism. The definition of terrorism excludes domestic acts of
terrorism or acts of terrorism committed in the course of a war
declared by Congress. Losses arising from an act of terrorism
must exceed $5.0 billion to qualify for reimbursement. If
an event is certified, the federal government will reimburse
losses not to exceed $100.0 billion in any year. Each
insurance company is responsible for a deductible based on a
percentage of direct earned premiums in the previous calendar
year. For losses in excess of the deductible, the federal
government will reimburse 90% of the insurer’s loss, up to
the insurer’s proportionate share of the
$100.0 billion. The Terrorism Risk Insurance Act is set to
expire on December 31, 2005, and the U.S. Department
of the Treasury has recommended that Congress not extend the law
in its current form. If this law is not extended or is extended
in a scaled-back form, which is the current proposal by the
U.S. Department of the Treasury, reinsurance for losses
arising from terrorism may be unavailable or prohibitively
expensive, and we may be further exposed to losses arising from
acts of terrorism. See “— Regulation— Federal and
State Legislative and Regulatory Changes.”
Technology
We use our internally developed and other management information
systems as an integral part of our operations and make a
substantial ongoing investment in improving our systems. We
provide our field premium auditors, field safety professionals
and field case managers with computer and communication
equipment to more timely and efficiently complete the
underwriting process. This technology also helps to facilitate
communication and to report and monitor claims. All of our
systems
77
development and infrastructure operation and maintenance is
performed by our 34 information technology professionals, with
limited assistance from outside vendors.
ICAMS.
Our internally developed Insurance Claims and
Accounting Management System, or ICAMS, is an application
designed to support our workers’ compensation insurance
business. ICAMS provides comprehensive rating, analysis,
quotation, audit, claims, policy issuance and policy-level
accounting transaction processes. By combining the information
we obtain in our underwriting process with information on claims
billing and claims management, we are able to enhance our
services to our policyholders.
RealSafe.
RealSafe is an internally developed
application that supports our field safety professionals, as
well as safety, claims and underwriting departments in our home
office, by providing risk assessment and reporting of
information to support safety and loss control initiatives.
Document Management System.
Our document management
system is a purchased application currently being used by our
underwriting, audit, finance and treasury departments to scan,
index and store imaged documents to facilitate the movement of
work items from one authority level to the next. The system will
ultimately include all departments. The system allows
departmental management to closely monitor and modify employee
workloads as needed.
Freedom Enterprise.
FFS-Enterprise is a Fiserv
product that functions as our general ledger and accounts
payable systems using an MS SQL database platform. We also use
Fiserv companion products for report writing, check printing and
annual statement preparation. Transactions can be manually
entered into Enterprise, interfaced via an ASCII file or copied
and pasted from a spreadsheet application. Enterprise is
currently set up to accept transaction detail by department,
cost center, line of business and state. Enterprise also offers
the capability of batch processing, which enables off-peak hour
work.
Visual Audit.
Visual Audit is a purchased
application used by our field premium auditors to input
information necessary to complete an interim or final premium
audit.
Information Warehouse.
Information Warehouse is an
internally developed SQL Server-based set of OLAP cubes, queries
and processes that extracts operational data from ICAMS and
other of our applications and transforms that data for porting
to Freedom Enterprise and
fnet.
fnet.
fnet
is an internally developed
data analysis portal.
fnet
is populated by our
Information Warehouse, and used throughout our company to
generate key performance statistics.
We use Microsoft Active Directory services to provide
application access, domain authentication and network services.
Our server hardware is predominately Compaq/ HP, but includes
Dell servers as well. Our production servers are under
manufacturer warranties.
|
|
|
|
|
Business Continuity/Disaster Recovery
|
Our Storage Area Network solution provides us with continuous
operations using mirrored servers and storage situated in two
separate corporate buildings, with built-in failover
capabilities to minimize business interruption. We utilize
software from Veritas for backup and recovery purposes. Full
system backups are performed nightly using one on-site and one
off-site facility for tape storage.
Competition
The insurance industry, in general, is highly competitive and
there is significant competition in the workers’
compensation insurance industry. Competition in the insurance
business is based on many
78
factors, including coverage availability, claims management,
safety services, payment terms, premium rates, policy terms,
types of insurance offered, overall financial strength,
financial ratings assigned by independent rating organizations,
such as A.M. Best, and reputation. Some of the insurers with
which we compete have significantly greater financial, marketing
and management resources and experience than we do. We may also
compete with new market entrants in the future.
We believe the workers’ compensation market for the
hazardous industries we target is underserved and competition is
fragmented and not dominated by one or more competitors. Our
competitors include other insurance companies, individual self
insured companies, state insurance pools and self-insurance
funds. More than 350 insurance companies participate in the
workers’ compensation market. The insurance companies with
which we compete vary state by state and by the industries we
target.
We believe our competitive advantages include our safety service
and claims management practices, our A.M. Best rating of
“A-” (Excellent) and our ability to reduce claims
through implementation of our work safety programs. In addition,
we believe that our insurance is competitively priced and our
premium rates are typically lower than those for policyholders
assigned to the state insurance pools, allowing us to provide a
viable alternative for policyholders in those pools.
Ratings
Many insurance buyers and agencies use the ratings assigned by
A.M. Best and other rating agencies to assist them in assessing
the financial strength and overall quality of the companies from
which they are considering purchasing insurance. We were
assigned a rating of “A-” (Excellent) by A.M. Best. An
“A-” rating is the fourth highest of 15 rating
categories used by A.M. Best. In June 2005, A.M. Best placed our
rating under review with negative implications, citing concerns
about our risk adjusted capital, credit risk associated with
amounts recoverable from our reinsurers and the somewhat limited
financial flexibility of our holding company, AMERISAFE. As a
result of our commutation with Converium Reinsurance (North
America), one of our reinsurers, and the application of the
proceeds from this offering, we expect that our under review
status will be returned to stable and that A.M. Best will affirm
our “A-” (Excellent) rating in late 2005.
In evaluating a company’s financial and operating
performance, A.M. Best reviews the company’s profitability,
indebtedness and liquidity, as well as its book of business, the
adequacy and soundness of its reinsurance, the quality and
estimated fair value of its assets, the adequacy of its loss
reserves, the adequacy of its surplus, its capital structure,
the experience and competence of its management and its market
presence. This rating is intended to provide an independent
opinion of an insurer’s ability to meet its obligations to
policyholders and is not an evaluation directed at investors.
Employees
As of September 30, 2005, we had 437 full-time employees
and two part-time employees. We have employment agreements
with each of our executive officers, which are described under
“Management— Employment and Consulting
Agreements.” None of our employees is subject to collective
bargaining agreements. We believe that our employee relations
are good.
Properties
We own our 45,000 square foot executive offices located in
DeRidder, Louisiana. In addition, we lease an additional
28,000 square feet of office space in DeRidder, Louisiana,
pursuant to a lease agreement that requires annual lease
payments of $250,000 and expires on December 31, 2006. This
lease agreement may be extended for three additional one-year
periods, at our option. We also lease space at other locations
for our service and claims representative offices.
79
Legal Proceedings
In the ordinary course of our business, we are involved in the
adjudication of claims resulting from workplace injuries. We are
not involved in any legal or administrative claims that we
believe are likely to have a materially adverse effect on our
business, financial condition or results of operations.
Regulation
|
|
|
|
|
Holding Company Regulation
|
Nearly all states have enacted legislation that regulates
insurance holding company systems. Each insurance company in a
holding company system is required to register with the
insurance supervisory agency of its state of domicile and
furnish information concerning the operations of companies
within the holding company system that may materially affect the
operations, management or financial condition of the insurers
within the system. Under these laws, the respective state
insurance departments may examine us at any time, require
disclosure of material transactions and require prior notice of
or approval for certain transactions. All transactions within a
holding company system affecting an insurer must have fair and
reasonable terms and are subject to other standards and
requirements established by law and regulation.
The insurance holding company laws of nearly all states require
advance approval by the respective state insurance departments
of any change of control of an insurer. “Control” is
generally presumed to exist through the direct or indirect
ownership of 10% or more of the voting securities of a domestic
insurance company or any entity that controls a domestic
insurance company. In addition, insurance laws in many states
contain provisions that require pre-notification to the
insurance commissioners of a change of control of a non-domestic
insurance company licensed in those states. Any future
transactions that would constitute a change of control of
American Interstate, Silver Oak Casualty or American Interstate
of Texas, including a change of control of AMERISAFE, would
generally require the party acquiring control to obtain the
prior approval of the department of insurance in the state in
which the insurance company being acquired is incorporated and
may require pre-notification in the states where
pre-notification provisions have been adopted. Obtaining these
approvals may result in the material delay of, or deter, any
such transaction.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change of control of AMERISAFE,
including through transactions, and in particular unsolicited
transactions, that some or all of the shareholders of AMERISAFE
might consider to be desirable.
|
|
|
|
|
State Insurance Regulation
|
Insurance companies are subject to regulation and supervision by
the department of insurance in the state in which they are
domiciled and, to a lesser extent, other states in which they
conduct business. American Interstate and Silver Oak Casualty
are primarily subject to regulation and supervision by the
Louisiana Department of Insurance, Workers’ Compensation
Commission and Insurance Rating Commission. American Interstate
of Texas is primarily subject to regulation and supervision by
the Texas Department of Insurance and Workers’ Compensation
Commission. These state agencies have broad regulatory,
supervisory and administrative powers, including among other
things, the power to grant and revoke licenses to transact
business, license agencies, set the standards of solvency to be
met and maintained, determine the nature of, and limitations on,
investments and dividends, approve policy forms and rates in
some states, periodically examine financial statements,
determine the form and content of required financial statements,
and periodically examine market conduct.
Detailed annual and quarterly financial statements and other
reports are required to be filed with the department of
insurance in all states in which we are licensed to transact
business. The financial
80
statements of American Interstate, Silver Oak Casualty and
American Interstate of Texas are subject to periodic examination
by the department of insurance in each state in which it is
licensed to do business.
In addition, many states have laws and regulations that limit an
insurer’s ability to withdraw from a particular market. For
example, states may limit an insurer’s ability to cancel or
not renew policies. Furthermore, certain states prohibit an
insurer from withdrawing one or more lines of business from the
state, except pursuant to a plan that is approved by the state
insurance department. The state insurance department may
disapprove a plan that may lead to market disruption. Laws and
regulations that limit cancellation and non-renewal and that
subject program withdrawals to prior approval requirements may
restrict our ability to exit unprofitable markets.
Insurance agencies are subject to regulation and supervision by
the department of insurance in the state in which they are
licensed. Our wholly owned subsidiary, Amerisafe General Agency,
Inc., is licensed in 24 states and is domiciled in
Louisiana. Amerisafe General is primarily subject to regulation
and supervision by the Louisiana Department of Insurance. This
agency regulates the solicitation of insurance and the
qualification and licensing of agents and agencies that may
desire to conduct business in Louisiana.
|
|
|
|
|
State Insurance Department Examinations
|
We are subject to periodic examinations by state insurance
departments in the states in which we operate. The Louisiana
Department of Insurance generally examines each of its
domiciliary insurance companies on a triannual basis. The last
examination of American Interstate and Silver Oak Casualty
occurred in 2002. We have been informally notified that our next
examination is scheduled for the end of 2005 or the beginning of
2006. American Interstate of Texas was formed in December 2004
and began operations in January 2005. Under Texas insurance law,
American Interstate of Texas will be subject to examination each
year in its first three years of operations.
|
|
|
|
|
Guaranty Fund Assessments
|
In most of the states where we are licensed to transact
business, there is a requirement that property and casualty
insurers doing business within each such state participate in a
guaranty association, which is organized to pay contractual
benefits owed pursuant to insurance policies issued by impaired,
insolvent or failed insurers. These associations levy
assessments, up to prescribed limits, on all member insurers in
a particular state on the basis of the proportionate share of
the premium written by member insurers in the lines of business
in which the impaired, insolvent or failed insurer is engaged.
Some states permit member insurers to recover assessments paid
through full or partial premium tax offsets.
Property and casualty insurance company insolvencies or failures
may result in additional security fund assessments to us at some
future date. At this time, we are unable to determine the
impact, if any, such assessments may have on our financial
position or results of operations. We have established
liabilities for guaranty fund assessments with respect to
insurers that are currently subject to insolvency proceedings.
Many of the states in which we conduct business or intend to
conduct business, require that all licensed insurers participate
in a program to provide workers’ compensation insurance to
those employers who have not or cannot procure coverage from a
carrier on a negotiated basis. The level of required
participation in such programs is generally determined by
calculating the volume of our voluntarily business in that state
as a percentage of all voluntarily business in that state by all
insurers. The resulting factor is the proportion of premium we
must accept as a percentage of all of premiums in policies
residing in that state’s residual market program.
Companies generally can fulfill their residual market
obligations by either issuing insurance policies to employers
assigned to them, or participating in a reinsurance pool where
the results of all policies
81
provided through the pool are shared by the participating
companies. Currently, we utilize both methods, depending on
management’s evaluation of the most cost-efficient method
to adopt in each state that allows a choice of assigned risk or
participation in a pooling arrangement. In general, we believe
that assigned risk produces better results as we apply our cost
management approach to these involuntary policyholders. We
currently have assigned risk in six states: Alabama, Alaska,
Georgia, North Carolina, South Carolina, and Virginia.
A number of states operate trust funds that reimburse insurers
and employers for claims paid to injured employees for
aggravation of prior conditions or injuries. The state-managed
trust funds are funded through assessments against insurers and
self-insurers providing workers’ compensation coverage in a
specific state. Our recoveries from state-managed trust funds
for the years ended December 31, 2002, 2003 and 2004 were
approximately $6.4 million, $7.3 million and
$8.1 million, respectively. Our cash paid for assessments
to state-managed trust funds for the years ended
December 31, 2002, 2003 and 2004 was approximately
$4.9 million, $4.2 million and $3.6 million,
respectively.
Under Louisiana law, American Interstate and Silver Oak Casualty
cannot pay dividends to their shareholders in excess of the
lesser of 10% of statutory surplus, or statutory net income,
excluding realized investment gains, for the preceding 12-month
period without the prior approval of the Louisiana Commissioner
of Insurance. However, net income from the previous two calendar
years may be carried forward to the extent that it has not
already been paid out as dividends. Based on reported capital
and surplus at December 31, 2004, this requirement limits
American Interstate’s ability to make distributions to
AMERISAFE in 2005 to approximately $11.2 million without
approval by the Louisiana Department of Insurance. Further,
under Texas law, American Interstate of Texas cannot pay
dividends to its shareholder in excess of the greater of 10% of
statutory surplus, or statutory net income, for the preceding
12-month period without the prior approval of the Texas
Commissioner of Insurance.
|
|
|
|
|
Federal Law and Regulations
|
As of September 30, 2005, 2.7% of our voluntary in-force
premiums were derived from employers engaged in the maritime
industry. As a provider of workers’ compensation insurance
for employers engaged in the maritime industry, we are subject
to the United States Longshore and Harbor Workers’
Compensation Act, or the USL&H Act, and the Merchant Marine
Act of 1920, or Jones Act. We are also subject to regulations
related to the USL&H Act and the Jones Act.
The USL&H Act, which is administered by the
U.S. Department of Labor, generally covers exposures on the
navigable waters of the United States and in adjoining
waterfront areas, including exposures resulting from
stevedoring. The USL&H Act requires employers to provide
medical benefits, compensation for lost wages and rehabilitation
services to longshoremen, harbor workers and other maritime
workers who may suffer injury, disability or death during the
course and scope of their employment. The Department of Labor
has the authority to require us to make deposits to serve as
collateral for losses incurred under the USL&H Act.
The Jones Act is a federal law, the maritime employer provisions
of which provide injured offshore workers, or seamen, with a
remedy against their employers for injuries arising from
negligent acts of the employer or co-workers during the course
of employment on a ship or vessel.
In 1999, Congress enacted the Gramm-Leach-Bliley Act, which,
among other things, protects consumers from the unauthorized
dissemination of certain personal information. Subsequently, a
majority of states have implemented additional regulations to
address privacy issues. These laws and regulations apply to all
financial institutions, including insurance and finance
companies, and require us to maintain appropriate policies and
procedures for managing and protecting certain personal
82
information of our policyholders and to fully disclose our
privacy practices to our policyholders. We may also be exposed
to future privacy laws and regulations, which could impose
additional costs and impact our results of operations or
financial condition. In 2000, the National Association of
Insurance Commissioners, or the NAIC, adopted the Privacy of
Consumer Financial and Health Information Model Regulation,
which assisted states in promulgating regulations to comply with
the Gramm-Leach-Bliley Act. In 2002, to further facilitate the
implementation of the Gramm-Leach-Bliley Act, the NAIC adopted
the Standards for Safeguarding Customer Information Model
Regulation. Several states have now adopted similar provisions
regarding the safeguarding of policyholder information. We have
established policies and procedures to comply with the
Gramm-Leach-Bliley related privacy requirements.
Federal and State
Legislative and Regulatory Changes
From time to time, various regulatory and legislative changes
have been proposed in the insurance industry. Among the
proposals that have in the past been or are at present being
considered are the possible introduction of federal regulation
in addition to, or in lieu of, the current system of state
regulation of insurers and proposals in various state
legislatures (some of which proposals have been enacted) to
conform portions of their insurance laws and regulations to
various model acts adopted by the NAIC. We are unable to predict
whether any of these laws and regulations will be adopted, the
form in which any such laws and regulations would be adopted or
the effect, if any, these developments would have on our
operations and financial condition.
On November 26, 2002, in response to the tightening of
supply in certain insurance and reinsurance markets resulting
from, among other things, the September 11, 2001 terrorist
attacks, the Terrorism Risk Insurance Act was enacted. The
Terrorism Risk Insurance Act is designed to ensure the
availability of insurance coverage for losses resulting from
acts of terror in the United States. This law established a
federal assistance program through the end of 2005 to help the
property and casualty insurance industry cover claims related to
future terrorism-related losses and requires such companies to
offer coverage for certain acts of terrorism. As a result, any
terrorism exclusions in policies in-force prior to the enactment
of the Terrorism Risk Insurance Act are void and, absent
authorization or failure of the insured to pay increased
premiums resulting from the terrorism coverage, we are
prohibited from adding certain terrorism exclusions to policies
written. Although we are protected by federally funded terrorism
reinsurance as provided for in the Terrorism Risk Insurance Act,
there is a substantial deductible that must be met, the payment
of which could have an adverse effect on our results of
operations. The Terrorism Risk Insurance Act is set to expire on
December 31, 2005, and the U.S. Department of the
Treasury has recommended that Congress not extend the law in its
current form. If this law is not extended or is extended in a
scaled-back form, which is the current proposal by the
U.S. Department of the Treasury, these changes could also
adversely affect us by causing our reinsurers to increase
premium rates or withdraw from certain markets where terrorism
coverage is required. See “—Reinsurance—
Terrorism Reinsurance” above.
The National Association of
Insurance Commissioners
The NAIC is a group formed by state Insurance Commissioners to
discuss issues and formulate policy with respect to regulation,
reporting and accounting of insurance companies. Although the
NAIC has no legislative authority and insurance companies are at
all times subject to the laws of their respective domiciliary
states and, to a lesser extent, other states in which they
conduct business, the NAIC is influential in determining the
form in which such laws are enacted. Model Insurance Laws,
Regulations and Guidelines, which we refer to as the Model Laws,
have been promulgated by the NAIC as a minimum standard by which
state regulatory systems and regulations are measured. Adoption
of state laws that provide for substantially similar regulations
to those described in the Model Laws is a requirement for
accreditation by the NAIC. The NAIC provides authoritative
guidance to insurance regulators on current statutory accounting
issues by promulgating and updating a codified set
83
of statutory accounting practices in its
Accounting Practices
and Procedures
manual. The Louisiana and Texas legislatures
have adopted these codified statutory accounting practices.
The NAIC has recently proposed a Model Law that would require
insurance brokers to obtain the written consent of the insured
before receiving compensation from the insurer. This proposed
Model Law would also require all insurance producers (including
agents) to disclose to its customers that the producer will
receive compensation from the insurer, that the compensation
received by the producer may differ depending upon the product
and insurer and that the producer may receive additional
compensation from the insurer based upon other factors, such as
premium volume placed with a particular insurer and loss or
claims experience. We do not sell insurance through brokers. We
do sell insurance through agents. We do not believe that the
disclosure obligations under the Model Law proposed by the NAIC
would have any significant effect on our business if it were
adopted in the states in which we conduct our business.
Under Louisiana law, American Interstate and Silver Oak Casualty
are required to maintain minimum capital and surplus of
$3.0 million. Under Texas law, American Interstate of Texas
is required to maintain minimum capital and surplus of
$1.0 million. Property and casualty insurance companies are
subject to certain risk based capital requirements by the NAIC.
Under those requirements, the amount of capital and surplus
maintained by a property and casualty insurance company is to be
determined based on the various risk factors related to it. As
of December 31, 2004, American Interstate, Silver Oak
Casualty, and American Interstate of Texas exceeded the minimum
risk based capital requirements.
The key financial ratios of NAIC’s Insurance Regulatory
Information System, or IRIS, which ratios were developed to
assist insurance departments in overseeing the financial
condition of insurance companies, are reviewed by experienced
financial examiners of the NAIC and state insurance departments
to select those companies that merit highest priority in the
allocation of the regulators’ resources. IRIS identifies 12
industry ratios and specifies “usual values” for each
ratio. Departure from the usual values on four or more of the
ratios can lead to inquiries from individual state insurance
commissioners as to certain aspects of an insurer’s
business.
The 2004 IRIS results for American Interstate and Silver Oak
Casualty showed their investment yield ratios were outside the
usual range for such ratio, which was consistent with the
insurance industry as a whole. In addition, the 2004 IRIS
results for Silver Oak Casualty showed its net written
premium-to-surplus ratio and one-year reserve
development-to-surplus ratio were above the usual ranges for
such ratios. These two ratios were above the IRIS usual values
because of Silver Oak Casualty’s small surplus base.
Statutory Accounting
Practices
Statutory accounting practices, or SAP, are a basis of
accounting developed to assist insurance regulators in
monitoring and regulating the solvency of insurance companies.
SAP is primarily concerned with measuring an insurer’s
surplus to policyholders. Accordingly, statutory accounting
focuses on valuing assets and liabilities of insurers at
financial reporting dates in accordance with appropriate
insurance law and regulatory provisions applicable in each
insurer’s domiciliary state.
Generally accepted accounting principles, or GAAP, are concerned
with a company’s solvency, but are also concerned with
other financial measurements, principally income and cash flows.
Accordingly, GAAP gives more consideration to appropriate
matching of revenue and expenses and accounting for
management’s stewardship of assets than does SAP. As a
direct result, different assets and liabilities and different
amounts of assets and liabilities will be reflected in financial
statements prepared in accordance with GAAP as compared to SAP.
Statutory accounting practices established by the NAIC and
adopted in part by the Louisiana and Texas insurance regulators,
determine, among other things, the amount of statutory surplus
and statutory net income of American Interstate, Silver Oak
Casualty and American Interstate of Texas and thus determine, in
part, the amount of funds that are available to pay dividends to
AMERISAFE.
84
MANAGEMENT
Directors, Director Nominee, Executive Officers and Key
Employees
The table below sets forth information about our directors,
director nominee, executive officers and key employees. Our
directors are divided into three classes with the number of
directors in each class as nearly equal as possible. Each
director will serve a three-year term. Executive officers serve
at the request of our board of directors.
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
|
|
|
|
|
|
|
|
Directors, Director Nominee and Executive Officers
|
|
|
|
|
|
|
|
C. Allen Bradley, Jr.(3)
|
|
|
54
|
|
|
Chairman, President and Chief Executive Officer
|
|
Mark R. Anderson
|
|
|
53
|
|
|
Executive Vice President
|
|
Geoffrey R. Banta
|
|
|
56
|
|
|
Executive Vice President and Chief Financial Officer
|
|
Arthur L. Hunt
|
|
|
60
|
|
|
Executive Vice President, General Counsel and Secretary
|
|
Craig P. Leach
|
|
|
55
|
|
|
Executive Vice President, Sales and Marketing
|
|
Paul B. Queally(1)
|
|
|
41
|
|
|
Director
|
|
Sean M. Traynor(2)
|
|
|
36
|
|
|
Director
|
|
Jared A. Morris(2)
|
|
|
30
|
|
|
Director
|
|
Austin P. Young III(3)
|
|
|
64
|
|
|
Director Nominee
|
|
|
|
Key Employees
|
|
|
|
|
|
|
|
Allan E. Farr
|
|
|
47
|
|
|
Senior Vice President, Enterprise Risk Management
|
|
Kelly R. Goins
|
|
|
39
|
|
|
Senior Vice President, Underwriting Operations
|
|
Cynthia P. Harris
|
|
|
51
|
|
|
Senior Vice President, Human Resources/Client Services
|
|
Leon J. Lagneaux
|
|
|
54
|
|
|
Senior Vice President, Safety Operations
|
|
Henry O. Lestage, IV
|
|
|
44
|
|
|
Senior Vice President, Claims Operations
|
|
Edwin R. Longanacre
|
|
|
47
|
|
|
Senior Vice President, Information Technology
|
|
Lasa L. Simmons
|
|
|
48
|
|
|
Senior Vice President, Premium Audit
|
|
Angela S. Lannen
|
|
|
59
|
|
|
Vice President, Treasurer
|
|
G. Janelle Frost
|
|
|
35
|
|
|
Assistant Vice President, Controller
|
|
|
|
|
(1)
|
Term expires at the annual meeting of shareholders in 2006.
|
|
|
|
(2)
|
Term expires at the annual meeting of shareholders in 2007.
|
|
|
|
(3)
|
Term expires at the annual meeting of shareholders in 2008.
|
Set forth below is certain background information relating to
our directors, director nominee, executive officers and key
employees.
C. Allen Bradley, Jr.
has served as Chairman of
our board of directors since October 2005, our President
since November 2002, our Chief Executive Officer since December
2003 and a Director since June 2003. From November 2002 until
December 2003 he served as our Chief Operating Officer. Since
joining our company in 1994, Mr. Bradley has had principal
responsibility for the management of our underwriting operations
(December 2000 through June 2005) and safety services (September
2000 through November 2002) and has served as our General
Counsel (September 1997 through December 2003) and Secretary
(September 1997 through November 2002). Prior to joining our
company, he was engaged in the private practice of law.
Mark R. Anderson
has served as Executive Vice President
since October 2005. He was Chairman of our board of
directors from December 2003 until October 2005 and a Director
from 1986 until
85
October 2005, our Chief Executive Officer from 1997 until
December 2003, and President of our subsidiary, American
Interstate, from 1987 until November 2002. Mr. Anderson
began his insurance career when he joined a predecessor to our
company in 1979. He has served on various legislative insurance
advisory committees in Louisiana, and has served as a
workers’ compensation rate and reform consultant to several
southern insurance commissioners.
Geoffrey R. Banta
has served as our Executive Vice
President and Chief Financial Officer since December 2003. Prior
to joining our company in 2003, he held the positions of
President and Chief Executive Officer from 2001 until November
2003, and Chief Operating Officer from 1996 until 2001, at
Scruggs Consulting, an actuarial and management consulting firm.
From 1994 to 1996, Mr. Banta was Chief Financial Officer of
the Atlanta Casualty Companies, an issuer of non-standard auto
insurance whose holding company was a subsidiary of American
Financial Group Holdings, Inc.
Arthur L. Hunt
has served as our General Counsel since
December 2003, Secretary since 2002 and Executive Vice President
since 1999. He has been employed with our company since 1991 and
served as our Chief Operating Officer from 1997 until 1999, and
as a Director from 1994 until June 2003.
Craig P. Leach
has served as our Executive Vice
President, Sales and Marketing since November 2002. He has
served in a variety of sales and key marketing positions within
our company since beginning his insurance career with a
predecessor to our company in 1980, including Senior Vice
President, Sales and Marketing from 1997 until November 2002.
Paul B. Queally
has served as a Director of our company
since 1997. He is currently a general partner of Welsh, Carson,
Anderson & Stowe, a private equity investment firm,
that he joined in 1996. Mr. Queally also serves as a
director of MedCath Corporation, Concentra Operating
Corporation, AmCOMP Incorporated and several private companies.
Sean M. Traynor
has served as a Director of our company
since April 2001. He is currently a general partner of Welsh,
Carson, Anderson & Stowe, a private equity investment
firm, that he joined in 1999. Mr. Traynor also serves as a
director for US Oncology, Inc., Select Medical Corporation,
Ameripath, Inc., AmCOMP Incorporated and several private
companies.
Jared A. Morris
has served as a Director of our company
since September 2005. Since 2002, Mr. Morris has been an
officer and a principal owner of Dumont Land, LLC and
Marine One Acceptance Corp., both of which are subprime finance
companies. He was an Assistant Vice President, Underwriter of
CIT Business Credit, a commercial finance company, from 2000
until 2002.
Austin P. Young III
is a Director Nominee. Mr. Young
served as Senior Vice President, Chief Financial Officer and
Treasurer of CellStar Corporation, a logistics service provider
to the wireless communications industry, from 1999 until his
retirement in December 2001. Prior to joining CellStar
Corporation, Mr. Young was a partner in the Houston and New
York offices of KPMG LLP for 22 years, Senior Vice
President and Chief Financial Officer of American General
Corporation for over eight years and Executive Vice
President-Finance and Administration of Metamor Worldwide, Inc.,
an information technology company, for three years.
Mr. Young serves as a Director and Chairman of the Finance,
Risk Management and Audit Committee of Administaff, Inc. and as
a Director and Chairman of the Audit Committee of Tower Group,
Inc. Mr. Young also currently serves as Vice President,
Treasurer and Director of The Park People, Vice President and
Director of the Houston Fire Museum and Chairman of the Houston
Zoo Advisory Council.
Allan E. Farr
has served as our Senior Vice President,
Enterprise Risk Management since April 2004. He has been
employed with our company since 1998 and served as Vice
President, Underwriting Services from 1999 until 2004.
Kelly R. Goins
has served as our Senior Vice President,
Underwriting Operations since March 2005. She has been employed
with our company since 1986 and served as Vice President,
Underwriting Operations from 2000 until March 2005.
86
Cynthia P. Harris
has served as our Senior Vice
President, Human Resources/ Client Services since January 2003.
She has been employed with our company since 1977 and served as
Vice President, Policyholder Services and Administration from
1992 until December 2002.
Leon J. Lagneaux
has served as our Senior Vice President,
Safety Operations since March 2005. He has been employed with
our company since 1994 and served as Vice President, Safety
Operations from 1999 until March 2005.
Henry O. Lestage, IV
has served as our Senior Vice
President, Claims Operations since September 2000. He has been
employed with our company since 1987 and served as Vice
President, Claims Operations from 1998 until 2000.
Edward R. Longanacre
has served as our Senior Vice
President, Information Technology since March 2005. He has been
employed with our company since 2000 and held the position of
Vice President, Information Technology from September 2004 until
March 2005 and Information Technology Director from 2000 until
September 2004.
Lasa L. Simmons
has served as our Senior Vice President,
Premium Audit since March 2005. She has been employed with our
company since 1985 and held the position of Vice President,
Premium Audit Manager from 1999 until March 2005.
Angela S. Lannen
has served as our Vice President,
Treasurer since January 2001. She has been employed with our
company since 1999 and served as Planning and Analysis Manager
from 1999 until December 2000.
G. Janelle Frost
has served as our Assistant Vice
President, Controller since May 2004. She has been employed with
our company since 1992 and served as Deputy Controller from 1998
to April 2004.
Board Composition
We are managed under the direction of our board of directors.
Upon completion of this offering, our board will consist of five
directors, four of whom will not be, and will never have been,
employees of our company, nor will they have any other relations
with us that would result in their being considered other than
independent under applicable U.S. federal securities laws
and the rules of the National Association of Securities Dealers,
or NASD. There are no family relationships among any of our
directors or executive officers.
Our board has approved Corporate Governance Guidelines and a
Code of Business Conduct and Ethics for all directors, officers
and employees, copies of which will be available on our website
and upon written request by our shareholders at no cost.
Number of Directors; Removal; Vacancies
Our articles of incorporation and bylaws provide that the number
of directors shall be fixed from time to time by our board of
directors. Our board of directors is divided into three classes
with the number of directors in each class as nearly equal as
possible. Each director serves a three-year term. The term of
office for each of our directors upon completion of this
offering is noted in the table listing our directors and
executive officers under “—Directors, Director
Nominee, Executive Officers and Key Employees.” Pursuant to
our bylaws, each director will serve until his or her successor
is duly elected and qualified, unless he or she dies, resigns,
retires, becomes disqualified or is removed. Our bylaws also
provide that any director may be removed for cause, at any
meeting of shareholders called for that purpose, by the
affirmative vote of the holders of at least two-thirds of the
combined voting power of the then-outstanding securities
entitled to vote generally in the election of directors.
Our bylaws further provide that newly created directorships in
our board may be filled by election at an annual or special
meeting of our shareholders called for that purpose or by our
board of directors, provided that our board may not fill more
than two newly created directorships during the period
87
between any two successive annual meetings of our shareholders.
Any director chosen to fill a newly created directorship will
hold office until the next election of one or more directors by
the shareholders. Any other vacancies in our board may be filled
by election at an annual or special meeting of our shareholders
called for that purpose or by the affirmative vote of a majority
of the remaining directors then in office, even if less than a
quorum. Any director chosen to fill a vacancy not resulting from
a newly created directorship will hold office for the unexpired
term of his or her predecessor.
Board Committees
Our board has an audit committee and a compensation committee
and, upon completion of this offering, will have a nominating
and corporate governance committee. Each committee will consist
of three persons. Upon completion of this offering, all of the
members of our audit committee, compensation committee and
nominating and corporate governance committee will be
“independent” as defined by the rules of the NASD. In
the case of our audit committee, upon completion of this
offering, two of the three members of our audit committee will
satisfy the SEC requirements relating to independence of audit
committee members. We expect that all of our audit committee
members will satisfy these SEC requirements within one year
after this offering.
Audit Committee.
The audit committee will be comprised of
three directors. Membership of the audit committee will include
Austin P. Young III (Chair), Jared A. Morris and
Sean M. Traynor. The audit committee will oversee our
accounting and financial reporting processes and the audits of
our financial statements. The functions and responsibilities of
the audit committee include:
|
|
|
|
|
|
•
|
establishing, monitoring and assessing our policies and
procedures with respect to business practices, including the
adequacy of our internal controls over accounting and financial
reporting;
|
|
|
|
|
•
|
engaging our independent auditors and conducting an annual
review of the independence of our independent auditors;
|
|
|
|
|
•
|
pre-approving any non-audit services to be performed by our
independent auditors;
|
|
|
|
|
•
|
reviewing the annual audited financial statements and quarterly
financial information with management and the independent
auditors;
|
|
|
|
|
•
|
reviewing with the independent auditors the scope and the
planning of the annual audit;
|
|
|
|
|
•
|
reviewing the findings and recommendations of the independent
auditors and management’s response to the recommendations
of the independent auditors;
|
|
|
|
|
•
|
overseeing compliance with applicable legal and regulatory
requirements, including ethical business standards;
|
|
|
|
|
•
|
preparing the audit committee report to be included in our
annual proxy statement;
|
|
|
|
|
•
|
establishing procedures for the receipt, retention and treatment
of complaints received by us regarding accounting, internal
accounting controls or auditing matters;
|
|
|
|
|
•
|
establishing procedures for the confidential, anonymous
submission by our employees of concerns regarding questionable
accounting or auditing matters; and
|
|
|
|
|
•
|
reviewing the adequacy of the audit committee charter on an
annual basis.
|
Our independent auditors will report directly to the audit
committee. Each member of the audit committee has the ability to
read and understand fundamental financial statements. Our board
has determined that Mr. Young and Mr. Morris satisfy
the SEC requirements relating to independence of audit committee
members, but that Mr. Traynor does not. Our board has
determined that Mr. Young meets the requirements of an
“audit committee financial expert” as defined by the
rules of the SEC.
88
We will provide for appropriate funding, as determined by the
audit committee, for payment of compensation to our independent
auditors, any independent counsel or other advisors engaged by
the audit committee and for administrative expenses of the audit
committee that are necessary or appropriate in carrying out its
duties.
Compensation Committee.
The compensation committee will
be comprised of three directors. Membership of the compensation
committee will include Mr. Queally (Chair), Mr. Young
and Mr. Morris. The compensation committee will establish,
administer and review our policies, programs and procedures for
compensating our executive officers and directors. The functions
and responsibilities of the compensation committee include:
|
|
|
|
|
|
•
|
evaluating the performance of and determining the compensation
for our executive officers, including our chief executive
officer;
|
|
|
|
|
•
|
administering and making recommendations to our board with
respect to our equity incentive plans;
|
|
|
|
|
•
|
overseeing regulatory compliance with respect to compensation
matters;
|
|
|
|
|
•
|
reviewing and approving employment or severance arrangements
with senior management;
|
|
|
|
|
•
|
reviewing our director compensation policies and making
recommendations to our board;
|
|
|
|
|
•
|
preparing the compensation committee report to be included in
our annual proxy statement; and
|
|
|
|
|
•
|
reviewing the adequacy of the compensation committee charter.
|
Nominating and Corporate Governance Committee.
The
nominating and corporate governance committee will be comprised
of three directors. Membership of the nominating and corporate
governance committee will include Mr. Morris (Chair), Mr.
Traynor and Mr. Young. The functions and responsibilities
of the nominating and corporate governance committee include:
|
|
|
|
|
|
•
|
developing and recommending corporate governance principles and
procedures applicable to our board and employees;
|
|
|
|
|
•
|
recommending committee composition and assignments;
|
|
|
|
|
•
|
identifying individuals qualified to become directors;
|
|
|
|
|
•
|
recommending director nominees;
|
|
|
|
|
•
|
recommending whether incumbent directors should be nominated for
re-election to our board; and
|
|
|
|
|
•
|
reviewing the adequacy of the nominating and corporate
governance committee charter.
|
Compensation Committee Interlocks and Insider
Participation
None of the members of our compensation committee will be, or
will have been, employed by us. None of our executive officers
currently serves, or in the past three years has served, as a
member of the board of directors, compensation committee or
other board committee performing equivalent functions of another
entity that has one or more executive officers serving on our
board or compensation committee. See “—Board
Composition.”
Director Compensation
It is anticipated that upon completion of this offering,
directors who are also our employees will receive no
compensation for serving as directors. Non-employee directors
will receive an annual cash retainer of $30,000. The chair of
the audit committee will receive an additional annual cash
retainer of $15,000 and each other member of the audit committee
will receive an additional annual cash retainer
89
of $5,000. The chairs of the compensation committee and
nominating and corporate governance committee will each receive
an additional annual cash retainer of $5,000. Under our 2005
non-employee director restricted stock plan, non-employee
directors will also receive an annual award of a number of
shares of restricted stock equal to $15,000 divided by the
closing price of our common stock on the date of our annual
shareholders meeting at which the non-employee director is
elected or re-elected as a member of the board. Upon completion
of this offering, our non-employee directors will receive
initial grants of restricted stock. See “—2005 Equity
Incentive Plans—Non-Employee Director Restricted Stock
Plan.” We also expect to reimburse all directors for
reasonable out-of-pocket expenses they incur in connection with
their service as directors.
Management Compensation and Incentive Plans
Our compensation policies are designed to maximize shareholder
value over the long term. Through our compensation and incentive
plans we seek to attract and retain select employees, officers
and directors and motivate these individuals to devote their
best efforts to our business and financial success.
The table below sets forth information about the compensation of
our chief executive officer and each of our other executive
officers for the year ended December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Annual
|
|
|
All Other
|
|
|
Name and Principal Position
|
|
Year
|
|
Salary
|
|
|
Bonus(1)
|
|
|
Compensation(2)
|
|
|
Compensation(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Allen Bradley, Jr.
|
|
2004
|
|
$
|
275,000
|
|
|
$
|
125,000
|
|
|
$
|
—
|
|
|
$
|
4,132
|
|
|
|
Chairman, President, Chief Executive Officer and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark R. Anderson
|
|
2004
|
|
|
352,000
|
|
|
|
40,000
|
|
|
|
—
|
|
|
|
4,132
|
|
|
|
Executive Vice President(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geoffrey R. Banta
|
|
2004
|
|
|
200,000
|
|
|
|
80,000
|
|
|
|
—
|
|
|
|
2,412
|
|
|
|
Executive Vice President and
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur L. Hunt
|
|
2004
|
|
|
215,000
|
|
|
|
80,000
|
|
|
|
—
|
|
|
|
4,132
|
|
|
|
Executive Vice President,
General Counsel and Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craig P. Leach
|
|
2004
|
|
|
215,000
|
|
|
|
70,000
|
|
|
|
—
|
|
|
|
4,132
|
|
|
|
Executive Vice President,
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects bonuses earned in 2004. In all cases, the bonuses were
paid in 2005 and were accrued as of December 31, 2004.
|
|
|
|
(2)
|
Perquisites and other personal benefits received by our
executive officers in 2004 are not included in the Summary
Compensation Table because the aggregate amount of this
compensation did not meet disclosure thresholds established
under the SEC’s regulations.
|
|
|
|
|
|
(3)
|
Consists of (a) 401(k) plan matching contributions of
$4,100 for Messrs. Bradley, Anderson, Hunt and Leach, and
$2,380 for Mr. Banta, and (b) life insurance premiums
paid by us in the amount of $32 for each of our executive
officers.
|
|
|
|
|
|
|
|
(4)
|
During the year ended December 31, 2004, Mr. Anderson
served as Chairman of our board of directors.
|
|
|
Our 2004 incentive compensation program consisted solely of cash
bonuses. The cash bonuses awarded to our executive officers were
determined by the compensation committee of our board of
directors. The amount awarded to each executive officer was
based upon several factors, including
90
company performance as compared to our business plan, the
performance of the executive officer in his area of
responsibility and the overall profitability of our company.
Option Grants in Last Fiscal Year
There were no options granted to our executive officers during
the year ended December 31, 2004.
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year End Option Values
There were no options exercised by our executive officers during
the year ended December 31, 2004. The table below indicates
for each of our executive officers the number of shares of our
common stock underlying exercisable and unexercisable stock
options granted under our 1998 Amended and Restated Stock Option
and Restricted Stock Purchase Plan, or the 1998 equity incentive
plan, and held on December 31, 2004. Based on an assumed
initial public offering price of $10.00 per share, none of
our executive officers held unexercised in-the-money options on
December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
Value of Unexercised
|
|
|
|
|
Underlying Unexercised
|
|
|
In-the-Money Options at
|
|
|
|
|
Options at Fiscal Year-End
|
|
|
Fiscal Year-End
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Allen Bradley, Jr.
|
|
|
1,909
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
Mark R. Anderson
|
|
|
10,310
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
Geoffrey R. Banta
|
|
|
0
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
Arthur L. Hunt
|
|
|
2,847
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
Craig P. Leach
|
|
|
2,430
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
In June 2005, we terminated our 1998 equity incentive plan and
cancelled all outstanding options under the 1998 equity
incentive plan, including the options listed in the table above.
See Note 13 and Note 22 to our audited financial
statements.
2005 Equity Incentive Plans
The purpose of our 2005 equity incentive plan is to attract and
retain officers, other key employees and consultants and to
provide them with appropriate incentives and rewards for
superior performance. A summary of the provisions of the 2005
incentive plan is set forth below. This summary is qualified in
its entirety by the detailed provisions of the 2005 incentive
plan, a copy of which has been filed as an exhibit to the
registration statement of which this prospectus is a part. Our
board of directors and shareholders approved the 2005 incentive
plan in October 2005.
Types of Awards and Eligibility.
Our 2005 incentive
plan permits awards in the form of incentive stock options, as
defined in Section 422(b) of the Internal Revenue Code of
1986, non-qualified stock options, restricted shares of common
stock and restricted stock units. The maximum number of shares
of common stock that may be issued pursuant to option grants and
restricted stock and restricted stock unit awards under the 2005
incentive plan is 1.9 million shares, subject to the
authority of our board to adjust this amount in the event of a
merger, consolidation, reorganization, stock dividend, stock
split, combination of shares, recapitalization or similar
transaction affecting our common stock. Officers, other key
employees, consultants and other persons performing services for
us that are equivalent to those typically provided by our
employees are eligible to participate in the 2005 incentive
plan. However, only employees (including our officers) can
receive grants of incentive stock options.
Subject to completion of this offering, our board of directors
has approved grants of options to our officers and employees to
purchase an aggregate of 1,567,500 shares of our common
stock, including grants of options to purchase
475,000 shares to Mr. Bradley, 95,000 shares to
Mr. Anderson, 237,500 shares to Mr. Banta,
237,500 shares to Mr. Hunt and 237,500 shares to
Mr. Leach. These
91
options will have an exercise price equal to the initial public
offering price of our common stock in this offering, and will be
subject to pro rata vesting over a five-year period.
Administration.
The 2005 incentive plan will be
administered by our compensation committee. Subject to the terms
of the 2005 incentive plan, the compensation committee may
select participants to receive awards, determine the types of
awards and terms and conditions of awards, and interpret
provisions of the 2005 incentive plan.
Stock Options.
Stock options granted under the 2005
incentive plan will have an exercise price of not less than 100%
of the fair value of our common stock on the date of grant.
However, any stock options granted to holders of more than 10%
of our voting stock will have an exercise price of not less than
110% of the fair value of our common stock on the date of grant.
Stock option grants are exercisable, subject to vesting
requirements determined by the compensation committee, for
periods of up to ten years from the date of grant, except for
any grants to holders of more than 10% of our voting stock,
which will have exercise periods limited to a maximum of five
years. Stock options generally expire 90 days after the
cessation of an optionee’s service as an employee. However,
in the case of an optionee’s death or disability, the
unexercised portion of a stock option remains exercisable for up
to one year after the optionee’s death or disability. Stock
options granted under the 2005 incentive plan are not
transferable, except by will or the laws of descent and
distribution.
Restricted Stock Awards.
A restricted stock award is
the grant or sale of common stock with restrictions on
transferability, and subject to vesting as determined by the
compensation committee. Restricted stock awards under the 2005
incentive plan may be made without additional consideration or
in consideration for a payment by the participant that is less
than the fair value of our common stock on the date of grant.
For as long as an award of restricted stock is subject to
vesting, there is a risk of forfeiture if the individual leaves
our employment prior to full vesting of the award. Restrictions
may lapse separately or in combination at relevant times, such
as after a specified period of employment or the satisfaction of
pre-established criteria, in installments or otherwise, all as
the compensation committee may determine. Except to the extent
provided otherwise under the award agreement relating to the
restricted stock award, a participant awarded restricted stock
will have all of the rights of a shareholder, including, without
limitation, the right to vote and the right to receive
dividends. Restricted stock awards under the 2005 incentive plan
cannot be transferred except as agreed by the compensation
committee, and in accordance with applicable U.S. federal
and state securities laws.
Restricted Stock Units.
The compensation committee
may authorize the grant or sale of restricted stock units
subject to the conditions and restrictions, and for the
restriction period, which will generally be at least one year,
that it determines in its discretion. Each restricted stock unit
is equivalent in value to one share of common stock and entitles
the grantee to receive or purchase one share of common stock for
each restricted stock unit at the end of the restriction period
applicable to such restricted stock unit, subject to the
fulfillment during the restriction period of such conditions as
the compensation committee may specify. During the applicable
restricted period for a given restricted stock unit, the grantee
will not have any right to transfer the rights associated with
the restricted stock units and will have no ownership or voting
rights with respect to the restricted stock units or the
underlying shares of common stock.
Amendment or Termination.
While our board of
directors may terminate or amend the 2005 incentive plan at any
time, no amendment may adversely impair the rights of
participants with respect to outstanding awards. In addition, an
amendment will be contingent upon approval of our shareholders
to the extent required by law or if the amendment would increase
the aggregate number of shares of common stock for awards under
the 2005 incentive plan, decrease the minimum exercise price or
change the class of employees eligible to receive incentive
stock options under the plan. Unless terminated earlier, the
2005 incentive plan will terminate in 2015, but will continue to
govern unexpired awards.
92
Change of Control.
At the discretion of the
compensation committee at the time of award, agreements for
option, restricted stock and restricted stock unit awards may
contain provisions providing for the acceleration of the
options, restricted stock or restricted stock units upon a
change of control of our company.
|
|
|
|
|
Non-Employee Director Restricted Stock Plan
|
The purpose of our 2005 non-employee director restricted stock
plan is to attract and retain qualified directors. A summary of
the provisions of the 2005 non-employee director plan is set
forth below. This summary is qualified in its entirety by the
detailed provisions of the 2005 non-employee director plan, a
copy of which has been filed as an exhibit to the registration
statement of which this prospectus is a part. Our board of
directors and shareholders approved the 2005 non-employee
director plan in October 2005.
Type of Award and Eligibility.
The 2005 non-employee
director plan provides for the automatic grant of restricted
stock awards to our non-employee directors. The aggregate number
of shares of restricted stock that may be issued under the plan
is 50,000 shares, subject to the authority of our board to
adjust this amount in the event of a merger, consolidation,
reorganization, stock dividend, stock split, combination of
shares, recapitalization or similar transaction affecting our
common stock.
Administration and Terms.
The 2005 non-employee
director plan will be administered by the compensation committee
of our board of directors. Restricted stock awards to
non-employee directors are generally subject to terms including
non-transferability, immediate vesting upon death or total
disability of a director, forfeiture of unvested shares upon
termination of service by a director and acceleration of vesting
upon a change of control of our company.
Automatic Grants.
Under the 2005 non-employee
director plan, each non-employee director will automatically be
granted a restricted stock award for a number of full shares
equal to $15,000 divided by the closing price of our common
stock on the date of our annual shareholders meeting at which
the non-employee director is elected or is continuing as a
member of the board. If a non-employee director is elected to
the board other than at an annual shareholders meeting to fill a
vacancy or a directorship resulting from an increase in the
number of directors, the non-employee director will receive a
pro-rated grant of restricted stock based upon the number of
whole months he or she will serve until the first anniversary of
the most recent annual shareholders meeting and using the
closing price of our common stock on the date of grant. Upon
completion of this offering, our non-employee directors will
receive their initial grants of restricted stock pro-rated for
the number of whole months between the closing date of this
offering and June 1, 2006 and using the initial public
offering price of our common stock in this offering. Each
restricted stock award will vest on the date of the next annual
shareholders meeting following the date of grant, subject to the
non-employee director’s continued service.
Employment and Consulting Agreements
The following information summarizes the employment and
consulting agreements for our chief executive officer and our
other executive officers.
Employment Agreements.
We have an employment
agreement with each of Messrs. Bradley, Banta, Hunt and
Leach. Each agreement expires on January 1, 2008, unless
extended. Beginning January 1, 2008, the term of each
agreement is automatically extended for an additional one year
term unless either party delivers notice to the other party of
its intention not to extend the term. The agreements provide for
an annual base salary of no less than $275,000 for
Mr. Bradley, $200,000 for Mr. Banta and $215,000 for
each of Mr. Hunt and Mr. Leach. They are also entitled
to receive an annual bonus in an amount, if any, determined by
our compensation committee. Each executive officer may
participate in present and future benefit, pension and profit
sharing plans that are provided to our executive officers from
time to time.
93
If we terminate the employment of Messrs. Bradley, Banta,
Hunt or Leach without cause, as defined in the employment
agreements, the terminated executive officer will be entitled to
receive his base salary for a period of 12 months (or, in
the case of Mr. Bradley, 18 months) payable in regular
installments after the date of his termination. In addition, we
have agreed to pay each executive officer the actual cost of
continuing health coverage premiums for a period of
12 months (or, in the case of Mr. Bradley,
18 months) after the date of his termination. Each of these
executive officers has further agreed during the term of his
employment by us not to engage in any business competitive with
us or solicit our employees, agents, consultants or
policyholders without our prior written consent. If
Messrs. Bradley, Banta, Hunt or Leach are terminated by us
without cause, the prohibitions on engaging in competitive
activities or soliciting our employees, agents, consultants or
policyholders extend for a period of 12 months (or, in the
case of Mr. Bradley, 18 months) after the date of
termination. If these executive officers are terminated by us
with cause or as a result of a resignation, as defined in the
employment agreements, or if an executive officer elects not to
renew the term of his employment agreement, we have the option
to extend the restriction on engaging in competitive activities
or soliciting our employees, agents, consultants or
policyholders for a period of 12 months (or, in the case of
Mr. Bradley, 18 months) after the date of termination
or non-renewal by (a) delivering a written notice to the
executive officer within 180 days after his termination or
non-renewal stating that we irrevocably exercise the option, and
(b) paying his base salary and the actual cost of his COBRA
continuing health coverage premiums for a period of
12 months (or, in the case of Mr. Bradley,
18 months) after the date of his termination or non-renewal.
Consulting Agreement.
We have an agreement with
Mr. Anderson that provides that he will serve as an
Executive Vice President of our company through
December 31, 2005. Effective as of January 1, 2006, we
will retain Mr. Anderson as an independent consultant for a
five-year period expiring in January 2011. As a consultant,
Mr. Anderson will perform general consulting and advisory
services as may be requested from time to time by our Chief
Executive Officer. Mr. Anderson will receive an annual fee
of $125,000, payable quarterly, during the term of the
agreement. In addition, upon completion of this offering,
Mr. Anderson will be awarded options to purchase
95,000 shares of our common stock pursuant to our 2005
equity incentive plan. The consulting agreement may be
terminated by Mr. Anderson upon 90 days’ written
notice to us, or by us upon notice to Mr. Anderson for
cause.
During the term of his agreement, Mr. Anderson is not
permitted to engage, directly or indirectly, in a business
similar to our business or to solicit our customers, clients or
insureds within a designated area, unless he obtains our prior
written consent. If the consulting agreement is terminated prior
to its expiration, we have the right, upon written notice to
Mr. Anderson, to extend this restriction for up to
24 months, but not beyond January 1, 2011, if we pay
Mr. Anderson the consulting fee that he would otherwise
have been entitled to receive during the extended period if the
agreement had not been terminated. In addition, during the term
of his agreement and for two years after the termination or
expiration of his agreement, Mr. Anderson is not permitted,
directly or indirectly, to solicit or induce any of our
employees, agents (including insurance agents) or consultants to
leave his or her employment or terminate his or her consulting
agreement with us.
Limitations of Liability and Indemnification of Directors and
Officers
As permitted by Texas law, our articles of incorporation provide
that our directors will not be personally liable to us or our
shareholders for or with respect to any acts or omissions in the
performance of such person’s duties as a director to the
fullest extent permitted by applicable law. Our articles of
incorporation and bylaws provide that we must indemnify our
directors and officers to the fullest extent permitted by Texas
law. Our bylaws further provide that we must pay or reimburse
reasonable expenses incurred by one of our directors or officers
who was, is or is threatened to be made a named defendant or
respondent in a proceeding to the maximum extent permitted under
Texas law. We believe that these provisions are necessary to
attract and retain qualified persons as directors and officers.
94
We have entered into indemnification agreements with our
directors and officers. These agreements, among other things,
require us to indemnify the director or officer to the fullest
extent permitted by Texas law, including indemnification for
judgments, penalties, fines, settlements and reasonable expenses
actually incurred by the director or officer in any action or
proceeding, including any action by or in our right, arising out
of the person’s services as our director or officer or as
the director or officer of any subsidiary of ours or any other
company or enterprise to which the person provides services at
our request. We have been informed that, in the opinion of the
SEC, personal liability of directors for violation of the
federal securities laws cannot be limited and that
indemnification by us for any such violation is unenforceable.
The indemnification provisions contained in our articles of
incorporation and bylaws are in addition to any other right that
a person may have or acquire under any statute, bylaw,
resolution of shareholders or directors or otherwise. We
maintain insurance on behalf of our directors and officers
insuring them against any liability asserted against them in
their capacities as directors or officers or arising out of
their service in these capacities.
We are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees
or agencies in which indemnification would be required or
permitted. We believe that the provisions of our articles of
incorporation and bylaws and our indemnification agreements are
necessary to attract and retain qualified persons to serve as
directors and officers of our company.
95
PRINCIPAL AND SELLING SHAREHOLDERS
The tables below contain information about the beneficial
ownership of our common stock and our Series C convertible
preferred stock prior to and following the completion of this
offering for:
|
|
|
|
|
|
|
|
•
|
each of our directors and director nominee;
|
|
|
|
|
|
|
•
|
each of our executive officers;
|
|
|
|
|
•
|
all directors and executive officers as a group;
|
|
|
|
|
•
|
each beneficial owner of more than five percent of our common
stock or Series C convertible preferred stock; and
|
|
|
|
|
•
|
each of the selling shareholders.
|
The tables below list the number of shares and percentage of
shares beneficially owned based on 299,774 shares of our
common stock and 300,000 shares of our Series C
convertible preferred stock outstanding as of October 28,
2005. Holders of our Series C convertible preferred stock
are entitled to vote on all matters to be voted on by our
shareholders and vote as a single class with the holders of our
common stock.
Beneficial ownership of our common stock and Series C
convertible preferred stock is determined in accordance with the
rules of the SEC, and generally includes voting power or
investment power with respect to securities held. Except as
indicated and subject to applicable community property laws, to
our knowledge the persons named in the tables below have sole
voting and investment power with respect to all shares of common
stock or Series C convertible preferred stock shown as
beneficially owned by them.
Directors, Director Nominee and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership
|
|
|
Beneficial Ownership
|
|
|
|
|
Prior to the Offering
|
|
|
After the Offering(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
Percentage
|
|
|
|
|
Percentage of
|
|
|
Percentage
|
|
|
|
|
Number of
|
|
|
Outstanding
|
|
|
of Total
|
|
|
Number of
|
|
|
Outstanding
|
|
|
of Total
|
|
|
Name of Beneficial Owner
|
|
Shares
|
|
|
Shares
|
|
|
Vote(1)
|
|
|
Shares
|
|
|
Shares
|
|
|
Vote(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Allen Bradley, Jr.
|
|
|
394
|
|
|
|
*
|
|
|
|
*
|
|
|
|
394
|
|
|
|
*
|
|
|
|
*
|
|
|
Mark R. Anderson
|
|
|
7,453
|
|
|
|
2.5
|
%
|
|
|
2.1
|
%
|
|
|
7,453
|
|
|
|
*
|
|
|
|
*
|
|
|
Jared A. Morris(3)
|
|
|
47,817
|
|
|
|
16.0
|
%
|
|
|
13.4
|
%
|
|
|
47,817
|
|
|
|
*
|
|
|
|
*
|
|
|
Paul B. Queally(4)(5)
|
|
|
127
|
|
|
|
*
|
|
|
|
*
|
|
|
|
4,605
|
|
|
|
*
|
|
|
|
*
|
|
|
Sean M. Traynor(5)
|
|
|
2
|
|
|
|
*
|
|
|
|
*
|
|
|
|
2
|
|
|
|
*
|
|
|
|
*
|
|
|
Austin P. Young III
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
|
|
|
*
|
|
|
|
*
|
|
|
Geoffrey R. Banta
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
|
|
|
*
|
|
|
|
*
|
|
|
Arthur L. Hunt
|
|
|
721
|
|
|
|
*
|
|
|
|
*
|
|
|
|
721
|
|
|
|
*
|
|
|
|
*
|
|
|
Craig P. Leach
|
|
|
787
|
|
|
|
*
|
|
|
|
*
|
|
|
|
787
|
|
|
|
*
|
|
|
|
*
|
|
|
All directors and executive officers as a group (9 persons)
|
|
|
57,301
|
|
|
|
19.1
|
%
|
|
|
16.0
|
%
|
|
|
61,779
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
(1)
|
Combined voting power of common stock and Series C
convertible preferred stock. Each share of common stock is
entitled to one vote and each share of Series C convertible
preferred stock is entitled to one vote for each share of common
stock into which it is convertible. Upon completion of this
offering and based on an assumed initial public offering price
of $10.00 per share, which is the mid-point of the price
range set forth on the cover page of this prospectus, the
conversion price used to determine the number of shares of our
common stock into which each share of
|
96
|
|
|
|
|
|
|
Series C convertible preferred stock is convertible will be
reduced from $521.50 per share to $22.26 per share.
|
|
|
|
|
|
|
|
(2)
|
Number of shares and percentages assume that our outstanding
Series A preferred stock is exchanged for
8,112,423 shares of common stock upon completion of this
offering. For additional information about the exchange of
Series A preferred stock, see “Description of Capital
Stock” below.
|
|
|
|
|
|
(3)
|
All shares are beneficially owned through the Jared Morris 1997
Trust, of which Jared Morris is a trustee. The address for the
Jared Morris 1997 Trust is 5000 Quorum Drive, Suite 200,
Dallas, Texas 75254.
|
|
|
|
|
|
(4)
|
Includes 127 shares of common stock and an additional
4,478 shares of common stock to be acquired upon completion
of the offering upon the exchange of shares of Series A
preferred stock.
|
|
|
|
|
|
(5)
|
Paul B. Queally is a general partner of the sole general partner
of Welsh, Carson, Anderson & Stowe VII, L.P., or
WCAS VII. Sean M. Traynor is a general partner equivalent
of certain funds managed by Welsh, Carson, Anderson &
Stowe, L.P. Each of Mr. Queally and Mr. Traynor may be
deemed to have shared voting and investment power with respect
to the securities held by Welsh Carson.
|
Other Five Percent Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership
|
|
|
Beneficial Ownership
|
|
|
|
|
Prior to the Offering
|
|
|
After the Offering(1)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
Percentage
|
|
|
|
|
Percentage of
|
|
|
Percentage
|
|
|
|
|
Number of
|
|
|
Outstanding
|
|
|
of Total
|
|
|
Number of
|
|
|
Outstanding
|
|
|
of Total
|
|
|
Name of Beneficial Owner
|
|
Shares
|
|
|
Shares
|
|
|
Vote(2)
|
|
|
Shares
|
|
|
Shares
|
|
|
Vote(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Welsh Carson(4)
|
|
|
202,335
|
|
|
|
67.5
|
%
|
|
|
56.6
|
%
|
|
|
7,256,272
|
|
|
|
44.2
|
%
|
|
|
40.9%
|
|
|
Abbott Capital 1330 Investors I, L.P.(5)
|
|
|
38,350
|
|
|
|
11.3
|
%
|
|
|
10.7
|
%
|
|
|
898,472
|
|
|
|
5.2
|
%
|
|
|
5.1%
|
|
|
Teachers Insurance and Annuity Association of America(6)
|
|
|
38,350
|
|
|
|
11.3
|
%
|
|
|
9.7
|
%
|
|
|
898,472
|
|
|
|
5.2
|
%
|
|
|
4.8%
|
|
|
Sprout Group(7)
|
|
|
23,249
|
|
|
|
7.8
|
%
|
|
|
6.5
|
%
|
|
|
834,500
|
|
|
|
5.1
|
%
|
|
|
4.7%
|
|
|
Series C Convertible Preferred Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abbott Capital 1330 Investors I, L.P.(5)
|
|
|
200,000
|
|
|
|
66.7
|
%
|
|
|
10.7
|
%
|
|
|
200,000
|
|
|
|
66.7
|
%
|
|
|
5.1%
|
|
|
Northwestern Mutual Life Insurance Company(8)
|
|
|
50,000
|
|
|
|
16.7
|
%
|
|
|
2.7
|
%
|
|
|
50,000
|
|
|
|
16.7
|
%
|
|
|
1.3%
|
|
|
Jackson National Life Insurance Company(9)
|
|
|
49,251
|
|
|
|
16.4
|
%
|
|
|
2.6
|
%
|
|
|
49,251
|
|
|
|
16.4
|
%
|
|
|
1.2%
|
|
|
|
|
|
(1)
|
Beneficial ownership after the offering assumes that the
underwriters do not exercise the option to purchase additional
shares.
|
|
|
|
|
|
(2)
|
Combined voting power of common stock and Series C
convertible preferred stock. Each share of common stock is
entitled to one vote and each share of Series C convertible
preferred stock is entitled to one vote for each share of common
stock into which it is convertible. Upon completion of this
offering and based on an assumed initial public offering price
of $10.00 share, which is the mid-point of the price range
set forth on the cover page of this prospectus, the conversion
price used to determine the number of shares of our common stock
into which each share of Series C convertible preferred
stock is convertible will be reduced from $521.50 per share
to $22.26 per share.
|
|
|
|
|
|
|
|
(3)
|
Number of shares and percentage assume that our outstanding
Series A preferred stock is exchanged for
8,112,423 shares of common stock upon completion of this
offering. For additional
|
|
|
97
|
|
|
|
|
information about the exchange of Series A preferred stock,
see “Description of Capital Stock” below.
|
|
|
|
|
|
|
(4)
|
Represents (a) 200,731 shares of common stock held by
Welsh, Carson, Anderson & Stowe VII, L.P., or
WCAS VII, and an additional 6,997,989 shares of common
stock to be acquired upon completion of the offering upon the
exchange of shares of Series A preferred stock, and
(b) 1,604 shares of common stock held by WCAS
Healthcare Partners, L.P., or WCAS HP, and an additional
55,948 shares of common stock to be acquired upon
completion of the offering upon the exchange of shares of
Series A preferred stock. Each of the following general
partners of WCAS VII and, in the case of Mr. Welsh and
Mr. Carson, WCAS HP may be deemed to have shared
voting and investment power with respect to the securities held
by Welsh Carson and, in addition, beneficially owns shares of
common stock, if any, as indicated parenthetically: Patrick J.
Welsh (1,604 shares held by The Patrick Welsh 2004
Irrevocable Trust and an additional 55,948 shares of common
stock to be acquired upon completion of the offering upon the
exchange of Series A preferred stock), Russell L. Carson
(1,604 shares and an additional 55,948 shares of
common stock to be acquired upon completion of the offering upon
the exchange of Series A preferred stock), Bruce K.
Anderson (1,604 shares held by The Bruce K. Anderson 2004
Irrevocable Trust and an additional 55,948 shares of common
stock to be acquired upon completion of the offering upon the
exchange of Series A preferred stock), Thomas A. McInerney
(321 shares and an additional 11,181 shares of common
stock to be acquired upon completion of the offering upon the
exchange of Series A preferred stock), Robert A. Minicucci
(121 shares and an additional 4,196 shares of common
stock to be acquired upon completion of the offering upon the
exchange of Series A preferred stock), Paul B. Queally
(127 shares and an additional 4,478 shares of common
stock to be acquired upon completion of the offering upon the
exchange of Series A preferred stock), Anthony J. DeNicola
(65 shares and an additional 2,234 shares of common
stock to be acquired upon completion of the offering upon the
exchange of Series A preferred stock) and Jonathan M.
Rather. Sean M. Traynor beneficially owns 2 shares of
common stock and is a general partner equivalent of certain
funds managed by Welsh, Carson, Anderson & Stowe, L.P.
Mr. Traynor may be deemed to have shared voting and
investment power with respect to the securities held by Welsh
Carson. The address for these Welsh Carson entities is
320 Park Avenue, Suite 2500, New York, New York 10022.
|
|
|
|
|
|
|
|
(5)
|
Beneficial ownership prior to the offering includes
38,350 shares of common stock that may be acquired pursuant
to the conversion of Series C convertible preferred stock.
Beneficial ownership after the offering includes
898,472 shares of common stock that may be acquired
pursuant to the conversion of Series C convertible
preferred stock. The address for Abbott Capital 1330
Investors I, L.P. is c/o Abbott Capital Management,
LLC, 1211 Avenue of the Americas, Suite 4300, New York, New
York 10036.
|
|
|
|
|
|
|
|
(6)
|
Beneficial ownership prior to the offering includes
38,350 shares of common stock that may be acquired pursuant
to the conversion of Series D convertible preferred stock
into non-voting common stock, and the subsequent conversion of
the non-voting common stock into common stock. Beneficial
ownership after the offering includes 898,472 shares of
common stock that may be acquired pursuant to the conversion of
Series D convertible preferred stock into non-voting common
stock, and the subsequent conversion of the non-voting common
stock into common stock. The address for Teachers Insurance and
Annuity Association of America is 730 Third Avenue, New York,
New York 10017.
|
|
|
|
|
|
|
|
(7)
|
Represents (a) 9,144 shares of common stock held by
Sprout Growth II, L.P., and an additional
319,090 shares of common stock to be acquired upon
completion of the offering upon the exchange of shares of
Series A preferred stock, (b) 11,185 shares of
common stock held by Sprout Capital VII, L.P., and an additional
390,289 shares of common stock to be acquired upon
completion of the offering upon the exchange of shares of
Series A preferred stock, (c) 130 shares of
common stock held by Sprout CEO Fund, L.P., and an additional
4,524 shares of common stock to be acquired upon completion
of the offering upon the exchange of shares of
|
|
|
98
|
|
|
|
|
|
|
Series A preferred stock; (d) 465 shares of
common stock held by DLJ Capital Corporation, and an
additional 16,226 shares of common stock to be acquired
upon completion of the offering upon the exchange of shares of
Series A preferred stock; and (e) 2,325 shares of
common stock held by DLJ First ESC, L.P., and an additional
81,122 shares of common stock to be acquired upon
completion of the offering upon the exchange of shares of
Series A preferred stock. The address for these entities is
c/o Sprout Group, 11 Madison Avenue, 13th Floor, New
York, New York 10010.
|
|
|
|
|
|
(8)
|
Northwestern Mutual Life Insurance Company has informed us that
Northwestern Investment Management Company, LLC
(“NMIC”) is its investment advisor with respect to its
shares. NMIC may therefore be deemed to be an indirect
beneficial owner with shared voting and investment control over
these shares. Mark Kishler is a portfolio manager for NMIC and
manages the portfolio that holds the shares owned by
Northwestern Mutual Life Insurance Company. Prior to and after
the offering, the number of shares of common stock to be issued
upon conversion of the shares of Series C convertible
preferred stock will represent less than five percent of both
the outstanding shares of common stock and the percentage of
total vote. The address for Northwestern Mutual Life Insurance
Company is 720 East Wisconsin Avenue, Milwaukee, Wisconsin
53202.
|
|
|
|
(9)
|
Prior to and after the offering, the number of shares of common
stock to be issued upon conversion of the shares of
Series C convertible preferred stock will represent less
than five percent of both the outstanding shares of common stock
and the percentage of total vote. The address for Jackson
National Life Insurance Company is c/o PPM America, Inc.,
225 West Wacker Drive, Chicago, Illinois 60606.
|
Selling Shareholders
To the extent the underwriters sell more than
8,000,000 shares of our common stock, the selling
shareholders have granted the underwriters a 30-day option to
purchase up to 1,200,000 additional shares of common stock
at the initial public offering price, less the underwriting
discount, to cover over-allotments, if any. We will not receive
any of the proceeds from the sale of shares by the selling
shareholders. The table below assumes the over-allotment option
is exercised in full.
Each of the selling shareholders acquired the common shares
offered for resale in connection with our recapitalization
transactions in 1997 and 1998. They also acquired shares in 2004
upon the exercise of warrants issued in connection with the 1997
and 1998 transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership
|
|
|
|
|
|
|
|
|
After the Offering(1)
|
|
|
|
|
Number of
|
|
|
Number of Common
|
|
|
|
|
|
|
|
Common Shares
|
|
|
Shares to be Sold if
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Beneficially Owned
|
|
|
Over-Allotment Option
|
|
|
Number of
|
|
|
Outstanding
|
|
|
Percentage of
|
|
|
Selling Shareholder
|
|
Prior to the Offering
|
|
|
Exercised in Full(1)
|
|
|
Shares
|
|
|
Shares
|
|
|
Total Vote(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Welsh Carson
|
|
|
202,335
|
|
|
|
1,076,400
|
|
|
|
6,179,872
|
|
|
|
37.6%
|
|
|
|
34.8%
|
|
|
Sprout Group(3)
|
|
|
23,249
|
|
|
|
123,600
|
|
|
|
710,900
|
|
|
|
4.3%
|
|
|
|
4.0%
|
|
|
|
|
|
(1)
|
Number of shares and percentage assume that our outstanding
Series A preferred stock is exchanged for
8,112,423 shares of common stock upon completion of this
offering. For additional information about the exchange of
Series A preferred stock, see “Description of Capital
Stock” below. The number of shares sold if the
over-allotment option is exercised in full includes shares of
common stock issuable to the selling shareholder upon exchange
of Series A preferred stock.
|
99
|
|
|
|
|
|
(2)
|
Combined voting power of common stock and Series C
convertible preferred stock. Each share of common stock is
entitled to one vote and each share of Series C convertible
preferred stock is entitled to one vote for each share of common
stock into which it is convertible. Upon completion of this
offering and based on an assumed initial public offering price
of $10.00 share, which is the mid-point of the price range
set forth on the cover page of this prospectus, the conversion
price used to determine the number of shares of our common stock
into which each share of Series C convertible preferred
stock is convertible will be reduced from $521.50 per share
to $22.26 per share.
|
|
|
|
|
|
(3)
|
Sprout Group has informed us that it is an affiliate of a
registered broker-dealer. In addition, Sprout Group has informed
us that it purchased the common shares offered for resale in the
ordinary course of business and, at the time of purchase, had no
agreements or understandings to distribute the common shares.
|
100
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Registration Rights Agreement
We have entered into a registration rights agreement with the
holders of our convertible preferred stock and certain holders
of our common stock, including Mark R. Anderson, Paul B.
Queally, Sean M. Traynor, the Jared Morris 1997 Trust, Welsh
Carson and Sprout Group. Under the registration rights
agreement, these holders may require us to register any or all
of their shares of common stock (including shares of common
stock issuable upon conversion of our outstanding convertible
preferred stock) under the Securities Act of 1933, or the
Securities Act, upon the request of:
|
|
|
|
|
|
•
|
the holders of a majority of certain shares of our common stock,
including shares held by Paul B. Queally, Sean M. Traynor, Welsh
Carson and Sprout Group;
|
|
|
|
|
•
|
the holders of 33% of the shares of our common stock previously
issued upon exercise of certain warrants issued by us in 1998,
including shares held by Paul B. Queally, Welsh Carson and
Sprout Group; or
|
|
|
|
|
•
|
beginning 180 days after this offering, the holders of a
majority of our convertible preferred stock.
|
In addition, the holders of our convertible preferred stock and
common stock that are party to the registration rights agreement
have the right to request that we:
|
|
|
|
|
|
•
|
register shares of their common stock (including shares of
common stock issuable upon conversion of our outstanding
convertible preferred stock) with an anticipated aggregate sale
price of at least $1.0 million under the Securities Act on
a Form S-3 registration statement; and
|
|
|
|
|
•
|
include shares of their common stock in any registration
statement whenever we propose to register our common stock under
the Securities Act.
|
We have agreed to pay all expenses, other than underwriting
discounts and commissions, in connection with these
registrations, including legal and accounting fees incurred by
the company, printing costs and the fees of one law firm for the
selling shareholders. In addition, we have agreed to indemnify
these holders of our common stock and convertible preferred
stock against certain liabilities, including liabilities under
the Securities Act.
The registration rights agreement provides that, in connection
with any firm commitment underwritten public offering of our
securities that includes shares of our common stock held by any
holder of our common stock that is a party to the registration
rights agreement or issuable upon conversion of our convertible
preferred stock, the parties to the registration rights
agreement who are not selling shares in the offering will
refrain, upon the written request of the underwriters, from
selling any of our securities during the distribution period of
the offering (not to exceed 180 days) and the period in
which the underwriters participate in the after market (not to
exceed 90 days).
101
Stockholders Agreements
We have entered into stockholders agreements with certain
holders of our capital stock, including Mark R. Anderson, Paul
B. Queally, the Jared Morris 1997 Trust, Welsh Carson, Sprout
Group, Abbott Capital 1330 Investors I, L.P., Northwestern
Mutual Life Insurance Company, Jackson National Life Insurance
Company and Teachers Insurance and Annuity Association of
America. Under the terms of the stockholders agreements, the
parties thereto have agreed, among other things, to vote to
elect certain persons to our board. Welsh Carson’s
designees are Paul B. Queally and Sean M. Traynor. In accordance
with their terms, the stockholders agreements will terminate
upon completion of this offering.
Concentra Inc.
We have entered into arm’s length agreements with certain
subsidiaries of Concentra Inc., pursuant to which they provide
us with health care management, cost containment and claims
management services. Affiliates of our principal shareholder,
Welsh Carson, beneficially own a majority of the outstanding
shares of common stock of Concentra. Two of our directors, Paul
B. Queally and Sean M. Traynor, are general partners of Welsh
Carson. In addition, Mr. Queally is the Chairman of the
Board and a director of Concentra. Under the terms of these
agreements, we made aggregate payments to subsidiaries of
Concentra of approximately $2.3 million, $1.6 million
and $0.8 million in 2004, 2003 and 2002, respectively.
102
DESCRIPTION OF CAPITAL STOCK
AMERISAFE is authorized to issue 69,000,000 shares of
capital stock, consisting of:
|
|
|
|
|
|
•
|
3,000,000 shares of preferred stock, par value
$0.01 per share, of which:
|
|
|
|
|
|
|
|
|
•
|
1,500,000 shares are designated as Series A preferred
stock; and
|
|
|
|
|
|
|
•
|
1,500,000 shares are designated as Series B preferred
stock;
|
|
|
|
|
|
|
•
|
500,000 shares of convertible preferred stock, par value $0.01
per share, of which:
|
|
|
|
|
|
|
|
|
•
|
300,000 shares are designated as Series C convertible
deferred pay preferred stock; and
|
|
|
|
|
|
|
•
|
200,000 shares are designated as Series D non-voting
convertible deferred pay preferred stock;
|
|
|
|
|
|
|
|
|
•
|
500,000 shares of Series E preferred stock, par value
$0.01 per share;
|
|
|
|
|
|
|
|
|
|
|
•
|
10,000,000 shares of junior preferred stock, par value
$0.01 per share;
|
|
|
|
|
|
|
|
|
•
|
50,000,000 shares of common stock, par value $0.01 per
share; and
|
|
|
|
|
|
|
•
|
5,000,000 shares of convertible non-voting common stock,
par value $0.01 per share.
|
As of October 28, 2005, the following shares of our capital
stock were outstanding:
|
|
|
|
|
|
|
|
•
|
862,924 shares of Series A preferred stock;
|
|
|
|
|
|
|
•
|
300,000 shares of Series C convertible preferred stock;
|
|
|
|
|
•
|
200,000 shares of Series D convertible preferred stock;
|
|
|
|
|
|
|
•
|
45,308 shares of Series E preferred stock; and
|
|
|
|
|
|
|
|
|
•
|
299,774 shares of common stock.
|
|
|
There are no shares of Series B preferred stock, junior
preferred stock or non-voting common stock outstanding. There
were 46 holders of record of our common stock as of
October 28, 2005.
As described below in “—Series A Preferred
Stock,” our articles of incorporation require that we use
proceeds from this offering to redeem all outstanding shares of
Series E preferred stock and use 50% of the net proceeds
from this offering to redeem outstanding shares of Series A
preferred stock, unless our board of directors determines in
good faith that the redemption would cause us not to maintain
our current A.M. Best rating or would contravene applicable law.
Our board of directors has determined that the use of 50% of the
net proceeds from this offering to redeem outstanding shares of
Series A preferred stock would not permit us to retain
sufficient net proceeds from this offering to maintain our
current A.M. Best rating. Assuming an initial public offering
price of $10.00 per share, which is the mid-point of the
price range set forth on the cover page of this prospectus, we
will use approximately $5.1 million of the proceeds from
this offering to redeem all outstanding shares of Series E
preferred stock and approximately $6.1 million of the
proceeds to redeem approximately 60,573 outstanding shares of
Series A preferred stock. See “Use of Proceeds.”
In accordance with terms of the Series A preferred stock
set forth in our articles of incorporation, holders of not less
than two-thirds of our Series A preferred stock have
elected to exchange all shares of Series A preferred stock
that remain outstanding after the redemption for shares of our
common stock. As provided in our articles of incorporation, the
exchange ratio is determined by dividing $100 (the redemption
price of the Series A preferred stock) plus an amount equal
to the accrued but unpaid dividends on the Series A
preferred stock, by the initial public offering price of our
common stock. In this prospectus, the number of shares of common
stock that will be issued upon exchange of the Series A
preferred stock following completion of this offering has been
determined based upon an assumed initial public offering price
of $10.00 per share, which is the mid-point of the range
set forth on the cover page of this prospectus. This number of
shares is an estimate because the final number will depend on
the actual public offering price, the aggregate dollar amount of
net proceeds available to
103
redeem shares of outstanding Series A preferred stock and
the date the offering is completed. See “Use of
Proceeds.”
Our outstanding shares of Series C and Series D
convertible preferred stock will remain outstanding following
completion of this offering. As described below in
“—Convertible Preferred Stock,” the number of
shares issuable upon conversion of our convertible preferred
stock may be adjusted as a result of issuances of additional
shares of our common stock, or other securities that are
convertible into or exchangeable for our common stock. The
number of shares of common stock issuable upon exercise of the
conversion rights by the holders of our convertible preferred
stock will be adjusted as a result of this offering and the
exchange of our Series A preferred stock for our common
stock as described above. The $22.26 conversion price of the
convertible preferred stock following this offering has been
determined based upon an assumed initial public offering price
of $10.00 per share, the mid-point of the range set forth
on the cover page of this prospectus. If the initial public
offering price is $9.00 per share (the low end of the range
set forth on the cover page of this prospectus), the conversion
price will be $20.58. If the initial public offering price is
$11.00 per share (the high end of the range set forth on
the cover page of this prospectus), the conversion price will be
$24.38. These conversion prices are estimates because the actual
conversion price will depend on the actual public offering
price, the number of shares of common stock sold by us in the
offering, the aggregate dollar amount of net proceeds available
to redeem shares of outstanding Series A preferred stock
and the date the offering is completed.
Upon completion of this offering and after giving effect to the
sale of shares by us and the redemption and/or exchange of all
outstanding shares of our Series A preferred stock and
Series E preferred stock, we expect 16,415,197 shares
of our common stock, 300,000 shares of our Series C
convertible preferred stock and 200,000 shares of
Series D convertible preferred stock will be outstanding.
No shares of our Series A preferred stock, Series B
preferred stock, Series E preferred stock, junior preferred
stock or non-voting common stock will be outstanding upon
completion of this offering.
The following summary of certain provisions of our common stock,
non-voting common stock, convertible preferred stock and Series
A preferred stock is qualified in its entirety by the detailed
provisions of our articles of incorporation and bylaws, copies
of which have been filed as exhibits to the registration
statement of which this prospectus is a part, and by the
provisions of applicable law. See “Where You Can Find More
Information.”
Common Stock and Non-Voting Common Stock
Voting.
Each holder of our common stock is entitled to
one vote for each share on all matters to be voted on by our
shareholders, and vote together as a single class with the
holders of our Series C convertible preferred stock.
Holders of shares of non-voting common stock are not entitled to
vote on any matter to be voted on by our shareholders, except as
required by Texas law.
Dividends.
Holders of common stock and non-voting common
stock are entitled to receive dividends, on an equal basis, at
the time and in the amount as our board may from time to time
determine, subject to any preferential amounts payable to
holders of all series of our outstanding preferred stock. Our
articles of incorporation prohibit us from paying dividends on
our common stock and non-voting common stock (other than in
additional shares of common stock or non-voting common stock, as
applicable) without the consent of the holders of two-thirds of
the outstanding shares of our convertible preferred stock. If
holders of our convertible preferred stock consent to the
payment of a dividend by us, we must pay a dividend to the
holders of our convertible preferred stock on an as-converted to
common stock or non-voting common stock, as applicable, basis
equal to the dividend we pay to the holders of our common stock
and non-voting common stock.
104
Stock Repurchases.
Our articles of incorporation prohibit
us from purchasing or redeeming any shares of our common stock
or non-voting common stock without the consent of the holders of
two-thirds of the outstanding shares of our convertible
preferred stock.
Liquidation.
Upon a liquidation and dissolution of our
company, the holders of common stock and non-voting common stock
are entitled to receive, on an equal basis, all assets available
for distribution to shareholders, subject to any preferential
amounts payable to holders of our then-outstanding series of
preferred stock.
Conversion of Non-Voting Common Stock.
Shares of our
non-voting common stock are issuable upon conversion of our
Series D convertible preferred stock. Each share of
non-voting common stock may be converted at any time, and
without cost to the shareholder, into one share of common stock.
Convertible Preferred Stock
Voting.
Each holder of our Series C convertible
preferred stock is entitled to one vote for each share of our
common stock into which the Series C convertible preferred
stock is convertible on all matters to be voted on by our
shareholders and vote together as a single class with holders of
our common stock. The Series D convertible preferred stock
is non-voting. However, the holders of Series C convertible
preferred stock and Series D convertible preferred stock
have the right to vote as a separate class on any amendment to
our articles of incorporation or on any action to be taken by us
that would adversely affect the rights, privileges and
preferences of the convertible preferred stock.
In addition, the holders of two-thirds of our convertible
preferred stock must approve any payment of a dividend or
distribution on our common stock or non-voting common stock
(other than in additional shares of common stock or non-voting
common stock, as applicable) or the purchase or redemption of
any shares of our common stock or non-voting common stock.
Dividends.
Prior to completion of this offering, holders
of convertible preferred stock are entitled to receive
pay-in-kind dividends at a rate of $7.00 per share per
annum payable in shares of Series E preferred stock. Under
the terms of our articles of incorporation, upon the redemption
and exchange of all outstanding shares of our Series A
preferred stock in connection with this offering, holders of our
convertible preferred stock will no longer be entitled to
receive these pay-in-kind dividends. However, if the holders of
two-thirds of our outstanding convertible preferred stock
consent to the declaration or payment of a dividend by us to the
holders of our common stock or non-voting common stock, the
holders of our outstanding convertible preferred stock will
receive a dividend payable on an as-converted to common stock or
non-voting common stock, as applicable, basis equal to the
dividend to be paid to the holders of our common stock and
non-voting common stock.
Liquidation Rights.
Upon any liquidation, dissolution or
winding up of our company, holders of our convertible preferred
stock are entitled to receive, in cash, an amount equal to the
greater of:
|
|
|
|
|
|
•
|
$100 for each share of convertible preferred stock outstanding,
plus the cash value, calculated at $100 per share, of all
accrued and unpaid dividends; and
|
|
|
|
|
•
|
the amount distributable to the holders of our convertible
preferred stock upon liquidation, dissolution or winding up had
the holders converted their shares into common stock or
non-voting common stock, as the case may be, in accordance with
the terms of the convertible preferred stock immediately prior
to liquidation, dissolution or winding up.
|
All liquidation payments in respect of shares of our convertible
preferred stock are required to be paid before any distribution
is made in respect of our Series A preferred stock, junior
preferred stock, common stock and non-voting common stock.
Conversion.
The Series C convertible preferred stock
is convertible into our common stock, and the Series D
convertible preferred stock is convertible into our non-voting
common stock, in each case at a conversion rate calculated by
multiplying the number of shares to be converted by $100 and
dividing
105
the result by the then-applicable conversion price, as adjusted
from time to time. As of October 28, 2005, the conversion
price was $521.50 per share. Upon completion of this
offering, the conversion price will be $22.26 per share.
Our convertible preferred stock is convertible:
|
|
|
|
|
|
•
|
at any time at the option of the holder;
|
|
|
|
|
|
|
•
|
at our option at any time following the consummation of any
public offering of our equity securities or a change of control
of our company if the closing price for our common stock for the
prior 20 trading days is, or the proceeds from the change of
control results in a value for our outstanding common stock of,
at least $651.60 per share; and
|
|
|
|
|
|
|
|
|
•
|
automatically upon consummation of a public offering of our
common stock with gross proceeds to us of at least
$40.0 million at a price to public of at least
$651.60 per share, subject to adjustment to reflect stock
splits, combinations and stock dividends.
|
|
|
Conversion Price Adjustments.
Following completion of
this offering, subject to certain exceptions, the conversion
price will be adjusted if we issue or sell shares of our common
stock or non-voting common stock (including options to acquire
shares and securities convertible into or exchangeable for
shares of common stock or non-voting common stock) without
consideration or for a consideration per share less than the
market price of our common stock or non-voting common stock in
effect immediately prior to the issuance or sale. In that event,
the conversion price will be reduced to a conversion price
(calculated to the nearest cent) determined by dividing:
|
|
|
|
|
|
•
|
an amount equal to the sum of:
|
|
|
|
|
|
|
|
|
•
|
the number of shares of common stock and non-voting common stock
outstanding immediately prior to the issuance or sale (including
as outstanding all shares of common stock and non-voting common
stock issuable upon conversion of outstanding convertible
preferred stock) multiplied by the then-existing market price of
our common stock; plus
|
|
|
|
|
|
|
|
|
•
|
the consideration, if any, received by us upon the issuance or
sale; by
|
|
|
|
|
|
|
|
|
•
|
the total number of shares of common stock and non-voting common
stock outstanding immediately after such issuance or sale
(including as outstanding all shares of common stock and
non-voting common stock issuable upon conversion of outstanding
convertible preferred stock, without giving effect to any
adjustment in the number of shares issuable by reason of such
issue and sale).
|
If we issue or sell shares of common stock or non-voting common
stock for cash, the cash consideration received will be deemed
to be the amount received by us, without deduction therefrom of
any expenses incurred or any underwriting commissions or
concessions paid or allowed by us. If we issue or sell shares of
common stock or non-voting common stock for a consideration
other than cash, the amount of the consideration other than cash
received shall be deemed to be the fair value of such
consideration as determined in good faith by our board of
directors, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by us.
No adjustments to the conversion price are required for
issuances of shares of our common stock or non-voting common
stock upon any conversion of our convertible preferred stock,
under our equity incentive plans or in connection with any
acquisition by us.
Determination of Post-Offering Conversion Price.
Upon
completion of this offering, all shares of our Series A
preferred stock that are not redeemed will be exchanged for
shares of our common stock. The issuance of shares of our common
stock in exchange for the Series A preferred stock is an
issuance of common stock for consideration other than cash.
Under the terms of our articles of incorporation relating to the
adjustment to the conversion price of our convertible preferred
stock, when we issue shares of our common stock for
consideration other than cash, the value of such consideration
is deemed to be the fair value of such consideration as
determined in good faith by our board of directors. As described
above, the value of the consideration we receive upon the
issuance of shares of our
106
common stock is used in calculating any adjustment to the
conversion price of our convertible preferred stock.
Our board of directors has determined that the per share fair
value of the Series A preferred stock that we will receive
in the exchange is not less than $100. In reaching its
determination, our board of directors considered a number of
factors, including that (a) holders of our Series A
preferred stock have the right (which right has been exercised)
to exchange shares of Series A preferred stock for a number
of shares of common stock determined by dividing $100 (the
redemption price of the Series A preferred stock) by the
per share price to the public in this offering, (b) the
exchange of the Series A preferred stock for our common
stock will eliminate our obligation to pay pay-in-kind dividends
at the rate of $7.00 per share per annum on both the
outstanding Series A preferred stock and our outstanding
convertible preferred stock, and (c) the exchange of the
Series A preferred stock for our common stock will increase
our shareholder equity by $81.2 million, substantially
improving our balance sheet.
We have received a letter from a representative of the holders
of a majority of our outstanding convertible preferred stock
requesting that we explain how our board of directors determined
the fair value of the Series A preferred stock. We have
advised them of the factors considered in making that
determination. If the determination made by our board of
directors was not made in good faith, and the fair value of the
Series A preferred stock is less than $100 per share,
the conversion price of our convertible preferred stock would be
lower than the $22.26 that we expect the conversion price to be
following this offering. We believe our board of directors made
a good faith determination of the fair value of the
Series A preferred stock.
Redemption.
Following a change of control of our company,
holders of our convertible preferred stock have the right to
require us to redeem their shares at a redemption price of $100
plus the cash value, calculated at $100 per share, of all
accrued and unpaid dividends. Our articles of incorporation
define a change of control of our company for this purpose to
include:
|
|
|
|
|
|
•
|
the sale, lease or transfer of all or substantially all of our
assets in one or a series of related transactions to any person;
or
|
|
|
|
|
•
|
the acquisition of beneficial ownership by any person, other
than Welsh Carson, in one or a series of related transactions,
of our voting stock representing more than 50% of the voting
power of all outstanding shares of our voting stock, whether by
merger, consolidation or otherwise, other than by way of a
public offering of our equity securities.
|
In addition, we may at any time, on 30 days’ notice,
redeem all, but not less than all, shares of convertible
preferred stock at a redemption price of $103.50 plus the cash
value, calculated at $100 per share, of any accrued and
unpaid dividends. Until payment of the redemption price, we may
not make any payment or distribution upon any preferred stock,
common stock or non-voting common stock.
Series A Preferred Stock
The following is a summary of the terms of our Series A
preferred stock. Upon completion of this offering, all
outstanding shares of Series A preferred stock will either
be redeemed or exchanged for shares of our common stock.
Consequently, no shares of our Series A preferred stock
will be outstanding upon completion of this offering. See
“Use of Proceeds” and “Capitalization.”
Voting.
Holders of Series A preferred stock have the
right to vote as a separate class on any amendment to our
articles of incorporation or any action to be taken by us that
would adversely affect the rights, privileges and preferences of
the Series A preferred stock. Otherwise, the holders of our
Series A preferred stock have no voting rights.
Dividends.
Holders of Series A preferred stock are
entitled to receive pay-in-kind dividends at a rate of
$7.00 per share per annum payable in shares of
Series A preferred stock.
107
Mandatory Redemption.
Our articles of incorporation
provide that, upon completion of this offering, we must use not
less than 50% of our proceeds (after deducting underwriting
discounts, commissions and expenses) to redeem any outstanding
shares of Series A preferred stock, unless, in the good
faith determination of our board, the redemption would cause us
not to maintain our current A.M. Best rating. If for any reason
the proceeds from the offering available for redemption are
insufficient to redeem the Series A preferred stock and to
redeem all of the Series E preferred stock, then the
Series A preferred stock and Series E preferred stock
must be equally redeemed from available proceeds on a
dollar-for-dollar basis until the Series E preferred stock
is redeemed in full, whereupon the remaining available proceeds,
if any, must be used to redeem Series A preferred stock.
Optional Exchange.
All or any portion of the outstanding
shares of Series A preferred stock may, at the option and
upon the written request of holders of not less than two-thirds
of the then-outstanding shares of Series A preferred stock,
be exchanged for common stock upon consummation of a registered
public offering of common stock with gross proceeds to us of at
least $40 million. Upon an exchange, each share of
Series A preferred stock (including shares of Series A
preferred stock issuable as pay-in-kind dividends that are
accrued but unpaid) will be exchanged for a number of shares of
common stock determined by dividing $100 by the per share price
to the public (without giving effect to deductions for
underwriters’ discounts and commissions) of the common
stock in the qualifying public offering. The holders of our
Series A preferred stock have elected to exchange any
remaining shares of Series A preferred stock outstanding
after the redemption contemplated in connection with this
offering.
Liquidation.
Upon any liquidation, dissolution or winding
up of our company, holders of our Series A preferred stock
are entitled to receive, in cash, an amount equal to $100 for
each share of Series A preferred stock, plus the cash
value, calculated at $100 per share, of all accrued and
unpaid dividends. All liquidation payments in respect of shares
of our Series A preferred stock are required to be paid
before any distribution is made in respect of our common stock.
Blank Check Junior Preferred Stock
Our board of directors has the authority, without further action
by the shareholders, to issue up to ten million shares of
junior preferred stock in one or more series. In addition, our
board may fix the rights, preferences and privileges of any
series of junior preferred stock it may determine to issue.
Subject to the rights, preferences and privileges of our
convertible preferred stock, these rights may include a
preferential return in the event of our liquidation, the right
to receive dividends if declared by our board, special dividend
rates, conversion rights, redemption rights, superior voting
rights to the common stock, the right to protection from
dilutive issuances of securities, or the right to approve
corporate actions. Any or all of these rights may be superior to
the rights of the common stock. As a result, junior preferred
stock could be issued with terms that could delay or prevent a
change of control or make removal of our management more
difficult. In addition, issuance of junior preferred stock may
decrease the market price of our common stock. At present, we
have no plans to issue any shares of junior preferred stock.
Anti-Takeover Provisions
Texas Business Corporation Act.
Upon completion of this
offering, we will be subject to Part 13 of the Texas
Business Corporation Act. In general, that statute prohibits a
publicly held Texas corporation from engaging, under certain
circumstances, in a “business combination” with any
“affiliated shareholder” for a period of three years
following the date that the shareholder became an affiliated
shareholder unless:
|
|
|
|
|
|
•
|
prior to that date, the corporation’s board of directors
approved either the business combination or the transaction that
resulted in the shareholder becoming an affiliated
shareholder; or
|
|
|
|
|
•
|
not less than six months after that date, the business
combination is approved at a meeting of shareholders duly called
for that purpose, and not by written consent, by the affirmative
vote of
|
108
|
|
|
|
|
|
|
at least two-thirds of the outstanding voting shares that are
not beneficially owned by the affiliated shareholder.
|
Part 13 of the TBCA defines a “business
combination” to include:
|
|
|
|
|
|
•
|
any merger, share exchange or conversion involving the
corporation and the affiliated shareholder;
|
|
|
|
|
•
|
any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 10% or more of the assets of the corporation
involving the affiliated shareholder;
|
|
|
|
|
•
|
subject to exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the affiliated shareholder;
|
|
|
|
|
•
|
the adoption of a plan or proposal for our liquidation or
dissolution proposed by or pursuant to an agreement with the
affiliated shareholder;
|
|
|
|
|
•
|
a reclassification, recapitalization or merger proposed by or
pursuant to an agreement with the affiliated shareholder that
has the effect of increasing the proportionate ownership
percentage of the affiliated shareholder; or
|
|
|
|
|
•
|
the receipt by the affiliated shareholder of the benefit of any
loan, advance, guarantee, pledge or other financial benefit
provided by or through the corporation.
|
In general, Part 13 of the TBCA defines an “affiliated
shareholder” as any shareholder who beneficially owns 20%
or more of the corporation’s outstanding voting shares, as
well as any entity or person affiliated with or controlling or
controlled by the shareholder.
A Texas corporation may opt out of Part 13 of the TBCA with
an express provision in its original articles of incorporation
or an express provision in its articles of incorporation or
bylaws resulting from an amendment approved by the affirmative
vote of at least two-thirds of the outstanding voting shares
that are not beneficially owned by the affiliated shareholder.
We have not opted out of the provisions of Part 13 of the
TBCA.
Louisiana and Texas Insurance Law.
Two of our three
insurance company subsidiaries, American Interstate and Silver
Oak Casualty, are incorporated in Louisiana and the other,
American Interstate of Texas, is incorporated in Texas. Under
Louisiana and Texas insurance law, advance approval by the state
insurance department is required for any change of control of an
insurer. “Control” is presumed to exist through the
direct or indirect ownership of 10% or more of the voting
securities of a domestic insurance company or any entity that
controls a domestic insurance company. Obtaining these approvals
may result in the material delay of, or deter, any such
transaction. For additional information, see
“Business— Regulation— Change of Control.”
Charter and Bylaw Provisions.
The following summary of
certain provisions of our articles of incorporation and bylaws
is qualified in its entirety by our articles of incorporation
and bylaws, copies of which have been filed as exhibits to the
registration statement of which this prospectus forms a part.
Our articles of incorporation provide that, upon completion of
this offering, shareholders are prohibited from taking action by
written consent, unless the consent is unanimous. In addition,
our articles of incorporation:
|
|
|
|
|
|
•
|
prohibit the use of cumulative voting in the election of
directors; and
|
|
|
|
|
|
|
•
|
authorize our board to issue blank check junior preferred stock
to increase the amount of outstanding shares.
|
|
|
Under cumulative voting, a minority shareholder holding a
sufficient percentage of a class of shares may be able to ensure
the election of one or more directors.
Our articles of incorporation provide that special meetings of
our shareholders may be called only by the chairman of our
board, our president, a majority of our board of directors or by
holders of at least 25% of the combined voting power of the
then-outstanding securities entitled to vote generally in
109
the election of directors of AMERISAFE. Should any shareholder
desire to present business at any meeting, including nominating
a candidate for director, they must comply with certain advance
notice provisions in our bylaws.
Our articles of incorporation and bylaws provide that the
authorized number of our directors is fixed by our board of
directors. In addition, our articles of incorporation and bylaws
provide that our board of directors will be divided into three
classes with the number of directors in each class as nearly
equal as possible. Each director will serve a three-year term.
The classification and term of office for each of our directors
upon completion of this offering is noted in the table listing
our directors and executive officers under
“Management— Directors, Director Nominee, Executive
Officers and Key Employees.” As a result, any effort to
obtain control of our board of directors by causing the election
of a majority of the board of directors may require more time
than would be required without a classified board.
Our bylaws provide that vacancies in our board may be filled by
election at an annual or special meeting of our shareholders
called for that purpose or by the affirmative vote of a majority
of the remaining directors then in office, even if less than a
quorum. Any newly created directorships may be filled by
election at an annual or special meeting of our shareholders
called for that purpose or by our board, provided that our board
may not fill more than two newly created directorships during
the period between any two successive annual meetings of our
shareholders. Our bylaws provide that, at any meeting of
shareholders called for that purpose, any director may be
removed for cause by the affirmative vote of the holders of at
least two-thirds of the shares of our stock entitled to vote for
the election of directors.
As described above, our board will be authorized to issue up to
ten million shares of junior preferred stock and to
determine the price and the rights, preferences and privileges
of these shares, without shareholder approval, which could also
delay or prevent a change of control transaction.
The terms of our convertible preferred stock could impede a
change of control of our company. Following a change of control,
holders of our convertible preferred stock have the right to
require us to redeem their shares at a redemption price of $100
plus the cash value, calculated at $100 per share, of any
accrued and unpaid dividends. The cost associated with the
redemption of our convertible preferred stock could have the
effect of discouraging a future change of control of our
company. See “Description of Capital Stock—Convertible
Preferred Stock—Redemption.”
These provisions contained in our articles of incorporation and
bylaws could delay or discourage certain types of transactions
involving an actual or potential change of control of us or our
management (including transactions in which shareholders might
otherwise receive a premium for their shares over the
then-current prices) and may limit the ability of shareholders
to remove current management or approve transactions that
shareholders may deem to be in their best interests and,
therefore, could adversely affect the price of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is
American Stock Transfer & Trust Company.
Listing
We have applied to have our shares of common stock approved for
listing on the Nasdaq National Market under the symbol
“AMSF.”
110
SHARES ELIGIBLE FOR FUTURE SALE
Prior to completion of this offering, there has not been a
public market for our common stock. Future sales of our common
stock in the public market, or the perception that sales may
occur, could adversely affect the market price of our common
stock and could impair our future ability to raise capital
through the sale of our equity securities.
Upon completion of this offering, we will have approximately
16,415,197 shares of common stock outstanding, which
includes the 8,000,000 shares of common stock sold by us in
this offering, 8,112,423 shares issued upon exchange of our
Series A preferred stock, and the 3,000 shares of
restricted stock to be issued to our non-employee directors. Of
these shares, the 8,000,000 shares sold in this offering
and any shares issued upon exercise of the underwriters’
over-allotment option will be freely tradable without
restriction or further registration under the Securities Act,
unless the shares are held by any of our “affiliates”
as that term is defined in Rule 144 of the Securities Act,
in which case they may only be sold in compliance with the
limitations described below. In addition, 8,412,197 shares
were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act and are eligible
for public sale if registered under the Securities Act or sold
in accordance with Rule 144.
In addition, 2,246,179 shares of our common stock will be
issuable upon the conversion of our convertible preferred stock,
based on a conversion price of $22.26. This conversion price is
subject to further adjustment pursuant to the terms of our
convertible preferred stock. Further, 1,567,500 shares will
be issuable upon the exercise of outstanding options that we
intend to grant to our executive officers and other employees,
at an exercise price equal to the initial public offering price.
Those options will vest 20% each year commencing on the first
anniversary of the grant date. As a result, none of these
options will be exercisable until one year after completion of
this offering.
Lock-Up Agreements
Each of our directors, our officers and the selling shareholders
has agreed with the underwriters not to sell, contract to sell,
pledge, dispose of or hedge any shares of stock (or securities
convertible into, or exchangeable for, shares of our common
stock) for a period of 180 days under agreements, referred
to as “lock-up agreements,” without the consent of the
underwriters. The conditions of these lock-up agreements may be
waived by the underwriters. Upon completion of this offering,
8,155,551 shares of our common stock will be subject to
lock-up agreements.
In addition, in accordance with the terms of our registration
rights agreement, the holders of our common stock that are party
to the registration rights agreement and the holders of our
convertible preferred stock are to refrain, at the written
request of the underwriters, from selling any of our securities
during the period of distribution of our common stock by the
underwriters (not to exceed 180 days) and during the period
in which the underwriting syndicate participates in the after
market (not to exceed 90 days).
Rule 144 Sales by Affiliates
Affiliates of our company must comply with Rule 144 of the
Securities Act when they sell shares of our common stock. In
general, under these rules, persons who acquire shares of common
stock, other than in a public offering registered with the SEC,
are required to hold those shares for a period of one year.
Shares acquired in a registered public offering or held for more
than one year may be sold by an affiliate subject to certain
conditions. An affiliate would be entitled to sell within any
three-month period a number of shares that does not exceed the
greater of:
|
|
|
|
|
|
•
|
one percent of the number of shares of common stock then
outstanding (approximately 164,152 shares immediately after
the offering); and
|
111
|
|
|
|
|
|
•
|
the average weekly trading volume of the common stock on the
Nasdaq National Market during the four calendar weeks preceding
the filing with the SEC of a notice on Form 144 with
respect to the sale.
|
Sales under Rule 144 are also subject to other requirements
regarding the manner of sale, notice and the availability of
current public information about our company, including the
requirement that we have been subject to the reporting
requirements of the Securities Exchange Act of 1934 for at least
90 days immediately preceding any sale of securities.
Rule 144(k)
Under Rule 144(k) of the Securities Act, a person who is
not, and has not been at any time during the 90 days
preceding a sale, one of our affiliates and who has beneficially
owned the shares proposed to be sold for at least two years is
entitled to sell the shares without complying with the manner of
sale, public information, volume limitation or notice provisions
of Rule 144.
All of the 299,774 shares of common stock outstanding as of
the date of this prospectus, the 8,112,423 shares issuable
upon exchange of our outstanding Series A preferred shares
upon completion of this offering and the 2,246,179 shares
issuable upon conversion of our outstanding shares of
convertible preferred stock will be available to be sold
pursuant to Rule 144, of which 517,433 shares could be
sold pursuant to Rule 144(k), in each case subject to the
terms of the lock-up agreements and registration rights
agreement described above.
We intend to file a Form S-8 registration statement
following completion of this offering to register shares of
common stock issuable under each of our equity incentive plans.
These shares will be available-for-sale in the public market,
subject to Rule 144 volume limitations applicable to
affiliates.
Registration Rights
We have granted registration rights to certain holders of our
common stock and holders of our convertible preferred stock.
Upon completion of this offering and assuming the over-allotment
option is not exercised, these holders will own approximately
10,658,001 shares of our common stock (including shares of
common stock issuable upon conversion of our convertible
preferred stock assuming a conversion price of $22.26 per
share) that they may require us to register for sale under the
Securities Act pursuant to the registration rights agreement.
See “Certain Relationships and Related Transactions—
Registration Rights Agreement.”
112
UNDERWRITING
Subject to the terms and conditions set forth in the
underwriting agreement between us, the selling shareholders and
the underwriters named below, for whom Friedman, Billings,
Ramsey & Co., Inc., or FBR, and William
Blair & Company, L.L.C. are acting as representatives,
we have agreed to sell to the underwriters, and the underwriters
have agreed to purchase, the following respective number of
shares of common stock:
|
|
|
|
|
|
|
|
Underwriter
|
|
Number of Shares
|
|
|
|
|
|
|
|
Friedman, Billings, Ramsey & Co., Inc.
|
|
|
|
|
|
William Blair & Company, L.L.C.
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,000,000
|
|
|
|
|
|
|
The selling shareholders have granted the underwriters an option
exercisable during the 30-day period after the date of this
prospectus to purchase on a pro rata basis, at the initial
public offering price less underwriting discounts and
commissions, up to an additional 1,200,000 shares of common
stock for the sole purpose of covering over-allotments, if any.
To the extent that the underwriters exercise the option, the
underwriters will be committed, subject to certain conditions,
to purchase that number of additional shares.
Under the terms and conditions of the underwriting agreement,
the underwriters are committed to purchase all of the shares
offered by this prospectus other than the shares subject to the
over-allotment option, if any shares are purchased. We and the
selling shareholders have agreed to indemnify the underwriters
against certain civil liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to
make in respect of such liabilities.
The underwriters initially propose to offer the common stock
directly to the public at the initial public offering price set
forth on the cover page of this prospectus and to certain
dealers at the same offering price less a concession not to
exceed
$ per
share. The underwriters may allow, and certain dealers may
re-allow, a discount not to exceed
$ per
share to certain other dealers.
The table below provides information regarding the per share and
total underwriting discounts and commissions we and the selling
shareholders will pay to the underwriters. These amounts are
shown assuming both no exercise and full exercise of the
underwriters’ over-allotment option to purchase up to
1,200,000 additional shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
No Exercise of
|
|
|
Full Exercise of
|
|
|
Paid by Us
|
|
Over-Allotment Option
|
|
|
Over-Allotment Option
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
$
|
|
|
|
$
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No Exercise of
|
|
|
Full Exercise of
|
|
|
Paid by Selling Shareholders
|
|
Over-Allotment Option
|
|
|
Over-Allotment Option
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
$
|
0
|
|
|
$
|
|
|
|
Total
|
|
$
|
0
|
|
|
$
|
|
|
In addition to the underwriting discounts and commissions to be
paid by us, we have agreed to reimburse FBR for certain of its
reasonable expenses incurred in connection with this offering up
to $275,000. FBR may provide us with investment banking and
financial advisory services in the future, for which it may
receive customary compensation. In this regard, for a period of
one year from the date of completion of the offering, we have
granted FBR a right of first refusal to act as placement agent
for any future trust preferred transactions in which we may
participate.
We estimate that the total expenses of the offering payable by
us, excluding underwriting discounts and commissions, will be
approximately $3.3 million.
113
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the
price of our common stock. Specifically, the underwriters may
over-allot this offering by selling more than the number of
shares of common stock offered by this prospectus, creating a
syndicate short position. In addition, the underwriters may bid
for and purchase common stock in the open market to cover
syndicate short positions or to stabilize the price of the
common stock. Finally, the underwriters may reclaim selling
concessions from dealers if shares of our common stock sold by
such dealers are repurchased in syndicate covering transactions,
in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the
common stock above independent market levels. These transactions
may be effected in the over-the-counter market or otherwise. The
underwriters are not required to engage in these activities and
may end any of these activities at any time.
We, our current directors, officers and the selling shareholders
have agreed that, without the prior written consent of the
representatives, we will not, during the period ending
180 days after the date of this prospectus:
|
|
|
|
|
|
•
|
offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any shares of
our common stock, or any securities convertible into or
exercisable or exchangeable for any shares of our common stock
or any right to acquire shares of our common stock; or
|
|
|
|
|
•
|
enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common stock, whether any such transaction
described above is to be settled by delivery of common stock or
such other securities, in cash or otherwise.
|
The representatives do not intend to release any portion of the
common stock subject to the foregoing lock-up agreements.
However, the representatives, in their sole discretion, may
release any of the common stock from the lock-up agreements
prior to expiration of the 180-day period without notice. In
considering a request to release shares from a lock-up
agreement, the representatives will consider a number of
factors, including the impact that such a release would have on
this offering and the market for our common stock and the
equitable considerations underlying the request for releases.
The underwriters have reserved for sale, at the initial offering
price, 240,000 shares of common stock for certain of our
directors, officers and employees who have expressed an interest
in purchasing common stock in the offering. The number of shares
of common stock available to the general public in the offering
will be reduced to the extent these persons purchase these
reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same
terms as the other shares.
The underwriters have informed us that they do not intend to
make sales of our common stock offered by this prospectus to
accounts over which they exercise discretionary authority.
Prior to completion of this offering, there has been no public
market for the shares. The initial public offering price will be
negotiated by us and the representatives. Among the factors to
be considered in determining the initial public offering price
of the shares, in addition to prevailing market conditions, will
be our historical performance, estimates of the business
potential and our earnings prospects, an assessment of our
management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
FBR will facilitate Internet distribution for this offering to
certain of its Internet subscription customers. FBR intends to
allocate a limited number of shares for sale to its online
brokerage customers. An electronic prospectus is available on
the Internet web site maintained by FBR. Other than the
prospectus in electronic format, the information on the FBR web
site is not part of this prospectus.
114
We have applied to have our shares of common stock approved for
listing on the Nasdaq National Market under the symbol
“AMSF.”
LEGAL MATTERS
Jones Day in Dallas, Texas will pass upon the validity of the
shares of common stock offered by this prospectus and certain
other legal matters for us. Lord, Bissell & Brook LLP
in Chicago, Illinois will pass upon certain legal matters for
the underwriters.
EXPERTS
The consolidated financial statements and financial statement
schedules of AMERISAFE, Inc. and its subsidiaries at
December 31, 2004 and 2003, and for each of the three years
in the period ended December 31, 2004, appearing in this
Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1 under the Securities Act with respect to the
shares of our common stock offered by this prospectus. This
prospectus does not contain all the information contained in the
registration statement. For further information with respect to
us and the shares to be sold in this offering, we refer you to
the registration statement, including the agreements and other
documents filed as exhibits to the registration statement.
Statements contained in this prospectus as to the contents of
any agreement or other document to which we make reference are
not necessarily complete. In each instance, we refer you to the
copy of the agreement or other document filed as an exhibit to
the registration statement, each statement being qualified in
all respects by reference to the agreement or document to which
it refers.
After completion of this offering, we will file annual,
quarterly and current reports, proxy statements and other
information with the SEC. We intend to make these filings
available on our website at
www.amerisafe.com.
The
information on our website is not part of this prospectus. In
addition, we will provide copies of our filings free of charge
to our shareholders upon request. Our SEC filings, including the
registration statement of which this prospectus is a part, will
also be available to you on the SEC’s Internet site at
http://www.sec.gov.
You may read and copy all or any
portion of the registration statement or any reports, statements
or other information we file at the SEC’s public reference
room at 100 F Street, N.E., Room 1580, N.W.,
Washington, D.C. 20549. You may call the SEC at
1-800-SEC-0330 for further information on the operation of the
public reference room. You can receive copies of these documents
upon payment of a duplicating fee by writing to the SEC. We
intend to furnish our shareholders with annual reports
containing consolidated financial statements audited by an
independent registered public accounting firm.
115
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
Audited Financial Statements as of December 31, 2004 and
2003 and for the three years in the period ended
December 31, 2004:
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
F-3
|
|
|
|
|
|
F-4
|
|
|
|
|
|
F-5
|
|
|
|
|
|
F-6
|
|
|
|
|
|
F-7
|
|
|
|
|
Unaudited Interim Financial Statements as of
September 30, 2005 and December 31, 2004 and for the
nine-month periods ended September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
F-35
|
|
|
|
|
|
F-36
|
|
|
|
|
|
F-37
|
|
|
|
|
|
F-38
|
|
|
|
|
|
F-39
|
|
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors
AMERISAFE, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
AMERISAFE, Inc. and subsidiaries as of December 31, 2004
and 2003, and the related consolidated statements of income,
changes in shareholders’ deficit, and cash flows for each
of the three years in the period ended December 31, 2004.
Our audits also included the financial statement schedules
listed in the Index at Item 16(b). These financial
statements and schedules are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for purposes of expressing an opinion on the effectiveness of
internal controls over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of AMERISAFE, Inc. and subsidiaries at
December 31, 2004 and 2003, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2004, in conformity
with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statements
taken as a whole present fairly, in all material respects, the
information set forth therein.
New Orleans, Louisiana
May 8, 2005, except for Note 22, as to
which the date is July 28,
2005, and
Note 23, as to which the date
is
October 27, 2005
F-2
AMERISAFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except
|
|
|
|
|
share data)
|
|
|
Assets
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities— held-to-maturity, at amortized
cost (fair value $328,948)
|
|
$
|
329,653
|
|
|
$
|
—
|
|
|
|
Fixed maturity securities— available-for-sale, at fair
value (cost $1,729 and $233,111 in 2004 and 2003, respectively)
|
|
|
1,755
|
|
|
|
243,863
|
|
|
|
Equity securities— available-for-sale, at fair value (cost
$30,926 and $11,215 in 2004 and 2003, respectively)
|
|
|
33,460
|
|
|
|
11,496
|
|
|
|
Mortgage loan
|
|
|
—
|
|
|
|
2,370
|
|
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
|
364,868
|
|
|
|
257,729
|
|
|
Cash and cash equivalents
|
|
|
25,421
|
|
|
|
49,815
|
|
|
Receivable for investments sold
|
|
|
—
|
|
|
|
1,380
|
|
|
Amounts recoverable from reinsurers
|
|
|
198,977
|
|
|
|
211,774
|
|
|
Premiums receivable, net
|
|
|
114,141
|
|
|
|
108,380
|
|
|
Deferred income taxes
|
|
|
15,624
|
|
|
|
12,713
|
|
|
Federal income tax recoverable
|
|
|
1,292
|
|
|
|
6,426
|
|
|
Accrued interest receivable
|
|
|
3,123
|
|
|
|
2,659
|
|
|
Property and equipment, net
|
|
|
7,077
|
|
|
|
6,000
|
|
|
Deferred policy acquisition costs
|
|
|
12,044
|
|
|
|
11,820
|
|
|
Deferred charges
|
|
|
3,054
|
|
|
|
2,987
|
|
|
Other assets
|
|
|
8,566
|
|
|
|
6,925
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
754,187
|
|
|
$
|
678,608
|
|
|
|
|
|
|
|
|
|
|
Liabilities, redeemable preferred stock and
shareholders’ deficit
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and loss adjustment expenses
|
|
$
|
432,880
|
|
|
$
|
377,559
|
|
|
|
Unearned premiums
|
|
|
111,741
|
|
|
|
103,462
|
|
|
|
Reinsurance premiums payable
|
|
|
861
|
|
|
|
485
|
|
|
|
Amounts held for others
|
|
|
1,214
|
|
|
|
1,376
|
|
|
|
Policyholder deposits
|
|
|
33,746
|
|
|
|
28,609
|
|
|
|
Insurance-related assessments
|
|
|
29,876
|
|
|
|
26,133
|
|
|
|
Accounts payable and other liabilities
|
|
|
18,725
|
|
|
|
18,902
|
|
|
|
Note payable
|
|
|
—
|
|
|
|
6,000
|
|
|
|
Subordinated debt securities
|
|
|
36,090
|
|
|
|
10,310
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
665,133
|
|
|
|
572,836
|
|
|
Redeemable preferred stock:
|
|
|
|
|
|
|
|
|
|
|
Series A nonconvertible— $0.01 par value,
$100 per share redemption value:
Authorized shares— 1,500,000; issued and outstanding
shares— 819,161 in 2004 and 764,243 in 2003
|
|
|
81,916
|
|
|
|
76,424
|
|
|
|
Series B nonconvertible— $0.01 par value,
$100 per share redemption value:
Authorized shares— 1,500,000; no shares issued or
outstanding in 2004 or 2003
|
|
|
—
|
|
|
|
—
|
|
|
|
Series C convertible— $0.01 par value,
$100 per share redemption value:
Authorized shares— 300,000; issued and outstanding
shares— 300,000 in 2004 and 2003
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
Series D convertible— $0.01 par value,
$100 per share redemption value:
Authorized shares— 200,000; issued and outstanding
shares— 200,000 in 2004 and 2003
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,916
|
|
|
|
126,424
|
|
|
Shareholders’ deficit:
|
|
|
|
|
|
|
|
|
|
|
Preferred stock: Series E nonconvertible—
$0.01 par value, $100 per share redemption value:
Authorized— 500,000; issued and outstanding shares—
17,653 in 2004 and 247,209 in 2003
|
|
|
1,765
|
|
|
|
24,720
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
Voting— $0.01 par value, authorized shares—
100,000,000; issued and outstanding shares— 299,774 in 2004
and 180,125 in 2003
|
|
|
3
|
|
|
|
2
|
|
|
|
|
Convertible nonvoting— $0.01 par value, authorized
shares— 5,000,000; no shares issued or outstanding in 2004
or 2003
|
|
|
—
|
|
|
|
—
|
|
|
Additional paid-in capital
|
|
|
—
|
|
|
|
—
|
|
|
Accumulated deficit
|
|
|
(51,683
|
)
|
|
|
(52,544
|
)
|
|
Accumulated other comprehensive income
|
|
|
7,053
|
|
|
|
7,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,862
|
)
|
|
|
(20,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
754,187
|
|
|
$
|
678,608
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
AMERISAFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
234,733
|
|
|
$
|
179,847
|
|
|
$
|
163,257
|
|
|
|
Net investment income
|
|
|
12,217
|
|
|
|
10,106
|
|
|
|
9,419
|
|
|
|
Net realized gains (losses) on investments
|
|
|
1,421
|
|
|
|
316
|
|
|
|
(895
|
)
|
|
|
Gain on sale of asset
|
|
|
—
|
|
|
|
—
|
|
|
|
194
|
|
|
|
Fee and other income
|
|
|
589
|
|
|
|
462
|
|
|
|
1,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
248,960
|
|
|
|
190,731
|
|
|
|
173,863
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses incurred
|
|
|
174,186
|
|
|
|
129,250
|
|
|
|
121,062
|
|
|
|
Underwriting and certain other operating costs
|
|
|
28,987
|
|
|
|
23,062
|
|
|
|
22,674
|
|
|
|
Commissions
|
|
|
14,160
|
|
|
|
11,003
|
|
|
|
9,189
|
|
|
|
Salaries and benefits
|
|
|
15,034
|
|
|
|
15,037
|
|
|
|
16,541
|
|
|
|
Interest expense
|
|
|
1,799
|
|
|
|
203
|
|
|
|
498
|
|
|
|
Policyholder dividends
|
|
|
1,108
|
|
|
|
736
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
235,274
|
|
|
|
179,291
|
|
|
|
170,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
13,686
|
|
|
|
11,440
|
|
|
|
3,743
|
|
|
Income tax expense (benefit)
|
|
|
3,129
|
|
|
|
2,846
|
|
|
|
(1,438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
10,557
|
|
|
|
8,594
|
|
|
|
5,181
|
|
|
Preferred stock dividends
|
|
|
(9,781
|
)
|
|
|
(10,133
|
)
|
|
|
(9,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
776
|
|
|
$
|
(1,539
|
)
|
|
$
|
(4,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.42
|
|
|
$
|
(8.55
|
)
|
|
$
|
(23.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.14
|
|
|
$
|
(8.55
|
)
|
|
$
|
(23.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
225,367
|
|
|
|
180,125
|
|
|
|
180,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
255,280
|
|
|
|
180,125
|
|
|
|
180,125
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
AMERISAFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series E
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at January 1, 2002
|
|
|
150,379
|
|
|
$
|
15,038
|
|
|
|
180,125
|
|
|
$
|
2
|
|
|
$
|
14,877
|
|
|
$
|
(61,610
|
)
|
|
$
|
1,693
|
|
|
$
|
(30,000
|
)
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,181
|
|
|
|
—
|
|
|
|
5,181
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,499
|
|
|
|
4,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,680
|
|
|
|
Series A preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,780
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,780
|
)
|
|
|
Series E preferred stock dividends
|
|
|
46,736
|
|
|
|
4,673
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,673
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
197,115
|
|
|
|
19,711
|
|
|
|
180,125
|
|
|
|
2
|
|
|
|
5,424
|
|
|
|
(56,429
|
)
|
|
|
6,192
|
|
|
|
(25,100
|
)
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,594
|
|
|
|
—
|
|
|
|
8,594
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
978
|
|
|
|
978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,572
|
|
|
|
Series A preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,124
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,124
|
)
|
|
|
Series E preferred stock dividends
|
|
|
50,094
|
|
|
|
5,009
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(300
|
)
|
|
|
(4,709
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
247,209
|
|
|
|
24,720
|
|
|
|
180,125
|
|
|
|
2
|
|
|
|
—
|
|
|
|
(52,544
|
)
|
|
|
7,170
|
|
|
|
(20,652
|
)
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,557
|
|
|
|
—
|
|
|
|
10,557
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(117
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,440
|
|
|
|
Conversion of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
119,649
|
|
|
|
1
|
|
|
|
—
|
|
|
|
85
|
|
|
|
—
|
|
|
|
86
|
|
|
|
Series A preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,492
|
)
|
|
|
—
|
|
|
|
(5,492
|
)
|
|
|
Series E preferred stock dividends
|
|
|
42,880
|
|
|
|
4,289
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,289
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
Redemption of Series E preferred stock
|
|
|
(272,436
|
)
|
|
|
(27,244
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(27,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
17,653
|
|
|
$
|
1,765
|
|
|
|
299,774
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
(51,683
|
)
|
|
$
|
7,053
|
|
|
$
|
(42,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
AMERISAFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,557
|
|
|
$
|
8,594
|
|
|
$
|
5,181
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,695
|
|
|
|
2,019
|
|
|
|
1,966
|
|
|
|
Provision for doubtful accounts
|
|
|
1,262
|
|
|
|
19
|
|
|
|
(902
|
)
|
|
|
Net amortization/accretion of investments
|
|
|
1,673
|
|
|
|
1,015
|
|
|
|
234
|
|
|
|
Deferred income taxes
|
|
|
(2,849
|
)
|
|
|
(1,868
|
)
|
|
|
915
|
|
|
|
Net realized (gains) losses on investments
|
|
|
(1,421
|
)
|
|
|
(316
|
)
|
|
|
895
|
|
|
|
Gain on sale of asset
|
|
|
—
|
|
|
|
—
|
|
|
|
(194
|
)
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums receivable
|
|
|
(7,023
|
)
|
|
|
(13,108
|
)
|
|
|
10,518
|
|
|
|
|
Accrued interest receivable
|
|
|
(464
|
)
|
|
|
(544
|
)
|
|
|
(225
|
)
|
|
|
|
Deferred policy acquisition costs and deferred charges
|
|
|
(291
|
)
|
|
|
(3,305
|
)
|
|
|
2,164
|
|
|
|
|
Other assets
|
|
|
3,497
|
|
|
|
(1,549
|
)
|
|
|
(31
|
)
|
|
|
|
Reserve for loss and loss adjustment expenses
|
|
|
55,321
|
|
|
|
31,017
|
|
|
|
(36,490
|
)
|
|
|
|
Unearned premiums
|
|
|
8,279
|
|
|
|
16,143
|
|
|
|
(4,727
|
)
|
|
|
|
Reinsurance balances
|
|
|
13,173
|
|
|
|
1,742
|
|
|
|
82,157
|
|
|
|
|
Amounts held for others and policyholder deposits
|
|
|
4,975
|
|
|
|
6,230
|
|
|
|
(1,839
|
)
|
|
|
|
Accounts payable and other liabilities
|
|
|
3,565
|
|
|
|
4,360
|
|
|
|
(5,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
91,949
|
|
|
|
50,449
|
|
|
|
54,312
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments held-to-maturity
|
|
|
(113,461
|
)
|
|
|
(81,988
|
)
|
|
|
(73,344
|
)
|
|
Purchases of investments available-for-sale
|
|
|
(31,795
|
)
|
|
|
(8,675
|
)
|
|
|
(4,861
|
)
|
|
Proceeds from maturities of investments held-to-maturity
|
|
|
21,789
|
|
|
|
—
|
|
|
|
—
|
|
|
Proceeds from sales and maturities of investments
available-for-sale
|
|
|
14,908
|
|
|
|
37,548
|
|
|
|
26,870
|
|
|
Repayments on mortgage loan
|
|
|
2,370
|
|
|
|
127
|
|
|
|
118
|
|
|
Purchases of property and equipment
|
|
|
(2,778
|
)
|
|
|
(640
|
)
|
|
|
(2,562
|
)
|
|
Proceeds from sales of property and equipment
|
|
|
2
|
|
|
|
7
|
|
|
|
874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(108,965
|
)
|
|
|
(53,621
|
)
|
|
|
(52,905
|
)
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of subordinated debt securities
|
|
|
25,780
|
|
|
|
10,310
|
|
|
|
—
|
|
|
Principal payments on note payable
|
|
|
(6,000
|
)
|
|
|
(2,000
|
)
|
|
|
(1,000
|
)
|
|
Warrants exercised
|
|
|
86
|
|
|
|
—
|
|
|
|
—
|
|
|
Redemption of outstanding Series E preferred stock
|
|
|
(27,244
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(7,378
|
)
|
|
|
8,310
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
(24,394
|
)
|
|
|
5,138
|
|
|
|
407
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
49,815
|
|
|
|
44,677
|
|
|
|
44,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
25,421
|
|
|
$
|
49,815
|
|
|
$
|
44,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,260
|
|
|
$
|
297
|
|
|
$
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
8,434
|
|
|
$
|
8,574
|
|
|
$
|
4,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment-in-kind dividends
|
|
$
|
9,781
|
|
|
$
|
10,133
|
|
|
$
|
9,453
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
|
|
|
|
1.
|
Summary of Significant Accounting Policies
|
Organization
AMERISAFE, Inc. (“Amerisafe”), is an insurance holding
company incorporated in the state of Texas, which, based on
voting common shares, is 67.5% owned by Welsh, Carson, Anderson
and Stowe VII L.P. and its affiliate WCAS Healthcare Partners,
L.P. (“Welsh Carson”). The accompanying consolidated
financial statements include the accounts of Amerisafe and its
subsidiaries: American Interstate Insurance Company
(“AIIC”) and its insurance subsidiaries, Silver Oak
Casualty, Inc. (“SOCI”) and American Interstate
Insurance Company of Texas (“AIIC-TX”), Amerisafe Risk
Services, Inc. (“RISK”) and Amerisafe General Agency,
Inc. (“AGAI”). AIIC and SOCI are property and casualty
insurance companies, domiciled in the state of Louisiana.
AIIC-TX is a property and casualty insurance company organized
under the laws of the state of Texas, was incorporated on
December 20, 2004, and commenced business on
January 1, 2005. RISK, a wholly-owned subsidiary of
Amerisafe, is a claims and safety service company servicing only
affiliate insurance companies. AGAI, a wholly owned subsidiary
of Amerisafe, is a general agent for the Company. AGAI sells
insurance, which is underwritten by AIIC, SOCI, and AIIC-TX, as
well as by nonaffiliated insurance carriers. The assets and
operations of AGAI are not significant to that of the
consolidated entity.
Amerisafe and its subsidiaries are collectively referred to
herein as the “Company.”
The Company provides workers’ compensation and general
liability insurance for companies primarily in special trade
groups, including construction, trucking, and logging. Assets
and revenues of AIIC represent approximately 99% of comparable
consolidated amounts of the Company for each of 2004, 2003, and
2002.
In 1997, the Company entered into a recapitalization agreement
with Welsh Carson that resulted in a change to the
Company’s capital structure. The Company used the proceeds
from this recapitalization to repurchase 80% of the
then-outstanding common stock. The repurchase of the common
stock resulted in a $164,186,000 charge to retained earnings.
Early in 2004, the Company engaged in initial discussions with
potential underwriters regarding an initial public offering. In
May 2005, Amerisafe’s Board of Directors authorized
management to proceed with the initial public offering.
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Amerisafe and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation. The consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States
(“GAAP”). The preparation of financial statements in
accordance with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Certain prior year amounts have been reclassified to conform
with the current year presentation.
Investments
At acquisition, investments in held-to-maturity fixed maturity
securities are recorded at amortized cost. The Company has the
ability and positive intent to hold these investments until
maturity.
F-7
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
Available-for-sale fixed maturity securities and equity
securities are recorded at fair value. Temporary changes in the
fair value of the available-for-sale fixed maturity and equity
securities are reported in shareholders’ equity as a
component of other comprehensive income, net of deferred income
taxes.
During 2004, the Company transferred all fixed maturity
securities, other than redeemable preferred stock, from the
available-for-sale category to the held-to-maturity category.
This transfer between categories was accounted for at fair value
as of the transfer date. At the date of transfer, the fair value
of all securities transferred was $10,707,000
($6,960,000 net of income taxes) greater than the
securities’ par value. The difference between each
security’s par value and fair value at the date of transfer
is being amortized as a yield adjustment over the respective
security’s life. The fair value at the date of transfer,
adjusted for subsequent amortization, is considered to be the
security’s amortized cost basis.
The mortgage loan is carried at the unpaid principal balance.
Collateral on the loan balance consists primarily of a first
mortgage on the underlying property. The Company received the
final payment on the mortgage loan in June 2004.
Investment income is recognized as it is earned. The discount or
premium on fixed maturities is amortized using the scientific
“constant yield” method. Anticipated prepayments,
where applicable, are considered when determining the
amortization of premiums or discounts. Realized investment gains
and losses are determined using the specific identification
method.
The Company regularly reviews the fair value of its investments.
Impairment of an investment security results in a reduction of
the carrying value of the security and the realization of a loss
when the fair value of the security declines below the cost or
amortized cost, as applicable, for the security and the
impairment is deemed to be other-than-temporary. The Company
regularly reviews the investment portfolio to evaluate the
existence of other-than-temporary declines in the fair value of
investments. The Company considers various factors in
determining if a decline in the fair value of an individual
security is other-than-temporary, including but not limited to
the length of time and magnitude of the unrealized loss, the
volatility of the security, analysts’ recommendations and
price targets, opinions of the Company’s external
investment advisor, market liquidity, and the Company’s
intent to sell or ability to hold the security.
If the Company determines that the decline in fair value is
other-than-temporary, the Company adjusts the cost basis of the
investment and reports an impairment charge in net realized
gains (losses) on investments in the consolidated statements of
income in the period in which the Company makes this
determination.
Cash and Cash Equivalents
Cash equivalents include commercial paper, short-term municipal
securities, pooled short-term money market funds, and
certificates of deposit with an original maturity of three
months or less.
Premiums Receivable
Premiums receivable consist primarily of premium-related
balances due from policyholders. The Company considers premiums
receivable as past due based on the payment terms of the
underlying policy. The balance is shown net of the allowance for
doubtful accounts. Receivables due from insureds are charged off
when a determination has been made that a specific balance will
not be collected based upon the collection efforts of Company
personnel. An estimate of amounts that are likely to be charged
off is established as an allowance for doubtful accounts as of
the balance sheet date. The estimate is
F-8
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
primarily comprised of specific balances that are considered
probable to be charged off after all collection efforts have
ceased, as well as historical trends and an analysis of the
aging of the receivables.
Property and Equipment
The Company’s property and equipment, including certain
costs incurred to develop or obtain software for internal use,
are stated at cost less accumulated depreciation. Depreciation
is calculated primarily by the straight-line method over the
estimated useful lives of the respective assets, generally
39 years for the building and three to seven years for all
other fixed assets.
Deferred Policy Acquisition Costs
The direct costs of acquiring and renewing business are
capitalized to the extent recoverable and are amortized over the
effective period of the related insurance policies in proportion
to premium revenue earned. These capitalized costs consist
mainly of sales commissions, premium taxes, and other
underwriting costs. The Company evaluates deferred policy
acquisition costs for recoverability by comparing the unearned
premiums to the estimated total expected claim costs and related
expenses, offset by anticipated investment income. The Company
would reduce the deferred costs if the unearned premiums were
less than expected claims and expenses after considering
investment income. The Company would report any adjustments in
amortization of deferred policy acquisition costs. There were no
adjustments necessary in 2004, 2003, or 2002.
Reserves for Loss and Loss Adjustment Expenses
Reserves for loss and loss adjustment expenses represent the
estimated ultimate cost of all reported and unreported losses
incurred through December 31. The Company does not discount
loss and loss adjustment expense reserves. The Company uses a
consulting actuary to assist in the evaluation of the adequacy
of the reserves for loss and loss adjustment expenses. The
reserves for loss and loss adjustment expenses are estimated
using individual case-basis valuations, statistical analyses,
and estimates based upon experience for unreported claims and
their associated loss and loss adjustment expenses. Such
estimates may be more or less than the amounts ultimately paid
when the claims are settled. The estimates are subject to the
effects of trends in loss severity and frequency. Although
considerable variability is inherent in these estimates,
management believes that the reserves for loss and loss
adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new
information becomes known. Any adjustments are included in
current operations.
Subrogation recoverables, as well as deductible recoverables
from policyholders, are estimated using individual case-basis
valuations and aggregate estimates. Deductibles that are
recoverable from policyholders, and other recoverables from
state funds, decrease the liability for loss and loss adjustment
expenses.
The Company funds its obligations under certain settled claims
where the payment pattern and ultimate cost are fixed and
determinable on an individual claim basis through the purchase
of annuities. These annuities are purchased from unaffiliated
carriers and name the claimant as payee. The cost of purchasing
the annuity is recorded as paid loss and loss adjustment
expenses. To the extent the annuity funds estimated future
claims, reserves for loss and loss adjustment expense are
reduced.
F-9
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
Premium Revenue
Premiums on workers’ compensation and general liability
insurance are based on actual payroll costs or production during
the policy term and are normally billed monthly in arrears or
annually. However, the Company generally requires a deposit at
the inception of a policy.
Premium revenue is earned on a pro rata basis over periods
covered by the policies. The reserve for unearned premiums on
these policies is computed on a daily pro rata basis.
Reinsurance
Reinsurance premiums, losses, and allocated loss adjustment
expenses are accounted for on a basis consistent with those used
in accounting for the original policies issued and the terms of
the reinsurance contracts.
Amounts recoverable from reinsurers include balances currently
owed to the Company for losses and allocated loss adjustment
expenses that have been paid to policyholders, as well as
amounts that are currently reserved for and will be recoverable
once the related expense has been paid.
Upon management’s determination that an amount due from a
reinsurer is uncollectible due to the reinsurer’s
insolvency, or other matters, the amount is written off.
Ceding commissions are earned from certain reinsurance companies
and are intended to reimburse the Company for costs related to
acquiring policies. Ceding commission income is recognized over
the effective period of the related insurance policies in
proportion to premium revenue earned and is reflected as a
reduction in underwriting and other operating costs.
Contingent commissions are earned from certain reinsurance
companies based on the financial results of the applicable risks
underwritten by the Company. Contingent commission revenue on
reinsurance contracts is recognized during the related
reinsurance treaty period and is based on the same assumptions
used for recording loss and allocated loss adjustment expenses.
These commissions are reflected as a reduction in underwriting
and other operating costs and are adjusted as necessary as
experience develops or new information becomes known. Any such
adjustments are included in current operations. Contingent
commissions recognized reduced underwriting and other operating
costs by $200,000 in 2004 and $10,000 in 2003 and increased
costs by $553,000 in 2002.
Fee and Other Income
The Company recognizes income related to commissions earned by
AGAI as the related services are performed.
Advertising
All advertising expenditures incurred by the Company are charged
to expense in the period to which they relate and are included
in underwriting and other operating costs in the consolidated
statements of income. Total advertising expenses incurred were
$412,000, $506,000, and $389,000 during 2004, 2003, and 2002,
respectively.
Income Taxes
The Company accounts for income taxes using the liability
method. The provision for income taxes has two components,
amounts currently payable or receivable and deferred amounts.
Deferred income tax assets and liabilities are recognized for
the differences between the financial statement carrying
F-10
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
amounts of existing assets and liabilities and their respective
tax bases. Deferred income tax assets and liabilities are
measured using tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred income tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company considers deferred tax assets to be recoverable if
it is probable that the related tax losses can be offset by
future taxable income. The Company includes future operating
income, reversal of existing temporary differences, and tax
planning strategies available in this assessment. To the extent
the deferred tax assets exceed the amount expected to be
recovered in future years, the Company records a valuation
allowance for the amount determined unrecoverable. The Company
has not recorded a valuation allowance, since the recorded
deferred tax asset is expected to be fully realized.
Insurance-Related Assessments
Insurance-related assessments are accrued in the period in which
they have been incurred. The Company is subject to a variety of
assessments related to insurance commerce, including those by
state guaranty funds and workers’ compensation
second-injury funds. State guaranty fund assessments are used by
state insurance oversight agencies to cover losses of
policyholders of insolvent or rehabilitated insurance companies
and for the operating expenses of such agencies. These mandatory
assessments may be partially recovered through a reduction in
future premium taxes in certain states. Assessments related to
premiums are generally paid one year after the calendar year in
which the premium is written, while assessments related to
losses are generally paid within one year of when the loss is
paid.
Policyholder Dividends
The Company writes certain policies for which the policyholder
may participate in favorable claims experience through a
dividend. An estimated provision for workers’ compensation
policyholders’ dividends is accrued as the related premiums
are earned. Dividends do not become a fixed liability unless and
until declared by the respective Boards of Directors of
Amerisafe’s insurance subsidiaries. The dividend to which a
policyholder may be entitled is set forth in the policy and is
related to the amount of losses sustained under the policy.
Dividends are calculated after the policy expiration. The
Company is able to estimate the policyholder dividend liability
because the Company has information regarding the underlying
loss experience of the policies written with dividend provisions
and can estimate future dividend payments from the policy terms.
Variable Interest Entities
In December 2003, Amerisafe formed Amerisafe Capital
Trust I (“ACT I”) for the sole purpose of
issuing $10,000,000 in trust preferred securities. ACT I
used the proceeds from the sale of these securities and
Amerisafe’s initial capital contribution to purchase
$10,310,000 of subordinated debt securities from Amerisafe. The
debt securities are the sole assets of ACT I, and the
payments under the debt securities are the sole revenues of
ACT I.
In April 2004, Amerisafe formed Amerisafe Capital Trust II
(“ACT II”) for the sole purpose of issuing
$25,000,000 in trust preferred securities. ACT II used the
proceeds from the sale of these securities and Amerisafe’s
initial capital contribution to purchase $25,780,000 of
subordinated debt securities from Amerisafe. The debt securities
are the sole assets of ACT II, and the payments under the
debt securities are the sole revenues of ACT II.
F-11
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
Amerisafe concluded that the equity investments in ACT I
and ACT II (collectively, the “Trusts”) are not
at risk since the subordinated debt securities issued by
Amerisafe are the Trusts’ sole assets. Accordingly, the
Trusts are considered variable interest entities. Amerisafe is
not considered to be the primary beneficiary of the Trusts and
has not consolidated these entities.
Earnings Per Share
The Company applies the two-class method to compute basic
earnings per share (“EPS”). This method calculates
earnings per share for each class of common stock and
participating security. Income available to common shareholders
is allocated to common shares and participating securities to
the extent that each security shares in earnings as if all
earnings for the period had been distributed. The amount of
earnings allocated to common shares is divided by the
weighted-average number of common shares outstanding for the
period. Participating securities that are convertible into
common stock are included in the computation of basic EPS if the
effect is dilutive.
Diluted EPS include potential common shares assumed issued under
the treasury stock method, which reflects the potential dilution
that would occur if any outstanding options or warrants were
exercised and includes the “if converted” method for
participating securities if the effect is dilutive. The
two-class method of calculating diluted EPS is used in the event
the “if converted” method is anti-dilutive.
Stock-Based Compensation
The Company accounts for its stock-based compensation using the
intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options.
The gross unrealized gains and losses on, and the cost and fair
value of, those investments classified as held-to-maturity at
December 31, 2004 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
U.S. Treasury securities and obligations of
U.S. Government agencies
|
|
$
|
39,255
|
|
|
$
|
37
|
|
|
$
|
(80
|
)
|
|
$
|
39,212
|
|
|
States and political subdivisions
|
|
|
173,103
|
|
|
|
—
|
|
|
|
(553
|
)
|
|
|
172,550
|
|
|
Mortgage-backed and asset-backed securities
|
|
|
91,836
|
|
|
|
165
|
|
|
|
(284
|
)
|
|
|
91,717
|
|
|
Long-term certificates of deposit
|
|
|
100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100
|
|
|
Corporate bonds
|
|
|
25,359
|
|
|
|
30
|
|
|
|
(20
|
)
|
|
|
25,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
329,653
|
|
|
$
|
232
|
|
|
$
|
(937
|
)
|
|
$
|
328,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
The gross unrealized gains and losses on, and the cost and fair
value of, those investments classified as available-for-sale at
December 31, 2004 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Common stocks
|
|
$
|
24,879
|
|
|
$
|
2,907
|
|
|
$
|
(269
|
)
|
|
$
|
27,517
|
|
|
Preferred stocks
|
|
|
7,776
|
|
|
|
149
|
|
|
|
(227
|
)
|
|
|
7,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
32,655
|
|
|
$
|
3,056
|
|
|
$
|
(496
|
)
|
|
$
|
35,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross unrealized gains and losses on, and the cost and fair
value of, those investments classified as available-for-sale at
December 31, 2003 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
U.S. Treasury securities and obligations of
U.S. Government agencies
|
|
$
|
28,507
|
|
|
$
|
1,066
|
|
|
$
|
(22
|
)
|
|
$
|
29,551
|
|
|
States and political subdivisions
|
|
|
147,798
|
|
|
|
5,946
|
|
|
|
(80
|
)
|
|
|
153,664
|
|
|
Mortgage-backed and asset-backed securities
|
|
|
31,246
|
|
|
|
1,118
|
|
|
|
(4
|
)
|
|
|
32,360
|
|
|
Long-term certificates of deposit
|
|
|
100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100
|
|
|
Corporate bonds
|
|
|
23,478
|
|
|
|
2,684
|
|
|
|
—
|
|
|
|
26,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231,129
|
|
|
|
10,814
|
|
|
|
(106
|
)
|
|
|
241,837
|
|
|
Common stocks
|
|
|
6,066
|
|
|
|
442
|
|
|
|
(124
|
)
|
|
|
6,384
|
|
|
Preferred stocks
|
|
|
7,131
|
|
|
|
177
|
|
|
|
(170
|
)
|
|
|
7,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,197
|
|
|
|
619
|
|
|
|
(294
|
)
|
|
|
13,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
244,326
|
|
|
$
|
11,433
|
|
|
$
|
(400
|
)
|
|
$
|
255,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the cost or amortized cost and fair value of
investments in fixed maturity securities at December 31,
2004, by contractual maturity, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Maturity:
|
|
|
|
|
|
|
|
|
|
|
Due in 2005
|
|
$
|
11,851
|
|
|
$
|
11,809
|
|
|
|
In 2006 through 2009
|
|
|
117,701
|
|
|
|
117,328
|
|
|
|
In 2010 through 2014
|
|
|
90,405
|
|
|
|
90,279
|
|
|
|
After 2014
|
|
|
19,589
|
|
|
|
19,570
|
|
|
Mortgage-backed and asset-backed securities
|
|
|
91,836
|
|
|
|
91,717
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
331,382
|
|
|
$
|
330,703
|
|
|
|
|
|
|
|
|
|
The actual maturities of the fixed maturity securities may
differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or
prepayment penalties.
F-13
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
At December 31, 2004, there were $25,000 of cash
equivalents and $18,028,000 of held-to-maturity investments on
deposit as required by regulatory agencies of states in which
the Company does business. A summary of the Company’s
realized gains and losses on sales, calls or redemptions of
investments for 2004, 2003, and 2002 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
Available
|
|
|
Equity
|
|
|
|
|
|
|
|
|
for Sale
|
|
|
Securities
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales
|
|
$
|
—
|
|
|
$
|
13,529
|
|
|
$
|
—
|
|
|
$
|
13,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains
|
|
$
|
—
|
|
|
$
|
1,784
|
|
|
$
|
—
|
|
|
$
|
1,784
|
|
|
Gross realized investment losses
|
|
|
—
|
|
|
|
(537
|
)
|
|
|
—
|
|
|
|
(537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gain
|
|
|
—
|
|
|
|
1,247
|
|
|
|
—
|
|
|
|
1,247
|
|
|
Impairments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other, including gains on calls and redemptions
|
|
|
—
|
|
|
|
—
|
|
|
|
174
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
$
|
—
|
|
|
$
|
1,247
|
|
|
$
|
174
|
|
|
$
|
1,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales
|
|
$
|
27,469
|
|
|
$
|
4,923
|
|
|
$
|
—
|
|
|
$
|
32,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains
|
|
$
|
2
|
|
|
$
|
357
|
|
|
$
|
—
|
|
|
$
|
359
|
|
|
Gross realized investment losses
|
|
|
(5
|
)
|
|
|
(56
|
)
|
|
|
—
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gain
|
|
|
(3
|
)
|
|
|
301
|
|
|
|
—
|
|
|
|
298
|
|
|
Impairments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other, including gains on calls and redemptions
|
|
|
18
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
$
|
15
|
|
|
$
|
301
|
|
|
$
|
—
|
|
|
$
|
316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales
|
|
$
|
18,447
|
|
|
$
|
4,503
|
|
|
$
|
—
|
|
|
$
|
22,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
Gross realized investment losses
|
|
|
(63
|
)
|
|
|
(857
|
)
|
|
|
—
|
|
|
|
(920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment loss
|
|
|
(41
|
)
|
|
|
(857
|
)
|
|
|
—
|
|
|
|
(898
|
)
|
|
Impairments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other, including gains on calls and redemptions
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment losses
|
|
$
|
(38
|
)
|
|
$
|
(857
|
)
|
|
$
|
—
|
|
|
$
|
(895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
Major categories of the Company’s net investment income are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Gross investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
11,294
|
|
|
$
|
9,358
|
|
|
$
|
8,430
|
|
|
|
Equity securities
|
|
|
811
|
|
|
|
611
|
|
|
|
428
|
|
|
|
Cash and cash equivalents
|
|
|
693
|
|
|
|
742
|
|
|
|
1,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross investment income
|
|
|
12,798
|
|
|
|
10,711
|
|
|
|
10,017
|
|
|
Investment expenses
|
|
|
(581
|
)
|
|
|
(605
|
)
|
|
|
(598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
12,217
|
|
|
$
|
10,106
|
|
|
$
|
9,419
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the gross unrealized losses on
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
Twelve Months
|
|
|
|
|
Twelve Months
|
|
|
or Longer
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
December 31, 2004
|
|
$
|
94,003
|
|
|
$
|
963
|
|
|
$
|
16,284
|
|
|
$
|
470
|
|
|
December 31, 2003
|
|
|
17,362
|
|
|
|
330
|
|
|
|
589
|
|
|
|
70
|
|
The Company reviewed all securities with unrealized losses in
accordance with the impairment policy described in Note 1.
The Company determined that the unrealized losses in the fixed
maturity portfolio relate primarily to changes in market
interest rates since the date of purchase or the transfer of the
investments from the available-for-sale classification to the
held-to-maturity classification. The Company expects to recover
the amortized cost of these securities since management expects
to hold the securities until they mature. The Company determined
the unrealized losses in the equity portfolio were due to
general market conditions. Management believes that these
conditions will improve such that these unrealized losses will
be recovered.
Premiums receivable consist primarily of premium-related
balances due from policyholders. The balance is shown net of the
allowance for doubtful accounts. The components of premiums
receivable are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Premiums receivable
|
|
$
|
117,057
|
|
|
$
|
111,609
|
|
|
Allowance for doubtful accounts
|
|
|
(2,916
|
)
|
|
|
(3,229
|
)
|
|
|
|
|
|
|
|
|
|
Premiums receivable, net
|
|
$
|
114,141
|
|
|
$
|
108,380
|
|
|
|
|
|
|
|
|
|
F-15
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
The following summarizes the activity in the allowance for
doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
3,229
|
|
|
$
|
4,339
|
|
|
$
|
5,714
|
|
|
Provision for bad debts
|
|
|
1,262
|
|
|
|
19
|
|
|
|
(902
|
)
|
|
Write-offs
|
|
|
(1,575
|
)
|
|
|
(1,129
|
)
|
|
|
(473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
2,916
|
|
|
$
|
3,229
|
|
|
$
|
4,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Deferred Policy Acquisition Costs
|
The Company incurs certain costs related to acquiring policies.
These costs are deferred and expensed over the life of the
related policies. Major categories of the Company’s
deferred policy acquisition costs are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Agents’ commissions
|
|
$
|
7,737
|
|
|
$
|
6,876
|
|
|
Premium taxes
|
|
|
2,957
|
|
|
|
2,695
|
|
|
Deferred underwriting expenses
|
|
|
1,350
|
|
|
|
2,249
|
|
|
|
|
|
|
|
|
|
|
Total deferred policy acquisition costs
|
|
$
|
12,044
|
|
|
$
|
11,820
|
|
|
|
|
|
|
|
|
|
The following summarizes the activity in the deferred policy
acquisition costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
11,820
|
|
|
$
|
9,505
|
|
|
$
|
11,077
|
|
|
Policy acquisition costs deferred
|
|
|
26,193
|
|
|
|
22,391
|
|
|
|
18,893
|
|
|
Amortization expense during the year
|
|
|
(25,969
|
)
|
|
|
(20,076
|
)
|
|
|
(20,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
12,044
|
|
|
$
|
11,820
|
|
|
$
|
9,505
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
|
|
|
|
5.
|
Property and Equipment
|
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Land and office building
|
|
$
|
4,334
|
|
|
$
|
4,313
|
|
|
Furniture and equipment
|
|
|
6,914
|
|
|
|
6,719
|
|
|
Software
|
|
|
6,022
|
|
|
|
3,630
|
|
|
Automobiles
|
|
|
110
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,380
|
|
|
|
14,772
|
|
|
Accumulated depreciation
|
|
|
(10,303
|
)
|
|
|
(8,772
|
)
|
|
|
|
|
|
|
|
|
|
Real estate, furniture, and equipment, net
|
|
$
|
7,077
|
|
|
$
|
6,000
|
|
|
|
|
|
|
|
|
|
At December 31, 2004, furniture and equipment included
property under capital leases of $20,000 and software included
property under capital leases of $1,110,000. There is no
accumulated depreciation related to these properties at
December 31, 2004. At December 31, 2003, furniture and
equipment included property under capital leases of $619,000 and
software included property under capital leases of $497,000.
Accumulated depreciation includes $465,000 at December 31,
2003 that was related to these properties. The capital lease
obligations related to this property are included in accounts
payable and other liabilities.
Future minimum lease payments related to the capital lease
obligations are detailed below (In thousands):
|
|
|
|
|
|
|
2005
|
|
$
|
510
|
|
|
2006
|
|
|
510
|
|
|
2007
|
|
|
510
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
1,530
|
|
|
Less amount representing interest
|
|
|
(69
|
)
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
1,461
|
|
|
|
|
|
|
The Company cedes certain premiums and losses to various
reinsurers under quota share and excess-of-loss treaties. These
reinsurance arrangements provide for greater diversification of
business, allow management to control exposure to potential
losses arising from large risks, and provide additional capacity
for growth. Ceded reinsurance contracts do not relieve the
Company from its obligations to policyholders. The Company
remains liable to its policyholders for the portion reinsured to
the extent that any reinsurer does not meet the obligations
assumed under the reinsurance agreements. To minimize its
exposure to significant losses from reinsurer insolvencies, the
Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar
F-17
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
geographic regions, activities, or economic characteristics of
the reinsurers. The effect of reinsurance on premiums written
and earned in 2004, 2003, and 2002 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Premiums
|
|
|
2003 Premiums
|
|
|
2002 Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Direct
|
|
$
|
264,962
|
|
|
$
|
256,684
|
|
|
$
|
223,590
|
|
|
$
|
207,447
|
|
|
$
|
185,093
|
|
|
$
|
189,820
|
|
|
Ceded
|
|
|
(21,951
|
)
|
|
|
(21,951
|
)
|
|
|
(27,600
|
)
|
|
|
(27,600
|
)
|
|
|
(26,563
|
)
|
|
|
(26,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums
|
|
$
|
243,011
|
|
|
$
|
234,733
|
|
|
$
|
195,990
|
|
|
$
|
179,847
|
|
|
$
|
158,530
|
|
|
$
|
163,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts recoverable from reinsurers consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Unpaid losses recoverable:
|
|
|
|
|
|
|
|
|
|
|
Case basis
|
|
$
|
164,942
|
|
|
$
|
181,870
|
|
|
|
Incurred but not reported
|
|
|
24,682
|
|
|
|
12,688
|
|
|
Paid losses recoverable
|
|
|
9,353
|
|
|
|
17,216
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
198,977
|
|
|
$
|
211,774
|
|
|
|
|
|
|
|
|
|
Amounts recoverable from reinsurers consists of paid losses
recoverable, ceded case reserves and ceded IBNR reserves. Paid
losses recoverable are receivables currently due from reinsurers
for ceded paid losses. Ceded case and ceded IBNR reserves
represent the portion of our gross loss and loss adjustment
expense liabilities that are recoverable under reinsurance
agreements, but are not yet due from reinsurers. The Company
considers paid losses recoverable outstanding for more than
90 days to be past due. At December 31, 2004,
approximately $164,000, or 1.8%, of the $9,353,000 of paid
losses recoverable were past due.
The Company received reinsurance recoveries of approximately
$54,144,000 in 2004, $60,960,000 in 2003, and $104,745,000 in
2002.
At December 31, 2004, unsecured reinsurance recoverables
from reinsurers that exceeded 3% of statutory surplus of the
Company’s insurance subsidiary are shown below (in
thousands). The A.M. Best Company rating for the reinsurer is
shown parenthetically.
|
|
|
|
|
|
|
Converium Reinsurance North America (B-)
|
|
$
|
83,403
|
|
|
American Re-Insurance Company (A+)
|
|
|
38,616
|
|
|
Odyssey America Reinsurance Corporation(A)
|
|
|
21,064
|
|
|
St. Paul Fire & Marine Insurance Company(A)
|
|
|
12,592
|
|
|
Clearwater Insurance Company(A)
|
|
|
10,571
|
|
|
Scor Reinsurance Company (B++)
|
|
|
7,962
|
|
|
Other reinsurers
|
|
|
24,769
|
|
|
|
|
|
|
|
Total
|
|
$
|
198,977
|
|
|
|
|
|
|
During 2004, the Company’s largest reinsurer, Converium
Reinsurance North America (“CRNA”), was downgraded by
A.M. Best Company, from A- to B-, as a result of the emergence
of significant and previously unrecorded losses. While this
downgrade had no immediate impact on the
F-18
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
Company’s consolidated financial statements, it caused a
decrease in the Company’s A.M. Best Company’s Capital
Adequacy Ratio (“BCAR”) due to the increase in the
capital charge sustained against the CRNA recoverable. CRNA
continues to reimburse the Company for its portion of reinsured
paid losses, and no amounts are past due. See Note 22—
Subsequent Events.
The Company’s deferred income tax assets and liabilities
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
|
|
Discounting of net unpaid loss and loss adjustment expenses
|
|
$
|
8,836
|
|
|
$
|
6,819
|
|
|
|
Unearned premiums
|
|
|
9,510
|
|
|
|
8,340
|
|
|
|
Accrued expenses and other
|
|
|
1,702
|
|
|
|
1,601
|
|
|
|
Accrued policyholder dividends
|
|
|
445
|
|
|
|
448
|
|
|
|
Accrued insurance-related assessments
|
|
|
5,578
|
|
|
|
5,071
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
26,071
|
|
|
|
22,279
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
(5,386
|
)
|
|
|
(4,603
|
)
|
|
|
Deferred charges
|
|
|
(877
|
)
|
|
|
(828
|
)
|
|
|
Unrealized gain on securities available-for-sale
|
|
|
(3,799
|
)
|
|
|
(3,861
|
)
|
|
|
Property and equipment, primarily a result of differences in
depreciation
|
|
|
(376
|
)
|
|
|
(273
|
)
|
|
|
Other
|
|
|
(9
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(10,447
|
)
|
|
|
(9,566
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
15,624
|
|
|
$
|
12,713
|
|
|
|
|
|
|
|
|
|
The components of consolidated income tax expense (benefit) are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,444
|
|
|
$
|
4,299
|
|
|
$
|
(2,678
|
)
|
|
|
State
|
|
|
534
|
|
|
|
415
|
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,978
|
|
|
|
4,714
|
|
|
|
(2,353
|
)
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,849
|
)
|
|
|
(1,868
|
)
|
|
|
915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,129
|
|
|
$
|
2,846
|
|
|
$
|
(1,438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
F-19
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
Income tax expense (benefit) from operations is different from
the amount computed by applying the U.S. federal income tax
statutory rate of 35% to income before income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Income tax computed at federal statutory tax rate
|
|
$
|
4,790
|
|
|
$
|
4,004
|
|
|
$
|
1,310
|
|
|
Tax-exempt interest, net
|
|
|
(1,737
|
)
|
|
|
(1,392
|
)
|
|
|
(1,055
|
)
|
|
State income tax
|
|
|
534
|
|
|
|
415
|
|
|
|
325
|
|
|
Dividends received deduction
|
|
|
(135
|
)
|
|
|
(127
|
)
|
|
|
(90
|
)
|
|
Tax method changes for prior year
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,125
|
)
|
|
Other
|
|
|
(323
|
)
|
|
|
(54
|
)
|
|
|
(803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,129
|
|
|
$
|
2,846
|
|
|
$
|
(1,438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2003, the Company had a note payable with
an outstanding balance of $6,000,000, bearing interest at the
Federal Funds Rate plus 0.75% (1.91%). The note matured on
April 1, 2004, and the Company made a final payment of
$6,000,000, plus accrued interest.
|
|
|
|
9.
|
Subordinated Debt Securities
|
On December 16, 2003, Amerisafe entered into a trust
preferred securities transaction pursuant to which it issued
$10,310,000 aggregate principal amount of subordinated debt
securities due in 2034. To effect the transaction, Amerisafe
formed a Delaware statutory trust, Amerisafe Capital
Trust I (“ACT I”). ACT I issued
$10,000,000 of preferred securities to investors and $310,000 of
common securities to Amerisafe. ACT I used the proceeds
from these issuances to purchase the subordinated debt
securities. Amerisafe pays interest on its ACT I
subordinated debt securities quarterly at a rate equal to LIBOR
plus 4.10% per annum. ACT I pays interest on its
preferred securities at the same rate. The Amerisafe
subordinated debt securities and ACT I preferred securities
are repayable on or after January 8, 2009. Payments of
principal, interest, and premium, if any, on the ACT I
preferred securities are guaranteed by Amerisafe.
On April 29, 2004, Amerisafe entered into a second trust
preferred securities transaction pursuant to which it issued
$25,780,000 aggregate principal amount of subordinated debt
securities due in 2034. To effect the transaction, Amerisafe
formed a Delaware statutory trust, Amerisafe Capital
Trust II (“ACT II”). ACT II issued
$25,000,000 of preferred securities to investors and $780,000 of
common securities to Amerisafe. ACT II used the proceeds
from these issuances to purchase the subordinated debt
securities. Amerisafe pays interest on its ACT II
subordinated debt securities quarterly at a rate equal to LIBOR
plus 3.80% per annum. ACT II pays interest on its
preferred securities at the same rate. The Amerisafe
subordinated debt securities and ACT II preferred
securities are repayable on or after April 29, 2009.
Payments of principal, interest, and premium, if any, on the
ACT II preferred securities are guaranteed by Amerisafe.
F-20
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
|
|
|
|
10.
|
Loss and Loss Adjustment Expenses
|
The following table provides a reconciliation of the beginning
and ending reserve balances, net of related amounts recoverable
from reinsurers, for 2004, 2003, and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Reserves for loss and loss adjustment expenses
(“LAE”), net of related amounts recoverable from
reinsurers, at beginning of year
|
|
$
|
183,001
|
|
|
$
|
152,908
|
|
|
$
|
119,020
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loss and LAE for claims occurring in the current
year, net of reinsurance
|
|
|
160,773
|
|
|
|
126,977
|
|
|
|
117,212
|
|
|
|
Change in estimated loss and LAE for claims occurring in prior
years, net of reinsurance
|
|
|
13,139
|
|
|
|
973
|
|
|
|
1,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,912
|
|
|
|
127,950
|
|
|
|
119,062
|
|
|
|
Uncollectible reinsurance adjustment, for loss and LAE occurring
in prior years
|
|
|
274
|
|
|
|
1,300
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred losses during the current year, net of reinsurance
|
|
|
174,186
|
|
|
|
129,250
|
|
|
|
121,062
|
|
|
Less loss and LAE payments for claims, net of reinsurance,
occurring during:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
40,312
|
|
|
|
32,649
|
|
|
|
36,060
|
|
|
|
|
Prior years
|
|
|
73,619
|
|
|
|
66,508
|
|
|
|
51,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,931
|
|
|
|
99,157
|
|
|
|
87,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and LAE, net of related amounts recoverable
from reinsurers, at end of year
|
|
|
243,256
|
|
|
|
183,001
|
|
|
|
152,908
|
|
|
Add amounts recoverable from reinsurers on unpaid loss and LAE
|
|
|
189,624
|
|
|
|
194,558
|
|
|
|
193,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and LAE
|
|
$
|
432,880
|
|
|
$
|
377,559
|
|
|
$
|
346,542
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s reserves for loss and loss adjustment
expenses, net of amounts recoverable from reinsurers, at
December 31, 2003, 2002, and 2001, were increased during
the subsequent year by $13,139,000, $973,000, and $1,850,000,
respectively. Most of the 2004 prior year development occurred
in the 2002 accident year, where the Company’s ultimate
loss estimate increased by approximately $9,400,000. The
unfavorable development in the 2002 accident year was the result
of settlements above the established case reserves or upward
revisions to the estimated settlements on an individual
case-by-case basis. The revisions to the Company’s case
reserves reflect new information gained by claims adjusters in
the normal course of adjusting claims and then reflected in the
financial statements when the information becomes available. It
is typical for more serious claims to take several years to
settle and the Company continually revises estimates as more
information about claimants’ medical conditions and
potential disability becomes known and the claims get closer to
being settled. As the 2002 accident year has developed, the
Company has found it necessary to increase reserves on reported
claims for both indemnity and medical losses.
Reliance Insurance Company (“Reliance”), one of the
Company’s reinsurers, was placed into liquidation in
October 2001. As a result of adverse development in the policy
years covered by the
F-21
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
Reliance reinsurance, the Company incurred an additional
$260,000, $1,300,000, and $2,000,000 of loss and allocated loss
adjustment expense related to additional impaired amounts
recoverable from Reliance during 2004, 2003, and 2002,
respectively.
The anticipated effect of inflation is implicitly considered
when estimating liabilities for loss and loss adjustment
expenses. Average severities are projected based on historical
trends adjusted for implemented changes in underwriting
standards, policy provisions, and general economic trends. These
anticipated trends are monitored based on actual development and
are modified if necessary.
|
|
|
|
11.
|
Statutory Accounting and Regulatory Requirements
|
Amerisafe’s insurance subsidiaries file financial
statements prepared in accordance with statutory accounting
principles prescribed or permitted by the insurance regulatory
authorities of the state in which they are domiciled.
Statutory-basis shareholder’s capital and surplus at
December 31, 2004, 2003, and 2002 of the directly owned
insurance subsidiary, American Interstate Insurance Company, and
the combined statutory-basis net income for all Amerisafe’s
insurance subsidiaries for the three years in the period ended
December 31, 2004, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital and surplus
|
|
$
|
112,334
|
|
|
$
|
96,905
|
|
|
$
|
86,378
|
|
|
Net income
|
|
|
7,828
|
|
|
|
2,598
|
|
|
|
4,976
|
|
Property and casualty insurance companies are subject to certain
risk-based capital (“RBC”) requirements specified by
the National Association of Insurance Commissioners. Under these
requirements, a target minimum amount of capital and surplus
maintained by a property/casualty insurance company is
determined based on the various risk factors related to it. At
December 31, 2004, the capital and surplus of AIIC and its
subsidiaries exceeded the minimum RBC requirement.
Pursuant to regulatory requirements, AIIC cannot pay dividends
to Amerisafe in excess of the lesser of 10% of statutory
surplus, or statutory net income, excluding realized investment
gains, for the preceding 12-month period, without the prior
approval of the Louisiana Commissioner of Insurance. However,
for purposes of this dividend calculation, net income from the
previous two calendar years may be carried forward to the extent
that it has not already been paid out as dividends. No such
dividends were paid to Amerisafe in 2004, 2003, or 2002. Based
upon the above described calculation, AIIC could pay to
Amerisafe dividends up to $11,233,000 in 2005 without seeking
regulatory approval.
F-22
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
Series A Preferred Stock
The following table summarizes the activity in the Series A
preferred stock for the three years in the period ended
December 31, 2004 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2002
|
|
|
665,206
|
|
|
$
|
66,520
|
|
|
|
Series A preferred stock dividends
|
|
|
47,801
|
|
|
|
4,780
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
713,007
|
|
|
|
71,300
|
|
|
|
Series A preferred stock dividends
|
|
|
51,236
|
|
|
|
5,124
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
764,243
|
|
|
|
76,424
|
|
|
|
Series A preferred stock dividends
|
|
|
54,918
|
|
|
|
5,492
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
819,161
|
|
|
$
|
81,916
|
|
|
|
|
|
|
|
|
|
Holders of Series A Preferred Stock are entitled to
cumulative dividends at the rate of $7 per year payable
quarterly in shares of Series A Preferred Stock.
The Series A Preferred Stock is redeemable, in whole or in
part, by Amerisafe at any time. The redemption price for the
Series A Preferred Stock is $100 plus accrued and unpaid
dividends per share (the “Redemption Price”).
Upon consummation of a public offering of its equity securities,
Amerisafe is required to use 50% of its net proceeds from the
offering to redeem outstanding shares of Series A Preferred
Stock, subject to the terms of the Series E Preferred Stock.
The Series A Preferred Stock is exchangeable, in whole or
in part, into shares of common stock following consummation of a
public offering of shares of common stock with gross proceeds of
at least $40,000,000 to Amerisafe (a “Qualified Public
Offering”), upon the written request of holders of at least
66
2
/
3
%
of the then-outstanding shares of Series A Preferred Stock.
The exchange rate for each share of Series A Preferred
Stock is $100 divided by the price per share to the public in
the public offering.
Holders of the Series A Preferred Stock may require
Amerisafe to redeem all or a portion of their outstanding shares
of the Series A Preferred Stock at the
Redemption Price upon the disposition of substantially all
of the assets of the Company or if a change of control of more
than 50% of the voting power of all outstanding shares of voting
stock occurs, other than through a public offering of equity
securities (collectively, a “Change of Control”).
Welsh Carson owns a majority of the outstanding Series A
Preferred Stock, as well as a majority of the voting Common
Stock of the Company. Additionally, under the terms of a
stockholders’ agreement, Welsh Carson has the right to
designate a majority of the members on the Amerisafe Board of
Directors. The Series A Preferred Stock is mandatorily
redeemable upon the occurrence of certain events that are deemed
to be outside the control of the Company and therefore is
classified outside of permanent equity.
F-23
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
Series B Preferred Stock
The terms of the Series B Preferred Stock are similar to
the terms of the Series A Preferred Stock described above.
There were no shares of Series B Preferred Stock
outstanding at December 31, 2004 and 2003 or issued during
the three year period ended December 31, 2004.
Series C and Series D Convertible Preferred
Stock
There has been no change in the number of shares or carrying
value of the Series C and Series D Convertible
Preferred Stock (“Convertible Preferred Stock”) during
the three-year period ended December 31, 2004.
Holders of the Convertible Preferred Stock are entitled to
cumulative dividends at the rate of $7 per year payable
quarterly in shares of Series E Preferred Stock.
The Convertible Preferred Stock is convertible at the option of
the holder into shares of common stock at a rate of
$100 per share divided by the then-applicable conversion
price. As of December 31, 2004, the conversion price was
$521.50 per share and the outstanding shares of Convertible
Preferred Stock were convertible into 95,877 shares of
common stock. Holders of the Convertible Preferred Stock also
have the right to participate in any common dividend paid by the
Company on an as-converted basis. Prior to a public offering,
the conversion price is adjusted in the event of issuances of
common stock (or other securities convertible into or
exchangeable for common stock) without consideration or for a
consideration per share less than the then-current conversion
price. On or after a public offering, the conversion price is
adjusted in the event of issuances of common stock (or other
securities convertible into or exchangeable for common stock) at
a price per share less than the market price in effect
immediately prior to such issuance.
The Convertible Preferred Stock is automatically convertible
into shares of common stock upon consummation of a Qualified
Public Offering at a price to the public of at least
$651.60 per share (subject to adjustment to reflect stock
splits, combinations, and stock dividends). In addition, the
Convertible Preferred Stock is convertible at Amerisafe’s
option upon consummation of a public offering of its equity
securities if the closing price of the common stock for the 20
trading days prior to consummation results in, or concurrently
with a Change of Control if the proceeds from the transaction
results in, a value for the outstanding common stock of at least
$651.60 per share.
Holders of the Convertible Preferred Stock may require Amerisafe
to redeem all or a portion of their outstanding shares of the
Convertible Preferred Stock at the Redemption Price upon
the disposition of substantially all of the assets of the
Company or if a change of control of more than 50% of the voting
power of all outstanding shares of voting stock occurs, other
than through a public offering of equity securities
(collectively, a “Change of Control”).
At any time after March 18, 2003, Amerisafe may redeem all,
but not less than all, of the outstanding shares of Convertible
Preferred Stock at a price per share of $103.50 plus accrued and
unpaid dividends. The Convertible Preferred Stock is mandatorily
redeemable at the Redemption Price upon a Change of Control.
The Convertible Preferred Stock is classified outside of
permanent equity because the shares are mandatorily redeemable
upon the occurrence of certain events that are deemed to be
outside the control of the Company.
F-24
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
Series E Preferred Stock
Holders of Series E Preferred Stock are entitled to
cumulative dividends at the rate of $7 per year payable
quarterly in shares of Series E Preferred Stock. The
Company made cash redemptions of Series E Preferred Stock
on May 28, June 8, and June 30, 2004. As a result
of these redemptions, there were no outstanding shares of
Series E Preferred Stock as of June 30, 2004.
Subsequently, in 2004, an additional 17,653 shares were
issued to the holders of the Convertible Preferred Stock.
Amerisafe may redeem all, but not less than all, of the
outstanding shares of Series E Preferred Stock at the
Redemption Price at any time. The Series E Preferred
Stock is subject to mandatory redemption at the
Redemption Price upon a Change of Control, subject to
certain limitations. Upon the consummation of a public offering
of equity securities, Amerisafe is required to use the proceeds
from the offering to redeem at the Redemption Price all
outstanding shares of the Series E Preferred Stock, subject
to the terms of the Series A Preferred Stock.
Redemption and Liquidation Provisions
In the event Amerisafe consummates a Qualified Public Offering
and the Series A Preferred Stock is concurrently redeemed
or exchanged, the rate at which dividends are paid to holders of
Convertible Preferred Stock and Series E Preferred Stock
will be reduced by multiplying the dividend rate by the
percentage of shares of Series A Preferred Stock
outstanding after the redemption or exchange as compared to the
number of shares of Series A Preferred Stock outstanding on
March 18, 1998. Subsequent redemptions or exchanges will
further reduce the dividend rate proportionately with the
percentage decrease in the number of outstanding shares of
Series A Preferred Stock. After all shares of Series A
Preferred Stock have been redeemed or exchanged, the dividend
rate on the Convertible Preferred Stock and Series E
Preferred Stock will be zero.
In the event of any liquidation or dissolution of Amerisafe, the
holders of Convertible Preferred Stock and Series E
Preferred Stock will receive $100 plus accrued and unpaid
dividends for each outstanding share before any distributions
are made to holders of Series A Preferred Stock or Common
Stock. Any remaining net assets will be distributed first to
holders of Series A Preferred Stock and then to holders of
Common Stock.
13. Stock Options
The Company had one stock option plan as of December 31,
2004, the Amerisafe 1998 Amended and Restated Stock Option and
Restricted Stock Purchase Plan (the “Plan”). The Plan
is administered by Amerisafe’s Board of Directors and
provides for grants of incentive stock options, nonqualified
stock options, or restricted stock to selected employees,
officers, and directors. Each option granted under the Plan is
exercisable for one share of common stock. Options may be
granted for a number of shares not to exceed, in the aggregate,
2,500,000 shares of common stock. Exercise prices for the
incentive stock options may be no less than 100% of the fair
value of a share of common stock on the date the option is
granted. If the option is granted to any owner of 10% or more of
the total combined voting power of the Company, the exercise
price is to be at least 110% of the fair value of a share of
common stock on the date the option is granted. Exercise prices
for the nonqualified stock options may be no less than 100% of
the fair value of a share of common stock on the date the option
is granted. Each option vests ratably over a period of five
years and may be exercised during a period not to exceed ten
years from the date such option is granted. Exercise prices for
nonemployee director stock options may be no less than 100% of
the fair value of a share of common stock on the date the option
is granted. The nonemployee director stock options granted when
a director becomes a board member, may be
F-25
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
exercised in increments of one-third of the total grant on each
anniversary of the grant date and become fully exercisable three
years after the grant date. The nonemployee director options
awarded at the re-election of the director become fully
exercisable at the award date. A summary of the Company’s
stock option plan as of December 31, 2004, 2003, and 2002,
and changes during each of the years then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
Weighted-
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
Average
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
Exercise
|
|
|
|
|
Exercise
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of the year
|
|
|
20,140
|
|
|
$
|
216.72
|
|
|
|
20,987
|
|
|
$
|
217.44
|
|
|
|
21,299
|
|
|
$
|
216.00
|
|
|
Granted
|
|
|
167
|
|
|
|
360.00
|
|
|
|
375
|
|
|
|
298.80
|
|
|
|
278
|
|
|
|
235.44
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Canceled, forfeited, or expired
|
|
|
(209
|
)
|
|
|
360.00
|
|
|
|
(1,222
|
)
|
|
|
251.28
|
|
|
|
(590
|
)
|
|
|
177.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year
|
|
|
20,098
|
|
|
|
215.28
|
|
|
|
20,140
|
|
|
|
216.72
|
|
|
|
20,987
|
|
|
|
217.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the end of the year
|
|
|
20,098
|
|
|
|
215.28
|
|
|
|
19,931
|
|
|
|
215.28
|
|
|
|
16,127
|
|
|
|
206.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted-
|
|
|
Number
|
|
|
Contractual Life
|
|
|
Average Exercise
|
|
|
Outstanding
|
|
|
(In Years)
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
13,994
|
|
|
|
2.73
|
|
|
$
|
152.64
|
|
|
|
6,104
|
|
|
|
4.19
|
|
|
$
|
360.00
|
|
The reported net income, basic earnings per share, and diluted
earnings per share would not be impacted had the Company
accounted for the outstanding stock options based on their fair
value. Accordingly, no additional disclosure of the pro forma
effects of this accounting method is considered necessary.
On December 16, 2004, the Financial Accounting Standards
Board (“FASB”) issued FASB Statement No. 123(R)
(revised 2004), Share-Based Payment, which is a revision of FASB
Statement No. 123, Accounting for Stock-Based Compensation.
Statement No. 123(R) supersedes Accounting Principles Board
(“APB”) Opinion No. 25, Accounting for Stock
Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach in Statement
No. 123(R) is similar to the approach described in
Statement No. 123. However, Statement No. 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no
longer an alternative.
Statement No. 123(R) permits public companies to adopt its
requirements using one of two methods. One method is a
“modified prospective” method in which compensation
cost is recognized beginning with the effective date
(a) based on the requirements of Statement No. 123(R)
for all share-based payments granted after the effective date
and (b) based on the requirements of Statement 123 for
all awards granted to employees prior to the effective date of
Statement No. 123(R) that remain unvested on the effective
date. The other method is a “modified retrospective”
method, which includes the requirements of the modified
prospective method described above, but also permits entities to
F-26
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
restate based on the amounts previously recognized under
Statement No. 123 for purposes of pro forma disclosures for
either (a) all prior periods presented or (b) prior
interim periods of the year of adoption. Statement
No. 123(R) must be adopted no later than January 1,
2006. Early adoption will be permitted in periods in which
financial statements have not yet been issued.
In anticipation of the initial public offering of the
Company’s common stock, the Company adopted the provisions
of Statement No. 123(R) using the modified prospective
method effective January 1, 2005. As all share-based
payments previously issued by the Company were fully vested,
there is no effect on the Company’s consolidated financial
position or results of operations as of the date of adoption.
As permitted by Statement No. 123, the Company currently
accounts for share-based payments to employees using APB Opinion
No. 25’s intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock
options. Accordingly, to the extent additional share-based
payments are issued, the adoption of Statement
No. 123(R)’s fair value method could have a
significant impact on the Company’s results of operations,
although it will have no impact on the Company’s overall
consolidated financial position. See
Note 22—Subsequent Events.
In 2004, warrants for 119,649 shares of common stock were
exercised at a price of $0.72 per share. The warrants were
issued in 1997 and 1998. The following table depicts warrant
activity for the last three years in the period ended
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Shares
|
|
|
|
|
Number
|
|
|
Price
|
|
|
Purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at December 31, 2001
|
|
|
119,849
|
|
|
$
|
0.72
|
|
|
|
—
|
|
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Warrants outstanding at December 31, 2002
|
|
|
119,849
|
|
|
$
|
0.72
|
|
|
|
—
|
|
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Warrants outstanding at December 31, 2003
|
|
|
119,849
|
|
|
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Exercised
|
|
|
119,649
|
|
|
|
0.72
|
|
|
|
119,649
|
|
|
|
Expired
|
|
|
200
|
|
|
|
0.72
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at December 31, 2004
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
The calculation of basic and diluted EPS for the years ended
December 31, 2004, 2003, and 2002 are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except
|
|
|
|
|
per share amounts)
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,557
|
|
|
$
|
8,594
|
|
|
$
|
5,181
|
|
|
|
Preferred stock dividends
|
|
|
(9,781
|
)
|
|
|
(10,133
|
)
|
|
|
(9,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders
|
|
$
|
776
|
|
|
$
|
(1,539
|
)
|
|
$
|
(4,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount allocable to common shareholders(1)
|
|
|
70%
|
|
|
|
100%
|
|
|
|
100%
|
|
|
|
Income (loss) allocable to common shareholders
|
|
$
|
545
|
|
|
$
|
(1,539
|
)
|
|
$
|
(4,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
225
|
|
|
|
180
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
2.42
|
|
|
$
|
(8.55
|
)
|
|
$
|
(23.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocable to common shareholders
|
|
$
|
545
|
|
|
$
|
(1,539
|
)
|
|
$
|
(4,272
|
)
|
|
|
Dividends on participating securities
|
|
|
—
|
(2)
|
|
|
—
|
(2)
|
|
|
—
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocable to common shareholders after assumed
conversions
|
|
$
|
545
|
|
|
$
|
(1,539
|
)
|
|
$
|
(4,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
225
|
|
|
|
180
|
|
|
|
180
|
|
|
|
Diluted effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
(2)
|
|
|
—
|
(2)
|
|
|
—
|
(2)
|
|
|
|
Warrants
|
|
|
30
|
|
|
|
—
|
(2)
|
|
|
—
|
(2)
|
|
|
|
Conversion of participating securities
|
|
|
—
|
(2)
|
|
|
—
|
(2)
|
|
|
—
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
255
|
|
|
|
180
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
2.14
|
|
|
$
|
(8.55
|
)
|
|
$
|
(23.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Computed under the two-class method by dividing the
weighted-average common shares outstanding (225 at
December 31, 2004) by the sum of the weighted-average
common shares outstanding and shares issuable upon conversion of
all convertible participating securities, calculated on the
if-converted method (such additional shares totaled 96 at
December 31, 2004). In computing basic EPS using the
two-class method, the Company has not allocated the loss to
common shareholders for the years ended December 31, 2003
and 2002 between common shareholders and participating security
holders as the participating holders do not have a contractual
obligation to share in the loss.
|
|
|
|
|
(2)
|
Not applicable as impact is antidilutive.
|
F-28
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
|
|
|
|
16.
|
Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre Tax
|
|
|
|
|
Net-of-Tax
|
|
|
|
|
Amount
|
|
|
Tax Expense
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities
|
|
$
|
1,993
|
|
|
$
|
698
|
|
|
$
|
1,295
|
|
|
|
Less amortization of differences between fair value and
amortized cost for fixed maturity security transfer
|
|
|
(2,413
|
)
|
|
|
(845
|
)
|
|
|
(1,568
|
)
|
|
|
Less reclassification adjustment for losses realized in net
income
|
|
|
242
|
|
|
|
86
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss
|
|
|
(178
|
)
|
|
|
(61
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
(178
|
)
|
|
$
|
(61
|
)
|
|
$
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities
|
|
$
|
1,484
|
|
|
$
|
519
|
|
|
$
|
965
|
|
|
|
Less reclassification adjustment for losses realized in net
income
|
|
|
20
|
|
|
|
7
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain
|
|
|
1,504
|
|
|
|
526
|
|
|
|
978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
1,504
|
|
|
$
|
526
|
|
|
$
|
978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities
|
|
$
|
6,455
|
|
|
$
|
2,260
|
|
|
$
|
4,195
|
|
|
|
Less reclassification adjustment for losses realized in net
income
|
|
|
467
|
|
|
|
163
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain
|
|
|
6,922
|
|
|
|
2,423
|
|
|
|
4,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
6,922
|
|
|
$
|
2,423
|
|
|
$
|
4,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
Employee Benefit Plan
|
The Company’s 401(k) benefit program is available to all
employees. The Company matches up to 2% of employee compensation
for participating employees, subject to certain limitations.
Employees are vested 100% in employer contributions to the Plan
after five years. Contributions to the Plan were $276,000,
$270,000, and $284,000 in 2004, 2003, and 2002, respectively.
|
|
|
|
18.
|
Commitments and Contingencies
|
The Company is a party to various legal actions arising
principally from claims made under insurance policies and
contracts. Those actions are considered by the Company in
estimating loss and loss adjustment expense reserves. In the
opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the Company’s
consolidated financial position or results of operations.
F-29
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
The Company provides workers’ compensation insurance in
several states that maintain second-injury funds. Incurred
losses on qualifying claims that exceed certain amounts may be
recovered from these state funds. There is no assurance that the
applicable states will continue to provide funding under these
programs.
The Company manages risk on certain long-duration claims by
settling these claims through the purchase of annuities from
unaffiliated carriers. In the event these carriers are unable to
meet their obligations under these contracts, the Company could
be liable to the claimants. The following table summarizes (in
thousands) the fair value of the annuities at December 31,
2004, that the Company has purchased to satisfy its obligations.
The A.M. Best Company rating is shown parenthetically.
|
|
|
|
|
|
|
American General Life Insurance Company (A++u)
|
|
$
|
18,220
|
|
|
First Colony Life Insurance Company (A+)
|
|
|
3,658
|
|
|
Monumental Life Insurance Company (A+)
|
|
|
3,632
|
|
|
John Hancock Life Insurance Company (A++)
|
|
|
3,312
|
|
|
Transamerica Life Companies (A+)
|
|
|
2,726
|
|
|
New York Life Insurance Company (A++)
|
|
|
2,548
|
|
|
Liberty Life Assurance Company of Boston (A-)
|
|
|
2,417
|
|
|
GE Capital Assurance Company (A+)
|
|
|
1,718
|
|
|
Pacific Life and Annuity Company (A++)
|
|
|
1,375
|
|
|
Other
|
|
|
7,794
|
|
|
|
|
|
|
|
|
|
$
|
47,400
|
|
|
|
|
|
|
Each of the life insurance companies from which the Company
purchases annuities, or the entity guaranteeing the life
insurance company, has an A.M. Best Company rating
“A-” (Excellent) or better.
The Company leases equipment and office space under
noncancelable operating leases. At December 31, 2004,
future minimum lease payments are as follows (in thousands):
|
|
|
|
|
|
|
2005
|
|
$
|
479
|
|
|
2006
|
|
|
303
|
|
|
2007
|
|
|
185
|
|
|
2008
|
|
|
88
|
|
|
2009
|
|
|
58
|
|
|
2010
|
|
|
50
|
|
|
|
|
|
|
|
|
|
$
|
1,163
|
|
|
|
|
|
|
Rental expense was approximately $956,000, $1,074,000, and
$1,144,000 in 2004, 2003, and 2002, respectively.
F-30
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
|
|
|
|
19.
|
Concentration of Operations
|
The Company derives its revenues primarily from its operations
in the workers’ compensation insurance line of business.
Total net premiums earned for the different lines of business
are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Workers’ compensation
|
|
$
|
232,291
|
|
|
|
99.0%
|
|
|
$
|
177,565
|
|
|
|
98.7%
|
|
|
$
|
161,060
|
|
|
|
98.7%
|
|
|
General liability
|
|
|
2,442
|
|
|
|
1.0%
|
|
|
|
2,282
|
|
|
|
1.3%
|
|
|
|
2,197
|
|
|
|
1.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net premiums earned
|
|
$
|
234,733
|
|
|
|
100.0%
|
|
|
$
|
179,847
|
|
|
|
100.0%
|
|
|
$
|
163,257
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned for the top ten states and all others are
shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Louisiana
|
|
$
|
26,422
|
|
|
|
11.3
|
%
|
|
$
|
20,809
|
|
|
|
11.6
|
%
|
|
$
|
20,421
|
|
|
|
12.5
|
%
|
|
Georgia
|
|
|
22,313
|
|
|
|
9.5
|
|
|
|
17,233
|
|
|
|
9.6
|
|
|
|
15,731
|
|
|
|
9.6
|
|
|
Texas
|
|
|
17,150
|
|
|
|
7.3
|
|
|
|
14,407
|
|
|
|
8.0
|
|
|
|
13,826
|
|
|
|
8.5
|
|
|
North Carolina
|
|
|
14,705
|
|
|
|
6.3
|
|
|
|
10,812
|
|
|
|
6.0
|
|
|
|
8,647
|
|
|
|
5.3
|
|
|
Illinois
|
|
|
14,186
|
|
|
|
6.0
|
|
|
|
8,423
|
|
|
|
4.7
|
|
|
|
5,046
|
|
|
|
3.1
|
|
|
Virginia
|
|
|
12,395
|
|
|
|
5.3
|
|
|
|
9,984
|
|
|
|
5.6
|
|
|
|
12,165
|
|
|
|
7.5
|
|
|
Arkansas
|
|
|
11,327
|
|
|
|
4.8
|
|
|
|
9,708
|
|
|
|
5.4
|
|
|
|
9,690
|
|
|
|
5.9
|
|
|
Florida
|
|
|
10,959
|
|
|
|
4.7
|
|
|
|
7,726
|
|
|
|
4.3
|
|
|
|
4,764
|
|
|
|
2.9
|
|
|
South Carolina
|
|
|
10,067
|
|
|
|
4.3
|
|
|
|
6,301
|
|
|
|
3.5
|
|
|
|
5,313
|
|
|
|
3.3
|
|
|
Pennsylvania
|
|
|
9,812
|
|
|
|
4.2
|
|
|
|
7,338
|
|
|
|
4.1
|
|
|
|
6,413
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,336
|
|
|
|
63.6
|
|
|
|
112,741
|
|
|
|
62.7
|
|
|
|
102,016
|
|
|
|
62.5
|
|
|
All others
|
|
|
85,397
|
|
|
|
36.4
|
|
|
|
67,105
|
|
|
|
37.3
|
|
|
|
61,241
|
|
|
|
37.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net premiums earned
|
|
$
|
234,733
|
|
|
|
100.0
|
%
|
|
$
|
179,847
|
|
|
|
100.0
|
%
|
|
$
|
163,257
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.
|
Fair Values of Financial Instruments
|
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.
Investments
—The fair values for fixed maturity and
equity securities are based on prices obtained from a
third-party investment manager.
Mortgage Loan
—The carrying amount reported in the
accompanying consolidated balance sheet for the mortgage loan is
the unpaid principal balance of the loan. This amount
approximates fair value due
F-31
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
to the interest rate and term of the loan being comparable with
what the borrower presently could obtain from other outside
sources.
Note Payable and Subordinated Debt
Securities
—The carrying values of the Company’s
note payable and subordinated debt securities approximate the
estimated fair values of the obligations as the interest rates
on all the debt are comparable to rates that the Company
believes it presently would incur on comparable borrowings.
The following table summarizes the carrying or reported values
and corresponding fair values for financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
331,408
|
|
|
$
|
330,703
|
|
|
$
|
243,863
|
|
|
$
|
243,863
|
|
|
|
Equity securities
|
|
|
33,460
|
|
|
|
33,460
|
|
|
|
11,496
|
|
|
|
11,496
|
|
|
|
Mortgage loan
|
|
|
—
|
|
|
|
—
|
|
|
|
2,370
|
|
|
|
2,370
|
|
|
|
Cash and cash equivalents
|
|
|
25,421
|
|
|
|
25,421
|
|
|
|
49,815
|
|
|
|
49,815
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
6,000
|
|
|
|
6,000
|
|
|
|
Subordinated debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACT I
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
10,310
|
|
|
|
|
ACT II
|
|
|
25,780
|
|
|
|
25,780
|
|
|
|
—
|
|
|
|
—
|
|
F-32
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
|
|
|
|
21.
|
Quarterly Financial Data (Unaudited)
|
The following table represents unaudited quarterly financial
data for the years ended December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
52,312
|
|
|
$
|
60,767
|
|
|
$
|
59,338
|
|
|
$
|
62,316
|
|
|
Net investment income
|
|
|
2,641
|
|
|
|
2,765
|
|
|
|
3,253
|
|
|
|
3,558
|
|
|
Net realized gain (losses) on investments
|
|
|
310
|
|
|
|
308
|
|
|
|
(75
|
)
|
|
|
878
|
|
|
Total revenues
|
|
|
55,406
|
|
|
|
63,961
|
|
|
|
62,643
|
|
|
|
66,950
|
|
|
Income before income taxes
|
|
|
3,888
|
|
|
|
582
|
|
|
|
4,040
|
|
|
|
5,176
|
|
|
Net income
|
|
|
2,891
|
|
|
|
708
|
|
|
|
3,147
|
|
|
|
3,811
|
|
|
Net income (loss) allocable to common shareholder
|
|
|
246
|
|
|
|
(1,868
|
)
|
|
|
685
|
|
|
|
1,714
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.89
|
|
|
|
(10.37
|
)
|
|
|
2.04
|
|
|
|
4.33
|
|
|
|
Diluted
|
|
|
0.54
|
|
|
|
(10.37
|
)
|
|
|
2.04
|
|
|
|
4.33
|
|
|
Comprehensive income
|
|
|
2,664
|
|
|
|
121
|
|
|
|
2,769
|
|
|
|
4,886
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
42,987
|
|
|
$
|
43,652
|
|
|
$
|
44,827
|
|
|
$
|
48,381
|
|
|
Net investment income
|
|
|
2,555
|
|
|
|
2,538
|
|
|
|
2,460
|
|
|
|
2,553
|
|
|
Net realized gain (losses) on investments
|
|
|
2
|
|
|
|
2
|
|
|
|
(46
|
)
|
|
|
358
|
|
|
Total revenues
|
|
|
45,681
|
|
|
|
46,287
|
|
|
|
47,380
|
|
|
|
51,383
|
|
|
Income (loss) before income taxes
|
|
|
4,535
|
|
|
|
5,163
|
|
|
|
3,836
|
|
|
|
(2,094
|
)
|
|
Net income (loss)
|
|
|
3,183
|
|
|
|
3,648
|
|
|
|
2,805
|
|
|
|
(1,042
|
)
|
|
Net income (loss) allocable to common shareholders
|
|
|
715
|
|
|
|
1,137
|
|
|
|
251
|
|
|
|
(3,642
|
)
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2.59
|
|
|
|
4.12
|
|
|
|
0.91
|
|
|
|
(20.22
|
)
|
|
|
Diluted
|
|
|
1.56
|
|
|
|
2.47
|
|
|
|
0.55
|
|
|
|
(20.22
|
)
|
|
Comprehensive income (loss)
|
|
|
3,288
|
|
|
|
5,691
|
|
|
|
1,828
|
|
|
|
(1,236
|
)
|
Effective June 30, 2005, the Company entered into a
commutation agreement with Converium Reinsurance (North America)
Inc. (“Converium”) pursuant to which the Company is to
receive cash payments totaling $61,297,000 in exchange for a
full termination and release of three of the five reinsurance
agreements between Converium and the Company. The commutation
agreement provides that all liabilities of the Company reinsured
with Converium under these three reinsurance agreements revert
back to the Company in exchange for the cash payments. As a
result of the termination of the three reinsurance agreements
the Company recognized a pretax loss of $6,653,000 in 2005.
Converium remains obligated to the Company under the remaining
two reinsurance agreements. As of June 30, 2005, the amount
recoverable from Converium under these two agreements was
$6,860,000.
F-33
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
December 31, 2004
On June 20, 2005, the Company entered into agreements with
the holders of all its outstanding options to purchase shares of
the Company’s common stock pursuant to which all
outstanding options of the Company were cancelled in exchange
for $0.072 for each share of common stock issuable upon exercise
of the options. Options to acquire a total of 20,265 shares
of the Company’s common stock were cancelled in exchange
for aggregate cash payments of $1,459. Additionally, the
Company’s Stock Option and Restricted Stock Purchase Plan,
under which these options were authorized, was terminated.
23. Reverse Stock Split
On October 27, 2005, the Company effected a 72-for-one
reverse stock split. All amounts included in these financial
statements have been restated to give effect to the reverse
stock split.
F-34
AMERISAFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands, except
|
|
|
|
|
share data)
|
|
|
Assets
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities — held-to-maturity, at
amortized cost (fair value $410,919 and $328,948 in 2005 and
2004, respectively)
|
|
$
|
416,946
|
|
|
$
|
329,653
|
|
|
|
Fixed maturity securities — available-for-sale, at
fair value (cost $1,729 in 2005 and 2004)
|
|
|
1,729
|
|
|
|
1,755
|
|
|
|
Equity securities — available-for-sale, at fair value
(cost $46,876 and $30,926 in 2005 and 2004, respectively)
|
|
|
50,641
|
|
|
|
33,460
|
|
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
|
469,316
|
|
|
|
364,868
|
|
|
Cash and cash equivalents
|
|
|
28,843
|
|
|
|
25,421
|
|
|
Receivable for investments sold
|
|
|
4
|
|
|
|
—
|
|
|
Amounts recoverable from reinsurers
|
|
|
122,774
|
|
|
|
198,977
|
|
|
Premiums receivable, net
|
|
|
140,061
|
|
|
|
114,141
|
|
|
Deferred income taxes
|
|
|
23,232
|
|
|
|
15,624
|
|
|
Federal income tax recoverable
|
|
|
—
|
|
|
|
1,292
|
|
|
Accrued interest receivable
|
|
|
4,691
|
|
|
|
3,123
|
|
|
Property and equipment, net
|
|
|
6,347
|
|
|
|
7,077
|
|
|
Deferred policy acquisition costs
|
|
|
18,189
|
|
|
|
12,044
|
|
|
Deferred charges
|
|
|
3,601
|
|
|
|
3,054
|
|
|
Other assets
|
|
|
13,250
|
|
|
|
8,566
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
830,308
|
|
|
$
|
754,187
|
|
|
|
|
|
|
|
|
|
|
Liabilities, redeemable preferred stock and
shareholders’ deficit
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and loss adjustment expenses
|
|
$
|
469,894
|
|
|
$
|
432,880
|
|
|
|
Unearned premiums
|
|
|
138,623
|
|
|
|
111,741
|
|
|
|
Reinsurance premiums payable
|
|
|
—
|
|
|
|
861
|
|
|
|
Amounts held for others
|
|
|
1,172
|
|
|
|
1,214
|
|
|
|
Policyholder deposits
|
|
|
36,122
|
|
|
|
33,746
|
|
|
|
Insurance-related assessments
|
|
|
33,847
|
|
|
|
29,876
|
|
|
|
Accounts payable and other liabilities
|
|
|
25,237
|
|
|
|
18,725
|
|
|
|
Subordinated debt securities
|
|
|
36,090
|
|
|
|
36,090
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
740,985
|
|
|
|
665,133
|
|
|
Redeemable preferred stock:
|
|
|
|
|
|
|
|
|
|
|
Series A nonconvertible — $0.01 par value,
$100 per share redemption value:
Authorized shares — 1,500,000; issued and outstanding
shares — 862,924 in 2005 and 819,161 in 2004
|
|
|
86,292
|
|
|
|
81,916
|
|
|
|
Series B nonconvertible — $0.01 par value,
$100 per share redemption value:
Authorized shares — 1,500,000; no shares issued or
outstanding in 2005 or 2004
|
|
|
—
|
|
|
|
—
|
|
|
|
Series C convertible — $0.01 par value,
$100 per share redemption value:
Authorized shares — 300,000; issued and outstanding
shares — 300,000 in 2005 and 2004
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
Series D convertible — $0.01 par value,
$100 per share redemption value:
Authorized shares — 200,000; issued and outstanding
shares — 200,000 in 2005 and 2004
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136,292
|
|
|
|
131,916
|
|
|
Shareholders’ deficit:
|
|
|
|
|
|
|
|
|
|
|
Preferred stock: Series E nonconvertible —
$0.01 par value, $100 per share redemption value:
Authorized — 500,000; issued and outstanding
shares — 45,308 in 2005 and 17,653 in 2004
|
|
|
4,531
|
|
|
|
1,765
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
Voting — $0.01 par value, authorized
shares — 100,000,000; issued and outstanding
shares — 299,774 in 2005 and 2004
|
|
|
3
|
|
|
|
3
|
|
|
|
Convertible nonvoting — $0.01 par value,
authorized shares — 5,000,000; no shares issued or
outstanding in 2005 or 2004
|
|
|
—
|
|
|
|
—
|
|
|
|
Additional paid-in capital
|
|
|
—
|
|
|
|
—
|
|
|
|
Accumulated deficit
|
|
|
(58,299
|
)
|
|
|
(51,683
|
)
|
|
|
Accumulated other comprehensive income
|
|
|
6,796
|
|
|
|
7,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,969
|
)
|
|
|
(42,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
830,308
|
|
|
$
|
754,187
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-35
AMERISAFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(In thousands, except
|
|
|
|
|
share and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
189,370
|
|
|
$
|
172,417
|
|
|
|
Net investment income
|
|
|
11,985
|
|
|
|
8,660
|
|
|
|
Net realized gains on investments
|
|
|
1,337
|
|
|
|
543
|
|
|
|
Fee and other income
|
|
|
426
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
203,118
|
|
|
|
182,009
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses incurred
|
|
|
155,625
|
|
|
|
128,304
|
|
|
|
Underwriting and certain other operating costs
|
|
|
24,478
|
|
|
|
21,128
|
|
|
|
Commissions
|
|
|
11,869
|
|
|
|
10,556
|
|
|
|
Salaries and benefits
|
|
|
10,068
|
|
|
|
11,367
|
|
|
|
Interest expense
|
|
|
2,061
|
|
|
|
1,215
|
|
|
|
Policyholder dividends
|
|
|
451
|
|
|
|
930
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
204,552
|
|
|
|
173,500
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(1,434
|
)
|
|
|
8,509
|
|
|
Income tax expense (benefit)
|
|
|
(1,960
|
)
|
|
|
1,763
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
526
|
|
|
|
6,746
|
|
|
Preferred stock dividends
|
|
|
(7,142
|
)
|
|
|
(7,481
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
(6,616
|
)
|
|
$
|
(735
|
)
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(22.07
|
)
|
|
$
|
(3.67
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(22.07
|
)
|
|
$
|
(3.67
|
)
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
299,774
|
|
|
|
200,301
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
299,774
|
|
|
|
200,301
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-36
AMERISAFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series E Preferred
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance at January 1, 2004
|
|
|
247,209
|
|
|
$
|
24,720
|
|
|
|
180,125
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
(52,544
|
)
|
|
$
|
7,170
|
|
|
$
|
(20,652
|
)
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,557
|
|
|
|
—
|
|
|
|
10,557
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(117
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,440
|
|
|
|
Conversion of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
119,649
|
|
|
|
1
|
|
|
|
—
|
|
|
|
85
|
|
|
|
—
|
|
|
|
86
|
|
|
|
Series A preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,492
|
)
|
|
|
—
|
|
|
|
(5,492
|
)
|
|
|
Series E preferred stock dividends
|
|
|
42,880
|
|
|
|
4,289
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,289
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
Redemption of Series E preferred stock
|
|
|
(272,436
|
)
|
|
|
(27,244
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(27,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
17,653
|
|
|
|
1,765
|
|
|
|
299,774
|
|
|
|
3
|
|
|
|
—
|
|
|
|
(51,683
|
)
|
|
|
7,053
|
|
|
|
(42,862
|
)
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
526
|
|
|
|
—
|
|
|
|
526
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(257
|
)
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
Series A preferred stock dividends (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,376
|
)
|
|
|
—
|
|
|
|
(4,376
|
)
|
|
|
Series E preferred stock dividends (unaudited)
|
|
|
27,655
|
|
|
|
2,766
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,766
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005 (unaudited)
|
|
|
45,308
|
|
|
$
|
4,531
|
|
|
|
299,774
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
(58,299
|
)
|
|
$
|
6,796
|
|
|
$
|
(46,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-37
AMERISAFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
111,441
|
|
|
$
|
69,253
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
Purchases of investments held-to-maturity
|
|
|
(133,799
|
)
|
|
|
(62,782
|
)
|
|
Purchases of investments available-for-sale
|
|
|
(34,353
|
)
|
|
|
(19,635
|
)
|
|
Proceeds from maturities of investments held-to-maturity
|
|
|
43,477
|
|
|
|
17,636
|
|
|
Proceeds from sales and maturities of investments
available-for-sale
|
|
|
19,624
|
|
|
|
5,010
|
|
|
Repayments on mortgage loan
|
|
|
—
|
|
|
|
2,370
|
|
|
Purchases of property and equipment
|
|
|
(977
|
)
|
|
|
(1,511
|
)
|
|
Proceeds from sales of property and equipment
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(106,025
|
)
|
|
|
(58,910
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of subordinated debt securities
|
|
|
—
|
|
|
|
25,780
|
|
|
Principal payments on notes payable
|
|
|
—
|
|
|
|
(6,000
|
)
|
|
Warrants exercised
|
|
|
—
|
|
|
|
86
|
|
|
Redemption of outstanding Series E preferred stock
|
|
|
—
|
|
|
|
(27,244
|
)
|
|
Offering costs incurred
|
|
|
(1,994
|
)
|
|
|
—
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(1,994
|
)
|
|
|
(7,378
|
)
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
3,422
|
|
|
|
2,965
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
25,421
|
|
|
|
49,815
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
28,843
|
|
|
$
|
52,780
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-38
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
|
|
|
|
1.
|
Summary of Significant Accounting Policies
|
Organization
AMERISAFE, Inc. (“Amerisafe”) is an insurance holding
company incorporated in the state of Texas, which, based on
voting common shares, is 67.5% owned by Welsh, Carson, Anderson
and Stowe VII L.P. and its affiliate WCAS Healthcare Partners,
L.P. (“Welsh Carson”). The accompanying consolidated
financial statements include the accounts of Amerisafe and its
subsidiaries: American Interstate Insurance Company
(“AIIC”) and its insurance subsidiaries, Silver Oak
Casualty, Inc. (“SOCI”) and American Interstate
Insurance Company of Texas (“AIIC-TX”), Amerisafe Risk
Services, Inc. (“RISK”) and Amerisafe General Agency,
Inc. (“AGAI”). AIIC and SOCI are property and casualty
insurance companies, domiciled in the state of Louisiana.
AIIC-TX is a property and casualty insurance company organized
under the laws of the state of Texas, was incorporated on
December 20, 2004, and commenced business on
January 1, 2005. RISK, a wholly-owned subsidiary of
Amerisafe, is a claims and safety service company servicing only
affiliate insurance companies. AGAI, a wholly owned subsidiary
of Amerisafe, is a general agent for the Company. AGAI sells
insurance, which is underwritten by AIIC, SOCI, and AIIC-TX, as
well as by nonaffiliated insurance carriers. The assets and
operations of RISK and AGAI are not significant to that of the
consolidated entity.
Amerisafe and its subsidiaries are collectively referred to
herein as the “Company.”
Early in 2004, the Company engaged in initial discussions with
potential underwriters regarding an initial public offering. In
May 2005, Amerisafe’s Board of Directors authorized
management to proceed with the initial public offering.
Basis of Presentation
The accompanying condensed consolidated financial statements
include the accounts of Amerisafe and its wholly owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The
consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States (“GAAP”). The preparation of financial
statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Interim Financial Statements
In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation in accordance with GAAP have been included.
Operating results for the nine months ended September 30,
2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005.
Earnings Per Share
The Company applies the two-class method to compute basic
earnings per share (“EPS”). This method calculates EPS
for each class of common stock and participating security.
Income available to common shareholders is allocated to common
shares and participating securities to the extent that each
security shares in earnings as if all earnings for the period
had been distributed. The amount of earnings allocated to common
shares is divided by the weighted-average number of common
shares outstanding
F-39
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
for the period. Participating securities that are convertible
into common stock are included in the computation of basic EPS
if the effect is dilutive.
Diluted EPS include potential common shares assumed issued under
the treasury stock method, which reflects the potential dilution
that would occur if any outstanding options or warrants were
exercised and includes the “if converted” method for
participating securities if the effect is dilutive. The
two-class method of calculating diluted EPS is used in the event
the “if converted” method is anti-dilutive.
On October 27, 2005, the Company effected a 72-for-one
reverse stock split. All amounts included in these financial
statements have been restated to effect to the reverse stock
split.
Share-Based Payments
On December 16, 2004, the Financial Accounting Standards
Board (“FASB”) issued FASB Statement No. 123(R)
(revised 2004),
Share-Based Payment,
which is a revision
of FASB Statement No. 123,
Accounting for Stock-Based
Compensation.
Statement No. 123(R) supersedes
Accounting Principles Board (“APB”) Opinion
No. 25,
Accounting for Stock Issued to Employees,
and amends FASB Statement No. 95,
Statement of Cash
Flows.
Generally, the approach in Statement No. 123(R)
is similar to the approach described in Statement No. 123.
However, Statement No. 123(R) requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.
The Company adopted the provisions of Statement No. 123(R)
using the modified prospective method effective January 1,
2005. As all share-based payments previously issued by the
Company were fully vested, there is no effect on the
Company’s consolidated financial position or results of
operations as of the date of adoption.
Prior to its adoption of Statement No. 123(R), the Company
accounted for share-based payments to employees using APB
Opinion No. 25’s intrinsic value method and, as such,
generally recognized no compensation cost for employee stock
options. Accordingly, to the extent additional share-based
payments are issued, the adoption of Statement
No. 123(R)’s fair value method could have a
significant impact on the Company’s results of operations,
although it will have no impact on the Company’s overall
consolidated financial position.
Reserves for Loss and Loss Adjustment Expenses
Reserves for loss and loss adjustment expenses represent the
estimated ultimate cost of all reported and unreported losses
incurred through the end of the reporting period. The Company
does not discount loss and loss adjustment expense reserves. The
Company uses a consulting actuary to assist in the evaluation of
the adequacy of the reserves for loss and loss adjustment
expenses. The reserves for loss and loss adjustment expenses are
estimated using individual case-basis valuations, statistical
analyses, and estimates based upon experience for unreported
claims and their associated loss and loss adjustment expenses.
Such estimates may be more or less than the amounts ultimately
paid when the claims are settled. The estimates are subject to
the effects of trends in loss severity and frequency. Although
considerable variability is inherent in these estimates,
management believes that the reserves for loss and loss
adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new
information becomes known. Any adjustments are included in
current operations.
Subrogation recoverables, as well as deductible recoverables
from policyholders, are estimated using individual case-basis
valuations and aggregate estimates. Deductibles that are
recoverable from
F-40
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
policyholders, and other recoverables from state funds, decrease
the liability for loss and loss adjustment expenses.
The Company funds its obligations under certain settled claims
where the payment pattern and ultimate cost are fixed and
determinable on an individual claim basis through the purchase
of annuities. These annuities are purchased from unaffiliated
carriers and name the claimant as payee. The cost of purchasing
the annuity is recorded as paid loss and loss adjustment
expenses. To the extent the annuity funds estimated future
claims, reserves for loss and loss adjustment expense are
reduced.
Reinsurance
Reinsurance premiums, losses, and allocated loss adjustment
expenses are accounted for on a basis consistent with those used
in accounting for the original policies issued and the terms of
the reinsurance contracts.
Amounts recoverable from reinsurers include balances currently
owed to the Company for losses and allocated loss adjustment
expenses that have been paid to policyholders, as well as
amounts that are currently reserved for and will be recoverable
once the related expense has been paid.
Upon management’s determination that an amount due from a
reinsurer is uncollectible due to the reinsurer’s
insolvency, or other matters, the amount is written off.
Ceding commissions are earned from certain reinsurance companies
and are intended to reimburse the Company for costs related to
acquiring policies. Ceding commission income is recognized over
the effective period of the related insurance policies in
proportion to premium revenue earned and is reflected as a
reduction in underwriting and other operating costs.
Contingent commissions are earned from certain reinsurance
companies based on the financial results of the applicable risks
underwritten by the Company. Contingent commission revenue on
reinsurance contracts is recognized during the related
reinsurance treaty period and is based on the same assumptions
used for recording loss and allocated loss adjustment expenses.
These commissions are reflected as a reduction in underwriting
and other operating costs and are adjusted as necessary as
experience develops or new information becomes known. Any such
adjustments are included in current operations.
Income Taxes
The Company accounts for income taxes using the liability
method. The provision for income taxes has two components,
amounts currently payable or receivable and deferred amounts.
Deferred income tax assets and liabilities are recognized for
the differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured
using tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be
recovered or settled. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
The Company considers deferred tax assets to be recoverable if
it is probable that the related tax losses can be offset by
future taxable income. The Company includes future operating
income, reversal of existing temporary differences, and tax
planning strategies available in this assessment. To the extent
the deferred tax assets exceed the amount expected to be
recovered in future years, the Company records a valuation
allowance for the amount determined unrecoverable. The Company
has not recorded a valuation allowance, since the recorded
deferred tax asset is expected to be fully realized.
F-41
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
The Company cedes certain premiums and losses to various
reinsurers under quota share and excess-of-loss treaties. These
reinsurance arrangements provide for greater diversification of
business, allow management to control exposure to potential
losses arising from large risks, and provide additional capacity
for growth. Ceded reinsurance contracts do not relieve the
Company from its obligations to policyholders. The Company
remains liable to its policyholders for the portion reinsured to
the extent that any reinsurer does not meet the obligations
assumed under the reinsurance agreements. To minimize its
exposure to significant losses from reinsurer insolvencies, the
Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of
the reinsurers. The effect of reinsurance on premiums written
and earned in the nine months ended September 30, 2005 and
2004 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2005
|
|
|
September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Direct
|
|
$
|
231,182
|
|
|
$
|
204,300
|
|
|
$
|
214,248
|
|
|
$
|
188,517
|
|
|
Ceded
|
|
|
(14,930
|
)
|
|
|
(14,930
|
)
|
|
|
(16,100
|
)
|
|
|
(16,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums
|
|
$
|
216,252
|
|
|
$
|
189,370
|
|
|
$
|
198,148
|
|
|
$
|
172,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts recoverable from reinsurers consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Unpaid losses recoverable:
|
|
|
|
|
|
|
|
|
|
|
Case basis
|
|
$
|
104,439
|
|
|
$
|
164,942
|
|
|
|
Incurred but not reported
|
|
|
12,061
|
|
|
|
24,682
|
|
|
Paid losses recoverable
|
|
|
6,274
|
|
|
|
9,353
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
122,774
|
|
|
$
|
198,977
|
|
|
|
|
|
|
|
|
|
Amounts recoverable from reinsurers consists of paid losses
recoverable, ceded case reserves and ceded IBNR reserves. Paid
losses recoverable are receivables currently due from reinsurers
for ceded paid losses. Ceded case and ceded IBNR reserves
represent the portion of our gross loss and loss adjustment
expense liabilities that are recoverable under reinsurance
agreements, but are not yet due from reinsurers. The Company
considers paid losses recoverable outstanding for more than
90 days to be past due. At September 30, 2005,
approximately $45,000, or 0.7%, of the $6,274,000 of paid losses
recoverable were past due.
The Company received reinsurance recoveries of approximately
$78,457,000 and $40,968,000 for the nine months ended
September 30, 2005 and 2004, respectively.
F-42
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
At September 30, 2005, reinsurance recoverables from
reinsurers that exceeded 3% of statutory surplus of the
Company’s insurance subsidiaries are shown below (in
thousands). The A.M. Best Company rating for the reinsurer is
shown parenthetically.
|
|
|
|
|
|
|
American ReInsurance Company(A)
|
|
$
|
26,194
|
|
|
Odyssey America Reinsurance Corporation(A)
|
|
|
22,745
|
|
|
St. Paul Fire & Marine Insurance Company(A+)
|
|
|
13,182
|
|
|
Clearwater Insurance Company(A)
|
|
|
11,793
|
|
|
Scor Reinsurance Company (B++)
|
|
|
7,994
|
|
|
Converium Reinsurance (North America) (B-)
|
|
|
6,343
|
|
|
Hannover Re (A)
|
|
|
5,861
|
|
|
Aspen Insurance UK (A)
|
|
|
4,446
|
|
|
Other reinsurers
|
|
|
24,216
|
|
|
|
|
|
|
|
Total
|
|
$
|
122,774
|
|
|
|
|
|
|
During 2004, the Company’s largest reinsurer, Converium
Reinsurance North America (“CRNA”), was downgraded by
A.M Best Company, from A- to B-, as a result of the emergence of
significant and previously unrecorded losses. While this
downgrade had no immediate impact on the Company’s
consolidated financial statements, it caused a decrease in the
Company’s A.M. Best Capital Adequacy Ratio
(“BCAR”) due to the increase in the capital charge
sustained against the CRNA recoverable. CRNA continues to
reimburse the Company for its portion of reinsured paid losses,
and no amounts are past due.
Effective June 30, 2005, the Company entered into a
commutation agreement with CRNA pursuant to which the Company
received cash payments totaling $61.3 million in exchange
for a full termination and release of three of the five
reinsurance agreements between CRNA and the Company. The
commutation agreement provides that all liabilities of the
Company reinsured with CRNA under these three reinsurance
agreements revert back to the Company in exchange for these cash
payments. As a result of the termination of the three
reinsurance agreements, the Company recognized a pretax loss of
$13.2 million in June 2005. CRNA remains obligated to the
Company under the remaining two reinsurance agreements. As of
September 30, 2005, the amount recoverable from CRNA under
these two agreements was $6.3 million.
Income tax expense (benefit) from operations is different from
the amount computed by applying the U.S. federal income tax
statutory rate of 35% to income (loss) before income taxes as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Income tax computed at federal statutory tax rate
|
|
$
|
(502
|
)
|
|
$
|
2,978
|
|
|
Tax-exempt interest, net
|
|
|
(1,533
|
)
|
|
|
(1,286
|
)
|
|
State income tax
|
|
|
217
|
|
|
|
275
|
|
|
Dividends received deduction
|
|
|
(160
|
)
|
|
|
(105
|
)
|
|
Other
|
|
|
18
|
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,960
|
)
|
|
$
|
1,763
|
|
|
|
|
|
|
|
|
|
F-43
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
|
|
|
|
4.
|
Loss and Loss Adjustment Expenses
|
The following table provides a reconciliation of the beginning
and ending reserve balances, net of related amounts recoverable
from reinsurers, for the nine months ended September 30,
2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Reserves for loss and loss adjustment expenses
(“LAE”), net of related amounts recoverable from
reinsurers, at beginning of period
|
|
$
|
243,256
|
|
|
$
|
183,001
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
Provision for loss and LAE for claims occurring in the current
year, net of reinsurance
|
|
|
133,743
|
|
|
|
113,617
|
|
|
|
Change in estimated loss and LAE for claims occurring in prior
years, net of reinsurance
|
|
|
8,682
|
|
|
|
14,687
|
|
|
|
Loss on Converium commutation
|
|
|
13,200
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155,625
|
|
|
|
128,304
|
|
|
Deduct loss and LAE payments for claims, net of reinsurance,
occurring during:
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
24,602
|
|
|
|
23,112
|
|
|
|
Prior years
|
|
|
76,985
|
|
|
|
59,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,587
|
|
|
|
82,169
|
|
|
|
|
|
|
|
|
|
|
Add effect of Converium commutation
|
|
|
56,100
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and LAE, net of related amounts recoverable
from reinsurers, at end of period
|
|
|
353,394
|
|
|
|
229,136
|
|
|
Add amounts recoverable from reinsurers on unpaid loss and LAE
|
|
|
116,500
|
|
|
|
191,649
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and LAE
|
|
$
|
469,894
|
|
|
$
|
420,785
|
|
|
|
|
|
|
|
|
|
See Note 2 for a discussion of the Converium commutation.
A summary of the Company’s stock option plan as of
September 30, 2005 and December 31, 2004, and changes
during each of the periods then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
|
|
September 30, 2005
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
Exercise
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of the period
|
|
|
20,098
|
|
|
$
|
215.28
|
|
|
|
20,140
|
|
|
$
|
216.72
|
|
|
Granted
|
|
|
167
|
|
|
|
360.00
|
|
|
|
167
|
|
|
|
360.00
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Canceled, forfeited, or expired
|
|
|
(20,265
|
)
|
|
|
216.72
|
|
|
|
(209
|
)
|
|
|
360.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the period
|
|
|
—
|
|
|
|
—
|
|
|
|
20,098
|
|
|
|
215.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the end of the period
|
|
|
—
|
|
|
|
—
|
|
|
|
20,098
|
|
|
|
215.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
The reported net income, basic earnings per share, and diluted
earnings per share would not be impacted had the Company
accounted for the outstanding stock options based on their fair
value in 2004.
On June 20, 2005, the Company entered into agreements with
the holders of all its outstanding options to purchase shares of
the Company’s common stock pursuant to which all
outstanding options of the Company were cancelled in exchange
for $0.072 for each share of common stock issuable upon exercise
of the options. Options to acquire a total of 20,265 shares
of the Company’s common stock were cancelled in exchange
for aggregate cash payments of $1,459. Additionally, on
June 20, 2005 the Company’s Stock Option and
Restricted Stock Purchase Plan, under which these options were
authorized, was terminated.
The calculation of basic and diluted EPS for the nine months
ended September 30, 2005 and 2004 are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except
|
|
|
|
|
per share amounts)
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
526
|
|
|
$
|
6,746
|
|
|
|
Preferred stock dividends
|
|
|
(7,142
|
)
|
|
|
(7,481
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(6,616
|
)
|
|
$
|
(735
|
)
|
|
|
|
|
|
|
|
|
|
|
Amount allocable to common shareholders(1)
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
Loss allocable to common shareholders
|
|
$
|
(6,616
|
)
|
|
$
|
(735
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
300
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(22.07
|
)
|
|
$
|
3.67
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
Loss allocable to common shareholders
|
|
$
|
(6,616
|
)
|
|
$
|
(735
|
)
|
|
|
Dividends on participating securities
|
|
|
—
|
(2)
|
|
|
—
|
(2)
|
|
|
|
|
|
|
|
|
|
|
Loss allocable to common shareholders after assumed conversions
|
|
$
|
(6,616
|
)
|
|
$
|
(735
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
300
|
|
|
|
200
|
|
|
|
Diluted effect:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Conversion of participating securities
|
|
|
—
|
(2)
|
|
|
—
|
(2)
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
300
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
(22.07
|
)
|
|
$
|
3.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Computed under the two-class method by dividing weighted-average
common shares outstanding (200,301 at September 30, 2004
and 299,774 September 30, 2005) by the sum of
weighted-average
|
F-45
AMERISAFE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
|
|
|
|
|
|
|
common shares outstanding and shares for all convertible
participating securities, calculated on the if-converted method
(such additional shares totaling 95,877 at September 30,
2004 and September 30, 2005).
|
|
|
|
|
|
(2)
|
Not applicable as impact is antidilutive.
|
|
|
|
|
7.
|
Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre Tax
|
|
|
|
|
Net-of-Tax
|
|
|
|
|
Amount
|
|
|
Tax Expense
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities
|
|
$
|
2,807
|
|
|
$
|
982
|
|
|
$
|
1,825
|
|
|
|
Less amortization of differences between fair value and
amortized cost for fixed maturity security transfer
|
|
|
(1,605
|
)
|
|
|
(562
|
)
|
|
|
(1,043
|
)
|
|
|
Less reclassification adjustment for gains realized in net income
|
|
|
(1,598
|
)
|
|
|
(559
|
)
|
|
|
(1,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss
|
|
|
(396
|
)
|
|
|
(138
|
)
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
(396
|
)
|
|
$
|
(138
|
)
|
|
$
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities
|
|
$
|
384
|
|
|
$
|
134
|
|
|
$
|
249
|
|
|
|
Less amortization of differences between fair value and
amortized cost for fixed maturity security transfer
|
|
|
(1,901
|
)
|
|
|
(665
|
)
|
|
|
(1,236
|
)
|
|
|
Less reclassification adjustment for gains realized in net income
|
|
|
(314
|
)
|
|
|
(110
|
)
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss
|
|
|
(1,831
|
)
|
|
|
(641
|
)
|
|
|
(1,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
(1,831
|
)
|
|
$
|
(641
|
)
|
|
$
|
(1,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
F-46
8,000,000 Shares
AMERISAFE, Inc.
Common Stock
PROSPECTUS
Until ,
2005, which is the 25th day after the date of this prospectus,
all dealers that effect transactions in our common stock,
whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
|
|
|
|
Friedman Billings Ramsey
|
William Blair & Company
|
The date of this prospectus
is ,
2005.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
|
|
Item 13.
|
Other Expenses of Issuance and Distribution.
|
The table below sets forth the costs and expenses in connection
with the distribution of the securities being registered. All
amounts are estimated except the SEC registration fee. All costs
and expenses are payable by AMERISAFE.
|
|
|
|
|
|
|
|
SEC Registration Fee
|
|
$
|
10,829
|
|
|
NASD Filing Fees
|
|
|
9,700
|
|
|
Nasdaq Listing Fee
|
|
|
105,000
|
|
|
Legal Fees and Expenses
|
|
|
1,750,000
|
|
|
Accounting Fees and Expenses
|
|
|
550,000
|
|
|
Transfer Agent and Registrar Fees
|
|
|
3,500
|
|
|
Printing and Engraving Expenses
|
|
|
350,000
|
|
|
Blue Sky Fees and Expenses
|
|
|
10,000
|
|
|
Miscellaneous Expenses
|
|
|
460,971
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,250,000
|
|
|
|
|
|
|
|
|
|
|
Item 14.
|
Indemnification of Directors and Officers.
|
Our articles of incorporation provide that no director or
officer of ours will be personally liable to us or our
shareholders for or with respect to any acts or omissions in the
performance of such person’s duties as a director or
officer to the fullest extent permitted by the Texas Business
Corporation Act (the “TBCA”) or any other applicable
law.
Under Article 2.02-1 of the TBCA, subject to the procedures
and limitations stated therein, we may indemnify any person who
was, is or is threatened to be made a named defendant or
respondent in a proceeding because the person is or was a
director, officer, employee or agent of ours against judgments,
penalties (including excise and similar taxes), fines,
settlements, and reasonable expenses (including court costs and
attorneys’ fees) actually incurred by the person in
connection with the proceeding if it is determined that the
person seeking indemnification:
|
|
|
|
|
|
•
|
acted in good faith;
|
|
|
|
|
•
|
reasonably believed that his or her conduct was in or at least
not opposed to our best interests; and
|
|
|
|
|
•
|
in the case of a criminal proceeding, had no reasonable cause to
believe his or her conduct was unlawful.
|
We are required by Article 2.02-1 of the TBCA to indemnify
a director or officer against reasonable expenses (including
court costs and attorneys’ fees) incurred by the director
or officer in connection with a proceeding in which the director
or officer is a named defendant or respondent because the
director or officer is or was in that position if the director
or officer has been wholly successful, on the merits or
otherwise, in the defense of the proceeding. The TBCA prohibits
us from indemnifying a director or officer in respect of a
proceeding in which the person is found liable to us or on the
basis that a personal benefit was improperly received by him or
her, other than for reasonable expenses (including court costs
and attorneys’ fees) actually incurred by him or her in
connection with the proceeding; provided, that the TBCA further
prohibits us from indemnifying a director or officer in respect
of any such proceeding in which the person is found liable for
willful or intentional misconduct in the performance of his or
her duties.
II-1
Under Article 2.02-1(J) of the TBCA, a court of competent
jurisdiction may order us to indemnify a director or officer if
the court determines that the director or officer is fairly and
reasonably entitled to indemnification in view of all the
relevant circumstances; however, if the director or officer is
found liable to us or is found liable on the basis that a
personal benefit was improperly received by him or her, the
indemnification will be limited to reasonable expenses
(including court costs and attorneys’ fees) actually
incurred by him or her in connection with the proceeding.
Article 2.02-1 of the TBCA states that rights of
indemnification to which a director may be entitled under any
provision contained in the articles of incorporation, the
bylaws, a resolution of shareholders or directors, an agreement,
or otherwise are valid only to the extent they are consistent
with Article 2.02-1 of the TBCA as limited by our articles
of incorporation, if such a limitation exists.
Article 2.02-1 of the TBCA permits us to purchase and
maintain insurance or to make other arrangements on behalf of
any person who is or was a director, officer, employee or agent
of ours against any liability asserted against and incurred by
that person in any such capacity, or arising out of that
person’s status as such a person, whether or not we would
otherwise have the power to indemnify the person against that
liability under Article 2.02-1 of the TBCA.
Article 2.41 of the TBCA provides, among other things, that
a director who votes for or assents to an unlawful distribution
will be liable to us for such actions. A director who dissented
at the time may avoid liability by causing his or her dissent to
such actions to be entered in the minutes of the meeting of our
board of directors or by filing his or her written dissent to
such actions with the person acting as the secretary of the
meeting before adjournment or immediately afterwards by
registered mail.
Our articles of incorporation and bylaws provide that we must
indemnify our directors and officers to the fullest extent
permitted by the TBCA, the Texas Miscellaneous Corporation Act
or any other applicable law. Our bylaws further provide that we
must pay or reimburse reasonable expenses incurred by one of our
directors or officers who was, is or is threatened to be made a
named defendant or respondent in a proceeding to the maximum
extent permitted under the TBCA. We believe that these
provisions are necessary to attract and retain qualified persons
as officers and directors.
We have entered into indemnification agreements with our
directors and officers that provide for indemnification to the
fullest extent permitted by applicable law.
The indemnification provisions contained in our articles of
incorporation and bylaws are in addition to any other right that
a person may have or acquire under any statute, bylaw,
resolution of shareholders or directors or otherwise. We
maintain insurance on behalf of our directors and officers
insuring them against any liability asserted against them in
their capacities as directors or officers or arising out of such
status.
|
|
|
|
Item 15.
|
Recent Sales of Unregistered Securities.
|
Between August 13, 2004 and September 2, 2004, we
issued 119,649 shares of our common stock (after giving
effect to the 72-for-one reverse stock split effected in October
2005) for $0.72 per share, or an aggregate purchase price
of $86,148, in connection with the exercise of warrants issued
in 1997 and 1998 to certain of our existing common shareholders
that were accredited investors. The issuance of these securities
was exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) thereof as transactions by an
issuer not involving any public offering. The recipients of the
securities represented their intention to acquire the securities
for investment only and not with a view towards the resale or
other distribution thereof and appropriate legends were affixed
to the share certificates issued in such transactions.
II-2
|
|
|
|
Item 16.
|
Exhibits and Financial Statement Schedules.
|
(a)
Exhibits.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
No.
|
|
Description of Exhibit
|
|
|
|
|
|
|
1
|
.1**
|
|
Form of Underwriting Agreement
|
|
|
3
|
.1
|
|
Restated Articles of Incorporation of the Registrant
|
|
|
3
|
.2**
|
|
Form of Restated Bylaws of the Registrant
|
|
|
5
|
.1
|
|
Opinion of Jones Day
|
|
|
10
|
.1
|
|
Consulting Agreement, dated October 27, 2005, by and
between the Registrant and Mark R. Anderson
|
|
|
10
|
.2**
|
|
Employment Agreement, dated January 1, 2004, by and between
the Registrant and C. Allen Bradley, Jr., as amended
by Amendment No. 1 to Employment Agreement, dated
June 17, 2005
|
|
|
10
|
.3**
|
|
Employment Agreement, dated January 1, 2004, by and between
the Registrant and Geoffrey R. Banta, as amended by Amendment
No. 1 to Employment Agreement, dated June 17, 2005
|
|
|
10
|
.4**
|
|
Employment Agreement, dated January 1, 2004, by and between
the Registrant and Arthur L. Hunt, as amended by Amendment
No. 1 to Employment Agreement, dated June 17, 2005
|
|
|
10
|
.5**
|
|
Employment Agreement, dated January 1, 2004, by and between
the Registrant and Craig P. Leach, as amended by Amendment
No. 1 to Employment Agreement, dated June 17, 2005
|
|
|
10
|
.6
|
|
Form of AMERISAFE, Inc. 2005 Equity Incentive Plan
|
|
|
10
|
.7
|
|
Form of Incentive Stock Option Award Agreement for the
AMERISAFE, Inc. 2005 Equity Incentive Plan
|
|
|
10
|
.8
|
|
Form of Non-Qualified Stock Option Award Agreement for the
AMERISAFE, Inc. 2005 Equity Incentive Plan
|
|
|
10
|
.9
|
|
Form of AMERISAFE, Inc. 2005 Non-Employee Director Restricted
Stock Plan
|
|
|
10
|
.10**
|
|
Form of Restricted Stock Award Agreement for the AMERISAFE, Inc.
2005 Non-Employee Director Restricted Stock Plan
|
|
|
10
|
.11**
|
|
Form of Director and Officer Indemnification Agreement
|
|
|
10
|
.12**
|
|
First Casualty Excess of Loss Reinsurance Contract, effective as
of January 1, 2005, issued to the Registrant by the
reinsurers named therein
|
|
|
10
|
.13**
|
|
Second Casualty Excess of Loss Reinsurance Contract, effective
as of January 1, 2005, issued to the Registrant by the
reinsurers named therein
|
|
|
10
|
.14**
|
|
Workers’ Compensation Catastrophe Excess of Loss
Reinsurance Contract, effective as of January 1, 2005,
issued to the Registrant by the reinsurers named therein
|
|
|
10
|
.15**
|
|
Commutation and Release Agreement, effective as of June 30,
2005, between the Registrant and Converium Reinsurance (North
America) Inc.
|
|
|
10
|
.16**
|
|
Services Agreement, effective as of March 31, 2005, by and
between Concentra Integrated Services, Inc. and Amerisafe Risk
Services, Inc.
|
|
|
10
|
.17**
|
|
Agreement, effective as of March 31, 2005, by and between
Amerisafe Risk Services, Inc. and MedRisk, Inc. and its
affiliates and subsidiaries
|
|
|
10
|
.18**
|
|
Lease Agreement, effective as of January 1, 2005, by and
between The Phoenix Hat Company, LLC and the Registrant
|
|
|
10
|
.19**
|
|
Amended and Restated Registration Rights Agreement, dated
March 18, 1998, by and among the Registrant and the
shareholders of the Registrant named therein
|
|
|
10
|
.20
|
|
Form of Non-Qualified Stock Option Award Agreement for Mark R.
Anderson under the AMERISAFE, Inc. 2005 Equity Incentive Plan
|
|
|
21
|
.1**
|
|
Subsidiaries of the Registrant
|
|
|
23
|
.1
|
|
Consent of Jones Day (included as part of its opinion filed as
Exhibit 5.1 hereto)
|
|
|
23
|
.2
|
|
Consent of Ernst & Young LLP
|
|
|
24
|
.1**
|
|
Power of Attorney for Mark R. Anderson, C. Allen
Bradley, Jr., Geoffrey R. Banta, Sean M. Traynor
and Paul B. Queally
|
|
|
24
|
.2**
|
|
Power of Attorney for Jared A. Morris
|
|
|
99
|
.1**
|
|
Consent of Austin P. Young III to be named as a director
|
II-3
Registrant has not filed certain long-term debt instruments not
being registered with the SEC where the total amount of
indebtedness authorized under any such instrument does not
exceed 10% of the total assets of the Registrant and its
subsidiaries on a consolidated basis. Registrant agrees and
undertakes to furnish a copy of any such instruments to the SEC
upon its request.
(b)
Financial Statement
Schedules.
The following financial statement schedules are included as
pages S-1 to S-3 to this registration statement:
Schedule II. Condensed
Financial Information of Registrant
Schedule VI. Supplemental
Information Concerning Property-Casualty Insurance Operations
Pursuant to Rule 7-05 of Regulation S-X, other
financial statement schedules have been omitted because the
information to be set forth therein is included in the notes to
the audited financial statements included in the prospectus
forming a part of this registration statement.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the “Securities Act”) may be
permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any
liability under the Securities Act, the information omitted from
the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For purposes of determining any
liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial
bona fide
offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Pre-Effective Amendment
No. 3 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the
City of Dallas, State of Texas, on October 31, 2005.
|
|
|
|
|
|
By:
|
/s/
C. Allen
Bradley, Jr.
|
|
|
|
|
|
|
|
|
C. Allen Bradley, Jr.
|
|
|
|
|
Chairman, President and Chief Executive Officer
|
|
|
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 3 to the Registration Statement
has been signed by the following persons in the capacities
indicated on October 31, 2005.
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
|
|
/s/
C. Allen
Bradley, Jr.
C. Allen
Bradley, Jr.
|
|
Chairman, President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
/s/
Geoffrey R. Banta
Geoffrey
R. Banta
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer)
|
|
|
*
Jared
A. Morris
|
|
Director
|
|
|
*
Sean
M. Traynor
|
|
Director
|
|
|
*
Paul
B. Queally
|
|
Director
|
|
Arthur L. Hunt, by signing his name hereto, does hereby sign and
execute this Pre-Effective Amendment No. 3 to the
Registration Statement on behalf of the above-named directors
and officers of AMERISAFE, Inc. on this 31st day of
October, 2005, pursuant to powers of attorney executed on behalf
of such director and/or officer, and previously filed with the
Securities and Exchange Commission.
|
|
|
|
*By:
|
|
/s/
Arthur L. Hunt
Arthur
L. Hunt, Attorney-in-Fact
|
|
|
II-5
Schedule II. Condensed
Financial Information of Registrant
AMERISAFE, INC.
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except
|
|
|
|
|
share data)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
Equity securities — available-for-sale, at fair value
|
|
$
|
1,090
|
|
|
$
|
310
|
|
|
|
Investment in subsidiaries
|
|
|
128,014
|
|
|
|
114,925
|
|
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
|
129,104
|
|
|
|
115,235
|
|
|
Cash and cash equivalents
|
|
|
4,066
|
|
|
|
10,172
|
|
|
Deferred income taxes
|
|
|
359
|
|
|
|
63
|
|
|
Property and equipment, net
|
|
|
3,275
|
|
|
|
15
|
|
|
Other assets
|
|
|
1,216
|
|
|
|
2,555
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
138,020
|
|
|
$
|
128,040
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, redeemable preferred stock and
shareholders’ deficit
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities
|
|
$
|
1,946
|
|
|
$
|
278
|
|
|
|
Note payable to subsidiaries
|
|
|
10,930
|
|
|
|
5,680
|
|
|
|
Subordinated debt securities and note payable
|
|
|
36,090
|
|
|
|
16,310
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
48,966
|
|
|
|
22,268
|
|
|
Redeemable preferred stock:
|
|
|
|
|
|
|
|
|
|
|
Series A nonconvertible — $0.01 par value,
$100 per share redemption value:
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares — 1,500,000; issued and outstanding
shares — 819,161 in 2004 and 764,243 in 2003
|
|
|
81,916
|
|
|
|
76,424
|
|
|
|
Series C convertible — $0.01 par value,
$100 per share redemption value:
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares — 300,000; issued and outstanding
shares — 300,000 in 2004 and 2003
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
Series D convertible — $0.01 par value,
$100 per share redemption value:
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares — 200,000; issued and outstanding
shares — 200,000 in 2004 and 2003
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,916
|
|
|
|
126,424
|
|
|
Shareholders’ deficit
|
|
|
(42,862
|
)
|
|
|
(20,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
138,020
|
|
|
$
|
128,040
|
|
|
|
|
|
|
|
|
|
S-1
Schedule II. Condensed
Financial Information of Registrant—(continued)
AMERISAFE, INC.
CONDENSED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
281
|
|
|
$
|
4
|
|
|
$
|
721
|
|
|
|
Loss on sale of asset
|
|
|
—
|
|
|
|
—
|
|
|
|
(80
|
)
|
|
|
Fee income from affiliates and subsidiaries
|
|
|
3,661
|
|
|
|
1,791
|
|
|
|
2,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,942
|
|
|
|
1,795
|
|
|
|
3,387
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting and other operating costs
|
|
|
1,831
|
|
|
|
1,276
|
|
|
|
2,035
|
|
|
|
Interest expense
|
|
|
1,757
|
|
|
|
264
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,588
|
|
|
|
1,540
|
|
|
|
2,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in earnings of subsidiaries
|
|
|
354
|
|
|
|
255
|
|
|
|
975
|
|
|
Income tax expense
|
|
|
293
|
|
|
|
246
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in net income of subsidiaries
|
|
|
61
|
|
|
|
9
|
|
|
|
690
|
|
|
Equity in net income of subsidiaries
|
|
|
10,496
|
|
|
|
8,585
|
|
|
|
4,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,557
|
|
|
$
|
8,594
|
|
|
$
|
5,181
|
|
|
|
|
|
|
|
|
|
|
|
|
AMERISAFE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
8,351
|
|
|
$
|
1,066
|
|
|
$
|
454
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(780
|
)
|
|
|
(310
|
)
|
|
|
—
|
|
|
Purchases of property and equipment
|
|
|
(3,589
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Capital contribution to subsidiary
|
|
|
(2,710
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(7,079
|
)
|
|
|
(310
|
)
|
|
|
—
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of subordinated debt securities
|
|
|
25,780
|
|
|
|
10,310
|
|
|
|
—
|
|
|
Principal payments on note payable
|
|
|
(6,000
|
)
|
|
|
(2,000
|
)
|
|
|
(1,000
|
)
|
|
Warrants exercised
|
|
|
86
|
|
|
|
—
|
|
|
|
—
|
|
|
Redemption of outstanding Series E preferred stock
|
|
|
(27,244
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(7,378
|
)
|
|
|
8,310
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
(6,106
|
)
|
|
|
9,066
|
|
|
|
(546
|
)
|
|
Cash and cash equivalents at beginning of year
|
|
|
10,172
|
|
|
|
1,106
|
|
|
|
1,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
4,066
|
|
|
$
|
10,172
|
|
|
$
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
S-2
Schedule VI. Supplemental
Information Concerning Property-Casualty Insurance Operations
AMERISAFE, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Loss and
|
|
|
and
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Loss and
|
|
|
|
|
|
|
|
|
LAE
|
|
|
LAE
|
|
|
of Deferred
|
|
|
Paid Claims
|
|
|
|
|
|
|
Policy
|
|
|
Loss
|
|
|
|
|
|
|
Net
|
|
|
related to
|
|
|
related
|
|
|
Policy
|
|
|
and Claim
|
|
|
Net
|
|
|
|
|
Acquisition
|
|
|
Adjustment
|
|
|
Unearned
|
|
|
Earned
|
|
|
Investment
|
|
|
Current
|
|
|
to Prior
|
|
|
Acquisition
|
|
|
Adjustment
|
|
|
Premiums
|
|
|
|
|
Costs
|
|
|
Expenses
|
|
|
Premiums
|
|
|
Premiums
|
|
|
Income
|
|
|
Period
|
|
|
Periods
|
|
|
Costs
|
|
|
Expenses
|
|
|
Written
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
2004
|
|
$
|
12,044
|
|
|
$
|
432,880
|
|
|
$
|
111,741
|
|
|
$
|
234,733
|
|
|
$
|
12,217
|
|
|
$
|
160,773
|
|
|
$
|
13,413
|
|
|
$
|
(25,969
|
)
|
|
$
|
113,931
|
|
|
$
|
243,011
|
|
|
2003
|
|
|
11,820
|
|
|
|
377,559
|
|
|
|
103,462
|
|
|
|
179,847
|
|
|
|
10,106
|
|
|
|
126,977
|
|
|
|
2,273
|
|
|
|
(20,076
|
)
|
|
|
99,157
|
|
|
|
195,990
|
|
|
2002
|
|
|
9,505
|
|
|
|
346,542
|
|
|
|
87,319
|
|
|
|
163,257
|
|
|
|
9,419
|
|
|
|
117,212
|
|
|
|
3,850
|
|
|
|
(20,465
|
)
|
|
|
87,174
|
|
|
|
158,530
|
|
S-3
Exhibit 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
AMERISAFE, INC.
ARTICLE I
AMERISAFE, Inc. (the “
Corporation
”), pursuant to Article 4.07 of the Texas Business
Corporation Act (the “
TBCA
”), hereby adopts restated articles of incorporation that
accurately copy the articles of incorporation and all amendments thereto that are in effect to date
and as further amended by such restated articles of incorporation as hereinafter set forth and that
contain no other change in any provision thereof.
ARTICLE II
The name of the Corporation is AMERISAFE, Inc.
ARTICLE III
The Amended and Restated Articles of Incorporation of the Corporation and all amendments
thereto are hereby amended by these Articles of Incorporation as follows: (i) current Article III
is amended in its entirety to read as set forth in Article III below; (ii) current Article IV is
amended in its entirety to read as set forth in Article IV below; (iii) current Article VIII is
amended in its entirety to read as set forth in Article VIII below; (iv) current Article IX is
amended in its entirety to read as set forth in Article IX below; (v) current Article XII is
amended in its entirety to read as set forth in Article XII below; (vi) current Article XIII is
amended in its entirety to read as set forth in Article XIII below; (vii) current Article XIV is
amended in its entirety to read as set forth in Article XIV below; (viii) current Article XV is
amended in its entirety to read as set forth in Article XV below; and (ix) current Article XVII is
amended in its entirety to read as set forth in Articles XVII below.
ARTICLE IV
Each such amendment made by these Articles of Incorporation has been effected in conformity
with the provisions of the TBCA and the Corporation’s constituent documents and each amendment
effected hereby was duly adopted by the shareholders of the Corporation effective as of October 27,
2005.
ARTICLE V
The Amended and Restated Articles of Incorporation of the Corporation and all amendments
thereto are hereby superceded by the following Articles of Incorporation, which accurately copy the
entire text thereof as amended as set forth above:
ARTICLES OF INCORPORATION
OF
AMERISAFE, INC.
As Amended and Restated on
October 27, 2005
ARTICLE I
NAME
The name of the Corporation is AMERISAFE, Inc.
ARTICLE II
DURATION
The period of the Corporation’s duration is perpetual.
ARTICLE III
PURPOSE
The purpose for which the Corporation is organized is to conduct any and all lawful business
for which a corporation may be organized under the Texas Business Corporation Act (the “TBCA”).
ARTICLE IV
CAPITALIZATION
Section A.
Authorized Capital Stock
.
The total number of shares of all classes of stock which the Corporation shall have the
authority to issue is 69,000,000 shares, consisting of (1) 3,000,000 shares of Preferred Stock,
$.01 par value, of which 1,500,000 shares are designated as Series A Preferred Stock, $.01 par
value (the “Series A Preferred Stock”), and 1,500,000 shares are designated as Series B Preferred
Stock, $.01 par value (the “Series B Preferred Stock,” and collectively with the Series A Preferred
Stock, the “Exchangeable Preferred Stock”); (2) 500,000 shares of Convertible Preferred Stock, $.01
par value, of which 300,000 shares are designated as Series C Convertible Deferred Pay Preferred
Stock, $.01 par value (the “Series C Preferred Stock”), and 200,000 shares are designated as Series
D Non-Voting Convertible Deferred Pay Preferred Stock, $.01 par value (the “Series D Preferred
Stock,” and collectively with the Series C Preferred Stock, the “Convertible Preferred Stock”); (3)
500,000 shares of Series E Preferred Stock, $.01 par value (the “Series E Preferred Stock”); (4)
10,000,000 shares of Junior Preferred Stock, $.01 par value (the “Junior Preferred Stock”) (5)
50,000,000 shares of Common Stock, $.01 par value (the “Common Stock”); and (6) 5,000,000 shares of
Convertible Non-Voting Common Stock, $.01
par value (the “Non-Voting Common Stock”). All cross-references in each subdivision of this
Article IV refer to other paragraphs in such subdivision unless otherwise indicated.
The Board of Directors of the Corporation is authorized, subject to any limitations prescribed
by the TBCA, to provide for the issuance of shares of Junior Preferred Stock in one or more series,
and, by filing a statement pursuant to the applicable law of the State of Texas (a “Statement of
Designation”), to establish from time to time the number of shares to be included in each such
series, to fix and determine the designations, preferences, limitations and relative rights,
including voting rights, and to increase (but not above the total number of authorized shares of
the class) or decrease the number of shares of any such series (but not below the number of shares
of such series then issued), each of the foregoing as established pursuant to a resolution adopted
by the Board of Directors of the Corporation and as provided in the TBCA. In the case the number
of shares of any series shall be decreased in accordance with the foregoing sentence, then the
shares constituting such decrease shall resume the status that they had prior to the adoption of
the resolution originally fixing the number of shares in such series.
Subject to the rights of the holders of Exchangeable Preferred Stock, Convertible Preferred
Stock and Series E Preferred Stock, any new series of Junior Preferred Stock may be fixed and
determined as provided herein by the Board of Directors of the Corporation without approval of the
holders of any class of the capital stock of the Corporation or any series thereof, and any such
new series of Junior Preferred Stock shall have such designations, preferences, limitations and
relative rights, including voting rights.
The following is a statement of the powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, in respect of each class of stock of the Corporation:
Section B.
Exchangeable Preferred Stock
.
1.
Cumulative Pay In Kind Dividends
. The holders of shares of Exchangeable Preferred
Stock shall be entitled to receive pay-in-kind dividends at the rate of $7 per share per annum, and
no more, which dividends shall be payable quarterly on March 31, June 30, September 30 and December
31 of each year (each such date being referred to for purposes of this subdivision 1 as a
“Quarterly Payment Date”) by the issuance on each Quarterly Payment Date of .0175 shares of
Exchangeable Preferred Stock, and no more (subject to the provisions of subsection 2E), on each
share of Exchangeable Preferred Stock that shall then be outstanding to the holders of record of
Exchangeable Preferred Stock as they appear on the stock books of the Corporation on record dates
fixed by the Board of Directors of the Corporation not more than 60 nor less than 10 days preceding
each Quarterly Payment Date;
provided
,
however
, that if any Quarterly Payment Date
is not a Business Day, such issuance of Exchangeable Preferred Stock shall occur on the next
succeeding Business Day. For purposes hereof, “Business Day” shall mean any day other than a
Saturday, Sunday or legal holiday. Such dividends shall be cumulative and shall accrue from and
after the date of issue. The amount of the dividends payable per share of Exchangeable Preferred
Stock for the initial dividend period and any period shorter than a full quarterly period shall be
computed on the basis of a 360-day year of twelve 30-day months. As long as any Exchangeable
Preferred Stock shall remain outstanding, in no event shall any dividend whatsoever be declared or
paid upon, nor shall any distribution be made upon, any Common Stock, other than a dividend or
distribution payable in shares of Common Stock, nor (without the
2
written consent of the holders of 66-2/3% of the outstanding shares of Exchangeable Preferred
Stock) shall any shares of Common Stock be purchased or redeemed by the Corporation or any moneys
be paid to or made available for a sinking fund for the purchase or redemption of any Common Stock,
except for the repurchase of shares (x) from participants under a stock option or stock purchase
plan approved by the holders of a majority of the outstanding shares of Exchangeable Preferred
Stock, (y) pursuant to employment agreements approved by the Board of Directors of the Corporation
or (z) pursuant to the Recapitalization Agreement dated as of August 11, 1997 among the Corporation
and the several persons named therein (the “Recapitalization Agreement”), unless in each instance
all accrued and unpaid dividends on all outstanding shares of Exchangeable Preferred Stock through
the date of such distribution, dividend, purchase or redemption shall have been paid in full (or
declared and sufficient funds or shares, as the case may be, for the payment thereof set apart),
and any arrears in the required redemption of the Exchangeable Preferred Stock shall have been
cured.
2.
Redemption
. The shares of Exchangeable Preferred Stock shall be redeemable as
follows:
2A.
Mandatory Redemption
. Except and to the extent expressly prohibited by
applicable law and subject to subsection 2E, upon:
(i) the consummation of any public offering of equity securities of the
Corporation (a “Public Offering”) registered under the Securities Act of
1933, as amended (the “Securities Act”) the Corporation shall cause not less
than 50% of the proceeds to the Corporation from such Public Offering (after
deducting underwriting discounts, commissions and expenses of such Public
Offering) to be used to redeem (in the manner and with the effect provided
in subsections 2C through 2G below, as applicable) any outstanding shares of
Exchangeable Preferred Stock;
provided
,
however
, that if for
any reason the proceeds from such Public Offering available for redemption
are insufficient to redeem Exchangeable Preferred Stock as aforesaid and to
redeem all of the Series E Preferred Stock then outstanding (pursuant to
subsection 2A of Section D of this Article IV), the Exchangeable Preferred
Stock and the Series E Preferred Stock will be equally redeemed from such
available proceeds on a “dollar for dollar” basis until the Series E
Preferred Stock shall have been redeemed in full, whereupon the balance (if
any) of such proceeds available for redemption shall be used to redeem the
Exchangeable Preferred Stock in accordance with this subsection 2A; or
(ii) the (1) sale, lease or transfer, whether direct or indirect, of
all or substantially all of the assets of the Corporation and its
subsidiaries, taken as a whole, in one transaction or a series of related
transactions, to any “person” or “group” other than the Cash Investors (as
such term is defined in the Recapitalization Agreement); (2) acquisition of
“beneficial ownership” by any “person” or group” other than the Cash
Investors, of voting stock of the Corporation representing more than 50% of
the voting power of all outstanding shares of such voting stock, whether by
way of
3
merger or consolidation or otherwise, other than by way of a Public
Offering; or (3) sale, exchange, transfer or other disposition (however
effected) by the Cash Investors of more than 50% of the Common Stock of the
Corporation held by the Cash Investors on the date of the consummation of
the transactions contemplated by the Recapitalization Agreement, other than
sales, exchanges, transfers or other dispositions by any Cash Investors to
any “affiliate” thereof or to other Cash Investors (any of the foregoing, a
“Change of Control”). Following a Change of Control, any holder or holders
of shares of Exchangeable Preferred Stock may elect, by written notice to
the Corporation within 15 days after receipt of the notice described in
subsection 2D below, to have any or all of its or their shares of
Exchangeable Preferred Stock redeemed, and the Corporation shall redeem the
same (in the manner and with the effect provided in subsections 2C through
2G below, as applicable) not later than 60 days after the effective time of
such Change of Control. A Public Offering or a Change of Control is
sometimes referred to herein as a “Mandatory Redemption Event,” and any
redemption of Exchangeable Preferred Stock pursuant to this subsection 2A
upon the occurrence of a Mandatory Redemption Event is sometimes referred to
herein as a “Mandatory Redemption.”
For purposes of this subsection 2A: (i) the terms “person” and “group” shall have the
meaning set forth in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), whether or not applicable; (ii) the term “beneficial owner” shall have
the meaning set forth in Rules 13d-3 and 1 3d-5 under the Exchange Act, whether or not
applicable, except that a person shall be deemed to have
“beneficial ownership” of all shares that any such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time or upon the occurrence of certain events;
(iii) any “person” or “group” will be deemed to beneficially own any voting stock of the
Corporation so long as such person or group beneficially owns, directly or indirectly, in
the aggregate a majority of the voting stock of a registered holder of the voting stock of
the Corporation; and (iv) the term “affiliate” shall have the meaning set forth in Section
405 of the Securities Act, and in the case of a Cash Investor that is a partnership shall
include its partners (including limited partners), and in the case of a Cash Investor that
is an individual shall include the spouse and lineal descendants of such Cash Investor, and
any trust or trusts for the benefit of such Cash Investor, spouse or lineal descendants.
2B.
Redemption at Corporation’s Option
. The Corporation may, in its sole
discretion, redeem (an “Optional Redemption”) at any time (in the manner and with the effect
provided in subsections 2C through 2G below, as applicable), any number of shares of
Exchangeable Preferred Stock. The date of a Mandatory Redemption or Optional Redemption is
sometimes referred to herein as a “Redemption Date”.
2C.
Redemption Price
. The Exchangeable Preferred Stock to be redeemed on a
Redemption Date shall be redeemed by paying for each such share the cash sum of (i) $100,
plus (ii) the cash value (calculated at the rate of $100 per share) of all accrued
4
and unpaid dividends thereon from the most recent Quarterly Payment Date on which
dividends were paid to such Redemption Date (the sum of (i) and (ii) being herein sometimes
referred to as the “Redemption Price”).
2D.
Notice of Redemption
. Not more than 20 days after a Mandatory Redemption
Event, or not less than 20 days prior to an Optional Redemption, as the case may be, notice
shall be given by the Corporation by mail, postage prepaid, to the holders of record of the
Exchangeable Preferred Stock, such notice to be addressed to each such stockholder at its
address as shown by the stock transfer records of the Corporation, specifying the Mandatory
Redemption Event or the occurrence of an Optional Redemption, the Redemption Price, the
place of such redemption and the Redemption Date, which date shall not be a day on which
banks in the City of New York are required or authorized to close. If such notice is given
pursuant to subsection 2A(i) or subsection 2B above, such notice shall also set forth the
number of shares to be redeemed from each holder of record of Exchangeable Preferred Stock.
If such notice shall have been duly given and if on or before such Redemption Date the
funds necessary for redemption shall have been set aside and continue to be available
therefore, then, notwithstanding that any certificate for shares of Exchangeable Preferred
Stock to be redeemed shall not have been surrendered for cancellation, after the close of
business on such Redemption Date, the shares so called for redemption pursuant to subsection
2A(i) or subsection 2B or elected to be redeemed by the holder or holders thereof pursuant
to subsection 2A(ii), shall no longer be deemed outstanding, the dividends thereon shall
cease to accrue, and all rights with respect to such shares shall forthwith cease after the
close of business on the Redemption Date, except only the right of the holders thereof to
receive, upon presentation of the certificate representing shares so called for redemption,
the Redemption Price therefore (without interest thereon).
2E.
Limitation on Redemption or Dividends; Partial Redemption
. Notwithstanding
anything to the contrary set forth herein, the Corporation shall not be obligated to, and
shall not, redeem shares of Exchangeable Preferred Stock on any Redemption Date or pay any
dividends thereon if and to the extent that payment of such redemption or dividend (i) would
in the good faith determination of the Board of Directors of the Corporation cause the
Corporation not to maintain its then current rating by the A.M. Best rating agency or any
successor thereto after giving effect to such payment or (ii) would contravene applicable
law;
provided
,
however
, that any shares of Exchangeable Preferred Stock that
the Corporation is obligated to redeem and are not redeemed pursuant to this subsection 2E
shall be redeemed as soon as possible after the Redemption Date and to the extent that such
redemption is permitted by this subsection 2E, and in such event dividends shall continue to
accrue on such shares as provided in this Section B.
Notwithstanding anything to the contrary herein, without the prior written consent of
the lender(s) under the Credit Agreement (as defined herein), the Corporation shall not be
obligated to, and shall not, redeem any shares of Exchangeable Preferred Stock on any
Redemption Date (whether in an Optional Redemption, a Mandatory Redemption or otherwise) if
any obligations of the Corporation remain unpaid or otherwise unsatisfied
5
under, or there exists any commitment to lend funds under, the Credit Agreement, dated
as of November 7, 1997, between the Corporation and Bank of America National Trust and
Savings Association, as from time to time amended, restated or refinanced (the “Credit
Agreement”). Any shares of Exchangeable Preferred Stock that would, but for the preceding
sentence, be required to be redeemed on any Redemption Date shall be redeemed as soon as
possible thereafter (subject to compliance with the preceding sentence) and to the extent
that such redemption is permitted by this subsection 2E, and in such event dividends shall
continue to accrue on such shares as provided in paragraph 1.
In case of a redemption of less than all of the shares of Exchangeable Preferred Stock
pursuant to this subsection 2E or subsection 2A or 2B on a Redemption Date, all shares of
Exchangeable Preferred Stock to be redeemed shall be selected pro rata, and there shall be
so redeemed from each registered holder in whole shares, as nearly as practicable to the
nearest whole share, that proportion of all the shares to be redeemed
which the number of shares held of record by such holder bears to the total number of shares of Exchangeable
Preferred Stock at the time outstanding.
2F.
Surrender of Shares
. Any holder of shares of Exchangeable Preferred Stock
to be redeemed upon a Redemption Date shall surrender a certificate or certificates for the
Exchangeable Preferred Stock so to be redeemed to the Corporation at its principal office
(or such other office or agency of the Corporation as the Corporation may designate by
notice in writing to the holder or holders of the Exchangeable Preferred Stock) at any time
during its usual business hours prior to the Redemption Date.
2G.
Redeemed Shares to Be Retired
. Any shares of Exchangeable Preferred Stock
redeemed pursuant to this paragraph 2 or otherwise acquired by the Corporation in any manner
whatsoever shall be permanently canceled and retired and shall not under any circumstances
be reissued; and the Corporation may from time to time take such appropriate corporate
action as may be necessary to reduce the number of authorized shares of Exchangeable
Preferred Stock accordingly.
3.
Liquidation
. Upon any liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary (each a “Liquidation Event”), the holders of the shares of
Exchangeable Preferred Stock shall be entitled, before any distribution or payment is made upon any
Common Stock, to be paid a cash amount for each such share equal to the sum of (i) $100 plus (ii)
the cash value (calculated at the rate of $100 per share) of all accrued and unpaid dividends
thereon from the most recent Quarterly Payment Date on which dividends were paid to the date of
such Liquidation Event, and the holders of Exchangeable Preferred Stock shall not be entitled to
any further payment, such amounts being sometimes referred to as the “Liquidation Payments”. If
upon such Liquidation Event, the assets of the Corporation to be distributed among the holders of
Exchangeable Preferred Stock of the Corporation shall be insufficient to permit payment to the
holders of Exchangeable Preferred Stock of the amount distributable as aforesaid, then the entire
assets of the Corporation to be distributed shall be distributed ratably among the holders of
Exchangeable Preferred Stock. Upon any Liquidation Event, after the holders of Exchangeable
Preferred Stock shall have been paid in full the amounts to which they shall be entitled, the
remaining net assets of the Corporation may be distributed to the holders of
6
Common Stock. Written notice of such Liquidation Event stating a payment date, the amount of
Liquidation Payments and the place where said sums shall be payable, shall be given by mail,
postage prepaid, not more than 20 days after the date of such Liquidation Event, to the holders of
record of Exchangeable Preferred Stock, such notice to be addressed to each stockholder at his post
office address as shown by the records of the Corporation. Neither the consolidation or merger of
the Corporation into or with any other corporation or corporations, nor the sale or transfer by the
Corporation of all or any part of its assets, nor the reduction of the capital stock of the
Corporation, shall be deemed to be a Liquidation Event within the meaning of any of the provisions
of this paragraph 3.
4.
Voting Rights
. Except as otherwise required by law or these Articles of
Incorporation, the holders of the Exchangeable Preferred Stock shall have no vote on any matters to
be voted on by the stockholders of the Corporation.
5.
Restrictions
. At any time when shares of Exchangeable Preferred Stock are
outstanding, except where the vote or written consent of the holders of a greater number of shares
of the Corporation is required by law or by these Articles of Incorporation, and in addition to any
other vote required by law, without the prior consent of the holders of a majority of the
outstanding Exchangeable Preferred Stock, given in person or by proxy, either in writing or at a
meeting, at which meeting the holders of the shares of such Exchangeable Preferred Stock shall vote
together as a class:
5A. The Corporation will not create or authorize the creation of any additional class
or series of shares that ranks senior to the Exchangeable Preferred Stock both as to
dividends and as to the distribution of assets on liquidation or authorize any obligation or
security convertible into shares of any other class or series that ranks senior to the
Exchangeable Preferred Stock either as to dividends and as to the distribution of assets on
liquidation, whether any such creation or authorization or increase shall be by means of
amendment of these Articles of Incorporation, merger, consolidation or otherwise; and
5B. The Corporation will not amend, alter or repeal the Corporation’s Articles of
Incorporation or Bylaws in any manner, or file any directors’ resolutions pursuant to
Article 4.02 of the TBCA containing any provision, in either case, which adversely affects
the respective preferences, qualifications, special or relative rights or privileges of the
Exchangeable Preferred Stock or which in any manner adversely affects the Exchangeable
Preferred Stock or the holders thereof.
6.
Pari Passu Treatment
. Except as and to the extent expressly set forth hereinabove,
each of the Series A Preferred Stock and Series B Preferred Stock shall be
pari
passu
to the other in all respects, including without limitation with respect to voting
rights (and the holders of Series A Preferred Stock and Series B Preferred Stock shall vote as a
single class on all matters for which such holders are entitled to vote, including any vote
required by law, these Amended and Restated Articles of Incorporation or otherwise), liquidation
preference, redemption rights and preference and rights to receive dividends.
7
7.
Optional Exchange
.
7A.
Optional Right to Exchange Upon Qualified Public Offering
. All or any
portion of the outstanding shares of Exchangeable Preferred Stock may, at the option and
upon the written request of holders of not less than 66-2/3% of the then outstanding shares
of Exchangeable Preferred Stock, be exchanged for Common Stock upon (and subject to) the
consummation by the Corporation of a public offering of Common Stock of the Corporation of a
public offering of Common Stock of the Corporation registered under the Securities Act with
gross proceeds to the Corporation of at least $40,000,000 (a “Qualified Public Offering”).
In such event and upon receipt by the Corporation of such written request, the shares of
Exchangeable Preferred Stock to be so exchanged shall be exchanged for such aggregate number
of fully paid and nonassessable whole shares of Common Stock as is obtained by multiplying
the number of shares of Exchangeable Preferred Stock so to be exchanged by $100 and dividing
the result by the per share price to the public (without giving effect to deductions for
underwriters’ discounts and commissions) of the Common Stock in such Qualified Public
Offering.
7B.
Issuance of Certificates; Time Exchange Effected
. Promptly after the
receipt by the Corporation of the written request referred to in subsection 7A and surrender
of the certificate or certificates for the share or shares of Exchangeable Preferred Stock
to be exchanged, the Corporation shall issue and deliver, or cause to be issued and
delivered, to the holder a certificate or certificates for the number of whole shares of
Common Stock issuable upon the exchange of such share or shares of Exchangeable Preferred
Stock, registered in such name or names as such holder may direct, subject to compliance
with applicable laws to the extent such designation shall involve a transfer. To the extent
permitted by law, such exchange shall be deemed to have been effected as of the effective
time of the Qualified Public Offering, and at such time the rights of the holder of such
share or shares of Exchangeable Preferred Stock shall cease, and the person or persons in
whose name or names any certificate or certificates for shares of Common Stock shall be
issuable upon such exchange shall be deemed to have become the holder or holders of record
of the shares represented thereby.
7C.
Fractional Shares; Dividends
. No fractional shares shall be issued upon
exchange of the Exchangeable Preferred Stock into Common Stock. To the extent that any
dividends payable in shares of Exchangeable Preferred Stock (“Dividend Shares”) are accrued
but unpaid with respect to the Exchangeable Preferred Stock exchanged pursuant to this
paragraph 7, the Corporation shall issue (in lieu of such dividends) such number of fully
paid and nonassessable whole shares of Common Stock as is obtained by multiplying the number
of Dividend Shares by $100 and dividing the result by the per share price to the public of
the Common Stock in the Qualified Public Offering taking place on the date of exchange. If
any fractional interest in a share of Common Stock would, except for the provisions of the
first sentence of this subsection 7C, be deliverable upon any such exchange, the
Corporation, in lieu of delivering the fractional share thereof, shall pay to the holder
surrendering the Exchangeable Preferred Stock for exchange an amount in cash equal to the
fair value of such fractional interest as determined in good faith by the Board of Directors
of the Corporation.
8
7D.
Stock to be Reserved
. The Corporation will at all times reserve and keep
available out of its authorized but unissued Common Stock, solely for the purpose of
issuance upon the exchange of the Exchangeable Preferred Stock and the Dividend Shares as
herein provided, such number of shares of Common Stock as shall then be issuable upon the
exchange of all outstanding shares of Exchangeable Preferred Stock. All shares of Common
Stock which shall be so issued shall be duly and validly issued and fully paid and
nonassessable and free from all taxes, liens and charges arising out of or by reason of the
issue thereof. The Corporation will take all such action within its control as may be
necessary on its part to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or regulation, or of any requirements of any
national securities exchange upon which the Common Stock of the Corporation may be listed.
7E.
No Reissuance of Exchangeable Preferred Stock
. Shares of Exchangeable
Preferred Stock which are exchanged into shares of Common Stock as provided herein shall not
be reissued.
7F.
Issue Tax
. The issuance of certificates for shares of Common Stock upon
exchange of the Exchangeable Preferred Stock and the Dividend Shares shall be made without
charge to the holders thereof for any issuance tax in respect thereof, provided that the
Corporation shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of the certificate in a name other than that
of the holder of Exchangeable Preferred Stock and/or Dividend Shares that are being
exchanged.
7G.
Closing of Books
. The Corporation will at no time close its transfer books
against the transfer of any Exchangeable Preferred Stock or of any shares of Common Stock
issued or issuable upon the exchange of any shares of Exchangeable Preferred Stock in any
manner which interferes with the timely exchange of such Exchangeable Preferred Stock.
7H.
Definition of Common Stock
. As used in this paragraph 7, the term “Common
Stock” shall mean the Corporation’s authorized Common Stock, $.01 par value, as constituted
on March 18, 1998.
Section C.
Convertible Preferred Stock
.
1.
Dividends
. The holders of shares of Convertible Preferred Stock shall be entitled
to receive pay-in-kind dividends at the rate of $7 per share per annum, subject to reduction as set
forth herein (the “Dividend Rate”) and subject also to the provisions of the first and second
sentences of subsection 2C of Section D of this Article IV, and no more, which dividends shall be
payable quarterly on March 31, June 30, September 30 and December 31 of each year (each such date
being referred to for purposes of this paragraph 1 as a “Quarterly Payment Date”) by the issuance
on each Quarterly Payment Date of .0175 shares of Series E Preferred Stock, and no more (subject to
the provisions of subsection 2E), on each share of Convertible Preferred Stock that shall then be
outstanding, to the holders of record of Convertible Preferred Stock as they appear on the stock
books of the Corporation on record dates fixed by the Board of Directors of
9
the Corporation not more than 60 nor less than 10 days preceding each Quarterly Payment Date;
provided
,
however
, that if any Quarterly Payment Date is not a Business Day, such
issuance of Series E Preferred Stock shall occur on the next succeeding Business Day. For purposes
hereof, “Business Day” shall mean any day other than a Saturday, Sunday or legal holiday. Such
dividends shall be cumulative and shall accrue from and after the date of issue. The amount of the
dividends payable per share of Convertible Preferred Stock for the initial dividend period and any
period shorter than a full quarterly period shall be computed pro rata on the basis of a 360-day
year consisting of twelve 30-day months.
In the event that the Corporation consummates a public offering of Common Stock of the
Corporation registered under the Securities Act of 1933, as amended (the “Securities Act”), with
gross proceeds to the Corporation of at least $40,000,000 (a “Qualified Public Offering”), and
concurrently with such Qualified Public Offering the Series A Preferred Stock and Series B
Preferred Stock (collectively, the “Exchangeable Preferred Stock”) are redeemed or exchanged for
Common Stock (in whole or in part) in accordance with subsection 2A and paragraph 7, respectively,
of Section B of this Article IV, the Dividend Rate shall be reduced by multiplying the Dividend
Rate by a fraction, the numerator of which is the number of shares, if any, of Exchangeable
Preferred Stock outstanding after such redemption and/or exchange and the denominator of which is
the number of shares of Exchangeable Preferred Stock outstanding on March 18, 1998, it being
understood that once all shares of Exchangeable Preferred Stock have been redeemed or exchanged,
the Dividend Rate shall be zero. Thereafter, upon each subsequent redemption or exchange of the
Exchangeable Preferred Stock, the Dividend Rate shall be further reduced by multiplying the
Dividend Rate then in effect by a fraction, the numerator of which is the number of shares of
Exchangeable Preferred Stock outstanding after such redemption and/or exchange and the denominator
of which is the number of shares of Exchangeable Preferred Stock that were outstanding immediately
prior to such redemption and/or exchange.
At any time when any shares of Convertible Preferred Stock are outstanding, without the prior
consent of the holders of 66-2/3% of the outstanding shares of Convertible Preferred Stock, no
dividend whatsoever shall be declared or paid upon, nor shall any distribution be made upon, any
Common Stock or Non-Voting Common Stock, other than a dividend or distribution payable in shares of
Common Stock and/or Non-Voting Common Stock, nor shall any shares of Common Stock or Non-Voting
Common Stock be purchased or redeemed by the Corporation or any moneys be paid to or made available
for a sinking fund for the purchase or redemption of any Common Stock or Non-Voting Common Stock,
except for the repurchase of shares (x) from participants under a stock option or stock purchase
plan approved by the Board of Directors of the Corporation or (y) pursuant to the employment
agreements approved by the Board of Directors of the Corporation.
In the event that the Corporation shall (with the consent of the holders of 66-2/3% of the
Convertible Preferred Stock as aforesaid) pay a dividend on the Common Stock and/or the Non-Voting
Common Stock (other than a dividend payable in shares of Common Stock and/or Non-Voting Common
Stock) at any time when any shares of Convertible Preferred Stock are outstanding, the holders of
shares of Convertible Preferred Stock shall be entitled to receive a dividend equal to the dividend
that would have been payable to such holder if the shares of Convertible Preferred Stock held by
such holder had been converted into Common Stock or Non-Voting Common Stock, as the case may be, on
the date of determination of holders of
10
Common Stock and/or Non-Voting Common Stock entitled to receive such dividend, which dividend
shall be in addition to, and not in lieu of, any pay-in-kind dividends otherwise payable on any
Quarterly Payment Date in accordance with the terms hereof.
2.
Redemption
. The shares of Convertible Preferred Stock shall be redeemable as
follows:
2A.
Mandatory Redemption
. Except and to the extent expressly prohibited by
applicable law (references herein to applicable law shall include, without limitation, the
rules and regulations of the Louisiana Department of Insurance) and subject to subsection
2E, upon the (1) sale, lease or transfer, whether direct or indirect, of all or
substantially all of the assets of the Corporation and its subsidiaries, taken as a whole,
in one transaction or a series of related transactions, to any person or persons; or (2)
acquisition of beneficial ownership by any person or persons (other than Welsh, Carson,
Anderson & Stowe VII, L.P. or any of its affiliates), in a single transaction or a series of
related transactions, of voting stock of the Corporation representing more than 50% of the
voting power of all outstanding shares of such voting stock, whether by way of merger or
consolidation or otherwise, other than by way of a public offering of equity securities of
the Corporation (a “Public Offering”) registered under the Securities Act; (each of the
foregoing, a “Change of Control”), the Corporation shall redeem (in the manner and with the
effect provided in subsections 2C through 2G below, as applicable) all outstanding shares of
Convertible Preferred Stock and until the Redemption Price (as defined herein) therefore
shall have been paid in full (or funds set aside for payment thereof) in accordance with
this paragraph 2, no payment or distribution shall be made upon any Series A Preferred
Stock, Series B Preferred Stock, Common Stock or Non-Voting Common Stock (other than a
distribution solely of shares of Common Stock or Non-Voting Common Stock).
For purposes of this subsection 2A: (i) the term “person” shall have the meaning set
forth in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), whether or not applicable; (ii) the term “beneficial owner” shall have the meaning
set forth in Rules 13d-3 and 13d-5 under the Exchange Act, whether or not applicable, except
that a person shall be deemed to have “beneficial ownership” of all shares that any such
person has the right to acquire, whether such right is exercisable immediately or only after
the passage of time or upon the occurrence of certain events; (iii) any “person” will be
deemed to beneficially own any voting stock of the Corporation so long as such person
beneficially owns, directly or indirectly, in the aggregate a majority of the voting stock
of a registered holder of the voting stock of the Corporation; and (iv) the term “affiliate”
shall have the meaning set forth in Section 405 of the Securities Act.
A Change of Control is sometimes referred to herein as a “Mandatory Redemption Event,”
and any redemption of Convertible Preferred Stock pursuant to this subsection 2A upon the
occurrence of a Mandatory Redemption Event is sometimes referred to herein as a “Mandatory
Redemption”.
11
2B.
Redemption at Corporation’s Option
. The Corporation may, in its sole
discretion, redeem (an “Optional Redemption”) at any time after March 18, 2003 (in the
manner and with the effect provided in subsections 2C through 2G below, as applicable), all
(but not less than all) of the then outstanding shares of Convertible Preferred Stock. The
date of a Mandatory Redemption or Optional Redemption is sometimes referred to herein as a
“Redemption Date”.
2C.
Redemption Price
. In the event of a Mandatory Redemption in accordance
with subsection 2A hereof, the Convertible Preferred Stock to be so redeemed on a Redemption
Date shall be redeemed by paying for each such share the cash sum of (A) $100, plus (B) the
cash value (calculated at the rate of $100 per share) of all accrued and unpaid dividends
thereon from the most recent Quarterly Payment Date on which dividends were paid to such
Redemption Date. In the event of an Optional Redemption in accordance with subsection 2B
hereof, the Convertible Preferred Stock to be so redeemed on a Redemption Date shall be
redeemed by paying for each share of Convertible Preferred Stock a cash amount equal to the
sum of (A) $103.50, plus (B) the cash value (calculated at the rate of $100 per share) of
all accrued and unpaid dividends thereon from the most recent Quarterly Payment Date on
which dividends were paid to such Redemption Date. In each case, such sum is herein
sometimes referred to as the “Redemption Price”.
2D.
Notice of Redemption
. Not less than 30 days prior to a Mandatory
Redemption Event or an Optional Redemption, as the case may be, notice shall be given by the
Corporation by facsimile and by mail, postage prepaid, to the holders of record of the
Convertible Preferred Stock, such notice to be addressed to each such stockholder at its
address or facsimile number, as applicable, as shown on the stock transfer records of the
Corporation, specifying the occurrence of a Mandatory Redemption Event or an Optional
Redemption, as the case may be, the applicable Redemption Price, the place of such
redemption and the Redemption Date, which date shall be a Business Day. Such notice shall
also set forth the number of shares to be redeemed from each holder of record of Convertible
Preferred Stock.
If such notice shall have been duly given and if on or before such Redemption Date the
funds necessary for redemption shall have been set aside and continue to be available
therefore, then, notwithstanding that any certificate for shares of Convertible Preferred
Stock to be redeemed shall not have been surrendered for cancellation, after the close of
business on such Redemption Date, the shares so called for redemption shall no longer be
deemed outstanding, the dividends thereon shall cease to accrue, and all rights with respect
to such shares shall forthwith cease, except only the right of the holders thereof to
receive, upon presentation of the certificate representing shares so called for redemption,
the Redemption Price therefore (without interest thereon).
2E.
Limitation on Redemption or Dividends; Partial Redemption
. Notwithstanding
anything to the contrary set forth herein, the Corporation shall not be obligated to, and
shall not, redeem shares of Convertible Preferred Stock on any Redemption Date or pay any
dividends thereon if and to the extent that payment of such redemption or dividend (i) would
in the good faith determination of the Board of
12
Directors of the Corporation cause the Corporation not to maintain its then current
rating by the A.M. Best rating agency or any successor thereto after giving effect to such
payment or (ii) would contravene applicable law;
provided
,
however
, that any
shares of Convertible Preferred Stock that the Corporation is obligated to redeem and are
not redeemed pursuant to this subsection 2E shall be redeemed as soon as possible after the
Redemption Date and to the extent that such redemption is permitted by this subsection 2E,
and in such event dividends shall continue to accrue on such shares as provided in paragraph
1.
Notwithstanding anything to the contrary herein, without the prior written consent of
the lender(s) under the Credit Agreement (as defined herein), the Corporation shall not be
obligated to, and shall not, redeem any shares of Convertible Preferred Stock on any
Redemption Date (whether in an Optional Redemption, a Mandatory Redemption or otherwise) if
any obligations of the Corporation remain unpaid or otherwise unsatisfied under, or there
exists any commitment to lend funds under, the Credit Agreement, dated as of November 7,
1997, between the Corporation and Bank of America National Trust and Savings Association (as
from time to time amended, restated or refinanced, the “Credit Agreement”). Any shares of
Convertible Preferred Stock that would, but for the preceding sentence, be required to be
redeemed on any Redemption Date shall be redeemed as soon as possible thereafter (subject to
compliance with the preceding sentence) and to the extent that such redemption is permitted
by this subsection 2E, and in such event dividends shall continue to accrue on such shares
as provided in paragraph 1.
In case of a Mandatory Redemption of less than all of the shares of Convertible
Preferred Stock pursuant to this subsection 2E on a Redemption Date, all shares of
Convertible Preferred Stock to be redeemed shall be selected pro rata, and there shall be so
redeemed from each registered holder in whole shares, as nearly as practicable to the
nearest whole share, that proportion of all the shares to be redeemed which the number of
shares held of record by such holder bears to the total number of shares of Convertible
Preferred Stock at the time outstanding.
2F.
Surrender of Shares
. Any holder of shares of Convertible Preferred Stock
to be redeemed upon a Redemption Date shall surrender a certificate or certificates for the
Convertible Preferred Stock so to be redeemed to the Corporation at its principal office (or
such other office or agency of the Corporation as the Corporation may designate by notice in
writing to the holder or holders of the Convertible Preferred Stock) at any time during its
usual business hours prior to the Redemption Date.
2G.
Redeemed Shares to Be Retired
. Any shares of Convertible Preferred Stock
redeemed pursuant to this paragraph 2 or otherwise acquired by the Corporation in any manner
whatsoever shall be permanently canceled and retired and shall not under any circumstances
be reissued; and the Corporation may from time to time take such appropriate corporate
action as may be necessary to reduce the number of authorized shares of Convertible
Preferred Stock accordingly.
13
3.
Liquidation
. Upon any liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary (a “Liquidation Event”), the holders of the shares of Convertible
Preferred Stock shall be entitled, before any distribution or payment is made upon any Series A
Preferred Stock, Series B Preferred Stock, Common Stock or Non-Voting Common Stock, but
pari
passu
with the holders of the shares of Series E Preferred Stock, to be paid a
cash amount for each such share equal to the greater of (i) the sum of (A) $100 plus (B) the cash
value (calculated at the rate of $100 per share) of all accrued and unpaid dividends thereon from
the most recent Quarterly Payment Date on which dividends were paid to the date of such Liquidation
Event or (ii) the amount distributable to the holders of Convertible Preferred Stock upon any such
liquidation, dissolution or winding up of the Corporation had such holders converted such shares of
Convertible Preferred Stock into Common Stock or Non-Voting Common Stock, as the case may be, in
accordance with paragraph 4 below immediately prior to such liquidation, dissolution or winding up,
and the holders of Convertible Preferred Stock shall not be entitled to any further payment. Such
amounts to be so paid are sometimes referred to herein as the “Liquidation Payments”. If upon such
Liquidation Event, the assets of the Corporation to be distributed among the holders of Convertible
Preferred Stock and the holders of the Series E Preferred Stock shall be insufficient to permit
payment to the holders of Convertible Preferred Stock and the holders of the Series E Preferred
Stock of the amounts distributable as aforesaid, then the entire assets of the Corporation to be
distributed shall be distributed ratably among the holders of Convertible Preferred Stock and the
holders of Series E Preferred Stock. Upon any Liquidation Event, after the holders of Convertible
Preferred Stock and the holders of Series E Preferred Stock shall have been paid in full the
amounts to which they shall be entitled, the remaining net assets of the Corporation shall be
distributed to the holders of the Series A Preferred Stock and the Series B Preferred Stock until
they have been paid the full amounts to which they are entitled and any remaining net assets shall
be distributed to the holders of the Common Stock and the Non-Voting Common Stock. Written notice
of such Liquidation Event stating a payment date, the amount of Liquidation Payments and the place
where said sums shall be payable shall be given by facsimile and by mail, postage prepaid, not more
than 30 days after the date of such Liquidation Event, to the holders of record of Convertible
Preferred Stock, such notice to be addressed to each stockholder at its post office address or
facsimile number, as applicable, as shown by the records of the Corporation;
provided
,
however
, that failure to give notice pursuant to this sentence shall not invalidate the
action involved. Neither the consolidation or merger of the Corporation into or with any other
corporation or corporations, nor the sale or transfer by the Corporation of all or any part of its
assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of any of the
provisions of this paragraph.
4.
Conversion
.
4A.
Right to Convert
. Subject to the terms and conditions of this paragraph 4,
the holder of any share or shares of Convertible Preferred Stock shall have the right, at
its option at any time, to convert any such shares of Convertible Preferred Stock (except
that upon any redemption of Convertible Preferred Stock or liquidation of the Corporation
the right of conversion shall terminate, as to shares to be redeemed or as to all shares in
the case of a liquidation, at the close of business on the last full business day next
preceding the date fixed for payment of the amount distributable on the Convertible
Preferred
14
Stock) into such number of fully paid and nonassessable whole shares of Common Stock
(in the case of the Series C Preferred Stock) or Non-Voting Common Stock (in the case of the
Series D Preferred Stock) as is obtained by multiplying the number of shares of such
Convertible Preferred Stock so to be converted by $100 and dividing the result by the
conversion price of $521.50 per share or, if there has been an adjustment of the conversion
price, by the conversion price as last adjusted and in effect at the date any share or
shares of Convertible Preferred Stock are surrendered for conversion (such price, or such
price as last adjusted, being referred to herein as the “Conversion Price”). Such rights of
conversion shall be exercised by the holder of such shares by giving written notice that the
holder elects to convert a stated number of shares of Convertible Preferred Stock into
Common Stock or Non-Voting Common Stock, as the case may be, and by surrender of a
certificate or certificates for the shares so to be converted to the Corporation at its
principal office (or such other office or agency of the Corporation as the Corporation may
designate by notice in writing to the holder or holders of the Convertible Preferred Stock)
at any time during its usual business hours on the date set forth in such notice, together
with a statement of the name or names (with address), subject to compliance with applicable
laws to the extent such designation shall involve a transfer, in which the certificate or
certificates for shares of Common Stock or Non-Voting Common Stock, as the case may be,
shall be issued.
4B.
Issuance of Certificates; Time Conversion Effected
. Promptly after the
receipt by the Corporation of the written notice referred to in subsection 4A and surrender
of the certificate or certificates for the share or shares of the Convertible Preferred
Stock to be converted, the Corporation shall issue and deliver, or cause to be issued and
delivered, to the holder a certificate or certificates for the number of whole shares of
Common Stock or Non-Voting Common Stock, as the case may be, issuable upon the conversion of
such share or shares of Convertible Preferred Stock, registered in such name or names as
such holder may direct, subject to compliance with applicable laws to the extent such
designation shall involve a transfer. To the extent permitted by law, such conversion shall
be deemed to have been effected and the Conversion Price shall be determined as of the close
of business on the date on which such written notice shall have been received by the
Corporation and the certificate or certificates for such share or shares shall have been
surrendered as aforesaid, and at such time the rights of the holder of such share or shares
of Convertible Preferred Stock shall cease, and the person or persons in whose name or names
any certificate or certificates for shares of Common Stock or Non-Voting Common Stock, as
the case may be, shall be issuable upon such conversion shall be deemed to have become the
holder or holders of record of the shares represented thereby.
4C.
Fractional Shares; Dividends; Partial Conversion
. No fractional shares
shall be issued upon conversion of the Convertible Preferred Stock into Common Stock or
Non-Voting Common Stock. To the extent that any dividends payable in shares of Series E
Preferred Stock (“Dividend Shares”) are accrued but unpaid with respect to the Convertible
Preferred Stock so converted, the Corporation shall issue such Dividend Shares on the next
succeeding Quarterly Payment Date (subject to the provisions of the first and second
sentences of subsection 2C of Section D of this Article IV). In case the number of shares
of Convertible Preferred Stock represented by the certificate or
15
certificates surrendered pursuant to subsection 4A exceeds the number of shares
converted, the Corporation shall, upon such conversion, execute and deliver to the holder
thereof, at the expense of the Corporation, a new certificate or certificates for the number
of shares of Convertible Preferred Stock, represented by the certificate or certificates
surrendered which are not to be converted. If any fractional interest in a share of Common
Stock or Non-Voting Common Stock would, except for the provisions of the first sentence of
this subsection 4C, be deliverable upon any such conversion, the Corporation, in lieu of
delivering the fractional share thereof, shall pay to the holder surrendering the
Convertible Preferred Stock for conversion an amount in cash equal to the fair value of such
fractional interest as determined in good faith by the Board of Directors of the
Corporation.
4D.
Adjustment of Price Upon Issuance of Common Stock or Non-Voting Common
Stock
. Except as provided in subsection 4E hereof, if and whenever the Corporation
shall issue or sell, or is in accordance with subsections 4D(l) through 4D(7) deemed to have
issued or sold, any shares of its Common Stock or Non-Voting Common Stock without
consideration or for a consideration per share less than the Conversion Price or, on or
after a Public Offering, the Market Price (as defined herein) (in lieu of the Conversion
Price) in effect immediately prior to the time of such issue or sale, then, forthwith upon
such issue or sale, the Conversion Price shall be reduced to the price (calculated to the
nearest cent) determined by dividing (i) an amount equal to the sum of (a) the number of
shares of Common Stock and Non-Voting Common Stock outstanding immediately prior to such
issue or sale (including as outstanding all shares of Common Stock and Non-Voting Common
Stock issuable upon conversion of outstanding Convertible Preferred Stock and issuable upon
exercise of outstanding Series A Warrants and Series B Warrants dated as of September 2,
1997 (the “Warrants”) to purchase Common Stock) multiplied by the then existing Conversion
Price or, on or after a Public Offering, the then existing Market Price (in lieu of the
Conversion Price), and (b) the consideration, if any, received by the Corporation upon such
issue or sale, by (ii) the total number of shares of Common Stock and Non-Voting Common
Stock outstanding immediately after such issue or sale (including as outstanding all shares
of Common Stock and Non-Voting Common Stock issuable upon conversion of outstanding
Convertible Preferred Stock and issuable upon exercise of outstanding Warrants, without
giving effect to any adjustment in the number of shares so issuable by reason of such issue
and sale).
No adjustment of the Conversion Price, however, shall be made in an amount less than
$.01 per share, and any such lesser adjustment shall be carried forward and shall be made at
the time and together with the next subsequent adjustment which together with any
adjustments so carried forward shall amount to $.01 per share or more.
For purposes of this subsection 4D, “Market Price” with respect to any share of Common
Stock or Non-Voting Common Stock means the market price of a share of Common Stock of the
Corporation determined on the basis of (1) the last sale price of shares of Common Stock,
regular way, on such date or, if no such sale takes place on such date, the average of the
closing bid and asked prices thereof on such date, in each case as officially reported on
the principal national securities exchange on which the
16
Common Stock is then listed or admitted to trading, or (2) if no shares of Common Stock
are then listed or admitted to trading on any national securities exchange but the Common
Stock is designated as a national market system security by the National Association of
Securities Dealers, the last trading price of the Common Stock on such date.
For purposes of this subsection 4D, the following subsections 4D(l) to 4D(7) shall also
be applicable:
4D(1).
Issuance of Rights or Options
. In case at any time the Corporation
shall in any manner grant (whether directly or by assumption in a merger or otherwise) any
rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or
Non-Voting Common Stock or any stock or securities convertible into or exchangeable for
Common Stock or Non-Voting Common Stock (such rights or options being herein called
“Options” and such convertible or exchangeable stock or securities being herein called
“Convertible Securities”) whether or not such Options or the right to convert or exchange
any such Convertible Securities are immediately exercisable, and the price per share for
which Common Stock or Non-Voting Common Stock is issuable upon the exercise of such Options
or upon conversion or exchange of such Convertible Securities (determined by dividing (i)
the total amount, if any, received or receivable by the Corporation as consideration for the
granting of such Options, plus the minimum aggregate amount of additional consideration
payable to the Corporation upon the exercise of all such Options, plus, in the case of such
Options which relate to Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible Securities and
upon the conversion or exchange thereof, by (ii) the total maximum number of shares of
Common Stock and Non-Voting Common Stock issuable upon the exercise of such Options or upon
the conversion or exchange of all such Convertible Securities issuable upon the exercise of
such Options) shall be less than the Conversion Price or, on or after a Public Offering, the
Market Price (in lieu of the Conversion Price) in effect immediately prior to the time of
the granting of such Options, then the total maximum number of shares of Common Stock and
Non-Voting Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable upon the
exercise of such Options shall be deemed to have been issued for such price per share as of
the date of granting of such Options and thereafter shall be deemed to be outstanding.
Except as otherwise provided in subsection 4D(3), no adjustment of the Conversion Price
shall be made upon the actual issue of such Common Stock or Non-Voting Common Stock or of
such Convertible Securities upon exercise of such Options or upon the actual issue of such
Common Stock or Non-Voting Common Stock upon conversion or exchange of such Convertible
Securities.
4D(2).
Issuance of Convertible Securities
. In case the Corporation shall in
any manner issue (whether directly or by assumption in a merger or otherwise) or sell any
Convertible Securities, whether or not the rights to exchange or convert thereunder are
immediately exercisable, and the price per share for which Common Stock or Non-Voting Common
Stock is issuable upon such conversion or exchange (determined by dividing (i) the total
amount received or receivable by the Corporation as consideration for the issue or sale of
such Convertible Securities, plus the minimum aggregate amount
17
of additional consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (ii) the total maximum number of shares of Common Stock and Non-Voting
Common Stock issuable upon the conversion or exchange of all such Convertible Securities)
shall be less than the Conversion Price or, on or after a Public Offering, the Market Price
(in lieu of the Conversion Price) in effect immediately prior to the time of such issue or
sale, then the total maximum number of shares of Common Stock and Non-Voting Common Stock
issuable upon conversion or exchange of all such Convertible Securities shall be deemed to
have been issued for such price per share as of the date of the issue or sale of such
Convertible Securities and thereafter shall be deemed to be outstanding, provided that (a)
except as otherwise provided in subsection 4D(3) below, no adjustment of the Conversion
Price shall be made upon the actual issue of such Common Stock or Non-Voting Common Stock
upon conversion or exchange of such Convertible Securities, and (b) if any such issue or
sale of such Convertible Securities is made upon exercise of any Option to purchase any such
Convertible Securities for which adjustments of the Conversion Price have been or are to be
made pursuant to other provisions of this subsection 4D, no further adjustment of the
Conversion Price shall be made by reason of such issue or sale.
4D(3).
Change in Option Price or Conversion Rate
. Upon the happening of any of
the following events, namely, if the purchase price provided for in any Option referred to
in subsection 4D(1), the additional consideration, if any, payable upon the conversion or
exchange of any Convertible Securities referred to in subsection 4D(1) or 4D(2), or the rate
at which any Convertible Securities referred to in subsection 4D(1) or 4D(2) are convertible
into or exchangeable for Common Stock or Non-Voting Common Stock shall change at any time
(in each case other than under or by reason of provisions designed to protect against
dilution), the Conversion Price in effect at the time of such event shall forthwith be
readjusted to the Conversion Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold; and on the expiration of any such Option or the
termination of any such right to convert or exchange such Convertible Securities, the
Conversion Price then in effect hereunder shall forthwith be increased to the Conversion
Price which would have been in effect at the time of such expiration or termination had such
Option or Convertible Securities, to the extent outstanding immediately prior to such
expiration or termination, never been issued, and the Common Stock or Non-Voting Common
Stock issuable thereunder shall no longer be deemed to be outstanding. If the purchase
price provided for in any such Option referred to in subsection 4D(1) or the rate at which
any Convertible Securities referred to in subsection 4D(l) or 4D(2) are convertible into or
exchangeable for Common Stock or Non-Voting Common Stock shall be reduced at any time under
or by reason of provisions with respect thereto designed to protect against dilution, then,
in case of the delivery of Common Stock or Non-Voting Common Stock upon the exercise of any
such Option or upon conversion or exchange of any such Convertible Securities, the
Conversion Price then in effect hereunder shall forthwith be adjusted to such respective
amount as would have been obtained had such Option or Convertible Securities never been
issued as to such Common Stock or Non-Voting Common Stock and had adjustments been made upon
the issuance of the shares of Common Stock or Non-Voting Common Stock delivered as
aforesaid, but only if as a
18
result of such adjustment the Conversion Price then in effect hereunder is thereby
reduced.
4D(4).
Stock Dividends
. In case the Corporation shall declare a dividend or
make any other distribution upon any stock of the Corporation payable in Common Stock,
Non-Voting Common Stock, Options or Convertible Securities, any Common Stock, Non-Voting
Common Stock, Options or Convertible Securities, as the case may be, issuable in payment of
such dividend or distribution shall be deemed to have been issued or sold without
consideration and the Conversion Price shall be reduced as if the Corporation had subdivided
its outstanding shares of Common Stock and Non-Voting Common Stock
into a greater number of shares, as provided in subsection 4D(5) hereof.
4D(5).
Subdivision or Combination of Stock
. In case the Corporation shall at
any time subdivide its outstanding shares of Common Stock or Non-Voting Common Stock into a
greater number of shares or shall declare or pay a dividend on its outstanding shares of
Common Stock or Non-Voting Common Stock payable in shares of Common Stock or Non-Voting
Common Stock, the Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the outstanding shares of Common Stock or
Non-Voting Common Stock of the Corporation shall be combined into a
smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be
proportionately increased.
4D(6).
Consideration for Stock
. In case any shares of Common Stock, Non-Voting
Common Stock, Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefore shall be deemed to be the amount received by the
Corporation therefore, without deduction therefrom of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Corporation in connection
therewith. In case any shares of Common Stock, Non-Voting Common Stock, Options or
Convertible Securities shall be issued or sold for a consideration other than cash, the
amount of the consideration other than cash received by the corporation shall be deemed to
be the fair value of such consideration as determined in good faith by the Board of
Directors of the Corporation, without deduction of any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Corporation in connection therewith. In
case any Options shall be issued in connection with the issue and sale of other securities
of the Corporation, together comprising one integral transaction in which no specific
consideration is allocated to such Options by the parties thereto, such Options shall be
deemed to have been issued without consideration.
4D(7).
Record Date
. In case the Corporation shall take a record of the holders
of its Common Stock or Non-Voting Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock, Non-Voting Common Stock,
Options or Convertible Securities, or (ii) to subscribe for or purchase Common Stock,
Non-Voting Common Stock, Options or Convertible Securities, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common Stock or Non-Voting
Common Stock deemed to have been issued or sold upon the declaration of such dividend or the
making of such other distribution or the date of the granting of such right of subscription
or purchase, as the case may be.
19
4E.
Certain Issues of Common Stock and Non-Voting Common Stock Excepted
.
Anything herein to the contrary notwithstanding, the Corporation shall not be required to
make any adjustment of the Conversion Price in the case of (i) the issuance of shares of
Common Stock or Non-Voting Common Stock upon conversion of Convertible Preferred Stock or
the issuance of Common Stock upon conversion of the Non-Voting Common Stock or upon exercise
of the Warrants, (ii) the issuance of shares of Common Stock or Non-Voting Common Stock to
be reserved for issuance to employees of the Corporation either directly or pursuant to
stock options, in either case pursuant to a plan approved by the Board of Directors of the
Corporation and (iii) the issuance of shares of Common Stock or Non-Voting Common Stock in
connection with acquisitions by the Corporation. Notwithstanding the foregoing, in the case
of an issuance of shares of Common Stock or Non-Voting Common Stock in connection with an
acquisition of a business entity that is affiliated with Welsh, Carson, Anderson & Stowe
VII, L.P., or Sprout Capital VII, L.P., the holders of not less than a majority of the then
outstanding shares of Convertible Preferred Stock may require that the Corporation retain a
nationally recognized investment banking firm to deliver a written opinion to the effect
that the number of shares of Common Stock or Non-Voting Common Stock issued in such
acquisition is fair to the holders of the Convertible Preferred Stock from a financial point
of view (a “Fairness Opinion”). If such investment banking firm is unable to deliver a
Fairness Opinion or opines that such Common Stock or Non-Voting Common Stock has not been
fairly valued, the Corporation shall be required to make an appropriate adjustment of the
Conversion Price upon the issuance of such securities. If such investment banking firm
delivers such a Fairness Opinion, no adjustment of the Conversion Price shall be required
upon the issuance of such securities, and the costs incurred by the Corporation in retaining
such investment banking firm shall be borne by the holders of Convertible Preferred Stock
requesting the Fairness Opinion. Such costs shall be allocated pro rata among such holders
on the basis of the number of shares of Convertible Preferred Stock held by each.
4F.
Reorganization or Reclassification
. If any capital reorganization or
reclassification of the capital stock of the Corporation shall be effected in such a way
(including, without limitation, by way of consolidation or merger, other than a
consolidation or merger resulting in a Change of Control) that holders of Common Stock
and/or Non-Voting Common Stock shall be entitled to receive stock, securities or assets with
respect to or in exchange for Common Stock and/or Non-Voting Common Stock, then, as a
condition of such reorganization or reclassification, lawful and adequate provision shall be
made whereby each holder of a share or shares of Convertible Preferred Stock shall
thereafter have the right to receive, upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of Common Stock and/or Non-Voting Common Stock of
the Corporation immediately theretofore receivable upon the
conversion of such share or shares of the Convertible Preferred Stock, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for a number of outstanding shares of
such Common Stock and/or Non-Voting Common Stock equal to the number of shares of such stock
immediately theretofore so receivable had such reorganization or reclassification not taken
place, and in any such case appropriate provision shall be made with respect to the rights
and interests of such holder to the end that the provisions hereof (including without
limitation provisions for adjustments of the
20
Conversion Price) shall thereafter be applicable, as nearly as may be, in relation to
any shares of stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights (including an immediate adjustment, by reason of such reorganization or
reclassification of the Conversion Price to the value for the Common Stock and/or Non-Voting
Common Stock reflected by the terms of such reorganization or reclassification if the value
so reflected is less than the Conversion Price in effect immediately prior to such
reorganization or reclassification). In the event of a merger or consolidation of the
Corporation as a result of which a greater or lesser number of shares of Common Stock and/or
Non-Voting Common Stock of the surviving Corporation are issuable to holders of Common Stock
and/or Non-Voting Common Stock of the Corporation outstanding immediately prior to such
merger or consolidation, the Conversion Price in effect immediately prior to such merger or
consolidation shall be adjusted in the same manner as though there were a subdivision or
combination of the outstanding shares of Common Stock and/or Non-Voting Common Stock of the
Corporation.
4G.
Notice of Adjustment
. Upon any adjustment of the Conversion Price, then
and in each such case the Corporation shall give written notice thereof, by facsimile and by
first class mail, postage prepaid, addressed to each holder of shares of Convertible
Preferred Stock at the address or facsimile number, as applicable, of such holder as shown
on the books of the Corporation, which notice shall state the Conversion Price resulting
from such adjustment, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
4H.
Other Notices
. In case at any time:
(1) the Corporation shall declare any dividend upon its Common Stock and/or
Non-Voting Common Stock payable in cash or stock or make any other distribution to
the holders of its Common Stock and/or Non-Voting Common Stock;
(2) the Corporation shall offer for subscription pro rata to the holders of its
Common Stock and/or Non-Voting Common Stock any additional shares of stock of any
class or other rights;
(3) there shall be a reorganization, reclassification or Change of Control;
(4) there shall be a Public Offering or a Qualified Public Offering; or
(5) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by facsimile and by
first class mail, postage prepaid, addressed to each holder of any shares of Convertible
Preferred Stock at the address or facsimile number, as applicable, of such holder as shown
on the books of the Corporation, (a) at least 30 days’ prior written notice of the date on
which the books of the Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect of
21
any such reorganization, reclassification, Change of Control, dissolution, liquidation or
winding up, or (b) in the case of any such reorganization, reclassification, Change of
Control, dissolution, liquidation or winding up, at least 30 days’ prior written notice of
the date when the same shall take place. Such notice in accordance with the foregoing
clause (a) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock and/or Non-Voting Common
Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (b)
shall also specify the date on which the holders of Common Stock and/or Non-Voting Common
Stock shall be entitled to exchange their Common Stock and/or Non-Voting Common Stock for
securities or other property deliverable upon such reorganization, reclassification, Change
of Control, dissolution, liquidation or winding up, as the case maybe.
4I.
Stock to be Reserved
. The Corporation will at all times reserve and keep
available out of its authorized but unissued Common Stock, solely for the purpose of
issuance upon the conversion of the Convertible Preferred Stock as herein provided, such
number of shares of Common Stock and Non-Voting Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Convertible Preferred Stock. All shares of
Common Stock and Non-Voting Common Stock which shall be so issued shall be duly and validly
issued and fully paid and nonassessable and free from all taxes, liens and charges arising
out of or by reason of the issue thereof, and, without limiting the generality of the
foregoing, the Corporation covenants that it will from time to time take all such action as
may be requisite to assure that the par value per share of the Common Stock and Non-Voting
Common Stock is at all times equal to or less than the effective Conversion Price. The
Corporation will take all such action within its control as may be necessary on its part to
assure that all such shares of Common Stock and Non-Voting Common Stock may be so issued
without violation of any applicable law or regulation, or of any requirements of any
national securities exchange upon which the Common Stock or Non-Voting Common Stock of the
Corporation may be listed. The Corporation will not take any action which results in any
adjustment of the Conversion Price if the total number of shares of Common Stock or
Non-Voting Common Stock issued and issuable after such action upon conversion of the
Convertible Preferred Stock would exceed the total number of shares of Common Stock or
Non-Voting Common Stock then authorized by the Corporation’s Articles of Incorporation.
4J.
No Reissuance of Convertible Preferred Stock
. Shares of Convertible
Preferred Stock which are converted into shares of Common Stock or Non-Voting Common Stock
as provided herein shall not be reissued.
4K.
Issue Tax
. The issuance of certificates for shares of Common Stock or
Non-Voting Common Stock upon conversion of the Convertible Preferred Stock shall be made
without charge to the holders thereof for any issuance tax in respect thereof, provided that
the Corporation shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name other than that
of the holder of the Convertible Preferred Stock which is being converted.
22
4L.
Closing of Books
. The Corporation will at no time close its transfer books
against the transfer of any Convertible Preferred Stock or of any shares of Common Stock or
Non-Voting Common Stock issued or issuable upon the conversion of any shares of Convertible
Preferred Stock in any manner which interferes with the timely conversion of such
Convertible Preferred Stock.
4M.
Definition of Common Stock and Non-Voting Common Stock
. As used in this
paragraph 4, the term “Common Stock” shall mean and include the Corporation’s authorized
Common Stock, $.01 par value and the term “Non-Voting Common Stock” shall mean and include
the Corporation’s authorized Convertible Non-Voting Common Stock, $.01 par value, in each
case as constituted on March 18, 1998 and such terms shall also include any capital stock of
any class of the Corporation thereafter authorized which shall not be limited to a fixed sum
or percentage of par value in respect of the rights of the holders thereof to participate in
dividends or in the distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; provided that the shares of Common Stock
receivable upon conversion of shares of the Series C Preferred Stock of the Corporation and
the shares of Non-Voting Common Stock receivable upon conversion of shares of Series D
Preferred Stock of the Corporation, or in case of any reorganization or reclassification of
the outstanding shares thereof, the stock, securities or assets provided for in subsection
4D(5), shall include only shares designated as Common Stock or Non-Voting Common Stock of
the Corporation, as the case may be, on March 18, 1998.
4N.
Mandatory Conversion
. The Convertible Preferred Stock shall automatically
convert, without any further action by the Corporation, if at any time after September 18,
1999 the Corporation shall have consummated a Qualified Public Offering at a price to the
public per share of at least $651.60 (appropriately adjusted to reflect stock splits,
combinations, stock dividends and the like). In addition, the Convertible Preferred Stock
may be converted by the Corporation (i) at any time after the Corporation shall have
consummated a Public Offering or (ii) concurrently with a Change of Control; provided,
however, that such conversion may only be effected (x) after September 18, 1999 and (y) if
the closing price of the Common Stock on the principal national securities exchange on which
the Common Stock is listed or admitted to trading or, as applicable, as quoted by NASD
Automated Quotation System, for the 20 trading days immediately preceding the date upon
which the Corporation shall effect such conversion, or the proceeds from such Change of
Control transaction, as the case may be, results in a per share value for the outstanding
Common Stock of the Corporation of at least $651.60.
5.
Voting Rights
. Except as otherwise provided by law and these Articles of
Incorporation, (i) the holders of Series C Preferred Stock shall be entitled to one vote for each
share of Common Stock which would be issuable to such holder upon the conversion of all the shares
of Series C Preferred Stock so held on the record date for the determination of shareholders
entitled to vote and shall vote together with the Common Stock as a class on all matters to be
voted on by the shareholders of the Corporation and (ii) the holders of outstanding shares of
Series D Preferred Stock shall not be entitled to vote on any matter on which the shareholders of
the Corporation shall be entitled to vote, and shares of Series D Preferred Stock
23
shall not be included in determining the number of shares voting or entitled to vote on any
such matters.
6.
Restrictions
. At any time when shares of Convertible Preferred Stock are
outstanding, except where the vote or written consent of the holders of a greater number of shares
of the Corporation is required by law or by these Articles of Incorporation and in addition to any
other vote required by law, without the prior consent of the holders of 66-2/3% of the outstanding
shares of Convertible Preferred Stock, given in person or by proxy and voting separately as a
class, either in writing or at a special meeting called for that purpose, at which meeting the
holders of the shares of such Convertible Preferred Stock shall vote separately as a class:
6A. The Corporation will not (i) create or authorize the creation of any additional
class of shares of stock unless the same ranks junior to the Convertible Preferred Stock
both as to dividends and as to the distribution of assets on the liquidation, dissolution or
winding up of the Corporation; (ii) increase the authorized amount of the Convertible
Preferred Stock or increase the authorized amount of any additional class of shares of stock
unless the same ranks junior to the Convertible Preferred Stock both as to dividends and as
to the distribution of assets on the liquidation, dissolution or winding up of the
Corporation; or (iii) create or authorize any obligation or security convertible into shares
of Convertible Preferred Stock or into shares of any other class of stock unless the same
ranks junior to the Convertible Preferred Stock both as to dividends and as to the
distribution of assets on the liquidation, dissolution or winding up of the Corporation,
whether any such creation or authorization or increase shall be by means of amendment of
these Articles of Incorporation or by merger, consolidation or otherwise; and
6B. The Corporation will not amend, alter or repeal these Articles of Incorporation or
its By-laws in any manner so as to adversely affect the relative rights and preferences of
the Convertible Preferred Stock or adversely affect the Convertible Preferred Stock or the
holders thereof.
Section D.
Series E Preferred Stock
.
1.
Dividends
. The holders of shares of Series E Preferred Stock shall be entitled to
receive pay-in-kind dividends at the rate of $7 per share per annum, subject to reduction as set
forth herein (the “Dividend Rate”) and subject also to the provisions of the first and second
sentences of subsection 2C hereof, and no more, which dividends shall be payable quarterly on March
31, June 30, September 30 and December 31 of each year (each such date being referred to for
purposes of this paragraph 1 as a “Quarterly Payment Date”) by the issuance on each Quarterly
Payment Date of .0175 shares of Series E Preferred Stock, and no more (subject to the provisions of
subsection 2E), on each share of Series E Preferred Stock that shall then be outstanding, to the
holders of record of Series E Preferred Stock as they appear on the stock books of the Corporation
on record dates fixed by the Board of Directors of the Corporation not more than 60 nor less than
10 days preceding each Quarterly Payment Date;
provided
,
however
, that if any
Quarterly Payment Date is not a Business Day, such issuance of Series E Preferred Stock shall occur
on the next succeeding Business Day. For purposes hereof, “Business Day” shall mean any day other
than a Saturday, Sunday or legal holiday. Such dividends shall be cumulative and shall accrue from
and after the date of issue. The amount of the dividends
24
payable per share of Series E Preferred Stock for the initial dividend period and any period
shorter than a full quarterly period shall be computed pro rata on the basis of a 360-day year
consisting of twelve 30-day months.
In the event that the Corporation consummates a public offering of Common Stock of the
Corporation registered under the Securities Act of 1933, as amended, with gross proceeds to the
Corporation of at least $40,000,000 (a “Qualified Public Offering”), and concurrently with such
Qualified Public Offering the Series A Preferred Stock and Series B Preferred Stock (collectively,
the “Exchangeable Preferred Stock”) are redeemed or exchanged for Common Stock (in whole or in
part) in accordance with subsection 2A and paragraph 7, respectively, of Section B of this Article
IV, the Dividend Rate shall be reduced by multiplying the Dividend Rate by a fraction, the
numerator of which is the number of shares, if any, of Exchangeable Preferred Stock outstanding
after such redemption and/or exchange and the denominator of which is the number of shares of
Exchangeable Preferred Stock outstanding on March 18, 1998, it being understood that once all
shares of Exchangeable Preferred Stock have been redeemed or exchanged, the Dividend Rate shall be
zero. Thereafter, upon each subsequent redemption or exchange of the Exchangeable Preferred Stock,
the Dividend Rate shall be further reduced by multiplying the Dividend Rate then in effect by a
fraction, the numerator of which is the number of shares of Exchangeable Preferred Stock
outstanding after such redemption and/or exchange and the denominator of which is the number of
shares of Exchangeable Preferred Stock that was outstanding immediately prior to such redemption
and/or exchange.
At any time when any shares of Series E Preferred Stock are outstanding, without the prior
consent of the holders of 66-2/3% of the outstanding shares of Series E Preferred Stock, no
dividend whatsoever shall be declared or paid upon, nor shall any distribution be made upon, any
Common Stock or Non-Voting Common Stock, other than a dividend or distribution payable in shares of
Common Stock and/or Non-Voting Common Stock, nor shall any shares of Common Stock and/or Non-Voting
Common Stock be purchased or redeemed by the Corporation or any moneys be paid to or made available
for a sinking fund for the purchase or redemption of any Common Stock or Non-Voting Common Stock,
except for the repurchase of shares (x) from participants under a stock option or stock purchase
plan approved by the Board of Directors of the Corporation or (y) pursuant to employment agreements
approved by the Board of Directors of the Corporation.
2.
Redemption
. The shares of Series E Preferred Stock shall be redeemable as follows:
2A.
Mandatory Redemption
. (i) Except and to the extent expressly prohibited by
applicable law (references herein to applicable law shall include, without limitation, the
rules and regulations of the Louisiana Department of Insurance) and subject to subsection
2E, upon a Change of Control, the Corporation shall redeem (in the manner and with the
effect provided in subsections 2C through 2G below, as applicable) all outstanding shares of
Series E Preferred Stock.
(ii) Except and to the extent expressly prohibited by applicable law and subject to
subsection 2E, upon the consummation of any Public Offering, the Corporation shall cause the
proceeds to the Corporation from such Public Offering to be used to redeem (in the manner
and with the effect provided in subsections 2C through 2G below, as
25
applicable) all outstanding shares of Series E Preferred Stock;
provided
,
however
, that if for any reason the proceeds from such Public Offering available for
redemption are insufficient to redeem the Series E Preferred Stock as aforesaid and to
redeem Exchangeable Preferred Stock as provided in subsection 2A of Section B of this
Article IV, the Series E Preferred Stock and the Exchangeable Preferred Stock will be
equally redeemed from such available proceeds on a “dollar for dollar” basis until the
Series E Preferred Stock shall have been redeemed in full, whereupon the balance (if any) of
proceeds available for redemption shall be used to redeem the Exchangeable Preferred Stock
in accordance with such subsection 2A.
A Change of Control or a Public Offering is sometimes referred to herein as a
“Mandatory Redemption Event,” and any redemption of Series E Preferred Stock pursuant to
this subsection 2A upon the occurrence of a Mandatory Redemption Event is sometimes referred
to herein as a “Mandatory Redemption.”
2B.
Redemption at Corporation’s Option
. The Corporation may, in its sole
discretion, redeem (an “Optional Redemption”) at any time (in the manner and with the effect
provided in subsections 2C through 2G below, as applicable), all (but not less than all) of
the then outstanding shares of Series E Preferred Stock. The date of a Mandatory Redemption
or Optional Redemption is sometimes referred to herein as a “Redemption Date”.
2C.
Redemption Price
. In the event of a Mandatory Redemption in accordance
with subsection 2A hereof, the Series E Preferred Stock to be so redeemed on a Redemption
Date shall be redeemed by paying for each such share the cash sum of (A) $100, plus (B) the
cash value (calculated at the rate of $100 per share) of all accrued and unpaid dividends
thereon from the most recent Quarterly Payment Date on which dividends were paid to such
Redemption Date; provided, however, that in the event a Public Offering causes a Mandatory
Redemption of Series E Preferred Stock prior to March 18, 1999, such sum per share shall
equal $3,592,952 divided by the number of outstanding shares of Series E Preferred Stock.
Thereafter, no dividends shall accrue or be payable in respect of the Series C Preferred
Stock, the Series D Preferred Stock or the Series E
Preferred Stock, whether in cash or in shares of Series E Preferred Stock, until (and then only to the extent that) the aggregate
cash value of such dividends (without giving effect to the provisions of this sentence) is
greater than (x) the amount actually paid on the Redemption Date minus (y) the amount that
would have been payable on such Redemption Date without giving effect to the proviso in the
preceding sentence. In the event of an Optional Redemption in accordance with subsection 2B
hereof, the Series E Preferred Stock to be so redeemed on a Redemption Date shall be
redeemed by paying for each share of Series E Preferred Stock a cash amount equal to the sum
of (A) $100, plus (B) the cash value (calculated at the rate of $100 per share) of all
accrued and unpaid dividends thereon from the most recent Quarterly Payment Date on which
dividends were paid to such Redemption Date. In each case, such sum is herein sometimes
referred to as the “Redemption Price”.
2D.
Notice of Redemption
. Not less than 30 days prior to a Mandatory
Redemption Event or an Optional Redemption, as the case may be, notice shall be given
26
by the Corporation by facsimile and by mail, postage prepaid, to the holders of record
of the Series E Preferred Stock, such notice to be addressed to each such stockholder at its
address or facsimile number, as applicable, as shown on the stock transfer records of the
Corporation, specifying the Mandatory Redemption Event or the occurrence of an Optional
Redemption, the applicable Redemption Price, the place of such redemption and the Redemption
Date, which date shall be a Business Day. Such notice shall also set forth the number of
shares to be redeemed from each holder of record of Series E Preferred Stock.
If such notice shall have been duly given and if on or before such Redemption Date the
funds necessary for redemption shall have been set aside and continue to be available
therefore, then, notwithstanding that any certificate for shares of Series E Preferred Stock
to be redeemed shall not have been surrendered for cancellation, after the close of business
on such Redemption Date, the shares so called for redemption shall no longer be deemed
outstanding, the dividends thereon shall cease to accrue, and all rights with respect to
such shares shall forthwith cease after the close of business on the Redemption Date, except
only the right of the holders thereof to receive, upon presentation of the certificate
representing shares so called for redemption, the Redemption Price therefore (without
interest thereon).
2E.
Limitation on Redemption or Dividends; Partial Redemption
. Notwithstanding
anything to the contrary set forth herein, the Corporation shall not be obligated to, and
shall not, redeem shares of Series E Preferred Stock on any Redemption Date or pay any
dividends thereon if and to the extent that payment of such redemption or dividend (i) would
in the good faith determination of the Board of Directors of the Corporation cause the
Corporation not to maintain its then current rating by the A.M. Best rating agency or any
successor thereto after giving effect to such payment or (ii) would contravene applicable
law;
provided
,
however
, that any shares of Series E Preferred Stock that the
Corporation is obligated to redeem and are not redeemed pursuant to this subsection 2E shall
be redeemed as soon as possible after the Redemption Date and to the extent that such
redemption is permitted by this subsection 2E, and in such event dividends shall continue to
accrue on such shares as provided in paragraph 1.
Notwithstanding anything to the contrary herein, without the prior written consent of
the lender(s) under the Credit Agreement (as defined herein), the Corporation shall not be
obligated to, and shall not, redeem any shares of Series E Preferred Stock on any Redemption
Date (whether in an Optional Redemption, a Mandatory Redemption or otherwise) if any
obligations of the Corporation remain unpaid or otherwise unsatisfied under, or there exists
any commitment to lend funds under, the Credit Agreement, dated as of November 7, 1997,
between the Corporation and Bank of America National Trust and Savings Association (as from
time to time amended, restated or refinanced, the “Credit Agreement”). Any shares of Series
E Preferred Stock that would, but for the preceding sentence, be required to be redeemed on
any Redemption Date shall be redeemed as soon as possible thereafter (subject to compliance
with the preceding sentence) and to the extent that such redemption is permitted by this
subsection 2E, and in such event dividends shall continue to accrue on such shares as
provided in paragraph 1.
27
In case of a Mandatory Redemption of less than all of the shares of Series E Preferred
Stock pursuant to this subsection 2E on a Redemption Date, all shares of Series E Preferred
Stock to be redeemed shall be selected pro rata, and there shall be so redeemed from each
registered holder in whole shares, as nearly as practicable to the nearest whole share, that
proportion of all the shares to be redeemed which the number of shares held of record by
such holder bears to the total number of shares of Series E Preferred Stock at the time
outstanding.
2F.
Surrender of Shares
. Any holder of shares of Series E Preferred Stock to
be redeemed upon a Redemption Date shall surrender a certificate or certificates for the
Series E Preferred Stock so to be redeemed to the Corporation at its principal office (or
such other office or agency of the Corporation as the Corporation may designate by notice in
writing to the holder or holders of the Series E Preferred Stock) at any time during its
usual business hours prior to the Redemption Date.
2G.
Redeemed Shares to Be Retired
. Any shares of Series E Preferred Stock
redeemed pursuant to this paragraph 2 or otherwise acquired by the Corporation in any manner
whatsoever shall be permanently canceled and retired and shall not under any circumstances
be reissued; and the Corporation may from time to time take such appropriate corporate
action as may be necessary to reduce the number of authorized shares of Series E Preferred
Stock accordingly.
3.
Liquidation
. Upon any liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary (a “Liquidation Event”), the holders of the shares of Series E
Preferred Stock shall be entitled, before any distribution or payment is made upon any Series A
Preferred Stock, Series B Preferred Stock, Common Stock or Non-Voting Common Stock, but
pari
passu
with the holders of the shares of Convertible Preferred Stock, to be
paid a cash amount for each such share the sum of (A) $100 plus (B) the cash value (calculated a
the rate of $100 per share) of all accrued and unpaid dividends thereon from the most recent
Quarterly Payment Date on which dividends were paid to the date of such Liquidation Event, and the
holders of Series E Preferred Stock shall not be entitled to any further payment. Such amounts to
be so paid are sometimes referred to herein as the “Liquidation Payments”. If upon such
Liquidation Event, the assets of the Corporation to be distributed among the holders of Series E
Preferred Stock and the holders of Convertible Preferred Stock shall be insufficient to permit
payment to the holders of Series E Preferred Stock and the holders of Convertible Preferred Stock
of the amounts distributable as aforesaid, then the entire assets of the Corporation to be
distributed shall be distributed ratably among the holders of Series E Preferred Stock and the
holders of the Convertible Preferred Stock. Upon any Liquidation Event, after the holders of
Series E Preferred Stock and the holders of the Convertible Preferred Stock shall have been paid in
full the amounts to which they shall be entitled, the remaining net assets of the Corporation shall
be distributed to the holders of the Series A Preferred Stock and the Series B Preferred Stock
until they have been paid the full amounts to which they are entitled and any remaining net assets
shall be distributed to the holders of the Common Stock and the Non-Voting Common Stock. Written
notice of such Liquidation Event stating a payment date, the amount of Liquidation Payments and the
place where said sums shall be payable shall be given by facsimile and by mail, postage prepaid,
not more than 30 days after the date of such Liquidation Event, to the holders of record of Series
E Preferred Stock, such notice to be addressed to each stockholder at its post office address or
28
facsimile number, as applicable, as shown by the records of the Corporation;
provided
,
however
, that failure to give notice pursuant to this sentence shall not invalidate the
action involved. Neither the consolidation or merger of the Corporation into or with any other
corporation or corporations, nor the sale or transfer by the Corporation of all or any part of its
assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of any of the
provisions of this paragraph.
4.
Voting Rights
. Except as otherwise provided by law and these Articles of
Incorporation, the holders of Series E Preferred Stock shall not be entitled to vote on any matters
on which the shareholders of the Corporation shall be entitled to vote, and shares of Series E
Preferred Stock shall not be included in determining the number of shares voting or entitled to
vote on any such matters.
5.
Restrictions
. At any time when any shares of Series E Preferred Stock are
outstanding, except where the vote or written consent of the holders of a greater number of shares
of the Corporation is required by law or by these Articles of Incorporation and in addition to any
other vote required by law, without the prior consent of the holders of 66-2/3% of the outstanding
shares of Series E Preferred Stock, given in person or by proxy and voting separately as a class,
either in writing or at a special meeting called for that purpose, at which meeting the holders of
the shares of such Series E Preferred Stock shall vote separately as a class:
5A. The Corporation will not (i) create or authorize the creation of any additional
class of shares of stock unless the same ranks junior to the Series E Preferred Stock both
as to dividends and as to the distribution of assets on the liquidation, dissolution or
winding up of the Corporation; (ii) increase the authorized amount of the Series E Preferred
Stock or increase the authorized amount of any additional class of shares of stock unless
the same ranks junior to the Series E Preferred Stock both as to dividends and as to the
distribution of assets on the liquidation, dissolution or winding up of the Corporation; or
(iii) create or authorize any obligation or security convertible into shares of Series E
Preferred Stock or into shares of any other class of stock unless the same ranks junior to
the Series E Preferred Stock both as to dividends and as to the distribution of assets on
the liquidation, dissolution or winding up of the Corporation, whether any such creation or
authorization or increase shall be by means of amendment of these Articles of Incorporation
or by merger, consolidation or otherwise; and
5B. The Corporation will not amend, alter or repeal these Articles of Incorporation or
its By-laws in any manner so as to adversely affect the relative rights and preferences of
the Series E Preferred Stock or adversely affect the Series E Preferred Stock or the holders
thereof.
Section E.
Powers, Rights and Privileges of Common Stock and Non-Voting Common Stock
.
Except as otherwise provided herein or as otherwise required by law, all shares of Common
Stock and Non-Voting Common Stock shall be identical in all respects and shall entitle the holders
thereof to the same powers, rights and privileges, subject to the same qualifications, limitations
and restrictions. The powers, rights and privileges, and the qualifications, limitations
29
and restrictions thereof in respect of the Common Stock and Non-Voting Common Stock are as set
forth below:
1.
Voting Rights
.
(a)
Common Stock
. Except as otherwise provided herein or as otherwise required
by law, each holder of outstanding shares of Common Stock shall be entitled to vote on all
matters on which the shareholders of the Corporation shall be entitled to vote, and each
such holder of Common Stock shall be entitled to one vote on such matters for each share of
such stock held by such holder.
(b)
Non-Voting Common Stock
. Except as otherwise provided herein or as
otherwise required by law, holders of outstanding shares of Non-Voting Common Stock shall
not be entitled to vote on any matter on which the shareholders of the Corporation shall be
entitled to vote, and shares of Non-Voting Common Stock shall not be included in determining
the number of shares voting or entitled to vote on any such matters.
2.
Dividends
. Subject to the prior rights of the holders of Exchangeable Preferred
Stock, Convertible Preferred Stock, Series E Preferred Stock and Junior Preferred Stock, the Board
of Directors of the Corporation may cause dividends to be paid to holders of shares of Common Stock
and Non-Voting Common Stock out of funds legally available for the payment of dividends. Any
dividend or distribution shall be payable ratably on all shares of Common Stock and Non-Voting
Common Stock, as if the same constituted a single class;
provided
,
however
, that in
the case of dividends payable in shares of common stock of the Corporation, or options, warrants or
rights to acquire shares of such common stock, or securities convertible into or exchangeable for
shares of such common stock, the shares, options, warrants, rights or securities so payable shall
be payable in shares of, or options, warrants or rights to acquire or securities convertible into
or exchangeable for, Common Stock, in the case of dividends or distributions payable on the Common
Stock, and Non-Voting Common Stock, in the case of dividends or distributions payable on the
Non-Voting Common Stock.
3.
Liquidation
. In the event of any Liquidation Event, after payment shall have been
made to holders of the Exchangeable Preferred Stock, Convertible Preferred Stock, Series E
Preferred Stock and Junior Preferred Stock of the full amounts to which they shall be entitled as
stated and expressed herein or as may be stated and expressed pursuant hereto, the holders of
Common Stock and Non-Voting Common Stock shall be entitled, to the exclusion of such holders of
Exchangeable Preferred Stock, Convertible Preferred Stock, Series E Preferred Stock and Junior
Preferred Stock, to share ratably based upon the number of shares of Common Stock and Non-Voting
Common Stock held by them, as if such shares constituted a single class, in all remaining assets of
the Corporation available for distribution to its shareholders.
4.
Conversion
.
(a)
Conversion of Non-Voting Common Stock
. Subject to and upon compliance with
the provisions of this paragraph 4, the holder of any share or shares of Non-Voting Common
Stock shall have the right at any time, at its option, to convert any such shares of
Non-Voting Common Stock (except that upon any liquidation, dissolution or winding
30
up of the Corporation the right of conversion shall terminate at the close of business
on the last full business day next preceding the date fixed for payment of the amount
distributable on Non-Voting Common Stock) into an equal number of fully paid and
nonassessable whole shares of Common Stock.
(b)
Conversion Procedure
. Each conversion of shares of Non-Voting Common Stock
of the Corporation into shares of Common Stock of the Corporation shall be effected by the
surrender of the certificate or certificates representing the shares to be converted at the
principal office of the Corporation (or such other office or agency of the Corporation as
the Corporation may designate by written notice to the holders of Common Stock) at any time
during its usual business hours, together with written notice by the record holder of the
shares represented by the surrendered certificates (the “Surrendered Shares”), stating the
number of such Surrendered Shares that such holder desires to convert (the shares into which
such shares are to be converted being the “Converted Shares”). Such notice shall also state
the name or names (with addresses) and denominations in which the certificate or
certificates for Converted Shares are to be issued and shall include instructions for the
delivery thereof. Promptly after such surrender and the receipt of such written notice, the
Corporation will (i) issue and deliver in accordance with the surrendering holder’s
instructions the certificate or certificates evidencing the Converted Shares (which shall
contain such legends as were set forth on the surrendered certificate or certificates) and
(ii) deliver to the converting holder a certificate (which shall contain such legends as
were set forth on the surrendered certificate or certificates) representing any Surrendered
Shares that were not converted. To the extent permitted by law, such conversion shall be
deemed to have been effected immediately prior to the close of business on the day the
certificate or certificates for such share or shares shall have been surrendered as
aforesaid, and at such time the rights of the holder of such share or shares of Non-Voting
Common Stock shall cease, and the person or persons in whose name or names any certificate
or certificates for shares of Common Stock shall be issuable upon such conversion shall be
deemed to have become the holder or holders of record of the shares represented thereby.
(c)
Subdivision or Combination of Stock
. In case the Corporation shall at any
time subdivide its outstanding shares of Common Stock into a greater number of shares, then
the Non-Voting Common Stock shall be similarly subdivided, and conversely, in case the
outstanding shares of Common Stock shall be combined into a smaller number of shares, then
the number of shares of Non-Voting Common Stock immediately prior to such combination shall
be proportionately reduced. Upon any such event, the Corporation shall give written notice
thereof, by first class mail, postage prepaid, addressed to each holder of shares of Common
Stock and Non-Voting Common Stock at the address of such holder as shown on the books of the
Corporation.
(d)
Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, Etc
.
If the Corporation (i) shall consolidate with or merge into any other corporation or entity
and shall not be the continuing or surviving corporation or entity of such consolidation or
merger, or (ii) shall permit any other corporation or entity to consolidate with or merge
into the Corporation and the Corporation shall be the continuing or surviving corporation
but, in connection with such consolidation or merger, the shares of Common Stock shall
31
be converted into or exchanged for stock or other securities of any other person or
cash or any other property, or (iii) shall transfer all or substantially all of its
properties or assets to any other corporation or entity, or (iv) shall effect a capital
reorganization or reclassification of the Common Stock (other than a change from par to
no-par value stock or from no-par to par value stock), then, and in each such event, proper
provision shall be made so that, if any shares of Non-Voting Common Stock shall thereafter
remain outstanding, upon the basis and the terms and in the manner provided in this
paragraph, each holder of such shares of Non-Voting Common Stock, upon the conversion
thereof at any time after the consummation of such consolidation, merger, transfer,
reorganization or reclassification, shall be entitled to receive, in lieu of the shares of
Common Stock issuable upon such conversion prior to such consummation, the stock and other
securities, cash and property to which such holders would have been entitled upon such
consummation if such holder had converted such shares of Non-Voting Common Stock immediately
prior thereto, subject to adjustments (subsequent to such corporate action) as nearly
equivalent as possible to the adjustments provided for in this subsection (D). Anything
contained in this paragraph to the contrary notwithstanding, the Corporation will not effect
any of the transactions described in clauses (i) through (iv) above unless, prior to the
consummation thereof, each corporation (other than the Corporation) which may be required to
deliver any stock, securities, cash or property upon the conversion of any shares of
Non-Voting Common Stock remaining outstanding after such transaction shall assume, by
written instrument delivered to each holder of shares of Non-Voting Common Stock, the
obligation to deliver to such holder such shares of stock, securities, cash or property as
such holder may be entitled to receive upon such conversion.
(e)
Notice of Adjustment
. Upon any adjustment made pursuant to subsection
4(d), then and in each such case the Corporation shall give written notice thereof, by
facsimile and by first class mail, postage prepaid, addressed to each holder of shares of
Non-Voting Common Stock at the address or facsimile number, as applicable, of such holder as
shown on the books of the Corporation, which notice shall state the number of shares of
Common Stock or other securities, cash or property issuable upon conversion of the
Non-Voting Common Stock resulting from such adjustment, setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is based.
(f)
Reservation of Shares
. The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares or its treasury shares, solely for the
purpose of issuance upon the conversion of shares of Non-Voting Common Stock, such number of
shares of Common Stock as are then issuable upon the conversion of all outstanding shares of
Non-Voting Common Stock.
(g)
No Charge
. The issuance of certificates for shares of Common Stock upon
conversion of the shares of Non-Voting Common Stock shall be made without charge to the
holders of such shares for any issuance tax in respect thereof or other cost incurred by the
Corporation in connection with such conversion and the related issuance of shares of Common
Stock; provided, however, that the Corporation shall not be required to pay any tax which
may be payable in respect of any transfer involved in the issuance and delivery
32
of any certificate in a name other than that of the holder of the Non-Voting Common
Stock converted.
(h)
Closing of Books
. The Corporation will at no time close its transfer books
against the transfer of any Non-Voting Common Stock or of any shares of Common Stock issued
or issuable upon the conversion of any shares of Non-Voting Common Stock in any manner which
interferes with the timely conversion of such Non-Voting Common Stock.
ARTICLE V
COMMENCEMENT OF BUSINESS
The Corporation will not commence business until it has received consideration for the
issuance of its shares of the value of $1,000.00, consisting of money, labor done or property
actually received.
ARTICLE VI
REGISTERED OFFICE
The street address of the Corporation’s registered office is as follows:
350 N. St. Paul, Suite 2900
Dallas, Texas 75201
ARTICLE VII
REGISTERED AGENT
The name of the Corporation’s registered agent at the Corporation’s registered office is CT
Corporation System.
ARTICLE VIII
DIRECTORS
The names of the current Directors of the Corporation are:
C. Allen Bradley, Jr.
Jared A. Morris
Paul B. Queally
Sean M. Traynor
The address of each of the Directors is 2301 Highway 190 West, DeRidder, Louisiana 70634.
33
ARTICLE IX
DENIAL OF PRE-EMPTIVE RIGHTS
The statutory right of any shareholder of the Corporation to exercise preemptive rights to
acquire additional, unissued or treasury shares of the Corporation or securities of the Corporation
convertible into or carrying a right to subscribe to or acquire shares of the Corporation is hereby
denied.
ARTICLE X
NON-CUMULATIVE VOTING
Cumulative voting is expressly prohibited.
The power to amend or repeal the Bylaws or to adopt new Bylaws shall be vested in either the
shareholders or the Board of Directors of the Corporation, subject to the shareholders providing in
amending, repealing or adopting a particular Bylaw that it may not be amended or repealed by the
Board of Directors of the Corporation.
ARTICLE XII
ELECTION OF DIRECTORS
12.1
Number of Directors
. The number of the Directors of the Corporation shall be
fixed from time to time by or pursuant to the Bylaws of the Corporation.
12.2
Classified Board of Directors
. The Directors shall be classified, with respect
to the time for which they severally hold office, into three classes, each class to be as nearly
equal in number as possible, as determined by the Board of Directors. At each annual meeting of
the shareholders of the Corporation, the successors of the class of Directors whose term expires at
that meeting shall be elected by a plurality of the votes cast by holders of shares entitled to
vote in the election of directors at a meeting of shareholders at which a quorum is present to hold
office for a term expiring at the annual meeting of shareholders held in the third year following
the year of their election.
12.3
Shareholder Nomination of Director Candidates and Introduction of Business
.
Advance notice of shareholder nominations for the election of Directors and advance notice of
business to be brought by shareholders before an annual meeting shall be given in the manner
provided in the Bylaws of the Corporation.
12.4
Decrease in Number of Directors
. No decrease in the number of Directors
constituting the Board of Directors shall shorten the term of an incumbent Director.
34
12.5
No Requirement of Written Ballot
. The election of the Directors may be conducted
in any form adopted by the Board of Directors, and need not be by written ballot. In the event,
however, that a majority of the shareholders vote to require written ballots, written ballots shall
be used.
ARTICLE XIII
SPECIAL MEETINGS OF SHAREHOLDERS
Special meetings of the shareholders, unless otherwise prescribed by statute, may be called by
the Chairman of the Board of Directors of the Corporation or the President and shall be called by
the Secretary upon written request, stating the purpose or purposes therefor, by a majority of the
whole Board of Directors or by the holders of at least 25% of the combined voting power of the
then-outstanding securities entitled to vote generally in the election of directors of the
Corporation.
ARTICLE XIV
INDEMNIFICATION
Each person who is or was a Director or officer of the Corporation, or while a Director or
officer of the Corporation is or was serving at the request of the Corporation as a director,
officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another
corporation, employee benefit plan, other enterprise or other entity, shall be indemnified by the
Corporation to the fullest extent that a corporation is required or permitted to grant
indemnification to such person under the TBCA and the Texas Miscellaneous Corporation Laws Act, as
the same exist or may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such amendment) or any other applicable laws
as presently or hereafter in effect. The right to indemnification under this Article XIV shall
extend to the heirs, executors, administrators and estate of any such Director or officer. The
right to indemnification provided in this Article XIV (a) will not be exclusive of any other rights
to which any person seeking indemnification may otherwise be entitled, including without
limitation, pursuant to any bylaw, agreement, vote of shareholders or disinterested Directors, or
otherwise, both as to action in their official capacities and as to action in another capacity
while holding such office; and (b) will be applicable to matters otherwise within its scope whether
or not such matters arose or arise before or after the adoption of this Article XIV. Without
limiting the generality or the effect of the foregoing, the Corporation may adopt bylaws or enter
into one or more agreements with any person which provide for indemnification greater or different
than that provided in this Article XIV to the extent provided by applicable laws. Any amendment or
repeal of this Article XIV shall not adversely affect any right or protection existing hereunder
immediately prior to such amendment or repeal.
35
ARTICLE XV
NO MONETARY LIABILITY OF DIRECTORS TO SHAREHOLDERS
To the fullest extent permitted by the TBCA, as the same may be amended from time to time, or
any other applicable laws presently or hereafter in effect, no Director of the Corporation shall be
personally liable to the Corporation or its shareholders for or with respect to any acts or
omissions in the performance of his or her duties as a Director of the Corporation. If the TBCA is
hereafter amended to authorize, with the approval of a corporation’s shareholders, further
elimination of the liability of a corporation’s directors for or with respect to any acts or
omissions in the performance of their duties as directors of a corporation, then a Director of the
Corporation shall not be liable for any such acts or omissions to the fullest extent permitted by
the TBCA, as so amended. Any repeal or modification of this Article XV shall not adversely affect
any right or protection of a Director of the Corporation existing immediately prior to such repeal
or modification.
ARTICLE XVI
AMENDMENT
The Corporation reserves the right at any time and from time to time to amend, alter, change
or repeal any provision contained in these Articles of Incorporation, and any other provisions
authorized by the laws of the State of Texas at the time in force may be added or inserted, in the
manner now or hereafter prescribed herein or by applicable law, and all rights, preferences and
privileges of whatsoever nature conferred upon shareholders, Directors or any other persons
whomsoever by and pursuant to these Articles of Incorporation in their present form or as hereafter
amended are granted subject to the right reserved in this Article XVI; provided, however, that any
amendment or repeal of Article XIV or Article XV of these Articles of Incorporation shall not
adversely affect any right or protection existing hereunder immediately prior to such amendment or
repeal.
ARTICLE XVII
SHAREHOLDER ACTION BY WRITTEN CONSENT
Prior to the closing of the Corporation’s first public offering of Common Stock under a
registration statement filed with the Securities and Exchange Commission, any action required by
the TBCA, as amended, to be taken at any annual or special meeting of shareholders, or any action
that may be taken at any annual or special meeting of shareholders, may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing, setting forth the
action so taken, shall be signed by the holder or holders of shares having not less than the
minimum number of votes that would be necessary to take such action at a meeting at which the
holders of all shares entitled to vote on the action were present and voted.
From and after the closing of the Corporation’s first public offering of Common Stock under a
registration statement filed with the Securities and Exchange Commission, any action required by
the TBCA, as amended, to be taken at any annual or special meeting of shareholders, or any action
that may be taken at any annual or special meeting of shareholders, may be taken
36
without a meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holder or holders of all the
shares entitled to vote with respect to the action that is the subject of the consent.
IN WITNESS WHEREOF, and in accordance with Article 4.07 of the TBCA, the undersigned has
executed these Articles of Incorporation as of October 27, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ C. Allen Bradley, Jr.
|
|
|
|
|
C. Allen Bradley, Jr.
|
|
|
|
|
Chairman, President and Chief Executive
Officer
|
|
|
|
37
