The others are correct. It does mean "laughing my ass off" (ass is a curse word, by the way. Use it with caution)
I just want to point out that he was letting you know that he thought whatever you said was really funny. Since you can't hear him laugh in person, he was showing you that he was laughing by saying "lmao". It would be the same if he said "lol", "lmfao" "roflmao" or any other variation. Typically the longer the acronym, the harder the person is laughing.