Business Context and Reporting Period
AMERISAFE, Inc. is a workers’ compensation insurer focused on small and mid-sized employers in hazardous industries, including construction, trucking, manufacturing, agriculture, and oil and gas. The company markets insurance in 27 states and is licensed in additional jurisdictions. This Form 10-Q covers the three and nine months ended September 30, 2016; financial statements are unaudited.
Financial Performance and Position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Gross premiums written | $88.8 million | $91.1 million | $292.4 million | $297.9 million |
| Net premiums earned | $89.9 million | $90.5 million | $276.6 million | $280.9 million |
| Total revenues | $98.2 million | $97.5 million | $298.1 million | $299.2 million |
| Net income | $17.9 million | $17.9 million | $58.8 million | $47.4 million |
| Diluted EPS | $0.93 | $0.94 | $3.06 | $2.48 |
| Net combined ratio | 80.3% | 79.1% | 77.0% | 82.6% |
| Return on average equity | 14.2% | 14.9% | 16.3% | 13.5% |
Q3 net income was essentially flat year over year despite lower premiums, while nine-month net income increased 24.1%. Net income margins based on total revenues were approximately 18.2% in Q3 and 19.7% for the first nine months.
- Net investment income was $8.0 million in Q3, up from $6.9 million, but $20.3 million for nine months, down from $20.6 million. Q3 benefited largely from an increase in the value of a hedge fund investment.
- Loss and loss adjustment expenses were $50.5 million in Q3 and $146.4 million for nine months, compared with $48.9 million and $166.3 million, respectively, in the prior-year periods.
- Current accident-year losses and LAE were 67.9% of net premiums earned in both Q3 and the nine-month period, compared with 69.8% in the comparable 2015 periods.
- Favorable prior accident-year development was $10.5 million in Q3 and $41.4 million for nine months, compared with $14.2 million and $29.8 million, respectively.
- Operating cash flow was $82.9 million for the first nine months, up from $62.7 million. Investing activities used $57.1 million and financing activities used $8.6 million.
- Cash and cash equivalents were $86.6 million at September 30, 2016, compared with $69.5 million at December 31, 2015. Total investments were $1.10 billion, and investments including cash totaled $1.18 billion.
- Total assets were $1.60 billion and shareholders’ equity was $509.7 million at September 30, 2016, compared with $1.50 billion and $454.0 million at year-end 2015. Book value per share was $26.51.
- The balance sheet presents no separately identified borrowings or debt; liabilities were primarily insurance reserves, unearned premiums, policyholder-related balances, and other operating liabilities. The filing does not provide a separate debt metric.
Material Changes Versus the Prior Comparable Period
- Gross premiums written declined 2.4% in Q3 and 1.8% for nine months; net premiums written declined 1.1% and 1.4%, respectively. Management attributed the decreases primarily to lower voluntary policy premiums, payroll audit adjustments, and lower assumed premium from mandatory pooling arrangements.
- The effective loss cost multiplier for voluntary business decreased to 1.71 in Q3 and 1.73 for nine months, from 1.77 and 1.80, respectively.
- The nine-month net loss ratio improved to 52.9% from 59.2%, while the Q3 net loss ratio increased to 56.2% from 54.1%. The nine-month net combined ratio improved to 77.0% from 82.6%, but the Q3 ratio increased to 80.3% from 79.1%.
- Underwriting, commission, and salary-related costs declined 6.7% in Q3 and 1.9% for nine months. The nine-month expense ratio was broadly stable at 22.9% versus 23.0%.
- Investment results improved relative to 2015 because the company recorded $1.0 million of net realized gains for nine months in 2016 versus $2.5 million of net realized losses in 2015, which included $2.7 million of other-than-temporary impairments.
- Cash dividends declared per share increased to $0.18 in Q3 and $0.54 for nine months, from $0.15 and $0.45, respectively.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide explicit quantitative earnings or premium guidance. Management emphasizes disciplined underwriting, proactive safety reviews, claims management, and audit services. Results are not necessarily indicative of full-year results.
- Key risks include the cyclical workers’ compensation market, economic and interest-rate conditions, competition, reduced policyholder activity, claim frequency and severity, reserve uncertainty, regulatory and legal changes, reinsurance availability and collectibility, cyber risks, and investment-market volatility.
- Because AMERISAFE focuses on relatively low-frequency, high-severity claims, loss reserves may be more volatile than those of other workers’ compensation insurers. Favorable prior-year development contributed materially to 2016 results.
- The company’s subsidiary is appealing a $25.3 million Iowa verdict related to a 2009 workers’ compensation claim, including $25.0 million of punitive damages. The company had paid $5.4 million and reserved $2.5 million at September 30, 2016, with a $27.8 million appeal bond posted. Management believes the reserve and reinsurance coverage are adequate; the ultimate outcome remains uncertain.
- At September 30, 2016, the investment portfolio had $1.7 million of gross unrealized losses, and no other-than-temporary impairment losses were recognized during the first nine months.
- On October 25, 2016, the board declared a regular dividend of $0.18 per share and an extraordinary dividend of $3.25 per share, both payable December 29, 2016. The board also reauthorized a $25.0 million share repurchase program; no shares were repurchased during the first nine months.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2016, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether favorable prior-year reserve development of $41.4 million for nine months is sustainable and how current accident-year loss trends develop.
- The status and ultimate cost of the Iowa litigation, including reinsurance recoveries and any effect beyond the recorded reserve.
- The impact of declining premium volume, lower loss cost multipliers, and competitive pricing on future underwriting margins.
- The composition, duration, credit quality, and interest-rate sensitivity of the $1.18 billion investment portfolio.
- The liquidity and capital impact of the $3.25-per-share extraordinary dividend and any future share repurchases.
- Reinsurance terms, recoverability of the $102.8 million of amounts recoverable from reinsurers, and the company’s exposure to severe or catastrophic claims.