AMERISAFE, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015; filed July 31, 2015. AMERISAFE provides workers’ compensation insurance to small and mid-sized employers in hazardous industries, including construction, trucking, manufacturing, oil and gas, and agriculture. The company actively markets insurance in 30 states and the District of Columbia.
Financial performance and condition
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Gross premiums written | $106.0 million | $103.8 million | $206.8 million | $209.5 million |
| Net premiums earned | $95.6 million | $93.5 million | $190.4 million | $182.7 million |
| Total revenues | $99.9 million | $100.6 million | $201.7 million | $196.8 million |
| Net investment income | $6.9 million | $6.8 million | $13.7 million | $13.6 million |
| Net income | $14.3 million | $12.8 million | $29.4 million | $23.3 million |
| Diluted EPS | $0.75 | $0.68 | $1.54 | $1.23 |
| Net combined ratio | 83.6% | 89.4% | 84.2% | 91.0% |
| Return on average equity | 12.3% | 11.9% | 12.8% | 10.9% |
Net income margin, calculated from reported net income and total revenues, was approximately 14.3% in the second quarter and 14.6% for the first six months, compared with approximately 12.7% and 11.9%, respectively, in the comparable 2014 periods.
- Q2 gross premiums written increased 2.1%, while six-month gross premiums written decreased 1.3%. Six-month net premiums earned increased 4.2%, reflecting premium growth written during 2014.
- Q2 loss and loss adjustment expenses declined 8.3% to $57.3 million. The net loss ratio improved to 60.0% from 66.8%, aided by $9.4 million of favorable prior-year development versus $4.4 million in 2014.
- For the six months, the net loss ratio improved to 61.6% from 67.7%, with favorable prior-year development of $15.6 million versus $6.9 million.
- Expense ratio was 23.1% in Q2 versus 22.5% and 22.3% for the six months versus 23.2%. Q2 expense growth reflected lower contingent profit commissions and higher compensation costs.
- Net realized investment losses were $2.6 million in Q2 and for the six months, principally due to a $2.7 million other-than-temporary impairment on four fixed maturity securities. The comparable 2014 periods included investment gains.
Liquidity, capital and investments
- At June 30, 2015, total assets were $1.534 billion, shareholders’ equity was $472.8 million, and book value was $24.87 per share.
- Cash and cash equivalents were $61.6 million, down from $91.0 million at December 31, 2014. Net cash provided by operating activities was $26.1 million, compared with $60.2 million in the first six months of 2014.
- Operating cash flow was reduced by higher amounts held for others, underwriting expenses paid, losses paid and federal income taxes. Net cash used in investing was $51.7 million, principally reflecting investment purchases; net cash used in financing was $3.8 million.
- Investments, including cash and cash equivalents, totaled $1.123 billion. Fixed maturity securities represented the substantial majority of the portfolio, including $698.5 million classified as held-to-maturity and $344.7 million classified as available-for-sale.
- The filing does not report material corporate debt or borrowings. Insurance-related liabilities included $715.1 million of reserves for loss and loss adjustment expenses and $179.9 million of unearned premiums.
- The board declared a quarterly cash dividend of $0.15 per share payable September 25, 2015. The company had repurchased 1,258,250 shares for $22.4 million since inception of its repurchase program; no shares were repurchased during the first six months of 2015.
Material changes and unusual items
- Underwriting profitability improved substantially, with the net combined ratio declining 5.8 percentage points in Q2 and 6.8 percentage points for the six months.
- Reinsurance pricing improved: ceded premiums were 2.6% of gross premiums earned versus 3.6% in the comparable periods.
- Investment results were negatively affected by the $2.7 million impairment charge and by lower unrealized investment gains; six-month comprehensive income was $28.7 million versus $29.6 million in 2014.
- In February 2015, an adverse verdict related to a 2009 Iowa workers’ compensation claim awarded $25.3 million, including $25.0 million of punitive damages. The company is appealing, posted a $27.8 million appeal bond, and carried a $2.6 million reserve. Management believes the reserve and reinsurance coverage are adequate.
- Former CFO Michael Grasher resigned effective June 12, 2015. On July 28, 2015, CEO G. Janelle Frost was appointed Acting CFO and principal financial and accounting officer.
- Management stated that disclosure controls were effective as of June 30, 2015 and that no material changes to internal control over financial reporting occurred during the period.
Outlook and risks
The filing does not provide quantitative earnings or premium guidance. Management emphasizes disciplined underwriting, safety reviews, claims management and premium audits. Results remain sensitive to claim frequency and severity, reserve estimates, reinsurance availability and collectibility, insurance competition and pricing, regulation, economic conditions, interest rates, investment-market performance, cybersecurity events and catastrophic losses. Because the company focuses on hazardous industries with relatively infrequent but severe claims, loss reserves may be more volatile than those of other workers’ compensation insurers.
Investor verification items
- Assess the sustainability of favorable prior-year reserve development and the 84.2% six-month combined ratio.
- Review the Iowa claim appeal, $27.8 million appeal bond, $2.6 million reserve and related reinsurance coverage.
- Monitor operating cash flow, which declined materially despite higher net income, and the reduction in cash balances.
- Evaluate the credit quality, unrealized losses and interest-rate sensitivity of the fixed maturity investment portfolio, including the four securities impaired in 2015.
- Track premium growth, reinsurance pricing and the effect of the lower voluntary-business loss cost multiplier.
- Verify continuity of financial reporting and oversight following the CFO resignation and appointment of the Acting CFO.