AMERISAFE, Inc. — 2012 First-Quarter Form 10-Q Summary
Business context and reporting period
AMERISAFE is an insurance holding company focused on workers’ compensation and general liability insurance for small and mid-sized employers in hazardous industries, principally construction, trucking and agriculture. The report covers the three months ended March 31, 2012, compared with the corresponding 2011 period. The financial statements are unaudited. The company actively markets insurance in 35 states and the District of Columbia.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Gross premiums written | $84.9 million | $71.4 million | Up 19.0% |
| Net premiums written | $81.0 million | $67.8 million | Up 19.5% |
| Net premiums earned | $69.8 million | $60.1 million | Up 16.1% |
| Total revenues | $78.7 million | $67.0 million | Up 17.5% |
| Net investment income | $6.9 million | $6.5 million | Up 5.6% |
| Net realized investment gains | $1.8 million | $0.1 million | Higher by $1.7 million |
| Total expenses | $67.2 million | $59.5 million | Up 13.0% |
| Income before taxes | $11.4 million | $7.5 million | Up 52.6% |
| Net income | $9.6 million | $6.6 million | Up 44.2% |
| Diluted EPS | $0.52 | $0.35 | Up $0.17 |
| Net combined ratio | 96.0% | 98.3% | Improved 2.3 points |
| Return on average equity | 10.8% | 8.0% | Improved 2.8 points |
| Book value per share | $19.78 | $18.24 | Up 8.4% |
Net income margin based on total revenues was approximately 12.1% in Q1 2012 versus 9.9% in Q1 2011. The net loss ratio increased to 74.3% from 73.5%, while the expense ratio improved to 21.1% from 24.2%.
Cash flow, liquidity, investments and debt
- Operating cash flow was $18.1 million, compared with $0.5 million in Q1 2011.
- Investing activities provided $0.2 million, compared with $7.9 million of cash used in the prior-year quarter.
- Financing activities used no cash, compared with $1.3 million used in Q1 2011.
- Cash and cash equivalents increased to $63.8 million from $45.5 million at December 31, 2011.
- Total investments were $804.9 million at March 31, 2012. Investments including cash totaled $868.7 million.
- Shareholders’ equity increased to $359.1 million from $349.4 million at December 31, 2011.
- Subordinated debt securities totaled $25.8 million. The company expected to redeem $12.9 million in the second quarter of 2012 and subsequently authorized redemption of the remaining $12.9 million, expected in the third quarter, using available capital.
Material changes versus the prior comparable period
- Premium growth was driven by an $8.0 million increase in annual premiums from voluntary policies and a $5.4 million increase from payroll audits and related adjustments.
- Current accident-year losses and loss adjustment expenses increased to $53.4 million from $46.3 million, but declined to 76.5% of earned premiums from 77.0%.
- Prior accident-year development remained favorable at $1.6 million, though less favorable than the $2.1 million recorded in Q1 2011.
- Underwriting and certain operating costs, commissions, and salaries increased only 1.1% to $14.7 million, supporting the improvement in the expense ratio.
- The effective tax rate increased to 16.4% from 11.5%, primarily because tax-exempt investment income represented a smaller proportion of pretax income.
- No shares were repurchased in Q1 2012, compared with 159,062 shares repurchased for $2.9 million in Q1 2011. No stock options were exercised in Q1 2012.
- Adoption of new insurance acquisition-cost guidance reduced deferred policy acquisition costs by $2.2 million, deferred tax liabilities by $0.8 million and shareholders’ equity by $1.4 million at December 31, 2011. The effect on Q1 2012 operations was not material.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or premium guidance. Management stated that claims are paid from operating cash flow and excess cash is invested primarily in fixed-maturity securities. The company’s strategy emphasizes disciplined underwriting, workplace safety, claims management and premium audits.
- Reserve estimates are inherently uncertain. AMERISAFE’s focus on hazardous industries produces relatively fewer but more severe claims, which may create greater reserve volatility.
- Management recorded favorable development in several prior accident years but noted that accident year 2010 results were worse than expected. Management did not change reserve assumptions based on recent experience.
- Key risks include competition, workers’ compensation industry cyclicality, claim frequency and severity, economic conditions, regulatory changes, reinsurance availability and collectability, investment-market performance, interest-rate risk, legal developments and reduced policyholder activity.
- The investment portfolio had $1.7 million of gross unrealized losses on securities at March 31, 2012; management concluded that the losses were not other-than-temporary and that no debt-security credit losses existed.
- The company realized $1.8 million of gains from sales of available-for-sale equity and fixed-maturity securities during the quarter.
- The IRS completed its examination of tax year 2009 and determined that the company properly computed an $8.1 million net long-term capital loss carryback; a resulting $2.9 million credit was being processed.
- Management concluded that disclosure controls and procedures were effective at March 31, 2012, with no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether premium growth and payroll-audit adjustments are sustainable rather than primarily timing-related.
- Future loss development, particularly for accident year 2010, and the adequacy of reserves for severe hazardous-industry claims.
- The effect of the planned $25.8 million subordinated-debt redemptions on capital, liquidity and investment income.
- Whether the 96.0% combined ratio and 10.8% return on equity are maintained without relying on favorable prior-year development or investment gains.
- Investment portfolio credit quality, interest-rate exposure and the potential for other-than-temporary impairments.
- Reinsurance recoverables of $99.9 million and the financial strength and payment performance of reinsurers.