AMERISAFE, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011; filed November 4, 2011. AMERISAFE provides workers’ compensation and general liability insurance to small and mid-sized employers in hazardous industries, primarily construction, trucking, and agriculture. The company markets in 33 states and the District of Columbia.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Gross premiums written | $65.7 million | $52.2 million | $210.0 million | $176.3 million |
| Net premiums earned | $64.5 million | $54.4 million | $184.8 million | $162.5 million |
| Total revenues | $71.7 million | $60.5 million | $205.8 million | $185.0 million |
| Net income | $6.7 million | $4.4 million | $17.9 million | $26.1 million |
| Diluted EPS | $0.36 | $0.23 | $0.95 | $1.36 |
| Net combined ratio | 98.0% | 101.7% | 99.6% | 93.4% |
| Return on average equity | 7.9% | 5.5% | 7.2% | 11.2% |
Q3 net income margin was approximately 9.3%, compared with approximately 7.2% in the prior-year quarter. Nine-month net income margin declined to approximately 8.7% from approximately 14.1%.
- Q3 loss and loss adjustment expenses were $49.3 million, with a 76.5% net loss ratio versus 85.8% in Q3 2010.
- Q3 expense ratio increased to 21.1% from 15.4%, primarily due to higher assessments, premium taxes, commissions, and lower experience-rated and ceding commissions.
- Net investment income was $6.5 million in Q3 and $19.6 million for nine months, slightly below comparable 2010 amounts. The pretax investment yield was 3.1%, versus 3.3%.
- Net cash provided by operating activities was $29.8 million for nine months, compared with $20.5 million in 2010.
- Cash and cash equivalents were $68.9 million at September 30, 2011, compared with $61.0 million at December 31, 2010.
- Total investments were $767.6 million; investments including cash and cash equivalents totaled $836.5 million.
- Shareholders’ equity was $338.5 million, and book value per share was $18.74.
- Subordinated debt declined to $25.8 million from $36.1 million after redemption of $10.3 million of ACT I subordinated debt securities. No material changes in market-risk exposure were reported.
Material Changes Versus the Prior Comparable Period
- Q3 gross premiums written increased 25.9%, and net premiums written increased 32.7%. Growth reflected payroll audits and related premium adjustments and higher annual premiums on voluntary policies.
- Nine-month gross premiums written increased 19.1%, while net premiums written increased 23.4%.
- Ceded premiums as a percentage of gross premiums earned decreased to 5.2% in Q3 and 5.4% for nine months, from 8.9% and 8.2%, respectively, due to changes in 2011 reinsurance treaties.
- Q3 net income increased 53.5%, but nine-month net income decreased 31.3%. The nine-month comparison was affected by substantially lower favorable prior-year reserve development and higher operating expenses.
- Favorable prior accident-year development was $1.1 million in Q3 and $4.4 million for nine months, compared with $5.3 million and $13.9 million, respectively, in 2010.
- Open claims increased 5.9% to 5,455 at September 30, 2011. Management attributed the increase partly to claim frequency and extended duration.
- The company repurchased 357,970 shares for $6.8 million during Q3 and 517,032 shares for $9.7 million during nine months. The board subsequently authorized a new repurchase limit of up to $25.0 million effective October 1, 2011.
Outlook, Risks, Contingencies, and Unusual Items
The filing provides no quantitative earnings or premium guidance. Management emphasizes disciplined underwriting, safety reviews, claims management, and audit services but notes that interim results are not necessarily indicative of full-year results.
- Insurance reserves are inherently uncertain, particularly because the company writes relatively fewer but more severe claims in hazardous industries. Actual 2010 accident-year results were worse than expected, while several older accident years performed better than assumptions.
- Investment securities had $1.8 million of gross unrealized losses at September 30, 2011. The company recorded a $0.2 million other-than-temporary impairment on an asset-backed security during the first nine months and concluded that remaining unrealized losses were primarily market- and interest-rate-related.
- Key risks include competition, workers’ compensation cyclicality, claim frequency and severity, catastrophic events, regulatory changes, economic weakness affecting policyholder activity, investment-market volatility, reinsurance availability and collectability, and changes in rating-agency practices.
- The IRS was examining tax year 2009; the filing reports no material unrecognized tax benefits.
- Adoption of new insurance-contract acquisition-cost guidance is expected to change consolidated financial position or results of operations by approximately $2.0 million to $3.0 million pretax; the filing does not state whether the effect will increase or decrease earnings.
- Management concluded that disclosure controls and procedures were effective and reported no material change in internal control over financial reporting.
Investor Verification Points
- Verify the sustainability of premium growth, including the contribution from payroll audits and prior-policy adjustments versus recurring new business.
- Review loss-reserve development, especially the deterioration in accident year 2010 and the lower level of favorable prior-year development.
- Assess whether the 2011 reinsurance structure appropriately balances ceded-premium savings with increased retained claim exposure.
- Monitor the 5.9% increase in open claims and the potential effect of claim frequency and duration on future reserves.
- Evaluate investment portfolio credit, interest-rate, and impairment risk, including the large held-to-maturity portfolio.
- Confirm the financial and regulatory implications of the remaining $25.8 million subordinated debt and ongoing share repurchases.