AMERISAFE INC annual report, FY2011

AMERISAFE, Inc. 2011 Form 10-K Summary

Business context and reporting period

AMERISAFE is a specialty workers’ compensation insurer focused on small and mid-sized employers in hazardous industries, principally construction, trucking and agriculture. The filing covers the fiscal year ended December 31, 2011, with quarterly information including the fourth quarter. The company operates through insurance subsidiaries domiciled primarily in Louisiana and Texas and markets coverage in 35 states and the District of Columbia.

More than 7,900 voluntary policyholders at year-end; voluntary policy renewal rate was 92.0%.
Gross premiums written were concentrated in construction, trucking and agriculture, which together represented 68.5% of gross premiums written.
AMERISAFE held an “A” group financial strength rating from A.M. Best.

Financial performance and key metrics

Metric	2011	2010	Change
Gross premiums written	$272.1 million	$228.4 million	19.1% increase
Net premiums written	$258.2 million	$207.9 million	24.2% increase
Net premiums earned	$251.0 million	$218.9 million	14.7% increase
Total revenues	$280.7 million	$248.2 million	13.1% increase
Net investment income	$26.3 million	$26.2 million	0.4% increase
Income before taxes	$27.3 million	$44.4 million	38.5% decrease
Net income	$24.1 million	$34.6 million	30.3% decrease
Diluted EPS	$1.29	$1.81	28.7% decrease
Net combined ratio	100.5%	92.4%	8.1 percentage-point deterioration
Return on average equity	7.1%	10.9%	3.8 percentage-point decline

The 2011 net loss ratio increased to 75.6% from 71.9%, while the current accident-year loss ratio improved to 78.2% from 81.8%. Favorable prior-year loss development was $6.6 million, compared with $21.6 million in 2010. The underwriting expense ratio increased to 24.3% from 20.1%, primarily because of higher insurance-related assessments, commissions and lower ceding commissions.

Fourth-quarter 2011 net income was $8.1 million, or diluted EPS of $0.44, compared with fourth-quarter 2010 net income of $8.5 million, or diluted EPS of $0.45. Fourth-quarter 2011 premiums earned were $66.2 million, compared with $56.4 million in the prior-year quarter.

Cash flow, liquidity, debt and capital

Net cash provided by operating activities was $43.7 million in 2011, compared with $44.8 million in 2010.
Net cash used in investing activities was $42.9 million, principally reflecting $294.8 million of investment purchases offset by $253.0 million of investment sales and maturities.
Net cash used in financing activities was $16.2 million, including $10.3 million for share repurchases and $10.3 million for redemption of subordinated debt.
Cash and cash equivalents were $45.5 million at year-end, compared with $61.0 million in 2010.
Investments, including cash and cash equivalents, totaled $851.5 million at carrying value and $890.7 million at fair value.
Shareholders’ equity increased to $350.9 million from $330.2 million; book value per share was $19.33 versus $17.99.
Subordinated debt was $25.8 million at year-end, down from $36.1 million. The remaining debt bears interest at LIBOR plus 3.8% and had an effective rate of 4.3% at year-end.
The company had no borrowings or letters of credit outstanding under its $20.0 million unsecured revolving credit facility, which matures in December 2013.
In March 2012, the board authorized redemption of $12.9 million of the remaining subordinated debt, expected in the second quarter of 2012.
The company repurchased 549,642 shares in 2011 for $10.3 million and had $24.4 million remaining under its repurchase authorization at year-end. No cash dividends were paid, and management did not expect dividends for the foreseeable future.

Material changes versus prior comparable periods

Premium growth accelerated materially, driven primarily by payroll audits and related premium adjustments, including a $33.1 million increase, and higher annual premiums on voluntary policies.
Loss and loss adjustment expenses increased 20.5% to $189.7 million, while total expenses increased 24.3% to $253.4 million.
Insurance-related assessments increased substantially and contributed to the higher underwriting expense ratio.
Gross loss reserves increased to $538.2 million from $532.2 million; net reserves increased to $477.3 million from $466.7 million.
Open claims increased to 5,184 from 5,129. The company reported 5,986 new claims and closed 5,931 claims during 2011.
The investment portfolio grew approximately 3.0%, but the pre-tax investment yield declined to 3.1% from 3.2% amid very low interest rates.
Prior-period financial statements were adjusted for an accounting error involving state guaranty fund assessment liabilities and related premium tax offsets. The correction reduced the 2010 assessment liability by approximately $15.2 million and increased adjusted 2010 shareholders’ equity by approximately $5.0 million. Management concluded the error was not material to any prior period.

Outlook, management commentary, risks and unusual items

Management stated that the workers’ compensation industry was transitioning from a soft market cycle and emphasized maintaining underwriting discipline, adequate pricing, market penetration and capital strength. The company expected operating cash flow to provide sufficient liquidity for operations, claims, interest and holding-company expenses for at least the next 18 months.

Management identified the cyclical and competitive nature of workers’ compensation insurance as a key factor affecting premium rates, volume and profitability.
Loss reserves are inherently uncertain because the company insures hazardous industries with relatively infrequent but severe claims, often involving long-duration medical and disability costs.
At year-end, the company’s best estimate of ultimate net loss and loss adjustment liabilities was $477.3 million. Sensitivity analyses showed that changes in selected loss-development assumptions could affect the net loss and defense-and-cost-containment reserve by approximately $16.9 million in the most adverse scenario presented.
Reinsurance recoverables totaled $96.2 million, including $48.9 million that was unsecured. The company remains liable to policyholders if reinsurers fail to pay.
The 2012 reinsurance program provided occurrence coverage up to $50.0 million, subject to deductibles, retentions and aggregate limits, but coverage for a single-claimant occurrence was limited to $10.0 million.
Investment risks include low interest rates, credit deterioration, market illiquidity, equity-price volatility and other-than-temporary impairments. The company recorded a $0.2 million impairment on one asset-backed security in 2011.
State guaranty fund assessments, residual-market obligations, second-injury fund assessments and regulatory restrictions may reduce profitability or limit market exits and dividend payments.
The company was subject to an IRS examination for tax year 2009; the filing states that no uncertain tax positions existed at year-end.
Management reported no legal or administrative proceedings expected to have a material adverse effect and no off-balance-sheet arrangements with a material current or future effect.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.

Most important facts for investors to verify

Whether premium growth is sustainable after separating payroll-audit adjustments and other one-time or timing-related premium effects from recurring policy growth.
Whether the 100.5% combined ratio improves and whether current accident-year loss trends remain favorable as prior-year reserve releases diminish.
The adequacy of loss reserves, particularly for severe, long-duration claims and accident year 2010, which management said had developed worse than expected.
The collectability and collateralization of the $96.2 million in reinsurance recoverables, including the $48.9 million unsecured amount.
The impact of low interest rates on investment income and the potential for additional investment impairments.
The effect of state guaranty fund assessments and the accounting correction on future earnings, cash flow and regulatory capital.
Regulatory capacity for subsidiary dividends, including the stated $21.4 million amount that could be paid to AMERISAFE without prior approval after March 2012.
The terms and financial impact of the planned $12.9 million debt redemption and continued share repurchases.