AMERISAFE, Inc. 2016 Q2 Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE 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 filing covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. The financial statements are unaudited.
Key Financial Metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Gross premiums written | $103.2 million | $106.0 million | $203.6 million | $206.8 million |
| Net premiums earned | $90.7 million | $95.6 million | $186.7 million | $190.4 million |
| Total revenues | $97.6 million | $99.9 million | $199.9 million | $201.7 million |
| Net income | $16.6 million | $14.3 million | $40.9 million | $29.4 million |
| Diluted EPS | $0.87 | $0.75 | $2.13 | $1.54 |
| Net combined ratio | 80.4% | 83.6% | 75.5% | 84.2% |
| Return on average equity | 13.7% | 12.3% | 17.2% | 12.8% |
Net income margins based on total revenues were approximately 17.0% in the second quarter and 20.5% for the first six months, compared with approximately 14.3% and 14.6%, respectively, in the prior-year periods.
- Loss and loss adjustment expenses declined 14.2% in the quarter and 18.3% year to date. The net loss ratio improved to 54.2% from 60.0% in the quarter and to 51.4% from 61.6% year to date.
- Favorable prior accident-year development was $12.4 million in the quarter and $30.9 million year to date, compared with $9.4 million and $15.6 million, respectively, in 2015.
- Net investment income was $6.2 million in the quarter and $12.2 million year to date, down from $6.9 million and $13.7 million. Management attributed the decline primarily to a decrease in the value of a hedge fund investment.
- Net realized investment gains were $0.5 million in the quarter and $0.8 million year to date, compared with losses of $2.6 million in both 2015 periods. No other-than-temporary impairment losses were recognized in 2016; 2015 included $2.7 million of such losses.
- As of June 30, 2016, total assets were $1.595 billion, investments were $1.109 billion, cash and cash equivalents were $70.2 million, and shareholders’ equity was $495.9 million. Book value per share was $25.83.
- Net cash provided by operating activities was $56.4 million for the first six months, compared with $26.1 million in 2015. Net cash used in investing activities was $49.8 million, and net cash used in financing activities was $5.9 million.
- The filing does not provide a clear amount for outstanding debt or identify debt as a material liquidity source or use.
Material Changes Versus the Prior Comparable Period
- Premium volume declined modestly: gross premiums written decreased 2.6% in the quarter and 1.5% year to date. Management cited payroll audits, lower assumed premiums from mandatory pooling arrangements, and lower voluntary-policy premiums.
- Profitability improved substantially because of lower current accident-year loss ratios, increased favorable reserve development, and the absence of the prior-year investment impairment charge.
- Underwriting and other operating costs, commissions, and salaries increased 2.2% in the quarter and 0.6% year to date. The expense ratio increased to 24.9% from 23.1% in the quarter and to 22.9% from 22.3% year to date.
- The investment portfolio, including cash, increased to approximately $1.179 billion from approximately $1.115 billion at December 31, 2015. Available-for-sale securities increased, while held-to-maturity securities declined.
- Accumulated other comprehensive income increased to $8.3 million from $2.6 million at year-end 2015, primarily from unrealized gains on available-for-sale securities.
- The quarterly dividend increased to $0.18 per share from $0.15 in the comparable 2015 period. The board declared another $0.18 per-share dividend payable September 23, 2016.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing provides no formal earnings or premium guidance. Management stated that interim results are not necessarily indicative of full-year performance and expects to continue considering regular quarterly dividends.
- Reserve estimates remain inherently uncertain. AMERISAFE’s focus on hazardous industries produces relatively fewer but more severe claims, which may create greater reserve volatility.
- Management attributed favorable reserve development in 2012–2014 accident years primarily to intensive claims management and settlements, but did not change its reserve assumptions based on recent results.
- The company faces an adverse Iowa workers’ compensation verdict involving a 2009 claim: $25.3 million, including $25.0 million in punitive damages. The verdict is being appealed, and a $27.8 million appeal bond has been posted. The recorded reserve was $2.5 million at June 30, 2016; cumulative payments plus the reserve totaled $5.4 million. Management believes reserves and reinsurance are adequate, subject to the appeal and reinsurance recovery.
- Principal risks include workers’ compensation industry cyclicality, claim frequency and severity, competition, regulatory and legal changes, reinsurance availability and collectability, investment-market and interest-rate risk, cyber risks, economic conditions, and catastrophic events.
- The company reported no material change in its market-risk profile since December 31, 2015. Disclosure controls and procedures were assessed as effective, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether favorable prior-year reserve development remains sustainable and how current accident-year loss trends evolve.
- The status and ultimate exposure from the Iowa verdict, appeal, appeal bond, and reinsurance coverage.
- The effect of lower premium volume and declining investment yields on future revenue and earnings.
- The composition, credit quality, duration, and unrealized-loss profile of the approximately $1.18 billion investment portfolio.
- The company’s actual debt and capital position, since the filing excerpt does not present a clear debt balance.
- Whether the $0.18 quarterly dividend and authorized $25.0 million share-repurchase capacity remain consistent with regulatory and insurance-subsidiary capital requirements.