AMERISAFE, Inc. — Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE provides workers’ compensation insurance to small and mid-sized employers in hazardous industries, principally construction, trucking, manufacturing, oil and gas, and agriculture. The filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. The financial statements are unaudited and presented in accordance with interim Form 10-Q requirements.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Gross premiums written | $100.8 million | $105.7 million | Down 4.6% |
| Net premiums written | $98.3 million | $102.4 million | Down 4.0% |
| Net premiums earned | $94.8 million | $89.2 million | Up 6.2% |
| Total revenues | $101.8 million | $96.2 million | Up 5.8% |
| Net investment income | $6.8 million | $6.7 million | Up 1.9% |
| Income before income taxes | $21.2 million | $13.4 million | Up 58.1% |
| Net income | $15.1 million | $10.5 million | Up 43.4% |
| Diluted EPS | $0.79 | $0.56 | Up 41.1% |
| Net combined ratio | 85.0% | 92.7% | Improved 7.7 points |
| Return on average equity | 13.3% | 10.1% | Improved 3.2 points |
Net income margin was approximately 14.9% of total revenue in Q1 2015, compared with approximately 11.0% in Q1 2014. The net loss ratio improved to 63.3% from 68.7%, while the expense ratio improved to 21.5% from 23.9%.
Operating cash flow was $32.3 million, compared with $30.3 million in the prior-year quarter. Investing activities used $42.1 million, principally for investment purchases, and financing activities used $1.5 million. Cash and cash equivalents declined to $79.7 million from $91.0 million at December 31, 2014.
At March 31, 2015, total assets were $1.515 billion, total investments were $1.073 billion, and investments including cash were $1.153 billion. Shareholders’ equity was $461.7 million, or $24.32 per outstanding share. Loss and loss adjustment expense reserves were $704.9 million. The filing does not identify material corporate debt or debt financing.
Material Changes Versus the Prior Comparable Period
- Gross and net premiums written declined, primarily because annual premiums on voluntary policies decreased by $6.1 million.
- Net premiums earned increased because of premium growth written during 2014.
- Ceded premiums as a percentage of gross premiums earned declined to 2.6% from 3.6%, reflecting improved pricing for the 2015 reinsurance program.
- Loss and loss adjustment expenses decreased 2.1% to $60.0 million. Favorable prior accident-year development increased to $6.1 million from $2.5 million.
- Current accident-year losses and loss adjustment expenses increased to $66.2 million, or 69.8% of net premiums earned, from $63.8 million, or 71.5%.
- Underwriting, commission, and salary-related expenses declined 4.7%, primarily due to lower insurance-related assessments and compensation expense.
- The effective tax rate increased to 28.6% from 21.3%, despite the substantial increase in pretax income.
- Cash dividends paid declined to $2.8 million from $11.5 million, primarily because the prior-year period included a $0.50 extraordinary dividend. The regular dividend increased to $0.15 per share from $0.12.
Outlook, Commentary, Risks, and Unusual Items
Management emphasizes disciplined underwriting, workplace safety reviews, claims management, and premium audits. The company markets insurance in 30 states and the District of Columbia and is licensed in an additional 17 states and the U.S. Virgin Islands. No formal earnings or premium guidance is provided in the filing.
Management notes that reserves are inherently uncertain and may be more volatile because the company focuses on relatively fewer but more severe claims. Key risks include competition and insurance-cycle conditions, economic weakness, claim frequency or severity, regulatory and legal changes, reinsurance availability and collectability, investment-market performance, interest-rate risk, cybersecurity events, catastrophic events, and employee retention.
The investment portfolio was heavily concentrated in fixed maturity securities. Unrealized losses totaled $3.5 million at March 31, 2015, and no other-than-temporary impairment losses were recognized. The company reported no material changes in market-risk exposure from December 31, 2014.
The Board declared a quarterly dividend of $0.15 per share on April 28, 2015, payable June 26, 2015. The share repurchase program remained authorized for up to $25.0 million of additional purchases, although no shares were repurchased during the quarter. The company also granted 6,757 restricted shares to executive officers and reported amended or restated employment agreements for two executives.
Important Facts for Investors to Verify
- Whether the favorable $6.1 million prior-year reserve development is sustainable and how current accident-year loss trends develop.
- Premium retention, renewal pricing, voluntary-policy growth, and the effect of the lower loss cost multiplier.
- Reinsurance pricing, coverage, counterparty strength, and recoverability of the $87.4 million receivable from reinsurers.
- The quality, duration, concentration, and interest-rate sensitivity of the $1.153 billion investment portfolio, including unrealized losses.
- Liquidity relative to loss-reserve payments, dividend commitments, regulatory capital requirements, and potential share repurchases.
- The higher effective tax rate and whether the Q1 rate is representative of future periods.
- Potential volatility from severe workers’ compensation claims, reserve changes, regulatory developments, and insurance-cycle conditions.