AMERISAFE, Inc. 2011 Q2 Form 10-Q Summary
Business context and reporting period
AMERISAFE is a workers’ compensation insurer serving small and mid-sized employers in hazardous industries, principally construction, trucking and agriculture. The filing covers the three and six months ended June 30, 2011, with comparisons to the corresponding 2010 periods. The financial statements are unaudited.
Financial results and key metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Gross premiums written | $72.9 million | $63.0 million | $144.3 million | $124.1 million |
| Net premiums earned | $60.3 million | $53.0 million | $120.4 million | $108.0 million |
| Total revenues | $67.1 million | $60.1 million | $134.0 million | $124.5 million |
| Net income | $4.6 million | $10.4 million | $11.2 million | $21.7 million |
| Diluted EPS | $0.24 | $0.54 | $0.60 | $1.13 |
| Net combined ratio | 102.7% | 87.3% | 100.5% | 89.4% |
| Return on average equity | 5.5% | 13.3% | 6.8% | 14.0% |
- Q2 net premiums written increased 19.1% to $69.5 million; six-month net premiums written increased 19.6% to $137.3 million.
- Q2 loss and loss adjustment expenses rose 38.2% to $46.6 million. The net loss ratio increased to 77.3% from 63.6%, while the expense ratio increased to 24.8% from 23.3%.
- Current accident-year loss ratios increased to 79.3% in Q2 and 78.2% for the first half, compared with 75.5% and 74.0%, respectively, in 2010. Management attributed the increase primarily to claim frequency and severity.
- Net investment income was approximately flat at $6.6 million in Q2 and $13.1 million for the first half. The pretax investment yield declined to 3.2% from 3.3%.
- Effective tax rates declined to 4.7% in Q2 and 8.8% for the first half, primarily because tax-exempt investment income represented a larger proportion of lower pretax earnings.
- At June 30, 2011, total assets were $1.15 billion and shareholders’ equity was $337.2 million. Book value per share was $18.31.
Cash flow, liquidity and debt
- Six-month operating cash flow was $4.7 million, down from $10.4 million in 2010, primarily due to higher losses paid, higher expense disbursements and lower reinsurance recoveries.
- Investing activities used $3.4 million, compared with $17.8 million used in 2010. Cash and cash equivalents increased to $62.0 million from $61.0 million at year-end 2010.
- The investment portfolio, including cash and cash equivalents, totaled $828.9 million. Fixed maturity securities represented the majority of the portfolio, including $648.3 million classified as held-to-maturity.
- Subordinated debt securities totaled $36.1 million at June 30, 2011, with a weighted average borrowing rate of approximately 4.2% during the quarter and first half.
- The company redeemed $10.3 million of subordinated debt securities in July 2011, funded with available capital.
- The company repurchased 159,062 shares for $2.9 million during the first half. Approximately $20.4 million remained available under the repurchase authorization at June 30, 2011.
Material changes versus the prior comparable period
- Premium growth was strong, driven by higher voluntary policy premiums, payroll audits and related adjustments, and a $4.0 million contribution from a renewal rights and assumption agreement completed in the first quarter.
- Ceded premiums declined as a percentage of gross premiums earned to 5.3% in Q2 and 5.5% for the first half, from 8.0% and 7.9%, respectively, reflecting changes in 2011 reinsurance treaties.
- Profitability deteriorated materially because loss costs increased faster than premium revenue and favorable prior-year reserve development declined to $1.2 million in Q2 and $3.3 million for the first half, from $6.3 million and $8.6 million, respectively.
- Open claims at June 30, 2011 totaled 5,132, up 11.2% from 4,614 a year earlier. Management cited higher frequency and extended claim duration.
- Net realized investment gains declined to $0.1 million in Q2 and $0.2 million for the first half, compared with $0.3 million and $2.8 million in the prior-year periods.
Outlook, risks, contingencies and unusual items
The filing does not provide specific earnings, premium or margin guidance. Management emphasized that results are sensitive to workers’ compensation industry cycles, competition, economic activity among policyholders, claim frequency and severity, reserve development, regulation, reinsurance availability and recoverability, investment performance, interest rates and catastrophic events.
- In June 2011, the company recorded a $0.2 million other-than-temporary impairment on an asset-backed security because a loss of principal was anticipated.
- Management reported favorable development in older accident years but higher-than-expected results for accident year 2010. Loss reserves remain inherently uncertain because the company writes relatively low-frequency, high-severity business.
- ASU 2010-26, effective for fiscal years beginning after December 15, 2011, is expected to change deferred policy acquisition costs by approximately $2.0 million to $3.0 million pretax.
- The IRS notified the company in July 2011 of an examination for tax year 2009. The filing reports no material unrecognized tax benefits.
- No legal proceedings, defaults upon senior securities or material risk-factor changes were reported in Part II of the filing.
Important facts for investors to verify
- Whether the elevated current accident-year loss ratio and claim counts persist or improve.
- The adequacy of loss and loss adjustment expense reserves, particularly for accident year 2010 and other recent periods.
- The sustainability of premium growth from payroll audits, policy renewals and changed reinsurance arrangements.
- The effect of the July 2011 debt redemption on capital, liquidity and future interest expense.
- Potential additional investment impairments and sensitivity of investment income to interest rates and credit conditions.
- The outcome of the 2009 IRS examination and the eventual accounting impact of ASU 2010-26.