AMERISAFE, Inc. 2017 Q2 Form 10-Q Summary
Business context and reporting period
AMERISAFE is a workers’ compensation insurer focused on small to mid-sized employers in hazardous industries, including construction, trucking, logging and lumber, manufacturing, and agriculture. The company markets insurance in 27 states through independent agencies and its wholly owned agency subsidiary. This filing covers the three and six months ended June 30, 2017; financial statements are unaudited and presented in accordance with interim U.S. GAAP.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Gross premiums written | $87.0 million | $103.2 million | $182.1 million | $203.6 million |
| Net premiums earned | $82.7 million | $90.7 million | $173.7 million | $186.7 million |
| Total revenues | $89.9 million | $97.6 million | $187.5 million | $199.9 million |
| Net investment income | $7.5 million | $6.2 million | $14.2 million | $12.2 million |
| Net income | $15.5 million | $16.6 million | $29.0 million | $40.9 million |
| Diluted EPS | $0.81 | $0.87 | $1.51 | $2.13 |
| Net combined ratio | 81.9% | 80.4% | 84.4% | 75.5% |
| Return on average equity | 13.1% | 13.7% | 12.4% | 17.2% |
Q2 net income margin was approximately 17.2%, compared with approximately 17.1% in the prior-year quarter. The six-month net income margin declined to approximately 15.5% from 20.5%. The Q2 net loss ratio increased to 56.1% from 54.2%, while the expense ratio improved to 24.4% from 24.9%.
At June 30, 2017, total assets were $1.56 billion, total investments were $1.12 billion, cash and cash equivalents were $54.0 million, and shareholders’ equity was $481.4 million. Book value per share was $25.02. Loss and loss adjustment expense reserves were $749.8 million, with $84.1 million of amounts recoverable from reinsurers. No separate debt balance is disclosed in the filing.
Operating cash flow for the first six months was $40.8 million, compared with $56.4 million in the prior-year period. Investing activities used $38.0 million, financing activities used $7.8 million, and ending cash was $54.0 million. The company paid $7.8 million in dividends during the period and declared a subsequent quarterly dividend of $0.20 per share payable September 22, 2017.
Material changes versus the prior comparable period
- Q2 gross premiums written decreased 15.7%; the six-month decrease was 10.6%, primarily reflecting lower voluntary-policy premiums and lower payroll-audit adjustments.
- Net premiums earned declined 8.8% in Q2 and 7.0% for the six-month period.
- Investment income increased 20.5% in Q2 and 15.8% for the six months, partly because the prior-year period included a decline in the value of a hedge fund investment.
- Net income declined 7.0% in Q2 and 29.1% for the six months. The six-month decline principally reflects lower earned premiums, higher current accident-year loss costs, and less favorable prior-year reserve development.
- Current accident-year losses and LAE were 69.0% of net premiums earned in both Q2 2017 and the first six months of 2017, compared with 67.9% in the comparable 2016 periods.
- Favorable prior accident-year development was $10.7 million in Q2 and $17.2 million for the first six months, compared with $12.4 million and $30.9 million, respectively, in 2016.
- Accumulated other comprehensive income improved to $2.4 million from a $0.5 million loss at December 31, 2016, primarily due to unrealized gains on available-for-sale securities.
Outlook, risks, contingencies, and unusual items
The filing does not provide formal earnings or premium guidance. Management attributes favorable reserve development to case reserve improvements, closed claims, and claims reaching maximum medical improvement, but emphasizes that reserves are inherently uncertain and may be volatile because the company writes relatively fewer, more severe claims.
Investment risks include interest-rate, credit, equity-price, and liquidity risk. At June 30, 2017, fixed maturity securities had $4.2 million of gross unrealized losses; management concluded the declines were principally market-related and did not recognize other-than-temporary impairment losses during the periods presented. The company had 187 fixed maturity securities in unrealized loss positions, including 21 held for more than 12 months.
An Iowa workers’ compensation case previously resulted in a $25.3 million adverse verdict. On May 19, 2017, the Iowa Supreme Court reversed the actual and punitive damage judgments and remanded the case for a new trial. The $27.8 million appeal bond was ordered returned on July 21, 2017. The company reported a $2.4 million reserve for the claim, total payments and reserve of $5.4 million, and reinsurance coverage above a $5.0 million retention.
Other disclosed risks include competition, economic and employment conditions, claim frequency and severity, regulatory and legal changes, reinsurance availability and collectability, investment-market performance, cyberattacks, agency relationships, and key-person risk. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Most important facts for an investor to verify
- Whether declining premium volume persists and how it affects future earned premiums and operating leverage.
- Whether the 69.0% current accident-year loss ratio and 84.4% year-to-date combined ratio improve or deteriorate.
- The sustainability of favorable prior-year reserve development and the adequacy of the $749.8 million loss reserve.
- Liquidity and capital adequacy, including cash flow available to fund claims, dividends, and potential share repurchases.
- Exposure to interest-rate changes and unrealized losses in the large fixed-income investment portfolio.
- Developments in the Iowa litigation, including the outcome of the new trial and the sufficiency of reserves and reinsurance.
- The absence of formal forward earnings or premium guidance and the uncertainty inherent in interim results.