AMERISAFE, Inc. — Q1 2017 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, logging and lumber, manufacturing, and agriculture. The company markets insurance in 27 states through independent agencies and its wholly owned agency subsidiary. This report covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Gross premiums written | $95.1 million | $100.4 million | Down 5.3% |
| Net premiums earned | $90.9 million | $96.0 million | Down 5.3% |
| Total revenues | $97.5 million | $102.3 million | Down 4.7% |
| Net investment income | $6.7 million | $6.0 million | Up $0.7 million |
| Total expenses | $78.8 million | $67.9 million | Up 16.0% |
| Income before taxes | $18.7 million | $34.4 million | Down 45.5% |
| Net income | $13.5 million | $24.3 million | Down 44.2% |
| Diluted EPS | $0.70 | $1.27 | Down $0.57 |
| Net combined ratio | 86.6% | 70.8% | Up 15.8 points |
| Return on average equity | 11.7% | 20.8% | Down 9.1 points |
| Book value per share | $24.29 | $24.96 | Down $0.67 |
The implied net income margin was approximately 13.9% in Q1 2017 versus approximately 23.7% in Q1 2016. The net loss ratio increased to 61.8% from 48.7%, while the expense ratio increased to 23.3% from 21.0%.
Net cash provided by operating activities was $23.8 million, compared with $30.3 million in the prior-year quarter. Investing activities used $39.5 million, primarily reflecting net investment purchases, versus $17.9 million used in Q1 2016. Financing activities used $3.9 million, principally for dividends. Cash and cash equivalents declined to $39.4 million from $58.9 million at December 31, 2016.
At March 31, 2017, total assets were $1.54 billion, total investments were $1.11 billion, and shareholders’ equity was $467.1 million. The investment portfolio, including cash, totaled $1.15 billion. The filing does not report a debt balance or identify material borrowings.
Material Changes Versus the Prior Comparable Period
- Premium volume declined 5.3%, primarily because of lower payroll-audit adjustments and lower annual premiums on voluntary policies. The effective loss cost multiplier for voluntary business declined to 1.65 from 1.76.
- Loss and loss adjustment expenses increased 20.3% to $56.2 million. Current accident-year losses declined to $62.7 million from $65.2 million, but favorable prior-year development fell sharply to $6.5 million from $18.4 million.
- Underwriting and other operating costs, commissions, and salaries increased 5.4% to $21.2 million; the expense ratio rose to 23.3%.
- Net investment income increased because the prior-year quarter included a decline in the value of a hedge fund investment. The pretax investment yield increased to 2.3% from 2.1%.
- Operating cash flow decreased by $6.5 million, reflecting higher losses paid, lower premium collections, and higher underwriting expenses paid.
- Comprehensive income was $14.5 million, down from $27.1 million, although unrealized gains on securities increased accumulated other comprehensive income to $0.5 million from a $0.5 million loss at year-end 2016.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal earnings or premium guidance. Management states that interim results are not necessarily indicative of full-year results. Management expects to continue funding claims and operating expenses from operating cash flow and investing remaining funds.
Loss reserves totaled $749.5 million at March 31, 2017, including $77.5 million recoverable from reinsurers. Management considers reserves adequate, but emphasizes that estimates are inherently uncertain and may be volatile because the company writes relatively fewer but more severe claims. Favorable prior-year development in Q1 2017 was largely attributed to favorable case reserve development on closed claims and claims reaching maximum medical improvement.
The company is appealing an adverse Iowa workers’ compensation verdict involving a 2009 claim, including $25.0 million of punitive damages and $0.3 million of actual damages. It posted a $27.8 million appeal bond. The recorded reserve was $2.4 million; cumulative payments plus the reserve totaled $5.4 million, and the company believes its reserve and reinsurance coverage are adequate.
Investment risks include interest-rate, credit, equity-price, liquidity, and impairment risk. At March 31, 2017, securities had $7.0 million of gross unrealized losses, and 16 securities had been in a continuous unrealized-loss position for more than 12 months. No other-than-temporary impairment losses were recognized during the quarter. Other risks include claim frequency and severity, competition, regulatory changes, reinsurance availability and collectibility, economic conditions, catastrophe exposure, cybersecurity, and dependence on key personnel and agencies.
The company adopted ASU 2016-09 regarding share-based compensation in Q1 2017 without a material impact. The filing states that implementation of other identified accounting standards is not expected to have a material effect based on current information.
The board declared a quarterly dividend of $0.20 per share on April 25, 2017, payable June 23, 2017. No shares were repurchased during the quarter; $25.0 million remained available under the repurchase authorization.
Important Facts for Investors to Verify
- Whether the lower premium volume and reduced voluntary-business loss cost multiplier persist through the remainder of 2017.
- Whether current accident-year loss trends and the smaller favorable reserve development result in further combined-ratio deterioration.
- The adequacy of the $749.5 million loss reserve, including assumptions regarding high-severity workers’ compensation claims.
- The outcome and ultimate financial exposure from the Iowa verdict and the collectibility of related reinsurance.
- Liquidity, premium collections, claims payments, and the continued decline in cash and cash equivalents.
- Interest-rate and credit-market effects on the large fixed-maturity investment portfolio and its unrealized losses.
- The filing’s statement that no material debt balance is reported, and whether any debt or holding-company liquidity needs arise outside the presented financial statements.