AMERISAFE, Inc. Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE underwrites workers’ compensation insurance for small to mid-sized employers in hazardous industries, principally construction, trucking, manufacturing, oil and gas, and agriculture. The company markets insurance in 30 states and the District of Columbia and is licensed in additional jurisdictions. This report covers the three and nine months ended September 30, 2015; financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Gross premiums written | $91.1 million | $94.0 million | $297.9 million | $303.5 million |
| Net premiums earned | $90.5 million | $95.9 million | $280.9 million | $278.7 million |
| Net investment income | $6.9 million | $6.5 million | $20.6 million | $20.0 million |
| Total revenues | $97.5 million | $102.3 million | $299.2 million | $299.1 million |
| Net income | $17.9 million | $13.5 million | $47.4 million | $36.8 million |
| Diluted EPS | $0.94 | $0.71 | $2.48 | $1.95 |
| Net combined ratio | 79.1% | 86.4% | 82.6% | 89.5% |
| Return on average equity | 14.9% | 12.2% | 13.5% | 11.3% |
At September 30, 2015, total assets were $1.553 billion, shareholders’ equity was $490.6 million, and book value per share was $25.69. Cash and cash equivalents were $99.9 million, while total investments were $1.049 billion. Loss and loss adjustment expense reserves were $720.7 million. The filing does not report outstanding debt; no material debt balance is disclosed.
Net cash provided by operating activities was $62.7 million for the first nine months of 2015, compared with $102.8 million in the prior-year period. Investing activities used $48.3 million, and financing activities used $5.5 million. Cash increased by $8.9 million from year-end 2014.
Material Changes Versus the Prior Comparable Period
- Third-quarter gross premiums written declined 3.1%, net premiums written declined 3.7%, and net premiums earned declined 5.7%. Management attributed the gross premium decline primarily to lower payroll-audit adjustments, partly offset by higher annual premiums on voluntary policies.
- For the first nine months, gross premiums written declined 1.8% and net premiums written declined 1.5%, while net premiums earned increased 0.8%.
- Net income increased 33.1% in the third quarter and 28.8% for the first nine months. Improvement was driven primarily by lower loss and loss adjustment expenses.
- Third-quarter loss and loss adjustment expenses declined 20.8% to $48.9 million; the nine-month amount declined 10.4% to $166.3 million. The current accident-year loss ratio improved to 69.8% from 71.5% in both comparable periods.
- Favorable prior accident-year development increased to $14.2 million in the third quarter and $29.8 million for the first nine months, versus $6.8 million and $13.7 million, respectively, in 2014.
- The expense ratio increased to 24.6% in the third quarter from 21.9%, and to 23.0% for the first nine months from 22.8%, reflecting higher operating costs and lower reinsurance contingent profit commissions.
- Operating cash flow decreased by $40.1 million, primarily because of increased amounts held by others, underwriting expenses paid, federal income taxes paid, and loss and loss adjustment expenses paid.
- Investments, including cash and cash equivalents, increased to approximately $1.149 billion at September 30, 2015 from approximately $1.108 billion at December 31, 2014.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
No quantitative earnings or premium guidance is provided. Management emphasizes disciplined underwriting, workplace safety reviews, claims management, and premium audits. The company states that interim results are not necessarily indicative of full-year results.
- The company recognized $2.7 million of other-than-temporary impairment charges on four fixed-maturity securities during the first nine months of 2015, compared with $0.2 million on one security in the prior-year period.
- In February 2015, an adverse verdict was entered against American Interstate Insurance Company relating to a 2009 Iowa workers’ compensation claim. The verdict included $25.0 million of punitive damages and $0.3 million of actual damages. The company is appealing, posted a $27.8 million appeal bond, and carried a $2.6 million reserve at September 30, 2015. Management believes the reserve and reinsurance coverage are adequate.
- On October 27, 2015, the board declared a regular quarterly dividend of $0.15 per share and an extraordinary dividend of $3.00 per share, both payable December 28, 2015. The board also reauthorized a $25.0 million share repurchase program through December 31, 2016 unless reauthorized.
- Key risks include workers’ compensation claim frequency and severity, reserve volatility, competition and pricing pressure, economic and regulatory conditions, reinsurance availability and collectability, investment-market and interest-rate risk, catastrophic events, cyber risks, and reduced activity among policyholders.
- Management identifies loss reserves, reinsurance recoverables, premiums receivable, deferred policy acquisition costs, deferred taxes, investment impairments, and share-based compensation as critical accounting areas requiring estimates.
- The company reported no material changes in its market-risk profile since December 31, 2014 and no foreign-currency exposure. Disclosure controls were deemed effective.
Most Important Facts to Verify
- Whether favorable prior-year reserve development of $29.8 million for the first nine months is sustainable and how much reflects reserve releases versus underlying accident-year performance.
- The adequacy of the $2.6 million reserve and reinsurance protection for the Iowa verdict, including the outcome and timing of the appeal.
- The trend in premiums, payroll audits, policyholder activity, and pricing, particularly in the targeted hazardous industries.
- The quality and duration of unrealized investment losses and the potential for additional impairment charges.
- The effect of the $3.00 extraordinary dividend and future share repurchases on statutory capital, liquidity, and insurance subsidiary financial strength.
- The decline in operating cash flow despite higher net income and the significance of the increase in amounts held for others.