AMERISAFE, Inc. 2014 Q3 Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE markets and underwrites workers’ compensation insurance for small to mid-sized employers in hazardous industries, including construction, trucking, manufacturing, oil and gas, and agriculture. The company operates through insurance subsidiaries and markets in 30 states and the District of Columbia. This filing covers the three and nine months ended September 30, 2014, compared with the same periods in 2013. Balance-sheet comparisons are to December 31, 2013.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Gross premiums written | $94.0 million, up 9.1% | $303.5 million, up 8.0% |
| Net premiums earned | $95.9 million, up 17.6% | $278.7 million, up 14.5% |
| Total revenues | $102.3 million, versus $88.0 million | $299.1 million, versus $262.0 million |
| Net investment income | $6.5 million, versus $6.9 million | $20.0 million, versus $20.3 million |
| Income before taxes | $19.3 million, versus $12.4 million | $49.8 million, versus $34.2 million |
| Net income | $13.5 million, versus $9.7 million | $36.8 million, versus $26.2 million |
| Diluted EPS | $0.71, versus $0.52 | $1.95, versus $1.39 |
| Net combined ratio | 86.4%, versus 92.5% | 89.5%, versus 93.6% |
| Return on average equity | 12.2%, versus 9.8% | 11.3%, versus 8.9% |
The third-quarter net loss ratio was 64.4%, compared with 69.9% in the prior-year quarter; the nine-month ratio was 66.6%, compared with 69.8%. The expense ratio improved to 21.9% from 22.6% for the quarter and to 22.8% from 23.4% for the nine months. Current accident-year losses and loss adjustment expenses were 71.5% of net premiums earned in both 2014 periods, compared with 73.2% in 2013.
At September 30, 2014, total assets were $1.467 billion, investments were $973.6 million, cash and cash equivalents were $118.5 million, and shareholders’ equity was $448.5 million. Book value per share was $23.85, compared with $21.67 at September 30, 2013. Loss and loss adjustment expense reserves were $676.6 million, and unearned premiums were $178.4 million. The filing does not provide a clear debt balance or identify material corporate debt.
Cash Flow, Liquidity, and Capital
- Operating cash flow for the first nine months was $104.0 million, compared with $99.8 million in 2013.
- Investing cash flow was negative $96.3 million, primarily reflecting $336.4 million of investment purchases partly offset by $240.9 million of investment sales and maturities.
- Financing cash flow was negative $12.2 million, including $16.0 million of dividends paid.
- Cash and cash equivalents decreased $4.5 million from $123.1 million at December 31, 2013 to $118.5 million at September 30, 2014.
- The investment portfolio, including cash, totaled $1.092 billion. Fixed maturity securities represented approximately 84% of the portfolio, with 54.9% classified as held-to-maturity and 29.1% as available-for-sale.
- The company had $25.0 million available under its share-repurchase authorization at September 30, 2014, although no shares were repurchased during the first nine months.
Material Changes Versus the Prior Comparable Period
- Premium growth accelerated, supported by higher voluntary-policy premiums, payroll audits, and assumed premiums from mandatory pooling arrangements.
- Ceded premiums declined as a percentage of gross premiums earned to 3.8% in the quarter and 3.7% for the nine months, from 5.2% and 5.3%, respectively, reflecting changes to the 2014 reinsurance program.
- Favorable prior accident-year development increased to $6.8 million for the quarter and $13.7 million for the nine months, compared with $2.7 million and $8.3 million in 2013.
- Operating expenses increased in absolute dollars, primarily due to higher commissions, compensation, lower contingent profit commissions, and lower ceding commissions, but the expense ratio improved.
- Investment yields declined despite higher average invested assets. The pretax annualized yield was 2.4% in the quarter and 2.6% for the nine months, versus 2.9% in both 2013 periods.
- Net realized investment results improved to a $0.2 million gain for the nine months from a $1.9 million loss in 2013. The 2014 results included a $0.2 million other-than-temporary impairment of a fixed maturity security.
- Open claims increased to 5,572 at September 30, 2014 from 5,387 a year earlier.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal earnings or premium guidance. Management emphasizes disciplined underwriting, workplace safety reviews, claims management, and audit services. It expects to continue considering regular quarterly dividends and declared a $0.12 quarterly dividend and a $1.00 extraordinary dividend on October 28, 2014, both payable December 26, 2014.
Key risks include competition, workers’ compensation industry cyclicality, claim frequency and severity, reserve estimation uncertainty, catastrophic events, economic and interest-rate conditions, regulatory changes, reinsurance availability and collectability, rating-agency actions, investment-market performance, and reduced business activity among policyholders. Because AMERISAFE targets hazardous industries with fewer but more severe claims, its reserves may be more volatile than those of other workers’ compensation insurers.
Accumulated other comprehensive income improved to $2.1 million from a $4.3 million loss at December 31, 2013, primarily due to unrealized gains on available-for-sale securities. The company reported effective disclosure controls as of September 30, 2014 and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether favorable prior-year reserve development continues and whether the higher open-claim count signals future reserve pressure.
- The sustainability of premium growth and the effect of the 2014 reinsurance structure on risk retention and ceded premiums.
- Investment portfolio credit quality, interest-rate sensitivity, unrealized losses, and future impairment charges.
- Cash requirements for claims, the declared $1.00 extraordinary dividend, regular dividends, and potential share repurchases.
- The absence of a clearly stated debt balance and the capital and regulatory implications of dividend distributions by the insurance subsidiaries.
- Whether lower investment yields and higher operating costs offset continued underwriting improvements.