AMERISAFE, Inc. 2014 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE is a workers’ compensation insurer serving small and midsized 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 unaudited report covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Financial Performance and Key Metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Gross premiums written | $103.8 million | $95.8 million | $209.5 million | $194.9 million |
| Net premiums earned | $93.5 million | $82.0 million | $182.7 million | $161.7 million |
| Total revenues | $100.6 million | $87.5 million | $196.8 million | $174.0 million |
| Net income | $12.8 million | $7.6 million | $23.3 million | $16.5 million |
| Diluted EPS | $0.68 | $0.41 | $1.23 | $0.88 |
| Net combined ratio | 89.4% | 93.8% | 91.0% | 94.2% |
| Return on average equity | 11.9% | 7.8% | 10.9% | 8.5% |
| Book value per share | $23.26 | $21.29 | $23.26 | $21.29 |
Second-quarter net income increased 67.1% year over year, while first-half net income increased 41.4%. Net income margins based on total revenues were approximately 12.7% in the second quarter and 11.8% for the first half. The net loss ratio improved to 66.8% from 69.3% in the quarter and to 67.7% from 69.8% year to date. The expense ratio improved to 22.5% from 24.0% in the quarter and to 23.2% from 23.8% year to date.
- Net investment income was $6.8 million in the quarter and $13.6 million year to date. Average invested assets, including cash, increased, but pretax portfolio yield declined to 2.6% from 2.9%.
- Net realized investment gains were $0.2 million in the quarter and $0.3 million year to date, versus losses of $1.3 million in each comparable 2013 period. The 2013 losses included $1.9 million of other-than-temporary equity impairments.
- Operating cash flow was $70.6 million for the first six months, compared with $59.4 million in 2013. Investing activities used $83.5 million, principally for investment purchases, and financing activities used $11.4 million, primarily for dividends.
- Cash and cash equivalents were $98.8 million at June 30, 2014, compared with $123.1 million at December 31, 2013. Total investments were $964.6 million, and investments including cash totaled $1.063 billion.
- Total assets were $1.440 billion and shareholders’ equity was $435.5 million at June 30, 2014, compared with $1.329 billion and $416.8 million, respectively, at December 31, 2013.
- The filing does not report outstanding debt or a debt facility; no material borrowing balance is disclosed.
Material Changes Versus the Prior Comparable Period
- Gross premiums written increased 8.4% in the quarter and 7.5% year to date, driven primarily by higher voluntary-policy premiums. Net premiums written increased 10.0% and 9.0%, respectively.
- Ceded premiums declined to 3.6% of gross premiums earned from 5.3%, reflecting a change in the 2014 reinsurance program.
- Current accident-year losses and loss adjustment expenses represented 71.5% of net premiums earned in both 2014 periods, versus 73.2% in 2013. Favorable prior-year development increased to $4.4 million in the quarter and $6.9 million year to date, compared with $3.2 million and $5.6 million.
- Shareholders received regular dividends of $0.12 per share per quarter, compared with $0.08 in 2013, plus a $0.50 extraordinary dividend declared in February 2014. Total dividends paid in the first half were $13.8 million versus $2.9 million in 2013.
- The share-repurchase program had $25.0 million available at June 30, 2014, but no shares were repurchased during the first half.
- Accumulated other comprehensive income improved to $2.0 million from a $4.3 million loss at December 31, 2013, primarily because of unrealized investment gains.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing provides no formal earnings or premium guidance. Management states that quarterly results are not necessarily indicative of full-year results and intends to continue considering regular quarterly dividends.
- Key underwriting risks include increased competition, pricing and regulatory changes, lower policyholder business activity, and the cyclical nature of workers’ compensation insurance.
- Claims risk is significant because the company focuses on hazardous industries with relatively infrequent but more severe claims. Loss reserves are inherently uncertain and may be more volatile than those of other workers’ compensation insurers.
- Other principal risks include adverse claims frequency or severity, catastrophic events, inflation and interest-rate changes, investment-market performance, reinsurance availability and collectability, legal developments, and rating-agency actions.
- At June 30, 2014, the investment portfolio had $4.3 million of gross unrealized losses, including $4.1 million on available-for-sale securities. Management concluded that these losses were not credit losses and that no other-than-temporary impairment was required.
- The company reported no material unrecognized tax benefits, no material changes in market-risk exposure since December 31, 2013, and effective disclosure controls. Tax years 2009 through 2013 remained subject to examination by federal and state authorities.
- A July 29, 2014 board action declared a $0.12-per-share quarterly dividend payable September 26, 2014.
Important Facts for Investors to Verify
- Whether favorable prior-year reserve development remains sustainable and whether claims severity or the 97-claim increase in open claims affects future results.
- The effect of the 2014 reinsurance structure on ceded premiums, recoveries, protection against severe losses, and underwriting volatility.
- Investment portfolio duration, credit quality, interest-rate sensitivity, and the potential for additional unrealized or realized losses.
- Liquidity and statutory capital at the insurance subsidiaries, including dividend capacity and regulatory restrictions on capital transfers.
- The absence of disclosed debt balances and whether any off-balance-sheet, contingent, or reinsurance-related obligations exist beyond the information summarized in this filing.
- The company’s future share-repurchase activity and ability to maintain regular dividends after the extraordinary 2014 dividend.