Business Context and Reporting Period
AMERISAFE, Inc. is an insurance holding company providing workers’ compensation and general liability insurance to small and mid-sized employers in hazardous industries, principally construction, trucking, and agriculture. The filing covers the unaudited quarter and nine months ended September 30, 2012, compared with the corresponding 2011 periods. The company marketed insurance in 35 states and the District of Columbia, with additional licenses in 12 states and the U.S. Virgin Islands. American Interstate Insurance Company represented more than 99% of consolidated assets and revenues.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Gross premiums written | $77.3 million | $65.7 million | $247.7 million | $210.0 million |
| Net premiums earned | $72.4 million | $64.5 million | $211.9 million | $184.8 million |
| Total revenues | $80.4 million | $71.7 million | $235.7 million | $205.8 million |
| Net investment income | $6.8 million | $6.5 million | $20.3 million | $19.6 million |
| Net income | $7.1 million | $4.9 million | $20.1 million | $16.1 million |
| Diluted EPS | $0.38 | $0.26 | $1.08 | $0.86 |
| Net combined ratio | 98.5% | 102.3% | 99.4% | 101.1% |
| Return on average equity | 7.7% | 5.7% | 7.4% | 6.4% |
Q3 net income margin on total revenues was approximately 8.9%, compared with approximately 6.8% in Q3 2011. The nine-month margin was approximately 8.5%, compared with approximately 7.8% in the prior-year period.
- Loss and loss adjustment expenses were $53.9 million in Q3 and $162.4 million for the nine months. The Q3 net loss ratio was 74.4%, versus 76.5% in Q3 2011; the nine-month ratio was 76.6%, versus 75.8%.
- Expense ratio declined to 22.8% in Q3 from 25.4%, and to 22.0% for the nine months from 24.8%.
- Net cash provided by operating activities was $59.1 million for the nine months, versus $29.8 million in 2011.
- Net cash used in investing activities was $9.8 million, while net cash used in financing activities was $25.4 million.
- Cash and cash equivalents increased to $69.3 million at September 30, 2012, from $45.5 million at December 31, 2011.
- Total investments, including cash and cash equivalents, were $882.6 million, or approximately 73% of total assets.
- Total assets were $1.20 billion and shareholders’ equity was $372.1 million at September 30, 2012. Book value per share was $20.46.
- Subordinated debt was eliminated: the company redeemed the remaining $12.9 million of subordinated debt securities in August 2012 after redeeming $12.9 million in May. Interest expense declined to $0.1 million in Q3 and $0.6 million for the nine months.
Material Changes Versus the Prior Comparable Period
- Gross premiums written increased 17.6% in Q3 and 18.0% for the nine months, primarily from higher annual premiums on voluntary policies, payroll audits, and mandatory pooling arrangements.
- Net premiums earned increased 12.4% in Q3 and 14.7% for the nine months.
- Net income increased 45.8% in Q3 and 24.9% for the nine months; diluted EPS increased from $0.26 to $0.38 and from $0.86 to $1.08, respectively.
- Underwriting performance improved in Q3, with the combined ratio moving below 100%, although the nine-month combined ratio remained marginally above 99% and prior-year reserve development was unfavorable by $0.2 million.
- Operating cash flow increased by $29.2 million, driven principally by higher premiums collected and lower underwriting expenses paid.
- Investment portfolio unrealized losses declined materially from $1.8 million at December 31, 2011 to $0.7 million at September 30, 2012. Management stated that the losses were primarily market-related and did not represent credit losses.
- The company adopted new insurance acquisition-cost guidance retrospectively, reducing deferred policy acquisition costs by $2.2 million and shareholders’ equity by $1.4 million at December 31, 2011, or $0.08 per share. The effect on 2012 results was not material.
Outlook, Commentary, Risks, Contingencies, and Unusual Items
- Management emphasized disciplined underwriting, workplace safety services, claims management, and premium audits as key elements of its strategy.
- Claims reserves are inherently uncertain. The company’s focus on hazardous industries produces relatively fewer but more severe claims and may cause greater reserve volatility than at other workers’ compensation insurers.
- Q3 included $1.6 million of favorable prior accident-year development; the nine-month period included $0.2 million of unfavorable development. Accident years 2010 and 2011 were developing worse than expected, while several older accident years were developing better than expected.
- Open claims decreased to 5,220 at September 30, 2012 from 5,455 a year earlier.
- Key disclosed risks include competition, the cyclical workers’ compensation market, claim frequency and severity, catastrophic events, policyholder business activity, economic and interest-rate conditions, regulatory changes, reinsurance availability and collectability, investment-market performance, legal developments, and dependence on key personnel.
- No material changes in the company’s quantitative or qualitative market-risk profile were reported since December 31, 2011. The company reported no foreign-currency exposure.
- The company reported effective disclosure controls and procedures and no material changes in internal control over financial reporting.
- The board extended the $25.0 million share-repurchase authorization through December 31, 2013 in October 2012; no shares were repurchased during the nine months ended September 30, 2012.
Important Facts for Investors to Verify
- Verify the sustainability of premium growth and whether the improved Q3 combined ratio persists, particularly as current accident-year loss ratios remain elevated.
- Review workers’ compensation reserve development by accident year, especially the adverse development in 2010 and 2011 and management’s decision not to revise reserve assumptions.
- Assess the company’s investment portfolio for interest-rate, credit, liquidity, and concentration risk, including its substantial holdings of municipal and mortgage-backed securities.
- Confirm the effects of the retrospective deferred policy acquisition-cost adoption on comparable prior-period results and book value.
- Confirm the post-quarter extension and remaining capacity of the share-repurchase program; the filing contains an earlier table stating the program would expire December 31, 2012 unless reauthorized, while later disclosure states it was extended through December 31, 2013.
- Evaluate reinsurance recoverables of $98.2 million and the financial strength and payment capacity of reinsurers.
- Consider the absence of debt after the August 2012 redemption alongside ongoing insurance-reserve, regulatory-capital, and liquidity requirements.