AMERISAFE, Inc. — Q1 2013 Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE provides workers’ compensation insurance to small and mid-sized employers in hazardous industries, principally construction, trucking, manufacturing and agriculture. The company markets insurance in 30 states and the District of Columbia. This unaudited report covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Gross premiums written | $99.1 million | $84.9 million | +16.7% |
| Net premiums written | $94.6 million | $81.0 million | +16.8% |
| Net premiums earned | $79.7 million | $69.8 million | +14.2% |
| Total revenues | $86.5 million | $78.7 million | +10.0% |
| Net investment income | $6.7 million | $6.9 million | -3.5% |
| Net income | $8.9 million | $9.6 million | -7.4% |
| Diluted EPS | $0.47 | $0.52 | -9.6% |
| Net combined ratio | 94.7% | 96.0% | Improved 1.3 points |
| Return on average equity | 9.2% | 10.8% | Down 1.6 points |
Net income margin was approximately 10.2% of total revenues, compared with approximately 12.2% in the prior-year quarter. The net loss ratio improved to 70.3% from 74.3%, while the expense ratio increased to 23.7% from 21.1%. Current accident-year losses and loss adjustment expenses were $58.4 million, or 73.2% of net premiums earned, versus $53.4 million, or 76.5%, in Q1 2012.
Net cash provided by operating activities was $21.8 million, up from $18.1 million. Investing activities used $39.2 million, primarily reflecting $117.3 million of investment purchases compared with $78.3 million of sales and maturities. Cash and cash equivalents declined to $75.3 million from $92.7 million at December 31, 2012.
At March 31, 2013, total assets were $1.265 billion and shareholders’ equity was $389.7 million, compared with $1.221 billion and $381.2 million, respectively, at December 31, 2012. The investment portfolio, including cash and cash equivalents, totaled $918.7 million. Loss and loss adjustment expense reserves were $578.0 million, and unearned premiums were $155.5 million.
The company reported no interest expense and no weighted-average borrowings in Q1 2013. The $25.8 million trust-preferred subordinated debt outstanding in Q1 2012 had been fully redeemed in August 2012. Liquidity sources are primarily premiums, investment income, and investment maturities and sales.
Material Changes Versus the Prior Comparable Period
- Premium growth was strong, driven primarily by a $12.6 million increase in annual premiums from voluntary policies, plus increases from mandatory pooling and payroll audits.
- Profitability declined despite improved underwriting loss performance because underwriting and other operating costs increased 28.3%, and Q1 2012 included $1.8 million of realized investment gains versus immaterial gains in Q1 2013.
- Insurance-related assessments increased by $2.3 million, while commissions and other operating expenses also increased. The expense ratio rose 2.6 percentage points.
- Favorable prior accident-year development increased to $2.4 million from $1.6 million, supporting the improved net loss ratio.
- The company paid its first quarterly cash dividend of $0.08 per share, totaling $1.5 million. Management indicated that the annualized dividend was expected to be $0.32 per share, subject to future board consideration.
- No shares were repurchased during the quarter. Approximately $24.4 million remained available under the repurchase program as of December 31, 2012.
- Book value per share increased to $21.20 from $19.78 in the prior-year comparable period.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or premium guidance. Management expects to consider a regular quarterly dividend, but future payments remain subject to board approval. Management describes its strategy as disciplined underwriting supported by safety, claims management and premium-audit services.
Key risks include higher-than-expected claim frequency or severity, catastrophe and other loss events, reserve estimation uncertainty, adverse economic, competitive or regulatory conditions, reduced policyholder business activity, investment-market and interest-rate volatility, reduced insurance demand, competition, reinsurance availability or counterparty failure, rating-agency changes, and changes in liability theories.
Because AMERISAFE focuses on hazardous industries with relatively infrequent but severe claims, loss reserves may be more volatile than those of other workers’ compensation insurers. The company had $2.7 million of gross unrealized investment losses at March 31, 2013, but recognized no other-than-temporary impairment losses and stated that the losses were primarily related to market interest rates and liquidity conditions rather than credit losses.
Other notable items include adoption of updated accumulated-other-comprehensive-income presentation guidance, with no effect on results, financial position or liquidity; restricted-stock grants totaling 29,141 shares; and 95,000 stock-option exercises generating approximately $0.9 million of proceeds. Management reported that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether premium growth is sustained and reflects policy volume and pricing rather than temporary audit adjustments or other one-time factors.
- Whether the higher expense ratio normalizes and whether operating-cost growth remains proportionate to premiums.
- Whether favorable prior-year reserve development continues and whether current accident-year loss trends remain favorable.
- The sensitivity of investment income and accumulated other comprehensive income to interest rates, equity markets and credit conditions.
- The adequacy and liquidity of loss reserves, including exposure to severe claims in hazardous industries and recoverables from reinsurers.
- The sustainability of the $0.08 quarterly dividend and the potential use of the remaining share-repurchase authorization.
- Future regulatory, rating-agency and reinsurance developments that could affect capital requirements or underwriting capacity.