AMERISAFE, Inc. 2012 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE 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 three and six months ended June 30, 2012, compared with the corresponding 2011 periods. The financial statements are unaudited. The company marketed insurance in 35 states and the District of Columbia and was licensed in 12 additional states and the U.S. Virgin Islands.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Gross premiums written | $85.5 million, up 17.2% | $170.4 million, up 18.1% |
| Net premiums earned | $69.7 million, up 15.7% | $139.5 million, up 15.9% |
| Total revenues | $76.6 million, up 14.3% | $155.3 million, up 15.9% |
| Net investment income | $6.6 million, essentially flat | $13.5 million, up 2.9% |
| Net income | $3.4 million, down 25.0% | $13.0 million, up 15.9% |
| Diluted EPS | $0.19 versus $0.24 | $0.70 versus $0.60 |
| Net combined ratio | 103.8% versus 102.6% | 99.8% versus 100.5% |
| Return on average equity | 3.8% versus 5.5% | 7.3% versus 6.7% |
Net income margin was approximately 4.5% in the second quarter and 8.4% for the first six months. The second-quarter net loss ratio increased to 81.3% from 77.3%, while the expense ratio improved to 22.0% from 24.7%. For the first six months, the net loss ratio increased to 77.8% from 75.4%, while the expense ratio improved to 21.5% from 24.5%.
Current accident-year losses and loss adjustment expenses were 76.5% of net premiums earned in both 2012 comparison periods, versus 79.3% in the second quarter and 78.2% in the first half of 2011. Prior accident-year development was unfavorable by $3.4 million in the quarter and $1.8 million for the first half, compared with favorable development of $1.2 million and $3.3 million, respectively, in 2011.
At June 30, 2012, total assets were $1.210 billion, shareholders’ equity was $363.4 million, book value per share was $19.98, and reserves for losses and loss adjustment expenses were $558.5 million. The investment portfolio, including cash and cash equivalents, totaled $878.1 million, consisting primarily of fixed maturity securities.
Cash and cash equivalents were $76.8 million, compared with $45.5 million at December 31, 2011. Six-month operating cash flow was $41.9 million, compared with $4.7 million in 2011. Investing activities provided $2.0 million, while financing activities used $12.6 million. The company had $12.9 million of subordinated debt securities outstanding at June 30, 2012, down from $25.8 million at year-end.
Material Changes Versus the Prior Comparable Period
- Premium growth was driven by higher voluntary-policy premiums, payroll audits and related adjustments, and assumed premiums from mandatory pooling arrangements.
- Quarterly net income declined despite revenue growth because loss and loss adjustment expenses increased 21.8% and prior-year development shifted from favorable to unfavorable.
- First-half net income improved because premium growth, lower expense ratios, and higher realized investment gains more than offset higher losses and taxes.
- Net realized investment gains increased to $1.9 million for the first half from $0.2 million in 2011.
- Interest expense declined to $0.2 million in the quarter and $0.5 million for the first half, reflecting lower average borrowings.
- The company adopted new insurance acquisition-cost accounting 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 2012 operating impact was not material.
- No shares were repurchased during the quarter or first half, although $24.4 million remained available under the repurchase authorization at June 30, 2012.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide a formal earnings or premium guidance range. Management stated that the remaining $12.89 million of subordinated debt securities was authorized for redemption and expected to be redeemed in the third quarter of 2012 using available cash.
Management identified competition, the cyclical workers’ compensation market, claim frequency and severity, economic conditions, regulatory changes, reinsurance availability and collectability, investment-market performance, interest-rate risk, and legal developments as material risks.
Reserve estimates remain inherently uncertain. The company reported higher-than-expected results for accident years 2010 and 2011 and lower-than-expected results for certain earlier accident years, but stated that it did not intend to modify its reserving assumptions based on recent results. The hazardous-industry focus produces relatively fewer but more severe claims and may cause greater reserve volatility.
At June 30, 2012, securities had $1.3 million of gross unrealized losses, compared with $1.8 million at December 31, 2011. Management concluded that the losses were primarily market-related, not credit losses, and that no other-than-temporary impairment was required for the 2012 period. The company reported no material changes in its market-risk profile and concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether unfavorable prior-year development and the 103.8% quarterly combined ratio persist or reverse in subsequent periods.
- The adequacy and volatility of loss reserves, particularly for accident years 2010 and 2011 and for severe claims in targeted hazardous industries.
- The effect of premium growth on future loss ratios, cash collections, unearned premiums, and capital requirements.
- Completion and funding of the planned third-quarter 2012 redemption of the remaining $12.89 million subordinated debt securities.
- Investment portfolio credit quality, interest-rate sensitivity, and potential additional unrealized or realized losses.
- Reinsurance recoverability and changes in reinsurance terms, including the lower ceded-premium percentage in 2012.
- The impact of the retrospective deferred policy acquisition-cost accounting change on comparability and book value.