AMERISAFE, Inc. 2013 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE is a workers’ compensation insurance holding company focused on small to mid-sized employers in hazardous industries, principally construction, trucking, manufacturing, and agriculture. The filing covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. The company marketed insurance in 30 states and the District of Columbia and was licensed in 17 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 | $95.8 million vs. $85.5 million | $194.9 million vs. $170.4 million |
| Net premiums earned | $82.0 million vs. $69.7 million | $161.7 million vs. $139.5 million |
| Total revenues | $87.5 million vs. $76.6 million | $174.0 million vs. $155.3 million |
| Net income | $7.6 million vs. $3.4 million | $16.5 million vs. $13.0 million |
| Diluted EPS | $0.41 vs. $0.19 | $0.88 vs. $0.70 |
| Net combined ratio | 93.8% vs. 103.8% | 94.2% vs. 99.8% |
| Return on average equity | 7.8% vs. 3.8% | 8.5% vs. 7.3% |
| Book value per share | $21.29 vs. $19.98 | $21.29 vs. $19.98 |
Loss and loss adjustment expenses were $56.8 million in the second quarter and $112.8 million year to date. The net loss ratio improved to 69.3% in the quarter and 69.8% for the first half, from 81.3% and 77.8%, respectively, in the prior-year periods. The expense ratio increased to 24.0% for the quarter and 23.8% year to date, from 22.0% and 21.5%.
Net investment income was $6.6 million in the quarter and $13.3 million year to date. Portfolio pre-tax yield was 2.9% in both the quarter and first half, versus 3.0% and 3.1% in the comparable 2012 periods. Net realized investment losses were $1.3 million in both 2013 periods, including $1.9 million of other-than-temporary impairments on equity securities, partly offset by $0.6 million of realized gains.
Net cash provided by operating activities was $59.4 million for the first six months, compared with $41.9 million in 2012. Investing activities used $67.8 million, reflecting $198.7 million of investment purchases, while financing activities used $0.9 million, principally dividends. Cash and cash equivalents were $83.4 million at June 30, 2013, compared with $92.7 million at December 31, 2012.
At June 30, 2013, total investments were $860.7 million and investments including cash totaled $944.1 million. Shareholders’ equity was $392.5 million, compared with $381.2 million at December 31, 2012. Loss reserves were $593.5 million. The filing reports no weighted-average borrowings and no interest expense during 2013; the remaining subordinated debt securities had been redeemed in August 2012.
Material Changes Versus the Prior Comparable Period
- Gross premiums written increased 12.1% in the second quarter and 14.4% year to date, driven primarily by higher annual premiums on voluntary policies and increased assumed premiums from mandatory pooling arrangements.
- Net premiums earned increased 17.6% for the quarter and 15.9% year to date.
- Net income increased 122% in the quarter and 27% year to date; diluted EPS increased to $0.41 and $0.88 from $0.19 and $0.70.
- Underwriting performance improved materially, with the net combined ratio declining by 10.0 percentage points in the quarter and 5.6 points year to date.
- Prior accident-year development was favorable by $3.2 million in the quarter and $5.6 million year to date, versus unfavorable development of $3.4 million and $1.8 million in the comparable 2012 periods.
- Operating expenses increased 28.1% in the quarter and 28.2% year to date, including higher premium taxes, insurance-related assessments, commissions, and compensation.
- Comprehensive income declined to $3.6 million for the quarter and $11.9 million year to date because of unrealized investment losses, compared with $3.9 million and $13.5 million in 2012.
- The company began paying quarterly cash dividends of $0.08 per share in 2013. The board declared another $0.08 dividend on July 30, 2013, payable September 27, 2013.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide quantitative earnings or premium guidance. Management emphasizes disciplined underwriting, workplace safety, claims management, and premium auditing as key drivers of results. The company expects to consider a regular cash dividend each quarter and may repurchase shares under its existing program, subject to market and regulatory conditions. Approximately $24.4 million remained available under the repurchase authorization, although no shares were repurchased during the first half of 2013.
Key risks include greater-than-expected claim frequency or severity, reserve volatility, catastrophic events, economic and competitive conditions, regulatory and legal changes, reduced policyholder business activity, investment-market declines, interest-rate risk, reinsurance availability or counterparty failure, rating-agency changes, and loss of key personnel. The company serves hazardous industries with relatively infrequent but more severe claims, creating potentially greater reserve volatility.
Unusual or notable items include $1.9 million of other-than-temporary investment impairments, favorable prior-year loss development, a higher effective tax rate of 28.2% for the quarter and 24.1% year to date, and a decline in accumulated other comprehensive income to negative $1.6 million due to unrealized investment losses. Management stated that unrealized losses were primarily market-related, not credit losses, and expected recovery of carrying values.
Important Facts for Investors to Verify
- Whether favorable prior-year reserve development is sustainable and how current accident-year loss trends evolve.
- The adequacy of loss reserves given the company’s concentration in high-severity workers’ compensation risks.
- The performance and impairment exposure of the investment portfolio, including available-for-sale securities and equity holdings.
- The effect of higher assessments, premium taxes, commissions, compensation, and other operating costs on future expense ratios.
- Premium growth, policy retention, payroll audits, voluntary business pricing, and the effective loss-cost multiplier.
- Reinsurance terms, recoverables, counterparty strength, and the company’s ability to fund claims from operating cash flow.
- The sustainability of the $0.08 quarterly dividend and any future share repurchases relative to regulatory capital needs.
- Management’s reserve, deferred tax, investment impairment, and premium receivable estimates, which involve significant judgment.