AMERISAFE, Inc. — 2016 First-Quarter Form 10-Q
Reporting period: Three months ended March 31, 2016; filed April 29, 2016. AMERISAFE provides workers’ compensation insurance primarily to small and mid-sized employers in hazardous industries, including construction, trucking, manufacturing, agriculture, and oil and gas. The company markets insurance in 27 states and is licensed in additional jurisdictions.
Financial Results and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Gross premiums written | $100.4 million | $100.8 million | -0.4% |
| Net premiums written | $97.8 million | $98.3 million | -0.4% |
| Net premiums earned | $96.0 million | $94.8 million | +1.2% |
| Net investment income | $6.0 million | $6.8 million | -11.5% |
| Total revenues | $102.3 million | $101.8 million | +0.5% |
| Loss and loss adjustment expenses | $46.7 million | $60.0 million | -22.1% |
| Total expenses | $67.9 million | $80.6 million | -15.7% |
| Income before taxes | $34.4 million | $21.2 million | +62.3% |
| Net income | $24.3 million | $15.1 million | +60.3% |
| Diluted EPS | $1.27 | $0.79 | +60.8% |
| Net combined ratio | 70.8% | 85.0% | Improved 14.2 points |
| Return on average equity | 20.8% | 13.3% | Improved 7.5 points |
| Book value per share | $24.96 | $24.32 | +2.6% |
Net income margin was approximately 23.7%, compared with approximately 14.9% in the prior-year quarter. The loss ratio improved to 48.7% from 63.3%, while the expense ratio improved to 21.0% from 21.5%.
Cash Flow, Liquidity, Investments, and Capitalization
- Net cash provided by operating activities was $30.3 million, compared with $32.3 million in Q1 2015.
- Net cash used in investing activities was $17.9 million, versus $42.1 million in the prior-year quarter.
- Net cash used in financing activities was $2.6 million, primarily reflecting $3.5 million of dividends paid.
- Cash and cash equivalents increased to $79.3 million at March 31, 2016, from $69.5 million at December 31, 2015.
- Total investments were $1.079 billion, and investments including cash and cash equivalents totaled $1.159 billion.
- Total assets were $1.558 billion, shareholders’ equity was $478.8 million, and book value per share was $24.96.
- The balance sheet does not identify a material debt balance or debt financing arrangement; the filing text does not provide a separate debt metric.
- Held-to-maturity and available-for-sale fixed-maturity securities totaled $1.056 billion at carrying value. No other-than-temporary investment impairment losses were recognized in either period.
Material Changes Versus the Prior Comparable Period
- Premium volume was broadly stable, but net premiums earned increased 1.2%, primarily because of payroll audits and related premium adjustments for policies written in prior quarters.
- Current accident-year losses and LAE declined to $65.2 million, or 67.9% of net premiums earned, from $66.2 million, or 69.8%.
- Favorable prior accident-year development increased substantially to $18.4 million from $6.1 million. Management attributed favorable development primarily to intensive claims management and settlement activity.
- Open claims at March 31, 2016 declined to 5,151 from 5,337 a year earlier.
- Net investment income declined because of a decrease in the value of a hedge fund investment. Average invested assets, including cash, increased 0.3%, but portfolio pre-tax yield declined to 2.1% from 2.4%.
- Comprehensive income increased to $27.1 million from $15.9 million, including a $2.8 million net unrealized gain on securities.
- The quarterly dividend increased to $0.18 per share from $0.15 per share. The April 26, 2016 dividend declaration maintained the $0.18 quarterly rate.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide quantitative earnings or premium guidance. Management states that interim results are not necessarily indicative of full-year results and expects to consider regular quarterly dividends.
- Workers’ compensation reserves are inherently uncertain, and AMERISAFE’s focus on hazardous industries creates relatively fewer but more severe claims and potentially greater reserve volatility.
- Key risks include industry cyclicality, economic and interest-rate conditions, competition, changes in laws and regulations, claims frequency and severity, catastrophe exposure, technology breaches, reinsurance availability and collectability, investment-market performance, and rating-agency actions.
- An adverse verdict related to a 2009 Iowa workers’ compensation claim totaled $25.3 million, including $25.0 million of punitive damages. The subsidiary is appealing, and the company posted a $27.8 million appeal bond.
- The claim reserve was $2.5 million at March 31, 2016; cumulative payments plus the reserve totaled $5.4 million. The company believes its retention and reinsurance coverage are adequate.
- The company had $25.0 million of remaining authorization under its share repurchase program at March 31, 2016, although no shares were repurchased during the quarter.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the $18.4 million of favorable prior-year reserve development is recurring or unusually favorable and how subsequent accident-year experience develops.
- The adequacy of loss reserves and reinsurance coverage, particularly for the Iowa litigation and other severe claims.
- The sustainability of the 70.8% combined ratio and 20.8% annualized return on average equity excluding favorable reserve development.
- The effect of lower investment yields and hedge fund valuation changes on future investment income.
- Any future changes in premium volume, pricing, the loss cost multiplier, policyholder payroll, and demand in the company’s targeted industries.
- The status and potential financial impact of the Iowa appeal, including the appeal bond and reinsurance recoveries.
- Future share repurchases and quarterly dividend payments relative to statutory capital and insurance-company liquidity requirements.