AMERISAFE, Inc. — 2014 Q1 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, oil and gas, and agriculture. The company markets insurance in 30 states and the District of Columbia and is licensed in additional jurisdictions. The filing covers the three months ended March 31, 2014, with comparisons to the three months ended March 31, 2013. Financial statements are unaudited.
Financial results and key metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Gross premiums written | $105.7 million | $99.1 million | 6.6% increase |
| Net premiums written | $102.4 million | $94.6 million | 8.2% increase |
| Net premiums earned | $89.2 million | $79.7 million | 11.9% increase |
| Total revenues | $96.2 million | $86.5 million | 11.2% increase |
| Net investment income | $6.7 million | $6.7 million | Essentially unchanged |
| Total expenses | $82.8 million | $75.4 million | 9.7% increase |
| Income before taxes | $13.4 million | $11.1 million | 21.0% increase |
| Net income | $10.5 million | $8.9 million | 19.2% increase |
| Diluted EPS | $0.56 | $0.47 | Increase |
| Net combined ratio | 92.7% | 94.7% | Improved 2.0 points |
| Return on average equity | 10.1% | 9.2% | Improved 0.9 points |
| Book value per share | $22.54 | $21.20 | Increase |
The net loss ratio improved to 68.7% from 70.3%, while the expense ratio increased modestly to 23.9% from 23.7%. Current accident-year losses and loss adjustment expenses were $63.8 million, or 71.5% of earned premiums, compared with $58.4 million, or 73.2%, in the prior-year quarter. Favorable prior-year development was $2.5 million versus $2.4 million.
Cash flow, liquidity, investments, and capital
- Net cash provided by operating activities was $30.3 million, up from $21.8 million, primarily reflecting higher premium collections and lower losses paid.
- Net cash used in investing activities was $36.2 million, compared with $39.2 million. Investment purchases totaled $118.9 million, while sales and maturities provided $82.9 million.
- Net cash used in financing activities was $10.3 million, principally due to $11.5 million of dividends paid.
- Cash and cash equivalents ended at $106.9 million, compared with $123.1 million at December 31, 2013 and $75.3 million at March 31, 2013.
- Total investments were $916.3 million at March 31, 2014. Investments including cash and cash equivalents totaled approximately $1.02 billion.
- Shareholders’ equity was $420.6 million, compared with $416.8 million at December 31, 2013. The company had no material debt balance identified in the filing; reported liabilities were primarily insurance reserves and operating liabilities.
- The company had $636.2 million of reserves for loss and loss adjustment expenses and $177.4 million of unearned premiums at March 31, 2014.
Material changes versus the prior comparable period
- Premium growth was driven by an $8.5 million increase in annual premiums on voluntary policies and a $0.7 million increase in assumed premiums from mandatory pooling arrangements. These increases were partly offset by a $2.7 million decrease from payroll audits and related adjustments.
- The effective loss cost multiplier for voluntary business increased to 1.86 from 1.72.
- Ceded premiums declined to 3.6% of gross premiums earned from 5.3%, reflecting changes to the 2014 reinsurance treaties. The working layer was fully placed with reinsurers, and AMERISAFE was no longer a co-participant.
- Underwriting, commissions, and salary-related costs increased 13.2% to $21.4 million, primarily due to compensation, commissions, and pooling fees. These increases were partly offset by lower assessments, premium taxes, and certain reinsurance-related costs.
- Net investment income was flat despite an 11.9% increase in average invested assets. Pre-tax portfolio yield declined to 2.7% from 2.9%, and tax-equivalent yield declined to 3.8% from 4.2%.
- Comprehensive income increased to $13.8 million from $8.3 million, aided by a $3.2 million after-tax unrealized gain on securities compared with a $0.5 million loss.
- AMERISAFE declared a $0.50 per-share extraordinary dividend, or approximately $9.3 million, in addition to a regular $0.12 quarterly dividend. The prior-year quarter had no extraordinary dividend and a regular dividend of $0.08 per share.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal earnings or premium guidance. Management states that it intends to consider regular quarterly dividends. On April 29, 2014, the board declared another $0.12-per-share quarterly dividend, payable June 26, 2014.
- Results are sensitive to the frequency and severity of workers’ compensation claims, including catastrophic events, and to reserve estimates. The company’s focus on hazardous industries produces fewer but more severe claims and may increase reserve volatility.
- Key risks include competition, economic conditions affecting policyholders, regulatory and legal changes, interest rates and investment-market performance, reinsurance availability and recoverability, rating-agency actions, and changes in demand for workers’ compensation coverage.
- At March 31, 2014, 5,334 claims were open, up from 5,079 a year earlier. Management attributed favorable prior-year development partly to efforts to close older claims.
- The investment portfolio had $6.5 million of gross unrealized losses at March 31, 2014, including $4.2 million on securities in unrealized-loss positions for at least 12 months. Management concluded that no other-than-temporary impairment losses were required.
- The share repurchase authorization had $25.0 million available; no shares were repurchased during the quarter. The program was scheduled to expire December 31, 2014 unless reauthorized.
- The filing reports effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether premium growth and the 1.86 voluntary-business loss cost multiplier persist without materially increasing claim severity.
- The sustainability of favorable prior-year reserve development and the effect of the higher open-claim count on future reserves.
- Reinsurance treaty terms, attachment points, limits, counterparty credit quality, and recoverability of reinsurance balances.
- The effect of lower investment yields and interest-rate movements on investment income, accumulated other comprehensive income, and statutory capital.
- Whether the extraordinary dividend and ongoing regular dividends affect insurance-subsidiary capital flexibility or future share repurchases.
- The company’s regulatory capital, statutory surplus, and rating-agency requirements, which are not fully detailed in the provided filing text.