AMERISAFE, Inc. 2013 Q3 Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE is a workers’ compensation insurer focused on small to mid-sized employers in hazardous industries, primarily construction, trucking, manufacturing and agriculture. The company markets insurance in 30 states and the District of Columbia and is licensed in additional jurisdictions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the same periods in 2012.
Financial Results and Key Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Gross premiums written | $86.1 million | $77.3 million | $281.1 million | $247.7 million |
| Net premiums earned | $81.6 million | $72.4 million | $243.3 million | $211.9 million |
| Total revenues | $88.0 million | $80.4 million | $262.0 million | $235.7 million |
| Net income | $9.7 million | $7.1 million | $26.2 million | $20.1 million |
| Diluted EPS | $0.52 | $0.38 | $1.39 | $1.08 |
| Net combined ratio | 92.5% | 98.5% | 93.6% | 99.4% |
| Return on average equity | 9.8% | 7.7% | 8.9% | 7.4% |
Q3 net income increased 36.2% year over year, while nine-month net income increased 30.2%. Net premiums earned increased 12.7% in Q3 and 14.8% for the nine-month period. The net loss ratio improved to 69.9% in Q3 and 69.8% for the nine months, from 74.4% and 76.6%, respectively. The expense ratio was 22.6% in Q3 versus 22.8% and 23.4% for the nine months versus 22.0%.
Net investment income was $6.9 million in Q3 and $20.3 million for the nine months, essentially unchanged for the nine-month period despite higher average invested assets. Pre-tax investment yield declined to 2.9% from 3.1% in both comparable periods.
At September 30, 2013, total assets were $1.31 billion, shareholders’ equity was $400.7 million and book value per share was $21.67. Cash and cash equivalents were $116.8 million, short-term investments were $86.1 million and total investments, including cash, were $978.3 million. Loss and loss adjustment expense reserves were $609.0 million. The filing reports no weighted-average borrowings and no interest expense in 2013; the remaining subordinated debt securities had been redeemed in 2012.
Cash Flow, Liquidity and Capital
- Operating cash flow was $99.8 million for the first nine months of 2013, compared with $59.1 million in 2012.
- Investing activities used $74.1 million, primarily reflecting $270.5 million of investment purchases partially offset by $197.2 million of sales and maturities.
- Financing activities used $1.6 million, including $4.4 million of dividends, partly offset by stock option proceeds and related tax benefits.
- Cash increased by $24.1 million to $116.8 million during the first nine months.
- The company had $24.4 million available under its share repurchase authorization at September 30, 2013; no shares were repurchased during the period.
Material Changes Versus Prior Comparable Period
- Gross premiums written increased 11.5% in Q3 and 13.5% for the first nine months, driven primarily by higher voluntary policy premiums and assumed premiums from mandatory pooling arrangements.
- Underwriting performance improved materially, with the combined ratio declining 6.0 percentage points in Q3 and 5.8 percentage points for the nine months.
- Prior accident-year development was favorable by $2.7 million in Q3 and $8.3 million for the nine months, compared with $1.6 million and unfavorable development of $0.2 million, respectively, in 2012.
- Net realized investment results changed from a $1.0 million gain to a $0.7 million loss in Q3 and from a $2.9 million gain to a $1.9 million loss for the nine months. The 2013 results included $2.2 million of other-than-temporary impairments on equity securities for the nine-month period.
- Other comprehensive income declined to $20.5 million for the first nine months from $22.0 million, primarily because of unrealized investment losses.
- Insurance-related assessments, commissions, compensation and other operating costs increased, contributing to the higher nine-month expense ratio.
Outlook, Commentary, Risks and Unusual Items
Management emphasizes disciplined underwriting, workplace safety, claims management and premium audits. The filing does not provide quantitative earnings or premium guidance. Management expects quarterly cash dividends to be considered regularly; a subsequent $0.08-per-share dividend was declared on October 28, 2013. The share repurchase authorization was extended through December 31, 2014 and increased to $25.0 million.
On September 15, 2013, the company commuted certain reinsurance agreements covering portions of the 2008 and 2009 accident years. It received $14.9 million in cash and an additional $17.6 million through an offset to a funds-withheld account. The company reported no effect on net income from the commutation.
Key risks include higher-than-expected frequency or severity of workers’ compensation claims, reserve estimation uncertainty, catastrophic events, regulatory and competitive changes, reduced policyholder business activity, investment-market and interest-rate risk, reinsurance availability and counterparty risk, legal developments, and the cyclical nature of the workers’ compensation industry. Open claims at September 30, 2013 totaled 5,387, up from 5,220 a year earlier. Management notes that its focus on higher-severity hazardous-industry risks can cause greater reserve volatility.
The company stated that unrealized investment losses were primarily attributable to interest-rate and market-liquidity conditions and that it did not expect to be required to sell the affected securities before recovery. The filing states that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether premium growth and improved loss ratios persist without relying on favorable prior-year reserve development.
- The adequacy and volatility of the $609.0 million loss and loss adjustment expense reserve, particularly given the increase in open claims.
- The effect of continued low investment yields and unrealized investment losses on future earnings and equity.
- The credit quality, duration and liquidity of the approximately $978.3 million investment portfolio, including $10.3 million of Level 3 limited-partnership investments.
- The continuing impact of insurance-related assessments, commissions and other operating costs on the expense ratio.
- The financial and claims-related consequences of the reinsurance commutation and the collectability of remaining reinsurance recoverables.
- The company’s ability to fund dividends and potential share repurchases while maintaining regulatory capital and insurance subsidiary liquidity.