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| ASI > SEC Filings for ASI > Form 10-Q on 9-Aug-2012 | All Recent SEC Filings |
9-Aug-2012
Quarterly Report
We segregate our business into two segments: insurance operations and other. The insurance operations are further classified into three divisions: excess and surplus lines (E&S), alternative risk transfer (ART) and assumed reinsurance (Assumed Re). E&S consists of seven product lines: environmental, primary casualty, excess, property, surety, healthcare, and professional liability. ART consists of two product lines: specialty programs and fully funded. Assumed Re consists of property and casualty business assumed from unaffiliated specialty insurers and reinsurers. Other includes lines of business that we no longer underwrite (run-off) and other ancillary product lines. Prior year amounts have been reclassified to conform to the current year presentation.
Within E&S, our environmental insurance products provide general contractor pollution and/or professional liability coverage for contractors and consultants in the environmental remediation industry and property owners. Primary casualty provides general liability insurance for residential and commercial contractors as well as general liability and product liability for smaller manufacturers, distributors, non-habitational real estate and certain real property owner, landlord and tenant risks. Excess provides excess and umbrella liability coverages over our own and other carriers' primary casualty polices. Our property product encompasses surplus lines commercial property business and commercial multi-peril (CMP) policies. Surety provides payment and performance bonds primarily to the environmental remediation and construction industries. Healthcare provides customized liability insurance solutions primarily for long-term care facilities. Professional Liability provides miscellaneous liability and professional liability coverage on both a primary and excess basis. Professional liability coverage is provided to lawyers, insurance agents, and other businesses, while miscellaneous liability coverage is provided to private and not for profit entities and, to a lesser extent, public companies.
In our ART division, specialty programs provide insurance to homogeneous niche groups through third party program managers. Our specialty programs consist primarily of property and casualty insurance coverages for certain classes of specialty risks including, but not limited to, construction contractors, pest control operators, auto dealers, real estate brokers, consultants, and restaurant and tavern owners. Fully funded policies provide our insureds the ability to fund their liability exposure via a self-insurance vehicle for which we generate fee income.
We write fully funded general and professional liability for businesses operating primarily in the healthcare and construction industries.
Our Assumed Reinsurance division offers property and casualty reinsurance products in the form of treaty and facultative contracts targeting specialty insurers, risk retention groups and captives. We provide this coverage on an excess of loss and, to a lesser extent, a quota share basis. We reinsure casualty business, which includes medical malpractice, general liability, commercial auto, professional liability and workers' compensation. The assumed reinsurance division also participates in one property catastrophe treaty that provides a maximum of $20 million of coverage over the treaty period. The treaty covers world-wide property catastrophe losses including hurricanes and earthquakes.
Our Other segment includes lines of business that we have placed in run-off, such as workers' compensation, excess liability insurance for municipalities, other commercial lines, real estate and other ancillary product lines.
The reportable insurance divisions are measured based on underwriting profit
(loss) and pre-tax operating income (loss). The following information is
presented on the basis of accounting principles generally accepted in the United
States of America ("GAAP").
The following table presents key financial data by segment for the three months ended June 30, 2012 and 2011, respectively (dollars in thousands):
Three Months Ended June 30, 2012
Insurance Other
E&S ART Reinsurance Run-off Total
Gross written premiums $ 50,448 $ 21,498 $ 15,603 $ - $ 87,549
Net written premiums 39,735 14,579 15,603 - 69,917
Net earned premiums 33,600 13,157 15,260 - 62,017
Fee & other income - 738 - (9 ) 729
Losses & loss adjustment expenses 20,221 11,875 8,751 (28 ) 40,819
Acquisition & other underwriting
expenses*** 15,140 5,865 4,471 874 26,350
Underwriting profit (loss) (1,761 ) (3,845 ) 2,038 (855 ) (4,423 )
Net investment income 4,285 1,348 1,595 174 7,402
Pre-tax operating income (loss) 2,524 (2,497 ) 3,633 (681 ) 2,979
Net realized losses - - - - (13 )
Interest and corporate expenses**** - - - - 1,215
Earnings before income taxes - - - - 1,751
Income tax benefit - - - - (234 )
Net earnings - - - - $ 1,985
Less: Net losses attributable to
the non-controlling interest - - - - (182 )
Net earnings attributable to ASIH,
Ltd. - - - - $ 2,167
Loss ratio 60.2 % 90.3 % 57.3 % *NM 65.8 %
Expense ratio 45.1 % 39.0 % 29.3 % NM 41.3 %
Combined ratio** 105.3 % 129.3 % 86.6 % NM 107.1 %
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Three Months Ended June 30, 2011
Insurance Other
E&S ART Reinsurance Run-off Total
Gross written premiums $ 43,929 $ 23,923 $ 15,028 $ (1 ) $ 82,879
Net written premiums 34,413 17,140 14,864 (1 ) 66,416
Net earned premiums 29,085 15,616 14,450 (1 ) 59,150
Fee & other income (5 ) 770 - 33 798
Losses & loss adjustment expenses 17,885 12,830 9,153 1 39,869
Acquisition & other underwriting
expenses*** 12,412 5,916 4,249 833 23,410
Underwriting profit (loss) (1,217 ) (2,360 ) 1,048 (802 ) (3,331 )
Net investment income 5,081 1,232 1,586 151 8,050
Pre-tax operating income (loss) 3,864 (1,128 ) 2,634 (651 ) 4,719
Net realized gains - - - - 194
Interest and corporate expenses**** - - - - 1,380
Earnings before income taxes - - - - 3,533
Income tax benefit - - - - (549 )
Net earnings - - - - $ 4,082
Less: Net earnings attributable to
the non-controlling interest - - - - 30
Net earnings attributable to ASIH,
Ltd. - - - - $ 4,052
Loss ratio 61.5 % 82.2 % 63.3 % *NM 67.4 %
Expense ratio 42.7 % 33.0 % 29.4 % NM 38.2 %
Combined ratio** 104.2 % 115.2 % 92.7 % NM 105.6 %
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* NM = Ratio is not meaningful
** The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of losses and loss adjustment expenses, acquisition expenses, and other underwriting expenses net of fee income to earned premiums.
*** Reclassifications between divisions and segments were made to allocate indirect corporate overhead costs.
**** Excise taxes have been classified as corporate expenses resulting in a reclassification of expenses for prior year.
Three Months Ended June 30, 2012, compared to
Net Earnings
Net earnings attributable to ASIH were $2.2 million, or $0.21 per diluted share, for the three months ended June 30, 2012, compared to $4.1 million, or $0.38 per diluted share, for the same period of 2011. Net earnings for the quarter include $3.0 million of after-tax net weather related property losses within the ART Division. During the three months ended June 30, 2011, after-tax net weather related property losses were $3.4 million comprised of $2.7 million in the ART Division with the remainder in the E&S Division.
Combined Ratio
Our underwriting results are measured by the combined ratio, which is the sum of
(a) the ratio of incurred losses and loss adjustment expenses to net earned
premiums (loss ratio), and, (b) the ratio of acquisition expenses and other
underwriting expenses, net of fee income, to net earned premiums (expense
ratio). A combined ratio below 100% indicates that an insurer has an
underwriting profit, and a combined ratio above 100% indicates that an insurer
has an underwriting loss.
The combined ratio of 107.1% consists of a loss ratio of 65.8% and an expense ratio of 41.3%, compared to 67.4% and 38.2%, respectively, for the same quarter of 2011. Net pre-tax weather related property losses in the 2012 quarter were $3.6 million (or 5.8 points) compared to $5.1 million (or 8.6 points) for the 2011 quarter. The $3.6 million is comprised of $5.1 million in property catastrophe losses, offset by a $1.5 million reduction in current accident year non catastrophe property losses. The loss ratio for the E&S Division improved 1.3 points due to lower weather related property losses and the assumed reinsurance loss ratio improved 6.0 points due primarily to mix of business and certain non-renewed contracts. The loss ratio for the ART Division increased 8.1 points due primarily to higher loss ratio assumptions for current year business. The expense ratio increase was attributable to: (a) lower acquisition costs in 2011 due to the impact of weather related losses on profit commissions, (b) mix of business and (c) costs associated with growth initiatives.
Gross Written Premiums
Gross written premiums increased 5.6% to $87.5 million from $82.9 million for the three months ended June 30, 2012 and 2011, respectively. The growth in the E&S division to $50.4 million from $43.9 million was attributable to increased production across all product lines but driven primarily by our excess, surety and healthcare products. The growth in Assumed Reinsurance from $15.0 million to $15.6 million was a result of new business opportunities in targeted classes. The ART Division's gross written premium declined to $21.5 million from $23.9 million in 2011 due to the non-renewal of certain programs.
Net Earned Premiums
Net earned premiums increased 4.9% to $62.0 million for the three months ended June 30, 2012, compared to $59.2 million for the same period of 2011. Net earned premium growth resulted from increased gross written premium discussed above.
Net Investment Income
Net investment income is derived from the investment portfolio net of investment expenses. Net investment income was $7.4 million for the three months ended June 30, 2012, compared to $8.1 million for the same period of 2011. Invested assets increased to $908.6 million at June 30, 2012, as compared to $863.1 million for the same period of 2011. Investment income is down due to lower yields on the portfolio.
Acquisition Expenses
Acquisition expenses are commissions paid to producers that are partially offset by ceding commissions or fronting fees. Acquisition expenses also include premium taxes paid to states in which we are admitted to conduct business. Policy acquisition expenses were $14.3 million or 23.1% of earned premium for the three months ended June 30, 2012, as compared to $13.2 million or 22.4% of earned premium for the same period of 2011. The percentage increase in acquisition costs is attributable to: (a) 2011 weather related property losses that reduced or eliminated profit commissions to producers, (b) mix of business in E&S and Assumed Reinsurance and (c) higher reinsurance costs in the E&S Division.
Other Underwriting Expenses
Other underwriting expenses were $12.0 million for the three months ended June 30, 2012, compared to $10.2 million for the same 2011 period. As a percentage of net earned premiums, other underwriting expenses increased to 19.4% from 17.2% for the same three months of 2011. Other underwriting expenses increased due to the acquisition of underwriting teams and technology investments placed in service during 2011.
Income Taxes
The income tax benefit for the three months ended June 30, 2012, was $0.2 million compared to $0.5 million for the same period of 2011. The benefit is due to the geographic mix of United States and Bermuda net earnings.
The following table presents key financial data by segment for the six months ended June 30, 2012 and 2011, respectively (dollars in thousands):
Six Months Ended June 30, 2012
Insurance Other
E&S ART Reinsurance Run-off Total
Gross written premiums $ 89,059 $ 42,676 $ 29,579 $ - $ 161,314
Net written premiums 70,468 30,722 29,579 - 130,769
Net earned premiums 64,750 29,501 29,178 - 123,429
Fee & other income - 1,402 - 8 1,410
Losses & loss adjustment expenses 39,138 21,862 17,100 - 78,100
Acquisition & other underwriting
expenses*** 29,057 12,253 8,801 1,734 51,845
Underwriting profit (loss) (3,445 ) (3,212 ) 3,277 (1,726 ) (5,106 )
Net investment income 8,910 2,778 3,216 310 15,214
Pre-tax operating income (loss) 5,465 (434 ) 6,493 (1,416 ) 10,108
Net realized gains - - - - 39
Interest and corporate
expenses**** - - - - 2,889
Earnings before income taxes - - - - 7,258
Income tax expense - - - - 872
Net earnings - - - - $ 6,386
Less: Net earnings attributable to
the non-controlling interest - - - - 163
Net earnings attributable to ASIH,
Ltd. - - - - $ 6,223
Loss ratio 60.4 % 74.1 % 58.6 % *NM 63.3 %
Expense ratio 44.9 % 36.8 % 30.2 % NM 40.9 %
Combined ratio** 105.3 % 110.9 % 88.8 % NM 104.2 %
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Six Months Ended June 30, 2011
Insurance Other
E&S ART Reinsurance Run-off Total
Gross written premiums $ 79,924 $ 45,801 $ 31,500 $ (1 ) $ 157,224
Net written premiums 64,015 32,046 30,366 (1 ) 126,426
Net earned premiums 57,079 29,971 26,469 (1 ) 113,518
Fee & other income - 1,630 - 44 1,674
Losses & loss adjustment expenses 35,638 21,844 24,647 - 82,129
Acquisition & other underwriting
expenses*** 24,633 11,964 7,114 1,653 45,364
Underwriting profit (loss) (3,192 ) (2,207 ) (5,292 ) (1,610 ) (12,301 )
Net investment income 9,896 2,352 2,935 303 15,486
Pre-tax operating income (loss) 6,704 145 (2,357 ) (1,307 ) 3,185
Net realized gains - - - - 11,302
Interest and corporate
expenses**** - - - - 2,592
Earnings before income taxes - - - - 11,895
Income tax benefit - - - - (581 )
Net earnings - - - - $ 12,476
Less: Net earnings attributable to
the non-controlling interest - - - - 523
Net earnings attributable to ASIH,
Ltd. - - - - $ 11,953
Loss ratio 62.4 % 72.9 % 93.1 % *NM 72.3 %
Expense ratio 43.2 % 34.5 % 26.9 % NM 38.5 %
Combined ratio** 105.6 % 107.4 % 120.0 % NM 110.8 %
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* NM = Ratio is not meaningful
** The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of losses and loss adjustment expenses, acquisition expenses, and other underwriting expenses net of fee income to earned premiums.
*** Reclassifications between divisions and segments were made to allocate indirect corporate overhead costs.
**** Excise taxes have been classified as corporate expenses resulting in a reclassification of expenses for prior year.
Six Months Ended June 30, 2012, compared to
Net Earnings
Net earnings attributable to ASIH were $6.2 million, or $0.59 per diluted share, for the six months ended June 30, 2012, compared to $12.0 million, or $1.11 per diluted share, for the same period of 2011. The decline in net earnings was due to lower investment income, realized gains and fee income as compared to prior year. For the six months ended June 30, 2012, after-tax net weather related property losses were $3.0 million and net realized gains were $0.04 million. The 2011 earnings included $11.3 million in realized gains from investments offset by $8.4 million in after-tax net weather related property losses.
Combined Ratio
The combined ratio was 104.2% compared to 110.8%, composed of a loss ratio of 63.3% and an expense ratio of 40.9%, compared to 72.3% and 38.5%, respectively, in the prior year. The decrease in the loss ratio is primarily attributable to lower pre-tax weather related property losses that for the six months ended June 30, 2012, totaled $3.6 million (or 2.9 points) compared to $10.8 million (or 9.5 points) for the same period in 2011. The increase in the expense ratio is due to the same factors discussed in the quarter results.
Gross Written Premiums
Gross written premiums increased 2.6% to $161.3 million from $157.2 million for the six months ended June 30, 2012 and 2011, respectively. The growth in the E&S division to $89.1 million from $79.9 million was attributable to increased production across all product lines but driven primarily by our excess, surety and healthcare products. ART gross written premiums declined due to certain non-renewed programs during 2011 and are expected to decline throughout 2012. Assumed Reinsurance gross written premiums declined approximately $2.0 million primarily due to the commutation of two treaties in 2012.
Net Earned Premiums
Net earned premiums increased 8.7% to $123.4 million for the six months ended June 30, 2012, compared to $113.5 million for the same period of 2011 as a result of increased gross written premiums during 2012 and 2011.
Net Investment Income
Net investment income is derived from the investment portfolio net of investment expenses. Net investment income was $15.2 million for the six months ended June 30, 2012, compared to $15.5 million for the same period of 2011 decreasing as a result of lower yields. Average invested assets increased to $897.6 million at June 30, 2012, as compared to $840.8 million for the same period of 2011. The pretax investment yield for the six months was 3.6% and 3.9% respectively for 2012 and 2011.
Acquisition Expenses
Acquisition expenses are commissions paid to producers that are partially offset by ceding commissions or fronting fees. Acquisition expenses also include premium taxes paid to states in which we are admitted to conduct business. Acquisition expenses were $29.1 million or 23.6% of earned premium for the six months ended June 30, 2012, as compared to $25.0 million or 22.0% of earned premium for the same period of 2011. The percentage increase in acquisition costs is attributable to: (a) 2011 weather related property losses reduced or eliminated profit commissions to producers, (b) mix of business in E&S and Assumed Reinsurance and (c) higher reinsurance costs in the E&S Division.
Other Underwriting Expenses
Other underwriting expenses were $22.8 million for the six months ended June 30, 2012, compared to $20.4 million for the same 2011 period. As a percentage of net earned premiums, other underwriting expenses increased to 18.4% from 17.9% for the same six months of 2011 due to increased earned premiums without a corresponding increase to other underwriting expenses. Other underwriting expenses increased due to the acquisition of underwriting teams and technology investments placed in service during 2011.
Income Taxes
The income tax expense for the six months ended June 30, 2012, was $0.9 million compared to $0.6 million of benefit for the same period of 2011 due to the income (loss) generated in the U.S. and Bermuda.
Liquidity and Capital Resources
The Company meets its cash requirements and finances its growth principally through cash flows generated from operations. The Company has experienced a reduction in premium rates due to the entrance of new competitors and overall market conditions. The Company's primary sources of short-term cash flow are premium writings and investment income. Short-term cash requirements relate to claims payments, reinsurance premiums, commissions, salaries, employee benefits, and other operating expenses. Due to the uncertainty regarding the timing and amount of settlements of unpaid claims, the Company's future liquidity requirements may vary; therefore, the Company has structured its investment portfolio to mitigate those factors. The Company believes its current cash flows are sufficient for the short-term needs of its business and its invested assets are sufficient for the long-term needs of its insurance business.
The Company has a line of credit facility of $20 million. The facility is unsecured and expires August 20, 2013. At June 30, 2012, the Company had not drawn on the facility.
Net cash provided by operations was $13.7 million for the six months ended June 30, 2012, compared to net cash provided by operations of $34.6 million for the same period of 2011. The reduction in net cash provided by operations was primarily due to paid losses of $58.8 million compared to $53.3 million in 2011 and collateral released in the E&S and ART divisions pursuant to contractual provisions.
On January 24, 2012, the Company's Board of Directors authorized the repurchase of up to 500,000 shares of common stock. Pursuant to this authorization, the Company has repurchased a total of 11,032 shares of common stock at a cost of approximately $.2 million during 2012.
Our ability to pay future dividends to shareholders will depend, to a significant degree, on the ability of our subsidiaries to generate earnings from which to pay dividends. The jurisdictions in which we and our insurance and reinsurance subsidiaries are domiciled place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect the solvency of insurers. Given the capital requirements associated with . . .
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