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| ASI > SEC Filings for ASI > Form 10-Q on 8-Nov-2012 | All Recent SEC Filings |
8-Nov-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, 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 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. 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 contract and commercial bonds for small to medium size businesses, including bonds for environmental contractors, consultants and other professionals. 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 liability insurance coverages for certain classes of specialty risks including, but not limited to general and trade contractors, pest control operators, tanning salons, auto dealers, pizza delivery operators and federal employees. 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 coverages 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 September 30, 2012 and 2011, respectively (dollars in thousands):
Three Months Ended September 30, 2012
Insurance Other
E&S ART Reinsurance Run-off Total
Gross written premiums $ 49,192 $ 16,146 $ 13,807 $ - $ 79,145
Net written premiums 39,004 8,772 13,806 - 61,582
Net earned premiums 35,650 13,295 14,150 - 63,095
Fee & other income 294 915 - 54 1,263
Losses & loss adjustment expenses 20,979 10,423 8,887 - 40,289
Acquisition & other underwriting
expenses*** 16,812 6,280 4,303 972 28,367
Underwriting profit (loss) (1,847 ) (2,493 ) 960 (918 ) (4,298 )
Net investment income 4,452 1,030 1,745 137 7,364
Pre-tax operating income (loss) 2,605 (1,463 ) 2,705 (781 ) 3,066
Net realized gains - - - - 5,693
Interest and corporate expenses**** - - - - 1,331
Earnings before income taxes - - - - 7,428
Income tax expense - - - - 1,350
Net earnings - - - - $ 6,078
Less: Net losses attributable to the
non-controlling interest - - - - (128 )
Net earnings attributable to ASIH,
Ltd. - - - - $ 6,206
Loss ratio 58.8 % 78.4 % 62.8 % NM 63.9 %
Expense ratio 46.3 % 40.4 % 30.4 % NM 43.0 %
Combined ratio** 105.2 % 118.8 % 93.2 % NM 106.9 %
Three Months Ended September 30, 2011
Insurance Other
E&S ART Reinsurance Run-off Total
Gross written premiums $ 39,782 $ 18,952 $ 14,512 $ - $ 73,246
Net written premiums 31,621 14,040 14,559 - 60,220
Net earned premiums 30,752 15,552 12,688 - 58,992
Fee & other income (8 ) 806 - 57 855
Losses & loss adjustment expenses 19,019 8,466 8,382 - 35,867
Acquisition & other underwriting
expenses*** 12,778 6,464 4,491 895 24,628
Underwriting profit (loss) (1,053 ) 1,428 (185 ) (838 ) (648 )
Net investment income 5,280 1,186 1,593 137 8,196
Pre-tax operating income (loss) 4,227 2,614 1,408 (701 ) 7,548
Net realized gains - - - - 10
Interest and corporate expenses**** - - - - 661
Earnings before income taxes - - - - 6,897
Income tax expense - - - - 1,169
Net earnings - - - - $ 5,728
Less: Net losses attributable to the
non-controlling interest - - - - (69 )
Net earnings attributable to ASIH,
Ltd. - - - - $ 5,797
Loss ratio 61.8 % 54.4 % 66.1 % *NM 60.8 %
Expense ratio 41.6 % 36.4 % 35.4 % NM 40.3 %
Combined ratio** 103.4 % 90.8 % 101.5 % NM 101.1 %
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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 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 September 30, 2012, compared to
Net Earnings
Net earnings attributable to ASIH were $6.2 million, or $0.60 per diluted share, for the three months ended September 30, 2012, compared to $5.8 million, or $0.54 per diluted share, for the same period of 2011. Net earnings for the quarter include $1.7 million of after-tax net weather related property losses within the ART Division from the Company's dealer open lot program. During the three months ended September 30, 2011, weather related property losses were minimal. For the three months ended September 30, 2012, net earnings include $4.1 million of after-tax net realized investment gains compared to $0.01 million in 2011. See the discussion below for operating results.
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 106.9% consists of a loss ratio of 63.9% and an expense ratio of 43.0%, compared to 60.8% and 40.3%, respectively, for the same quarter of 2011. Net pre-tax weather related property losses in the 2012 quarter were $2.0 million (or 3.2 points) compared to minimal weather related property losses in the 2011 quarter. The expense ratio increase was attributable to: (a) higher acquisition costs in 2012, due primarily to profit commissions, (b) mix of business and (c) costs associated with growth initiatives.
Gross Written Premiums
Gross written premiums increased 8.1% to $79.1 million from $73.2 million for the three months ended September 30, 2012 and 2011, respectively. The growth in the E&S division to $49.2 million from $39.8 million was attributable to increased production across all product lines but driven primarily by the addition of the BSA acquisition and a new Midwest casualty underwriting office. The increase in the E&S division was offset by lower production in both the ART and Reinsurance divisions. ART gross written permiums declined due to the Company de-emphasizing the specialty programs product. The Reinsurance division's gross written premium declined due to non-renewed treaties and a commutation of a contract written prior to 2012.
Net Earned Premiums
Net earned premiums increased 7.0% to $63.1 million for the three months ended September 30, 2012, compared to $59.0 million for the same period of 2011. Net earned premium growth was driven by increased earned premiums in E&S division to $35.7 million from $30.8 million in 2011. The growth in net earned premiums is primarily associated with the increase in E&S gross written premium.
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 September 30, 2012, compared to $8.2 million for the same period of 2011. Invested assets increased to $948.3 million at September 30, 2012, as compared to $881.1million for the same period of 2011. Investment income is down due to lower yields on the portfolio. At September 30, 2012, the book yield of the fixed income portfolio was 3.6% as compared to 4.1% in 2011.
Acquisition Expenses and Other Underwriting 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 $16.0 million or 25.3% of earned premium for the three months ended September 30, 2012, as compared to $13.7 million or 23.2% of earned premium for the same period of 2011. The percentage increase in acquisition costs is primarily attributable to: (a) mix of business in E&S and Assumed Reinsurance and (b) higher reinsurance costs in the E&S division due to the purchase of property catastrophe coverage.
Other underwriting expenses were $12.4 million for the three months ended September 30, 2012, compared to $10.9 million for the same 2011 period. As a percentage of net earned premiums, other underwriting expenses increased to 19.6% from 18.5% 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 the later part of 2011.
Income Taxes
The income tax expense for the three months ended September 30, 2012, was $1.4 million compared to $1.2 million for the same period of 2011.
The following table presents key financial data by segment for the nine months ended September 30, 2012 and 2011, respectively (dollars in thousands):
Nine Months Ended September 30, 2012
Insurance Other
E&S ART Reinsurance Run-off Total
Gross written premiums $ 138,251 $ 58,822 $ 43,386 $ - $ 240,459
Net written premiums 109,472 39,494 43,385 - 192,351
Net earned premiums 100,400 42,796 43,328 - 186,524
Fee & other income 294 2,317 - 62 2,673
Losses & loss adjustment expenses 60,117 32,285 25,987 - 118,389
Acquisition & other underwriting
expenses*** 45,869 18,533 13,104 2,705 80,211
Underwriting profit (loss) (5,292 ) (5,705 ) 4,237 (2,643 ) (9,403 )
Net investment income 13,362 3,807 4,961 447 22,577
Pre-tax operating income (loss) 8,070 (1,898 ) 9,198 (2,196 ) 13,174
Net realized gains - - - - 5,732
Interest and corporate expenses**** - - - - 4,220
Earnings before income taxes - - - - 14,686
Income tax expense - - - - 2,222
Net earnings - - - - $ 12,464
Less: Net earnings attributable to
the non-controlling interest - - - - 35
Net earnings attributable to ASIH,
Ltd. - - - - $ 12,429
Loss ratio 59.9 % 75.4 % 60.0 % NM 63.5 %
Expense ratio 45.4 % 37.9 % 30.2 % NM 41.6 %
Combined ratio** 105.3 % 113.3 % 90.2 % NM 105.1 %
Nine Months Ended September 30, 2011
Insurance Other
E&S ART Reinsurance Run-off Total
Gross written premiums $ 119,706 $ 64,753 $ 46,012 $ (1 ) $ 230,470
Net written premiums 95,636 46,086 44,925 (1 ) 186,646
Net earned premiums 87,831 45,523 39,158 (1 ) 172,511
Fee & other income (8 ) 2,436 - 101 2,529
Losses & loss adjustment expenses 54,657 30,310 33,030 - 117,997
Acquisition & other underwriting
expenses*** 37,411 18,428 11,605 2,548 69,992
Underwriting profit (loss) (4,245 ) (779 ) (5,477 ) (2,448 ) (12,949 )
Net investment income 15,176 3,538 4,528 440 23,682
Pre-tax operating income (loss) 10,931 2,759 (949 ) (2,008 ) 10,733
Net realized gains - - - - 11,311
Interest and corporate expenses**** - - - - 3,252
Earnings before income taxes - - - - 18,792
Income tax expense - - - - 588
Net earnings - - - - $ 18,204
Less: Net earnings attributable to
the non-controlling interest - - - - 454
Net earnings attributable to ASIH,
Ltd. - - - - $ 17,750
Loss ratio 62.2 % 66.6 % 84.4 % *NM 68.4 %
Expense ratio 42.6 % 35.1 % 29.6 % NM 39.1 %
Combined ratio** 104.8 % 101.7 % 114.0 % NM 107.5 %
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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 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.
Nine Months Ended September 30, 2012, compared to
Net Earnings
Net earnings attributable to ASIH were $12.4 million, or $1.18 per diluted share, for the nine months ended September 30, 2012, compared to $17.8 million, or $1.65 per diluted share, for the same period of 2011. For the nine months ended September 30, 2012, after-tax weather related property losses were $4.7 million and net realized gains after-tax were $4.1 million. The 2011 earnings included $11.2 million in after-tax realized gains from investments offset by $8.4 million in after-tax net weather related property losses. See the discussion below for the components of operating results.
Combined Ratio
The combined ratio was 105.1% compared to 107.5%, composed of a loss ratio of 63.5% and an expense ratio of 41.6%, compared to 68.4% and 39.1%, respectively, in the prior year. The decrease in the loss ratio is primarily attributable to lower weather related property losses totaling 5.6 million (or 3.0 points), for the nine months ended September 30, 2012, compared to $10.8 million (or 6.3 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 4.3% to $240.5 million from $230.5 million for the nine months ended September 30, 2012 and 2011, respectively. The growth in the E&S division to $138.3 million from $119.7 million was attributable to the Bluestone acquisition, a new Midwest casualty underwriting office and our healthcare product. ART gross written premiums declined due to the Company's de-emphasis of the specialty programs product and are expected to decline throughout 2012. Reinsurance gross written premiums declined approximately $2.6 million primarily due to the commutations during 2012 of two contracts written prior to 2012 and the non-renewal of select contracts in 2012.
Net Earned Premiums
Net earned premiums increased 8.1% to $186.5 million for the nine months ended September 30, 2012, compared to $172.5 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 $22.6 million for the nine months ended September 30, 2012, compared to $23.7 million for the same period of 2011 decreasing as a result of lower yields. Invested assets increased to $948.3 million at September 30, 2012, as compared to $881.1 million for the same period of 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 $45.0 million or 24.2% of earned premium for the nine months ended September 30, 2012, as compared to $38.7 million or 22.4% of earned premium for the same period of 2011. The percentage increase in acquisition costs is primarily attributable to: (a) mix of business in E&S and Assumed Reinsurance and (b) higher reinsurance costs in the E&S division due to the purchase of property catastrophe coverage.
Other Underwriting Expenses
Other underwriting expenses were $35.2 million for the nine months ended September 30, 2012, compared to $31.3 million for the same 2011 period. As a percentage of net earned premiums, other underwriting expenses increased to 18.8% from 18.1% for the same nine months of 2011 due to the acquisition of underwriting teams and technology investments placed in service during the later part of 2011.
Income Taxes
The income tax expense for the nine months ended September 30, 2012, was $2.2
million compared to $0.6 million for the same period of 2011 due to the income
(loss) generated in the U.S. and Bermuda. Net realized gains in 2012 were
generated in the U.S. while 2011 investment gains were generated in 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 September 30, 2012, the Company had not drawn on the facility.
Net cash provided by operations was $37.5 million for the nine months ended September 30, 2012, compared to net cash provided by operations of $51.8 million for the same period of 2011. The reduction in net cash provided by operations was primarily due to paid losses of $102.1 million compared to $86.2 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. The Company has since June 30, 2012, purchased 488,968 shares of its common stock and completed this repurchase authorization. On October 23, 2012, the Company's Board of Directors approved the repurchase of up to an additional 500,000 shares of the Company's outstanding common stock.
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 our business plan, we do not anticipate paying dividends on the common shares in the near future.
Forward Looking Statements
This report contains forward-looking statements and non-GAAP financial measures. The forward-looking statements reflect the Company's current views with respect to future events and financial performance, including insurance market . . .
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