AMERISAFE, Inc. — Q2 2023 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, including construction, trucking, logging and lumber, agriculture, manufacturing, telecommunications and maritime. The company markets in 27 states through independent agencies and its wholly owned agency subsidiary. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Gross premiums written | $71.7 million | $74.5 million | $154.2 million | $152.3 million |
| Net premiums earned | $65.6 million | $70.3 million | $134.8 million | $137.8 million |
| Net investment income | $7.7 million | $6.5 million | $15.2 million | $12.6 million |
| Total revenues | $75.7 million | $68.0 million | $154.1 million | $143.6 million |
| Total expenses | $56.1 million | $60.9 million | $113.0 million | $115.1 million |
| Net income | $15.6 million | $6.1 million | $33.0 million | $23.5 million |
| Diluted EPS | $0.81 | $0.32 | $1.72 | $1.21 |
| Net combined ratio | 85.4% | 86.7% | 83.9% | 83.4% |
| Return on average equity | 18.6% | 6.3% | 20.0% | 12.0% |
Profitability, margins and underwriting
- Q2 net income increased 155% year over year, primarily reflecting a $2.0 million unrealized gain on equity securities versus a $9.9 million loss in Q2 2022, higher investment income and lower loss expenses.
- The Q2 net loss ratio improved to 54.3% from 57.4%, while the expense ratio increased to 30.4% from 28.3%. The resulting combined ratio improved to 85.4% from 86.7%.
- For the first six months, the net loss ratio improved to 55.4% from 56.6%, but the expense ratio increased to 27.4% from 25.4%, resulting in a combined ratio of 83.9% versus 83.4%.
- Management estimated the 2023 accident-year loss and LAE ratio at 71.0% of net premiums earned, consistent with the initial estimate for 2022.
- Favorable prior accident-year reserve development was $10.9 million in Q2 and $21.0 million year to date, compared with $9.6 million and $19.8 million, respectively, in 2022.
Cash flow, liquidity, investments and capital
- Net cash provided by operating activities was $20.7 million for the first six months, down from $25.0 million in 2022. The decrease primarily reflected lower premium collections and higher underwriting expenses and federal taxes paid.
- Investing activities used $34.3 million, compared with $7.3 million provided in the prior-year period. The company purchased $94.0 million of investments and received $59.7 million from investment sales and maturities.
- Cash and cash equivalents declined to $33.9 million at June 30, 2023 from $61.5 million at December 31, 2022. Total investments, including cash and cash equivalents, were $962.7 million, up 1.3% from year-end.
- The investment portfolio consisted primarily of fixed maturity securities: $476.4 million held to maturity and $340.4 million available for sale. Available-for-sale securities had $16.4 million of gross unrealized losses; the filing reports no allowance for credit losses on those securities.
- Total assets were $1.299 billion and shareholders’ equity was $340.6 million at June 30, 2023, compared with $1.269 billion and $317.4 million at December 31, 2022. Book value per share was $17.76.
- The filing does not present borrowings or debt as a separate material liability category; no material debt balance is clearly identified in the provided financial statements.
- The company paid $13.1 million in shareholder dividends during the first six months. The board declared a quarterly dividend of $0.34 per share on July 25, 2023, payable September 22, 2023.
- No shares were repurchased during the first six months. The company had $12.6 million remaining under its repurchase authorization at June 30, 2023.
Material changes versus the prior comparable period
- Q2 gross premiums written decreased 3.7%, net premiums written decreased 5.6% and net premiums earned decreased 6.7%. Management attributed the quarterly premium decline mainly to lower annual premiums on voluntary policies, lower audit-related adjustments and lower residual-market premium.
- Year-to-date gross premiums written increased 1.3%, but net premiums written declined 0.6% because ceded premiums increased. Ceded premiums were 5.7% of gross premiums earned versus 3.7% in the prior-year periods, reflecting higher reinsurance levels and generally higher pricing.
- Net investment income increased 19.1% in Q2 and 20.3% year to date because of higher investment yields. The pretax portfolio yield increased to 3.2% from 2.5% in Q2 and to 3.2% from 2.4% year to date.
- Loss and LAE incurred declined 11.6% in Q2 and 4.4% year to date. The liability for loss and LAE reserves declined to $684.6 million from $696.0 million at year-end 2022.
- The effective tax rate increased to 20.1% in Q2 and 19.8% year to date, from 13.9% and 17.8%, respectively, due mainly to a lower proportion of tax-exempt investment income.
- The company reported $2.6 million of other comprehensive loss in Q2, but $1.7 million of other comprehensive income year to date, reflecting changes in unrealized gains and losses on available-for-sale debt securities.
Guidance, outlook, management commentary and risks
The filing does not provide formal earnings, premium or combined-ratio guidance. Management expects results to remain sensitive to workers’ compensation pricing and cycles, claim frequency and severity, medical inflation, reserve development, competition, reinsurance availability and pricing, investment performance, interest rates, equity-market movements, regulation, economic conditions and cybersecurity events.
Management stated that favorable reserve development was largely driven by favorable case reserve development on closed claims and claims where workers had reached maximum medical improvement. The company cautioned that reserves remain inherently uncertain because its focus on hazardous industries produces relatively fewer but more severe claims, which may create greater reserve volatility.
As of June 30, 2023, there were 4,160 open claims, down from 4,435 a year earlier. Management stated that no material changes had occurred in the company’s market-risk profile since December 31, 2022. Disclosure controls and procedures were evaluated as effective.
Most important facts for investors to verify
- Whether premium growth stabilizes and whether higher ceded premiums continue to pressure net written and earned premiums.
- Whether favorable prior-year reserve development persists or reverses, particularly given the severity profile of the insured risks.
- The sustainability of higher investment yields and the effect of interest-rate changes on unrealized losses in the fixed-income portfolio and accumulated other comprehensive income.
- Cash generation relative to claim payments, dividends, investment purchases and potential share repurchases.
- Reinsurance coverage, pricing, recoverability and counterparty exposure.
- The effect of higher operating costs, commissions, assessments and taxes on the combined ratio.
- Subsequent filings for changes in claim frequency and severity, reserve adequacy, regulatory developments and any material contingencies not quantified in this filing.