AMERISAFE, Inc. 2023 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE is a holding company that markets and underwrites workers’ compensation insurance for small to mid-sized employers in hazardous industries, including construction, trucking, logging and lumber, agriculture, manufacturing, telecommunications and maritime. The company actively markets insurance in 27 states and is licensed in additional jurisdictions. This report covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Gross premiums written | $82.5 million | $77.8 million | +6.0% |
| Net premiums written | $78.3 million | $75.2 million | +4.1% |
| Net premiums earned | $69.2 million | $67.6 million | +2.4% |
| Net investment income | $7.4 million | $6.1 million | +21.6% |
| Total revenues | $78.4 million | $75.6 million | +3.8% |
| Total expenses | $56.9 million | $54.1 million | +5.1% |
| Income before income taxes | $21.5 million | $21.4 million | +0.5% |
| Net income | $17.3 million | $17.3 million | Flat |
| Diluted EPS | $0.90 | $0.89 | +1.1% |
| Net combined ratio | 82.2% | 80.1% | +2.1 points |
| Return on average equity | 21.3% | 17.4% | +3.9 points |
Net income was supported by higher premiums and investment income but was offset by higher operating costs, commissions and insurance-related assessments. The effective tax rate was 19.5%, compared with 19.1% in the prior-year quarter.
Loss and loss adjustment expenses were $39.0 million, up 3.4%. The current accident-year loss and LAE ratio was estimated at 71.0% of net premiums earned. Favorable prior accident-year development reduced current-quarter loss expenses by $10.1 million, compared with $10.2 million in Q1 2022. The net loss ratio increased to 56.4% from 55.9%, while the expense ratio increased to 24.5% from 22.4%.
Liquidity, Investments and Capital
- Net cash provided by operating activities was $13.5 million, compared with $7.1 million in Q1 2022.
- Net cash used in investing activities was $27.2 million, primarily reflecting purchases of investments.
- Net cash used in financing activities was $6.5 million, including $6.5 million of dividends.
- Cash and cash equivalents declined to $41.2 million at March 31, 2023 from $61.5 million at December 31, 2022.
- Total investments, including cash and cash equivalents, were $961.1 million, or 1.1% above year-end 2022.
- Investment holdings included $480.1 million of held-to-maturity fixed maturities, $345.1 million of available-for-sale fixed maturities, $63.4 million of equity securities and $31.3 million of short-term investments.
- Available-for-sale securities had $14.0 million of gross unrealized losses, while held-to-maturity securities had $18.4 million of gross unrecognized losses at March 31, 2023. The filing reported no allowance for credit losses on available-for-sale securities and a $0.2 million allowance on held-to-maturity securities.
- Total assets were $1.288 billion and shareholders’ equity was $332.9 million at March 31, 2023. Book value per share was $17.38.
- The filing does not provide a clear separate amount for conventional debt; liabilities primarily consist of insurance reserves, unearned premiums and other insurance-related obligations.
Material Changes Versus the Prior Comparable Period
- Gross premiums written increased $4.7 million, primarily from $6.1 million of payroll audits and related adjustments for prior policies, partly offset by lower annual premiums on voluntary policies.
- Ceded premiums increased to 5.7% of gross premiums earned from 3.6%, reflecting higher levels and generally higher prices for reinsurance.
- Net investment income increased $1.3 million because of higher investment yields, despite average invested assets declining 10.7% to $960.7 million.
- New-money tax-equivalent yields averaged 5.39%, compared with 2.26% in Q1 2022; the portfolio’s pretax annualized yield increased to 3.1% from 2.3%.
- Underwriting and other operating costs, commissions and salaries increased to $17.0 million from $15.1 million. The change included higher assessments, commissions and professional fees, partly offset by higher profit-sharing reinsurance commission.
- Open claims at quarter-end declined to 4,307 from 4,409 a year earlier, although fewer claims were closed during the quarter.
- Accumulated other comprehensive loss improved to $9.5 million from $13.8 million at year-end 2022, reflecting $4.3 million of favorable after-tax unrealized changes in available-for-sale debt securities.
- No shares were repurchased in Q1 2023. The company had $12.6 million remaining under its repurchase authorization.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that the 2023 accident-year loss and LAE ratio estimate of 71.0% was consistent with the initial estimate for accident year 2022 and reflected long-term claim frequency and severity trends and medical inflation.
Management attributed favorable reserve development primarily to case reserve improvements on closed claims and claims involving workers who had reached maximum medical improvement. Reserves remain inherently uncertain because the company focuses on relatively low-frequency, high-severity risks; future medical, legal, economic and claims trends could produce unfavorable development.
- Key risks include industry cyclicality, competition, economic conditions, inflation, interest-rate and investment-market volatility, cyber breaches, regulatory and legal changes, reinsurance availability and counterparty performance, and higher-than-expected claim frequency or severity.
- Available-for-sale and held-to-maturity securities remain exposed to interest-rate, credit and valuation risk.
- The company’s insurance subsidiaries depend on reinsurance recoveries; amounts recoverable from reinsurers were $118.1 million at March 31, 2023.
- A quarterly dividend of $0.34 per share was declared on April 25, 2023, payable June 23, 2023, to shareholders of record June 16, 2023.
- Management reported that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether favorable prior-year reserve development persists or reverses, particularly in the company’s high-severity workers’ compensation business.
- The sustainability of premium growth, including the contribution from payroll audits and prior-policy adjustments versus new voluntary business.
- The effect of higher reinsurance costs and ceded premiums on future net premiums and underwriting margins.
- Changes in the net combined ratio and current accident-year loss ratio, excluding the benefit of prior-year reserve releases.
- The effect of interest rates and equity-market movements on investment income, unrealized gains and losses, liquidity and book value.
- The adequacy and collectability of loss reserves and reinsurance recoverables.
- Future capital deployment through dividends and the authorized share repurchase program.