Amerisafe, Inc. 10-Q Summary
Business Context and Reporting Period
Amerisafe, Inc. 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 insurance in 27 states through independent agencies and its wholly owned agency subsidiary. This Form 10-Q covers the three and six months ended June 30, 2022; results are unaudited.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|---|---|---|---|
| Gross premiums written | $74.5 million | $73.7 million | $152.3 million | $155.2 million |
| Net premiums earned | $70.3 million | $69.9 million | $137.8 million | $140.6 million |
| Total revenues | $68.0 million | $81.2 million | $143.6 million | $164.5 million |
| Net income | $6.1 million | $23.8 million | $23.5 million | $43.1 million |
| Diluted EPS | $0.32 | $1.23 | $1.21 | $2.22 |
| Net combined ratio | 86.7% | 74.4% | 83.4% | 79.6% |
| Return on average equity | 6.3% | 20.8% | 12.0% | 19.0% |
Loss and loss adjustment expenses were $40.3 million in the second quarter and $78.1 million for the first six months, compared with $32.4 million and $71.9 million, respectively, in the prior-year periods. The net loss ratio was 57.4% for the quarter and 56.6% year to date. The expense ratio was 28.3% for the quarter and 25.4% year to date.
Net investment income was $6.5 million in the quarter and $12.6 million year to date. Equity-market declines produced $9.9 million of net unrealized losses on equity securities in the quarter and $8.9 million year to date, compared with gains of $3.3 million and $8.8 million in the comparable 2021 periods.
Net cash provided by operating activities was $25.0 million for the six months ended June 30, 2022, compared with $26.0 million in 2021. Investing activities provided $7.3 million, versus $18.9 million of cash used in the prior-year period. Financing activities used $17.7 million, including $12.0 million of dividends and $5.7 million of share repurchases.
At June 30, 2022, cash and cash equivalents were $85.3 million, total investments were $966.4 million, and total investments including cash were $1.052 billion. Shareholders’ equity was $385.0 million, or $19.95 per outstanding share. The filing does not present a separate borrowings or debt balance on the consolidated balance sheet.
Material Changes Versus the Prior Comparable Period
- Second-quarter net income declined 74.2%, and diluted EPS declined from $1.23 to $0.32, primarily because of the $9.9 million equity-securities valuation loss, less favorable prior-year reserve development and higher expenses.
- Six-month net income declined 45.5%, while total revenues declined 12.7%. Gross premiums written declined 1.9%, net premiums written declined 2.2%, and net premiums earned declined 2.0%.
- Gross premiums written increased 1.0% in the second quarter, primarily because of $5.0 million of payroll-audit and related premium adjustments for prior policies. This was partly offset by lower voluntary-policy premiums and assumed premiums from mandatory pooling arrangements.
- Prior accident-year favorable reserve development decreased to $9.6 million in the quarter and $19.8 million year to date, from $17.9 million and $29.3 million, respectively, in 2021.
- The investment portfolio experienced significant market-value pressure as interest rates rose. Fair value of held-to-maturity securities was $525.6 million versus $575.9 million at December 31, 2021, while accumulated other comprehensive income declined to a loss of $8.9 million from income of $13.5 million.
- The company repurchased 121,592 shares for $5.7 million during the first six months, compared with no repurchases in the prior-year period. Approximately $19.3 million remained available under the repurchase authorization at June 30, 2022.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings, premium or combined-ratio guidance. Management estimated the 2022 accident-year loss and LAE ratio at 71.0% of net premiums earned, compared with 72.0% initially set for accident year 2021. Management stated that recent favorable reserve development was largely attributable to favorable case-reserve development on closed claims and claims reaching maximum medical improvement, but it does not intend to modify reserve assumptions solely because of recent results.
Key risks include the cyclical and competitive nature of workers’ compensation insurance; claim frequency and severity exceeding assumptions; uncertainty in loss reserves; inflation and broader economic conditions; interest-rate and equity-market volatility; reinsurance availability and counterparty performance; regulatory, legal and accounting changes; cyberattacks; pandemics; agency relationships; and the availability of qualified personnel. The company’s concentration in hazardous industries produces relatively fewer but more severe claims and may increase reserve volatility.
Unusual or notable items included $9.9 million of second-quarter unrealized equity-security losses, $19.8 million of favorable prior-year reserve development year to date, and a $3.8 million return of assessments from the Minnesota Workers’ Compensation Reinsurance Association. On July 26, 2022, the board declared a quarterly dividend of $0.31 per share payable September 23, 2022.
Management reported that disclosure controls and procedures were effective as of June 30, 2022, and that no material changes to internal control over financial reporting occurred during the period.
Important Facts for Investors to Verify
- Whether future claim severity, medical inflation and reserve development support the 71.0% accident-year loss-ratio estimate.
- The sustainability of favorable prior-year reserve development, which was lower than in 2021 and materially supported current-period underwriting results.
- The effect of rising interest rates on the fair value, liquidity and realized-loss potential of the company’s fixed-maturity portfolio.
- The impact of equity-market volatility on future net income from mark-to-market equity securities.
- Premium trends in voluntary policies, payroll audits and the company’s 2022 reinsurance treaty structure.
- Capital deployment priorities, including quarterly dividends and the remaining $19.3 million share-repurchase authorization.
- The adequacy of reinsurance recoverables and the company’s $724.9 million gross loss and LAE reserve balance.