Amerisafe, Inc. — 2021 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Amerisafe is a workers’ compensation insurance holding company focused on small to mid-sized employers in hazardous industries, including construction, trucking, logging and lumber, agriculture, manufacturing, telecommunications and maritime. The filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The financial statements are unaudited.
The company markets insurance in 27 states through independent agencies and its wholly owned agency subsidiary. Its insurance subsidiaries account for at least 95% of consolidated assets and revenues.
Financial Performance and Key Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Gross premiums written | $67.2 million | $72.6 million | $222.4 million | $240.0 million |
| Net premiums earned | $67.6 million | $74.8 million | $208.3 million | $229.7 million |
| Net investment income | $6.0 million | $7.1 million | $19.4 million | $22.1 million |
| Total revenues | $73.0 million | $83.0 million | $237.6 million | $251.3 million |
| Income before taxes | $24.7 million | $28.7 million | $77.5 million | $71.3 million |
| Net income | $19.1 million | $23.4 million | $62.2 million | $58.1 million |
| Diluted EPS | $0.99 | $1.21 | $3.21 | $3.00 |
| Net combined ratio | 71.5% | 72.8% | 76.9% | 78.4% |
| Return on average equity | 16.1% | 19.8% | 18.1% | 17.0% |
Quarterly net income margin was approximately 26.2%, compared with 28.1% in the prior-year quarter. Nine-month net income margin was approximately 26.2%, compared with 23.1% in the prior-year period.
- Loss and loss adjustment expenses declined to $29.7 million in the quarter and $101.6 million year to date, from $39.8 million and $121.0 million, respectively.
- The current accident-year loss and LAE ratio was estimated at 72.0%, compared with 72.5% for the 2020 accident year.
- Favorable prior-year reserve development was $19.0 million in the quarter and $48.3 million year to date, compared with $14.4 million and $45.6 million in the comparable periods.
- The quarterly expense ratio increased to 26.5% from 18.6%; the nine-month expense ratio increased to 26.6% from 24.5%.
- The effective tax rate was 22.6% in the quarter and 19.7% year to date, compared with 18.5% in both 2020 comparable periods.
Cash Flow, Investments, Liquidity and Capital
| Metric | September 30, 2021 | December 31, 2020 |
|---|---|---|
| Total assets | $1.480 billion | $1.471 billion |
| Total investments | $1.034 billion | $1.089 billion |
| Cash and cash equivalents | $123.1 million | $61.8 million |
| Total liabilities | $999.8 million | $1.032 billion |
| Shareholders’ equity | $480.2 million | $438.8 million |
| Book value per share | $24.80 | Not provided in the balance-sheet comparison |
- Net cash provided by operating activities was $29.4 million, down from $50.9 million in the first nine months of 2020.
- Net cash provided by investing activities was $48.9 million, compared with $9.4 million in the prior-year period, largely reflecting lower investment purchases relative to proceeds from maturities and sales.
- Net cash used in financing activities was $17.0 million, primarily consisting of $16.9 million of shareholder dividends.
- The investment portfolio, including cash, totaled $1.157 billion. Fixed-maturity securities represented approximately 76.3% of the portfolio, cash 10.6%, short-term investments 8.2% and equity securities 4.9%.
- The filing does not disclose conventional outstanding debt or a revolving credit facility. Finance lease purchases were $0.03 million during the nine-month period.
- Loss and LAE reserves were $720.8 million at September 30, 2021, compared with $760.6 million at December 31, 2020. Reinsurance recoverables were $108.4 million.
- The company had repurchased 1,258,250 shares for $22.4 million under its authorization, with $25.0 million remaining available. No shares were repurchased during the first nine months of 2021.
Material Changes Versus the Prior Comparable Period
- Gross premiums written declined 7.5% in the quarter and 7.3% year to date, primarily due to lower voluntary policy premiums and lower payroll-audit-related adjustments. Net premiums earned declined 9.6% and 9.3%, respectively.
- Investment income decreased 14.4% in the quarter and 12.5% year to date because of lower yields on fixed-income securities and cash. The pretax portfolio yield declined to 2.1% from 2.3% in the quarter and to 2.2% from 2.5% year to date.
- Underwriting results improved, with the net combined ratio declining 1.3 percentage points in the quarter and 1.5 percentage points year to date.
- Quarterly net income decreased 18.1% and diluted EPS declined from $1.21 to $0.99, despite lower claims costs, primarily because of lower premium and investment income, higher assessments and a higher tax rate.
- Nine-month net income increased 7.1% and diluted EPS increased from $3.00 to $3.21, supported by favorable loss development and an $8.0 million unrealized gain on equity securities, compared with a $2.3 million unrealized loss in 2020.
- Accumulated other comprehensive income declined to $15.0 million from $21.0 million at year-end, reflecting a $6.0 million after-tax decline in unrealized gains on available-for-sale debt securities.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal quantitative earnings or premium guidance. Management states that accident-year loss estimates are based on long-term claim frequency and severity trends and medical inflation. The company does not presently intend to modify its reserve assumptions based on recent favorable experience.
Management attributes favorable reserve development primarily to case reserve improvements on closed claims and claims in which workers reached maximum medical improvement. Reserves remain inherently uncertain because the company writes relatively low-frequency, high-severity workers’ compensation business.
- Key risks include industry cyclicality, competition, premium-rate and regulatory changes, economic conditions, interest-rate and investment-market volatility, cybersecurity events, claim frequency and severity, reserve estimation uncertainty, reinsurance availability and reinsurer credit risk.
- Payroll audits included periods affected by COVID-19, and the filing identifies potential pandemic effects on operations, policyholders, investments, revenue, earnings and cash flows.
- The company held $341.8 million of available-for-sale fixed-maturity securities and $541.2 million of held-to-maturity securities at carrying value. Held-to-maturity securities had a fair value of $569.4 million, exceeding carrying value by $28.2 million.
- The board declared an extraordinary dividend of $4.00 per share on October 26, 2021, payable November 17, 2021, and a quarterly dividend of $0.29 per share payable December 17, 2021.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether premium contraction continues and how voluntary policy growth, payroll audits, pricing and the effective loss cost multiplier develop.
- Whether favorable prior-year reserve development is sustainable or reverses as claims mature, particularly given the company’s high-severity exposure.
- The effect of lower investment yields and changes in interest rates on recurring investment income and accumulated other comprehensive income.
- The liquidity and capital impact of the $4.00 extraordinary dividend in addition to regular dividends.
- The collectability and credit quality of the $108.4 million of reinsurance recoverables and the adequacy of the $720.8 million loss reserve.
- The impact of assessments, receivable write-offs, COVID-19-related payroll data and regulatory or market changes on future underwriting margins.