AMERISAFE, Inc. 2020 Q2 Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE is a workers’ compensation insurer focused on small and mid-sized employers in hazardous industries, including construction, trucking, logging and lumber, manufacturing, agriculture, maritime, and oil and gas. The filing covers the three and six months ended June 30, 2020; financial statements are unaudited.
The company marketed insurance in 27 states and reported that operations continued without disruption during the COVID-19 pandemic, although policyholder payrolls, premium collections, claims activity, investment income, and investment values remained uncertain.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Gross premiums written | $80.3 million | $87.0 million | Down 7.7% |
| Net premiums earned | $76.0 million | $83.0 million | Down 8.4% |
| Net investment income | $7.3 million | $8.2 million | Down 10.3% |
| Total revenues | $89.1 million | $91.8 million | Down 2.9% |
| Net income | $23.9 million | $17.9 million | Up 33.9% |
| Diluted EPS | $1.24 | $0.93 | Up $0.31 |
| Net margin | 26.9% | 19.5% | Improved |
| Net combined ratio | 78.5% | 83.9% | Improved 5.4 points |
| Return on average equity | 21.3% | 16.3% | Improved |
| Metric | Six Months 2020 | Six Months 2019 | Change |
|---|---|---|---|
| Gross premiums written | $167.4 million | $180.1 million | Down 7.1% |
| Net premiums earned | $155.0 million | $167.9 million | Down 7.7% |
| Total revenues | $168.3 million | $186.9 million | Down 10.0% |
| Net income | $34.7 million | $37.3 million | Down 6.8% |
| Diluted EPS | $1.80 | $1.93 | Down $0.13 |
| Net combined ratio | 81.1% | 84.0% | Improved 2.9 points |
| Return on average equity | 15.6% | 17.4% | Decreased |
Loss and loss adjustment expenses were $37.5 million in Q2, compared with $48.9 million in the prior-year quarter. The current accident-year loss ratio remained 72.5%, while favorable prior-year development increased to $17.5 million from $11.3 million. The expense ratio increased to 27.8% from 23.8%, partly because of lower earned premiums and higher compensation, assessments, and receivable write-offs.
Six-month operating cash flow was $42.2 million, compared with $39.6 million in the prior-year period. Investing activities provided $34.8 million, versus $18.9 million of cash used in the prior-year period. Cash and cash equivalents increased to $110.3 million at June 30, 2020 from $43.8 million at December 31, 2019. Dividends paid during the first six months were $10.5 million.
Total investments were $1.10 billion at June 30, 2020, and investments including cash totaled $1.21 billion. Shareholders’ equity was $462.8 million, up from $430.2 million at year-end 2019, and book value per share was $23.94. The filing does not provide a clear conventional debt balance; reported liabilities primarily consist of insurance reserves and other operating liabilities.
Material Changes Versus Prior Comparable Period
- Premium volume declined, primarily from lower voluntary-policy premiums and lower payroll-audit adjustments. Ceded premiums also increased as a percentage of gross premiums because of higher 2020 reinsurance pricing.
- Q2 net income increased despite lower revenue, primarily because of lower loss expenses, greater favorable prior-year reserve development, and $5.6 million of unrealized equity-security gains.
- Six-month net income declined because of lower premiums and investment income and a $3.2 million unrealized loss on equity securities, compared with a $2.8 million gain in the prior-year period.
- Net investment yield decreased to 2.5% from 2.7% for both the quarter and six-month period, reflecting lower yields on fixed-income securities and cash.
- Open claims at June 30, 2020 were 4,621, down from 4,978 at June 30, 2019.
- The company adopted CECL on January 1, 2020, reducing retained earnings by $594 thousand and establishing credit-loss allowances for held-to-maturity securities and reinsurance recoverables.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal earnings or premium guidance. Management stated that future premiums will depend on the continuing economic effects of COVID-19, including changes in policyholder payrolls and business activity. Other identified risks include reduced demand, slower premium collections, lower interest rates and investment values, potential policy-cancellation restrictions or premium-payment grace periods, expanded coverage requirements, and increased frequency or severity of COVID-19-related claims.
Reserve estimates remain inherently uncertain because AMERISAFE writes relatively low-frequency, high-severity business. Q2 and year-to-date results benefited materially from favorable development of prior accident years. Management attributed the favorable development primarily to closed claims and claims involving workers who reached maximum medical improvement, but stated that it did not intend to modify reserve assumptions based solely on recent results.
Equity-security gains and losses flow through earnings and may create volatility. The company recognized $5.6 million of Q2 unrealized equity gains but a $3.2 million year-to-date unrealized loss. Held-to-maturity securities had a $357 thousand credit-loss allowance at June 30, 2020, while available-for-sale securities had no credit-loss allowance.
On July 27, 2020, the board declared a quarterly dividend of $0.27 per share payable September 25, 2020. No shares were repurchased during the first six months, and $25.0 million remained available under the repurchase authorization.
Important Facts for Investors to Verify
- Whether COVID-19 produces sustained reductions in policyholder payrolls, premiums, collections, and renewal demand.
- Whether favorable prior-year loss development persists or reverses, particularly given the company’s high-severity workers’ compensation exposure.
- The adequacy of loss reserves, reinsurance recoverables, and the $357 thousand held-to-maturity credit-loss allowance.
- The effect of lower interest rates on future investment income and the sensitivity of earnings to equity-market volatility.
- The company’s reinsurance pricing, coverage, counterparty quality, and potential COVID-19-related claims or disputes.
- The sustainability of the 78.5% quarterly combined ratio after excluding unusually favorable prior-year reserve development and investment gains.
- Capital deployment priorities, including the $0.27 quarterly dividend and the remaining $25.0 million share-repurchase authorization.