AMERISAFE, Inc. 2020 Form 10-K Summary
Business context and reporting period
AMERISAFE is a specialty workers’ compensation insurer focused on small and mid-sized employers in hazardous industries, principally construction, trucking, logging and lumber, manufacturing, agriculture, maritime, and oil and gas. The filing covers the fiscal year ended December 31, 2020, with comparisons to 2019 and 2018. The company operates through three insurance subsidiaries, each rated “A” (Excellent) by A.M. Best.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Gross premiums written | $303.1 million | $333.5 million | Down 9.1% |
| Net premiums earned | $304.4 million | $332.9 million | Down 8.5% |
| Total revenues | $339.5 million | $370.4 million | Down 8.3% |
| Net income | $86.6 million | $92.7 million | Down 6.6% |
| Diluted EPS | $4.47 | $4.80 | Down 6.9% |
| Net combined ratio | 76.3% | 76.6% | Improved 0.3 points |
| Return on average equity | 19.9% | 22.1% | Down 2.2 points |
| Net cash from operating activities | $63.4 million | $78.8 million | Down 19.6% |
Net investment income was $29.4 million, down from $32.5 million, primarily because of lower interest rates. Net realized investment gains were $1.1 million versus a $0.1 million loss in 2019, while net unrealized equity gains were $4.2 million versus $4.8 million.
The current accident-year loss ratio was 72.5%, unchanged from 2019. Favorable prior-year development reduced loss and loss adjustment expenses by $63.5 million, compared with $65.0 million in 2019. The resulting net loss ratio was 51.6%, compared with 53.0%.
At December 31, 2020, total assets were $1.47 billion, shareholders’ equity was $438.8 million, cash and cash equivalents were $61.8 million, and investments were $1.09 billion. Including cash and cash equivalents, the investment portfolio was $1.15 billion. The portfolio was 86.9% fixed-maturity securities by carrying value and had a 2.5% pretax yield.
Gross reserves for unpaid losses and loss adjustment expenses were $760.6 million, including $127.9 million of IBNR reserves. Net reserves were $654.9 million after reinsurance recoverables. The company reported 4,758 open claims at year-end.
AMERISAFE had no outstanding borrowings under its unsecured $20.0 million Frost Bank credit facility at year-end. Net cash used in financing activities was $88.8 million, primarily reflecting shareholder dividends. Cash dividends paid were $4.58 per share, including a $3.50 extraordinary dividend and $1.08 in regular dividends.
Material changes versus the prior comparable period
- Premium volume declined as voluntary policy premiums, payroll audit adjustments, and assigned-risk premiums decreased. Management also cited declining loss-cost rates and reduced policyholder activity.
- Operating cash flow declined because of lower premium collections, although claim payments also decreased to $179.9 million from $190.0 million.
- The underwriting expense ratio increased to 23.6% from 22.3%, partly reflecting lower premium volume and higher variable compensation and receivable write-offs.
- Shareholders’ equity increased to $438.8 million from $430.2 million, supported by net income and an $8.8 million increase in accumulated other comprehensive income, partly offset by $88.5 million of dividends.
- The company adopted CECL accounting in 2020, recording a $0.6 million reduction to beginning retained earnings. The adoption produced a $0.3 million allowance for held-to-maturity securities and a $0.5 million allowance for reinsurance recoverables at year-end.
- The company did not repurchase shares in 2020. Its repurchase authorization had $25.0 million remaining at year-end.
Guidance, outlook, management commentary, risks and unusual items
Management did not provide formal earnings or premium guidance. It expects operating cash flow to fund operations, claims, expenses, and holding-company needs for at least the next 18 months. The company expects to continue considering quarterly regular dividends; a February 2021 declaration increased the quarterly dividend to $0.29 per share, or an annualized $1.16.
Management’s strategy remains focused on underwriting profitability through disciplined risk selection, safety inspections, claims management, premium audits, prudent geographic expansion, and maintaining capital strength. Voluntary policy renewal was 94.4% in 2020, and 92.5% of new voluntary policyholders received pre-quotation safety inspections.
The 2021 reinsurance program provides up to $70.0 million of coverage per loss occurrence, subject to deductibles, retentions, and aggregate limits. Single-claimant coverage is limited to $10.0 million, and the company retains $2.0 million per occurrence. The company had $105.8 million of net reinsurance recoverables at year-end, of which $33.8 million was unsecured.
- COVID-19 may reduce policyholder payrolls, insurance demand, premium collections, investment values, and interest income, and may increase compensable claim frequency, severity, medical costs, or regulatory restrictions on cancellations.
- Loss reserves are highly judgmental, particularly for severe claims. A 30% change in selected loss development factors would change the net loss and DCC reserve by approximately $44.6 million to $45.0 million.
- The company is exposed to workers’ compensation industry cyclicality, price competition, declining rates, medical inflation, judicial and regulatory changes, and adverse claims development.
- Investment results are sensitive to interest rates, credit conditions, equity prices, and reinsurer credit quality. A hypothetical 200-basis-point increase in rates would reduce estimated shareholders’ equity by approximately 8.0%.
- State insurance regulation restricts subsidiary dividends and market exits. The subsidiaries could pay up to $83.4 million to AMERISAFE in 2021 without regulatory approval, subject to applicable limitations.
- The company must provide terrorism coverage under applicable law. Its 2021 reinsurance program provides limited terrorism protection, which may not cover all potential losses.
- The filing states that no current legal or administrative proceeding is expected to have a material adverse effect. The company has no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether premium declines stabilize or continue, particularly in construction, trucking, and other targeted hazardous industries.
- Whether favorable reserve development persists and whether current accident-year loss ratios remain near 72.5%.
- The adequacy of the $760.6 million gross reserve and $654.9 million net reserve, including sensitivity to severe claims, medical inflation, and claim settlement trends.
- The collectability and collateralization of the $105.8 million reinsurance recoverable balance, including the $33.8 million unsecured portion.
- The effect of sustained low interest rates on the $1.15 billion investment portfolio and future investment income.
- The impact of COVID-19 on policyholder payrolls, premium receivables, claims, investment values, and regulatory requirements.
- The sustainability of the regular dividend and future extraordinary dividends given subsidiary dividend restrictions and capital needs.
- The company’s continued “A” A.M. Best rating and the financial strength of its reinsurers.