AMERISAFE, Inc. 2019 Q2 Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE is a workers’ compensation insurance holding company serving small and midsized employers in hazardous industries, primarily construction, trucking, logging and lumber, manufacturing, and agriculture. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. The company actively markets insurance in 27 states and is licensed in additional jurisdictions.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|---|---|
| Gross premiums written | $87.0 million | $93.7 million | $180.1 million | $191.0 million |
| Net premiums earned | $83.0 million | $89.0 million | $167.9 million | $176.3 million |
| Total revenues | $91.8 million | $95.4 million | $186.9 million | $189.6 million |
| Net investment income | $8.2 million | $7.3 million | $16.2 million | $14.5 million |
| Net income | $17.9 million | $17.0 million | $37.3 million | $33.1 million |
| Diluted EPS | $0.93 | $0.88 | $1.93 | $1.72 |
| Net combined ratio | 83.9% | 83.6% | 84.0% | 84.7% |
| Return on average equity | 16.3% | 15.5% | 17.4% | 15.2% |
Approximate net income margins were 19.5% of total revenue in the second quarter and 20.0% for the six-month period. Current accident-year loss and loss adjustment expense ratios were 72.5% of net premiums earned in both 2019 periods, compared with 71.5% in 2018. The reported net loss ratio was 58.9% for the quarter and 58.7% for the six months.
At June 30, 2019, total assets were $1.57 billion and shareholders’ equity was $449.4 million, compared with $1.52 billion and $409.8 million, respectively, at December 31, 2018. Book value per share was $23.29. The investment portfolio, including cash and cash equivalents, totaled $1.21 billion, consisting primarily of fixed-maturity securities.
Cash and cash equivalents were $51.2 million at June 30, 2019, compared with $40.3 million at year-end 2018. Six-month operating cash flow was $39.6 million, compared with $37.0 million in 2018. Investing activities used $18.9 million, while financing activities used $9.8 million, principally for shareholder dividends. The filing does not report material conventional debt; disclosed lease liabilities totaled approximately $0.6 million, including $0.5 million of operating lease liabilities and $0.1 million of finance lease liabilities.
Material Changes Versus the Prior Comparable Period
- Gross premiums written declined 7.1% in the quarter and 5.7% for the six months, primarily because of lower premiums on voluntary policies and lower payroll-audit adjustments.
- Net premiums earned declined 6.8% in the quarter and 4.8% for the six months.
- Net investment income increased 11.9% in the quarter and 11.5% for the six months, reflecting slightly higher fixed-income investment yields.
- Net income increased 5.5% in the quarter and 12.6% for the six months. Diluted EPS increased to $0.93 from $0.88 in the quarter and to $1.93 from $1.72 for the six months.
- Net realized investment losses improved to $0.1 million in the quarter and an immaterial amount for the six months, compared with $1.1 million in each 2018 comparable period.
- Net unrealized gains on equity securities were $0.6 million in the quarter and $2.8 million for the six months, compared with $0.1 million and a $0.3 million loss, respectively, in 2018.
- Favorable prior accident-year reserve development was $11.3 million in the quarter and $23.2 million for the six months, compared with $11.6 million and $20.8 million in 2018.
- The expense ratio increased to 24.1% for the six months from 23.6%, although the quarterly expense ratio was broadly stable at 23.8% versus 23.9%.
Outlook, Commentary, Risks, and Unusual Items
The filing provides no specific earnings, premium, or combined-ratio guidance. Management continues to emphasize disciplined underwriting, workplace safety reviews, claims management, and premium audits. Management noted that the company’s focus on hazardous industries produces relatively fewer but more severe claims, which can create greater reserve volatility.
Loss reserves are inherently uncertain and depend on claim frequency, severity, medical and disability developments, litigation, regulatory conditions, and actuarial estimates. Management reported favorable reserve development but stated that it does not currently intend to modify reserve assumptions solely because of recent favorable results.
At June 30, 2019, fixed-maturity securities had gross unrealized losses of $0.4 million, substantially lower than the $7.8 million reported at December 31, 2018. Management attributed the losses primarily to interest-rate and market-liquidity changes and reported no other-than-temporary impairment losses.
Other relevant risks include competition and pricing pressure, economic conditions, interest-rate and investment-market movements, reinsurance availability and collectability, adverse claims development, regulatory and accounting changes, agency relationships, cybersecurity incidents, and concentration in hazardous industries. The company adopted the new lease standard in 2019 with no material impact. A new credit-loss standard is scheduled to become effective in the first quarter of 2020, but its eventual financial impact had not been determined.
The board declared a quarterly dividend of $0.25 per share on July 30, 2019, payable September 20, 2019. The company had $25.0 million remaining under its share repurchase authorization and made no repurchases during the reported periods.
Most Important Facts for Investors to Verify
- Whether the decline in premium volume continues and whether pricing, policy retention, and the effective loss cost multiplier support future growth.
- Whether favorable prior-year reserve development persists or reverses, particularly given the company’s high-severity claims profile.
- Whether the 72.5% current accident-year loss ratio and 84.0% six-month combined ratio remain stable.
- The sustainability of higher investment income and the sensitivity of the substantial fixed-income portfolio to interest rates, credit spreads, and liquidity.
- The future effect of the credit-loss accounting standard effective in 2020.
- Liquidity and capital needs of the regulated insurance subsidiaries, including reinsurance recoverables of $103.7 million and total loss reserves of $795.0 million at June 30, 2019.
- The filing’s forward-looking statements and risk disclosures, particularly those concerning competition, claims severity, reinsurance, regulation, cybersecurity, and economic conditions.