AMERISAFE, Inc. 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, and agriculture. The filing covers the three and nine months ended September 30, 2017, with comparisons to the same periods in 2016. The financial statements are unaudited and prepared under interim GAAP requirements.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Gross premiums written | $87.0 million | $88.8 million | $269.2 million | $292.4 million |
| Net premiums earned | $85.1 million | $89.9 million | $258.8 million | $276.6 million |
| Net investment income | $7.8 million | $8.0 million | $22.0 million | $20.3 million |
| Total revenues | $92.8 million | $98.2 million | $280.3 million | $298.1 million |
| Net income | $16.6 million | $17.9 million | $45.6 million | $58.8 million |
| Diluted EPS | $0.86 | $0.93 | $2.37 | $3.06 |
| Net combined ratio | 81.4% | 80.3% | 83.5% | 77.0% |
| Return on average equity | 13.6% | 14.2% | 12.8% | 16.3% |
Net profit margin was approximately 17.9% in the third quarter and 16.3% for the first nine months, compared with approximately 18.2% and 19.7%, respectively, in the prior-year periods. The Q3 net loss ratio was 56.9%, compared with 56.2% in 2016; the nine-month ratio was 58.4%, compared with 52.9%.
At September 30, 2017, total assets were $1.58 billion, shareholders’ equity was $494.9 million, cash and cash equivalents were $80.4 million, and total investments were $1.14 billion. Investments including cash totaled $1.22 billion. Loss and loss adjustment expense reserves were $755.0 million, including $79.5 million recoverable from reinsurers. The filing does not present a separate borrowing or debt balance; reported liabilities are primarily insurance reserves, unearned premiums, policyholder deposits, and other operating liabilities.
Operating cash flow for the first nine months was $102.3 million, compared with $82.9 million in 2016. Investing activities used $69.2 million, and financing activities used $11.6 million, principally for shareholder dividends. Cash increased from $58.9 million at year-end 2016 to $80.4 million at September 30, 2017.
Material Changes Versus the Prior Comparable Period
- Gross premiums written declined 2.0% in Q3 and 8.0% for the first nine months, primarily from lower voluntary-policy premiums. Net premiums earned declined 5.3% and 6.4%, respectively.
- Net income declined 7.4% in Q3 and 22.5% for the first nine months. Diluted EPS decreased from $0.93 to $0.86 in Q3 and from $3.06 to $2.37 for the first nine months.
- The nine-month combined ratio worsened to 83.5% from 77.0%, driven by a higher loss ratio and lower favorable prior-year reserve development. The Q3 combined ratio increased modestly to 81.4% from 80.3%.
- Current accident-year loss and LAE represented 69.0% of net premiums earned in both the quarter and nine-month period, compared with 67.9% in the prior-year periods.
- Favorable prior accident-year development was $10.3 million in Q3 and $27.5 million for the first nine months, compared with $10.5 million and $41.4 million, respectively, in 2016.
- Net investment income increased 8.5% for the first nine months, largely due to redemption premiums on called corporate bonds, but declined slightly in Q3 because of hedge fund valuation changes. Net realized investment results shifted from a $1.0 million gain to a $0.8 million loss for the first nine months.
- Operating cash flow increased by $19.5 million, partly because the return of an appeal bond increased cash from amounts held for others.
- Book value per share was $25.72 at September 30, 2017, compared with $26.51 at September 30, 2016. The company paid $0.60 per share in dividends during the first nine months, compared with $0.54 in 2016.
Outlook, Commentary, Risks, and Unusual Items
No formal earnings, premium, or combined-ratio guidance is provided. Management stated that workers’ compensation reserves are adequate but inherently uncertain, particularly because the company writes relatively lower-frequency, higher-severity risks. Reserve estimates may change as claims develop and additional medical and disability information becomes available.
Management attributed recent favorable reserve development primarily to favorable case development on closed claims and claims involving workers who reached maximum medical improvement. The company does not presently intend to change its reserve assumptions based solely on recent favorable results.
A significant legal contingency involves an Iowa workers’ compensation claim. The Iowa Supreme Court reversed a prior $25.3 million verdict in May 2017 and remanded the matter for a new trial scheduled for the first quarter of 2018. The company’s reserve was $2.3 million at September 30, 2017; cumulative payments plus the reserve totaled $5.4 million. The company’s retention is $5.0 million before reinsurance applies, and management believes the reserve and reinsurance coverage are adequate.
On October 23, 2017, the board declared a regular quarterly dividend of $0.20 per share and an extraordinary dividend of $3.50 per share, both payable December 28, 2017. No shares were repurchased during the first nine months; $25.0 million remained available under the repurchase authorization.
Key risks include industry cyclicality, premium competition, economic and interest-rate conditions, investment-market losses, cyber breaches, claim frequency and severity, catastrophic events, reserve inadequacy, regulatory and legal changes, reinsurance availability and collectability, agency relationships, and reduced demand or policyholder activity. The company reported no material change in market-risk exposure and stated that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether premium growth stabilizes after the 8.0% nine-month decline and whether voluntary-policy production improves.
- Whether current accident-year loss ratios remain near 69.0% and whether favorable prior-year reserve development continues.
- The outcome and financial impact of the Iowa claim retrial, including the sufficiency of reserves and reinsurance.
- The sustainability of earnings given the reduced favorable reserve development and lower nine-month net income.
- The liquidity and capital impact of the declared $3.50 per-share extraordinary dividend.
- The valuation and interest-rate sensitivity of the $1.22 billion investment portfolio, including $292.1 million of securities with unrealized losses.
- Whether the company continues to operate without material borrowing or debt obligations, as the filing does not present a separate debt balance.