AMERISAFE, Inc. — 2020 Q1 Form 10-Q Summary
Business context and reporting period
AMERISAFE is a workers’ compensation insurance holding company serving 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 months ended March 31, 2020, with comparisons to the three months ended March 31, 2019. The financial statements are unaudited.
The company markets insurance in 27 states through independent agencies and its wholly owned agency subsidiary. Its principal insurance subsidiaries represented at least 95% of consolidated assets and revenues for the periods presented.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Gross premiums written | $87.1 million | $93.1 million | Down 6.5% |
| Net premiums written | $84.3 million | $90.7 million | Down 7.0% |
| Net premiums earned | $79.0 million | $84.9 million | Down 7.0% |
| Net investment income | $7.7 million | $8.0 million | Down 3.3% |
| Total revenues | $79.2 million | $95.2 million | Down 16.8% |
| Income before income taxes | $13.2 million | $23.8 million | Down 44.4% |
| Net income | $10.8 million | $19.4 million | Down 44.3% |
| Diluted EPS | $0.56 | $1.01 | Down $0.45 |
| Net combined ratio | 83.5% | 84.0% | Improved 0.5 points |
| Return on average equity | 10.0% | 18.5% | Down 8.5 points |
| Book value per share | $22.64 | $22.33 | Up $0.31 |
Reported results were materially affected by an $8.8 million net unrealized loss on equity securities in Q1 2020, compared with a $2.2 million net unrealized gain in Q1 2019. Net realized investment gains were $1.0 million in Q1 2020 versus immaterial gains in the prior-year quarter.
Loss and loss adjustment expenses declined to $43.6 million from $49.6 million. Current accident-year losses were 72.5% of net premiums earned in both periods, while favorable prior-year development increased to $13.6 million from $12.0 million. The net loss ratio improved to 55.3% from 58.4%, but the expense ratio increased to 26.9% from 24.3%.
Cash flow, liquidity, investments, and capital
- Net cash provided by operating activities was $15.2 million, down from $20.3 million, primarily due to lower premium receipts, higher policyholder dividends, and higher loss payments.
- Net cash provided by investing activities was $25.8 million, compared with $20.8 million of cash used in Q1 2019, reflecting higher proceeds from investment sales and maturities.
- Net cash used in financing activities was $5.3 million, principally consisting of $5.2 million in shareholder dividends.
- Cash and cash equivalents increased to $79.5 million from $43.8 million at December 31, 2019.
- Total investments declined to $1.10 billion from $1.13 billion at year-end 2019. Investments, including cash and cash equivalents, totaled $1.18 billion at March 31, 2020.
- Shareholders’ equity increased to $437.0 million from $430.2 million at December 31, 2019. The increase reflected net income and other comprehensive income, partly offset by dividends.
- The balance sheet does not report material conventional debt. Finance lease payments were $12 thousand during the quarter.
- The company had $25.0 million available under its authorized share repurchase program, although no shares were repurchased during Q1 2020.
- The board declared a quarterly dividend of $0.27 per share on April 28, 2020, payable June 26, 2020.
Material changes versus the prior comparable period
- Premium volume decreased, primarily from a $5.0 million reduction in annual premiums on voluntary policies and a $0.9 million reduction from audits and related adjustments to prior policies.
- Ceded premiums increased to 3.4% of gross premiums earned from 2.8%, due to higher pricing for the 2020 reinsurance program.
- Investment yields declined modestly; the pretax annualized portfolio yield was 2.6% versus 2.7%.
- Underwriting and other operating costs, commissions, and salaries increased 3.0%, while the expense ratio rose 2.6 percentage points.
- Unrealized equity investment losses and lower premium volume drove the substantial decline in total revenues and net income.
- The company adopted CECL on January 1, 2020, recording a $594 thousand reduction to retained earnings, including $243 thousand for held-to-maturity securities and $351 thousand for reinsurance recoverables. At March 31, 2020, the allowance was $275 thousand for held-to-maturity securities and $449 thousand for reinsurance recoverables.
Outlook, management commentary, risks, and unusual items
AMERISAFE activated its COVID-19 business continuity team, moved most home-office employees to remote work, suspended in-person customer visits, and continued operations through virtual, telephone, email, and website channels. Management stated that operations were continuing without disruption as of the filing.
Management cautioned that COVID-19 could reduce policyholder business activity and payrolls, which are a primary source of premium revenue. The effect on future premiums, particularly second-quarter premiums, remained uncertain. Investment income and investment-market values could also decline. The filing provides no specific quantitative earnings or premium guidance.
Key insurance risks include adverse claims frequency or severity, reserve inadequacy, volatility from relatively infrequent but severe claims, reinsurance availability or recoverability, competition, regulatory and legal changes, economic weakness, interest-rate and equity-market movements, cybersecurity incidents, and changes in rating-agency policies or ratings.
Management reported favorable reserve development across several prior accident years, largely from closed claims and claims reaching maximum medical improvement, but emphasized that loss reserves remain inherently uncertain and may be volatile. The company held 4,910 open claims at March 31, 2020, down from 4,963 a year earlier.
The company reported effective disclosure controls and procedures as of March 31, 2020 and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether COVID-19 materially reduced policyholder payrolls, premium receipts, and second-quarter and subsequent-period premium growth.
- Whether the $13.6 million of favorable prior-year reserve development is sustainable or reverses in future periods.
- The effect of equity-market and interest-rate changes on investment income, unrealized gains and losses, accumulated other comprehensive income, and capital.
- The adequacy of loss reserves and the $449 thousand reinsurance recoverable credit-loss allowance, including reinsurer credit quality and collectability.
- Whether the higher 2020 reinsurance pricing and increased ceded-premium percentage affect future margins.
- Future trends in the expense ratio, combined ratio, premium retention, and book value per share.
- The company’s ability to maintain dividends while operating cash flow and earnings remain exposed to insurance and investment-market volatility.