AMERISAFE, Inc. 2021 Form 10-K Summary
Business context and reporting period
AMERISAFE, Inc. is a specialty workers’ compensation insurer serving small and mid-sized employers in hazardous industries, principally construction, trucking, logging and lumber, agriculture, manufacturing, telecommunications and maritime. The filing covers the fiscal year ended December 31, 2021; it is an annual report rather than a quarterly filing. The company operates through insurance subsidiaries rated “A” (Excellent) by A.M. Best and markets primarily through independent agencies.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Gross premiums written | $278.3 million | $303.1 million | Down 8.2% |
| Net premiums earned | $276.0 million | $304.4 million | Down 9.3% |
| Total revenues | $315.9 million | $339.5 million | Down 6.9% |
| Net investment income | $25.4 million | $29.4 million | Down 13.4% |
| Income before taxes | $79.4 million | $106.9 million | Down 25.7% |
| Net income | $65.8 million | $86.6 million | Down 24.1% |
| Diluted EPS | $3.39 | $4.47 | Down 24.2% |
| Return on average equity | 15.7% | 19.9% | Down 4.2 percentage points |
| Net combined ratio | 85.7% | 76.3% | Up 9.4 percentage points |
| Net cash from operating activities | $38.0 million | $63.4 million | Down 40.1% |
The current accident-year loss ratio increased to 80.7% from 72.5%, while favorable prior-year development was $61.9 million versus $63.5 million in 2020. The resulting net loss ratio was 58.3%, compared with 51.6% in 2020. The net underwriting expense ratio increased to 26.1% from 23.6%.
At December 31, 2021, total assets were $1.403 billion, shareholders’ equity was $399.3 million and book value per share was $20.62. Cash and cash equivalents were $70.7 million, and investments, including cash and cash equivalents, totaled $1.083 billion. The investment portfolio produced a 2.3% pretax yield. The portfolio was primarily fixed income, with 82.3% of investments, including cash, represented by fixed maturity securities.
Gross reserves for unpaid loss and loss adjustment expenses were $745.3 million, including $119.8 million of gross IBNR reserves. Net reserves were $626.0 million after reinsurance recoverables. The company reported 4,594 open claims at year-end and paid $189.6 million of claims, net of reinsurance, during 2021.
AMERISAFE had a $20.0 million unsecured revolving credit facility expiring in December 2022. No borrowings or letters of credit were outstanding at year-end. Management expects operating cash flow to fund operations, claims, expenses and holding-company needs for at least the next 18 months.
Material changes versus the prior comparable period
- Premium volume continued to decline, primarily because of lower state-approved loss costs and lower premiums from policy audits and adjustments.
- Profitability weakened as net premiums earned and investment income declined, while loss and LAE incurred increased 2.3% to $160.8 million.
- A catastrophic claim reported in the fourth quarter increased the 2021 current accident-year loss ratio. The company increased its net estimate for the loss by approximately $24 million after reinsurance.
- Operating cash flow fell to $38.0 million from $63.4 million, while cash dividends to shareholders increased to approximately $99.9 million from $88.8 million.
- Shareholders’ equity declined to $399.3 million from $438.8 million, primarily reflecting dividends and a $7.5 million after-tax decline in accumulated other comprehensive income.
- Gross loss reserves declined by $15.3 million, continuing a pattern of favorable prior-year reserve development. Prior-year favorable development was $61.9 million in 2021, compared with $63.5 million in 2020.
- Policy renewal remained strong at 93.5% for voluntary business that the company elected to quote for renewal, compared with 94.4% in 2020.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or premium guidance. Management’s stated strategy is to preserve underwriting profitability through market cycles, increase penetration in existing markets, expand geographically when prudent, optimize reinsurance and maintain capital strength. The company expects operating cash flow to provide sufficient liquidity for at least the next 18 months.
Management attributes favorable prior-year reserve development primarily to lower-than-expected claim severity and favorable case-reserve development from closed claims or claims reaching maximum medical improvement. Reserve estimates remain highly judgmental and may vary materially as medical treatment, disability duration, inflation, litigation and regulatory conditions develop.
The 2022 reinsurance program provides up to $70.0 million of coverage per loss occurrence, subject to deductibles, retentions, aggregate limits and other conditions. Coverage for a single claimant is limited to $10.0 million. The company retains primary responsibility to policyholders if reinsurers fail to pay. At year-end, net reinsurance recoverables were $120.6 million, of which $46.1 million was unsecured.
Key risks include workers’ compensation market cyclicality, continued rate pressure, competition, declining policyholder payrolls, claim frequency and severity, medical and wage inflation, reserve inadequacy, investment and interest-rate risk, reinsurer credit risk, regulatory restrictions, cybersecurity events, pandemics, terrorism exposure and dependence on independent agencies. The company also disclosed that Chief Financial Officer Neal Fuller expects to retire in 2022 and that a search for a successor had begun.
AMERISAFE paid regular dividends of $0.29 per share quarterly in 2021 and an extraordinary dividend of $4.00 per share. On February 18, 2022, the board declared a regular quarterly dividend of $0.31 per share, implying an annualized regular dividend of $1.24 per share. Future dividends depend on subsidiary earnings, statutory surplus and regulatory limitations. AIIC could pay up to $77.8 million to AMERISAFE in 2022 without prior regulatory approval under the disclosed statutory calculation.
Ernst & Young LLP issued unqualified opinions on the financial statements and internal control over financial reporting. The critical audit matter was valuation of loss and LAE reserves, particularly IBNR estimates.
Important facts for investors to verify
- Whether premium declines and lower approved loss costs persist, and whether pricing remains adequate for hazardous-industry risks.
- The development of the 2021 catastrophic claim and the adequacy of the $24 million net estimate.
- Whether favorable prior-year reserve development continues or reverses, particularly in light of medical inflation and severe claims.
- The company’s ability to maintain an underwriting profit as the combined ratio increased to 85.7%.
- Liquidity after shareholder dividends, the renewal or replacement of the $20.0 million credit facility, and regulatory capacity for subsidiary dividends.
- Credit quality, collateralization and concentration of the $120.6 million reinsurance recoverable balance.
- The effect of interest-rate changes on the investment portfolio and future investment income.
- The transition to a new Chief Financial Officer and any related changes in capital allocation or underwriting strategy.