Amerisafe, Inc. 2022 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Amerisafe is a workers’ compensation insurance holding company serving small to mid-sized employers in hazardous industries, including construction, trucking, logging and lumber, agriculture, manufacturing, telecommunications and maritime. The company markets insurance in 27 states through independent agencies and its agency subsidiary. This filing covers the three and nine months ended September 30, 2022, compared with the same periods in 2021. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Gross premiums written | $68.2 million | $67.2 million | $220.5 million | $222.4 million |
| Net premiums earned | $67.8 million | $67.6 million | $205.6 million | $208.3 million |
| Net investment income | $7.0 million | $6.0 million | $19.6 million | $19.4 million |
| Total revenues | $71.4 million | $73.0 million | $215.0 million | $237.6 million |
| Net income | $11.4 million | $19.1 million | $34.8 million | $62.2 million |
| Diluted EPS | $0.59 | $0.99 | $1.80 | $3.21 |
| Net combined ratio | 85.4% | 71.5% | 84.1% | 76.9% |
| Return on average equity | 12.0% | 16.1% | 12.0% | 18.1% |
| Book value per share | $19.47 | $24.80 | $19.47 | $24.80 |
Q3 net income margin was approximately 15.9%, compared with approximately 26.2% in Q3 2021. The nine-month net income margin was approximately 16.2%, compared with approximately 26.2% in the prior-year period.
Loss and loss adjustment expenses increased to $37.7 million in Q3 from $29.7 million and to $115.8 million for the first nine months from $101.6 million. The net loss ratio increased to 55.6% in Q3 from 43.9% and to 56.3% for the first nine months from 48.8%. The expense ratio was 28.9% in Q3 versus 26.5% and 26.6% for the nine-month periods in both years.
Net cash provided by operating activities was $36.1 million for the first nine months, up from $29.4 million. Investing activities provided $14.4 million, compared with $48.9 million in 2021. Financing activities used $30.2 million, including $18.0 million of dividends and $12.2 million of share repurchases. Cash and cash equivalents increased to $91.0 million from $70.7 million at December 31, 2021.
At September 30, 2022, total investments were $934.8 million and investments plus cash totaled approximately $1.03 billion. Shareholders’ equity was $373.0 million, down from $399.3 million at December 31, 2021. The balance sheet does not show material traditional debt; finance lease purchases used $35,000 during the first nine months.
Material Changes Versus Prior Comparable Period
- Gross premiums written increased 1.5% in Q3, principally due to $5.5 million of payroll-audit and related premium adjustments, partially offset by lower voluntary-policy premiums and assumed pooling premiums. For the first nine months, gross premiums written declined 0.9% because of lower voluntary-policy premiums.
- Net premiums earned were essentially flat in Q3 but declined 1.3% for the first nine months. Ceded premiums increased to 3.7% of gross premiums earned from 3.4%, reflecting changes in the 2022 reinsurance treaties.
- Investment income increased 15.4% in Q3 as higher yields offset a smaller average investment portfolio. The pretax portfolio yield rose to 2.7% from 2.1%. For the first nine months, investment income increased 1.1% and the pretax yield rose to 2.5% from 2.2%.
- Equity-market declines produced $4.1 million of unrealized equity-security losses in Q3 and $13.0 million for the first nine months, compared with $0.8 million and an $8.0 million gain, respectively, in 2021.
- Favorable prior-year loss development was $10.4 million in Q3 and $30.2 million for the first nine months, substantially below the $19.0 million and $48.3 million recorded in the comparable 2021 periods.
- Accumulated other comprehensive income declined to a loss of $20.0 million from income of $13.5 million at December 31, 2021, primarily because of $33.5 million of after-tax unrealized losses on available-for-sale debt securities.
- The company repurchased 261,151 shares for $12.2 million during the first nine months, including 139,559 shares for $6.5 million in Q3. Approximately $12.8 million remained available under the repurchase authorization at September 30, 2022.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or premium guidance. Management estimated the 2022 accident-year loss and loss adjustment expense ratio at 71.0% of net premiums earned, down from the 72.0% initial estimate for accident year 2021. Management attributed favorable prior-year development mainly to case-reserve reductions on closed claims and claims where workers reached maximum medical improvement, but stated that reserves remain inherently uncertain and may be more volatile because the company underwrites lower-frequency, higher-severity risks.
Higher interest rates increased investment yields but reduced the market value of the bond portfolio. At September 30, available-for-sale securities had $25.4 million of gross unrealized losses, while held-to-maturity securities had a fair value $34.7 million below carrying value. Management reported no allowance for credit losses on available-for-sale securities and a $255,000 allowance on held-to-maturity securities.
Key disclosed risks include workers’ compensation industry cyclicality, competition and pricing pressure, claim frequency and severity, reserve estimation uncertainty, inflation and economic conditions, interest-rate and investment-market volatility, reinsurance availability and collectability, regulatory and legal changes, cyberattacks, pandemics, and terrorism or geopolitical events. The company reported no material change in its market-risk profile since December 31, 2021.
On October 25, 2022, after the quarter ended, the board declared a special cash dividend of $4.00 per share and a quarterly dividend of $0.31 per share, both payable December 16, 2022 to shareholders of record December 2, 2022. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether premium growth can improve beyond the largely flat Q3 result and offset lower voluntary-policy volumes.
- Whether the 71.0% accident-year loss ratio estimate and favorable reserve development persist, particularly as medical inflation and severe claims evolve.
- The effect of interest rates on bond valuations, accumulated other comprehensive income, capital and regulatory surplus.
- Whether equity-market losses continue to affect earnings through unrealized changes in equity securities.
- The adequacy and collectability of $716.2 million of loss reserves and $118.0 million of amounts recoverable from reinsurers.
- The sustainability of operating cash flow, share repurchases and the post-quarter special dividend in light of insurance capital requirements and claim payments.