Amerisafe, Inc. 2019 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Amerisafe, Inc. is a workers’ compensation insurance holding company serving small and mid-sized employers in hazardous industries, including construction, trucking, logging and lumber, manufacturing, and agriculture. The company markets in 27 states through independent agencies and its wholly owned agency subsidiary. This Form 10-Q covers the three and nine months ended September 30, 2019; financial statements are unaudited.
Financial Results and Key Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Gross premiums written | $82.6 million | $85.3 million | $262.8 million | $276.4 million |
| Net premiums earned | $82.7 million | $85.2 million | $250.6 million | $261.5 million |
| Net investment income | $8.3 million | $7.9 million | $24.4 million | $22.4 million |
| Total revenues | $91.5 million | $93.5 million | $278.4 million | $283.1 million |
| Net income | $21.4 million | $19.7 million | $58.7 million | $52.8 million |
| Diluted EPS | $1.11 | $1.02 | $3.04 | $2.74 |
| Net combined ratio | 78.4% | 81.1% | 82.1% | 83.5% |
| Return on average equity | 18.6% | 17.4% | 17.8% | 15.9% |
Current accident-year loss and loss adjustment expenses were 72.5% of net premiums earned in both the quarter and nine-month period, compared with 71.5% in the comparable 2018 periods. Favorable prior-year reserve development reduced loss expenses by $15.6 million in the quarter and $38.9 million year to date, compared with $13.3 million and $34.1 million, respectively, in 2018. The net loss ratio was 53.6% for the quarter and 57.0% year to date.
At September 30, 2019, total assets were $1.575 billion, shareholders’ equity was $468.7 million, and book value per share was $24.29. Cash and cash equivalents were $125.9 million. Investments totaled $1.091 billion, or $1.217 billion including cash. The filing does not report conventional funded debt; liabilities primarily comprise insurance reserves and other operating obligations. Lease liabilities totaled approximately $0.5 million, including $0.5 million of operating lease liabilities and $0.1 million of finance lease liabilities.
Net cash provided by operating activities was $62.5 million for the first nine months of 2019, compared with $70.7 million in 2018. Investing activities provided $37.8 million, versus $80.1 million of cash used in 2018, reflecting higher proceeds from investment sales and maturities and lower investment purchases. Financing activities used $14.7 million, principally for shareholder dividends. Ending cash increased from $40.3 million at December 31, 2018 to $125.9 million.
Material Changes Versus the Prior Comparable Period
- Gross premiums written declined 3.2% in the quarter and 4.9% year to date, primarily because of lower annual premiums on voluntary policies.
- Net premiums earned declined 2.9% in the quarter and 4.2% year to date.
- Net investment income increased 4.8% in the quarter and 9.2% year to date because of slightly higher fixed-income yields.
- Net income increased 8.6% in the quarter and 11.1% year to date, supported by lower loss expenses, lower operating costs, favorable reserve development, and higher investment income.
- The combined ratio improved by 2.7 percentage points in the quarter and 1.4 percentage points year to date.
- Net unrealized gains on equity securities were $0.4 million in the quarter and $3.2 million year to date, compared with $0.6 million and $0.3 million in the respective 2018 periods.
- Accumulated other comprehensive income increased to $12.6 million from a $0.8 million loss at December 31, 2018, primarily because of unrealized gains on available-for-sale debt securities.
- The company adopted the new lease standard in 2019, recognizing approximately $0.4 million of right-of-use assets and $0.3 million of lease liabilities, with no material financial statement effect.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal earnings or premium guidance. Management continues to emphasize disciplined underwriting, workplace safety reviews, claims management, and premium audits. The company’s strategy targets higher-premium, lower-frequency but higher-severity workers’ compensation risks.
Loss reserves are inherently uncertain and may be volatile because of the severity of claims in the company’s target industries. Favorable development in prior accident years benefited current-period results, but future development may be favorable or unfavorable. Reserves for loss and loss adjustment expenses were $790.8 million at September 30, 2019, with $97.9 million of related reinsurance recoverables.
The investment portfolio had $282,000 of gross unrealized losses on fixed maturity securities at September 30, 2019, compared with $7.8 million at December 31, 2018. Management concluded that the losses were primarily related to interest-rate and market conditions and did not recognize other-than-temporary impairment losses.
Key risks include workers’ compensation industry cyclicality, competition and pricing pressure, economic and interest-rate changes, investment market volatility, claim frequency and severity, reserve estimation uncertainty, regulatory and legal changes, reinsurance availability and counterparty risk, agency relationships, cybersecurity events, and employee retention.
The company expected to adopt the current expected credit loss standard in the first quarter of 2020. The preliminary estimated impact was a $250,000 to $400,000 allowance for held-to-maturity securities and a $400,000 to $600,000 allowance for reinsurance recoverables; management stated that estimates could change.
On October 29, 2019, the board declared a $3.50 per share extraordinary dividend payable November 20, 2019, and a $0.25 per share quarterly dividend payable December 27, 2019. The company had $25.0 million available under its share repurchase authorization, although no shares were repurchased during the first nine months of 2019.
Important Facts for Investors to Verify
- Assess the sustainability of earnings in light of declining premium volume and the substantial contribution from favorable prior-year reserve development.
- Monitor current accident-year loss ratios, claim severity, open claims, and future reserve development.
- Evaluate investment portfolio duration, interest-rate sensitivity, credit quality, and the effect of equity-market movements on income and accumulated other comprehensive income.
- Verify the actual adoption impact of the current expected credit loss standard on held-to-maturity securities and reinsurance recoverables.
- Consider capital and liquidity after the $3.50 per share extraordinary dividend and the regular quarterly dividend.
- Review reinsurance recoverables, reinsurer credit quality, and the company’s ability to fund claims under adverse loss conditions.