AMERISAFE, Inc. — 2018 First-Quarter Form 10-Q
Business Context and Reporting Period
AMERISAFE is a workers’ compensation insurer focused on small to mid-sized employers in hazardous industries, including construction, trucking, logging and lumber, manufacturing, and agriculture. The filing covers the three months ended March 31, 2018, with comparisons to the three months ended March 31, 2017. The company markets insurance in 27 states through independent agencies and its wholly owned agency subsidiary.
Financial Results and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Gross premiums written | $97.3 million | $95.1 million | +2.4% |
| Net premiums written | $95.0 million | $92.7 million | +2.5% |
| Net premiums earned | $87.3 million | $90.9 million | -4.0% |
| Net investment income | $7.2 million | $6.7 million | +$0.5 million |
| Total revenues | $94.2 million | $97.5 million | -3.5% |
| Total expenses | $74.8 million | $78.8 million | -5.1% |
| Net income | $16.2 million | $13.5 million | +19.6% |
| Diluted EPS | $0.84 | $0.70 | +20.0% |
| Net combined ratio | 85.6% | 86.6% | Improved 1.0 point |
| Return on average equity | 15.1% | 11.7% | Improved 3.4 points |
Net income represented approximately 17.2% of total revenues, compared with approximately 13.9% in the prior-year quarter. The net loss ratio improved to 60.9% from 61.8%, while the expense ratio was broadly stable at 23.2% versus 23.3%.
Current accident-year loss and loss adjustment expenses were $62.4 million, or 71.5% of net premiums earned, compared with $62.7 million, or 69.0%, in Q1 2017. Favorable prior-year reserve development increased to $9.3 million from $6.5 million.
At March 31, 2018, total assets were $1.53 billion and shareholders’ equity was $432.1 million. Investments totaled $1.135 billion, including $619.4 million of held-to-maturity fixed-maturity securities, $459.3 million of available-for-sale fixed-maturity securities, $44.7 million of short-term investments, and $11.4 million of equity securities. Cash and cash equivalents were $36.1 million, compared with $55.6 million at December 31, 2017. The filing does not provide a clear outstanding debt balance; no debt line item is reported in the condensed balance sheet.
Net cash provided by operating activities was $12.7 million, compared with $23.8 million in Q1 2017. Investing activities used $27.9 million, primarily reflecting net investment purchases, and financing activities used $4.3 million, principally for dividends. The company declared quarterly dividends of $0.22 per share, compared with $0.20 per share in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Premium production increased, but earned premiums declined because of lower premiums written in previous quarters.
- Net income and diluted EPS increased primarily because of lower loss and operating expenses and the lower federal corporate tax rate.
- The effective tax rate declined to 16.7% from 27.8%, reflecting the reduction in the federal corporate tax rate to 21% under the Tax Act.
- Loss and loss adjustment expenses declined by $3.1 million, with more favorable prior-year reserve development.
- Net investment income increased by $0.5 million; management attributed much of the prior-year comparison to a change in the value of a limited partnership hedge fund investment recorded in Q1 2017.
- Comprehensive income declined to $10.3 million from $14.5 million because of a $5.8 million net unrealized loss on securities, compared with a $1.0 million gain in Q1 2017.
- Book value per share declined to $22.43 from $24.29, despite higher total shareholders’ equity, reflecting the reporting measure and period-end share data.
- The company adopted ASU 2016-01, recognizing a $0.4 million unrealized loss on equity securities in net income and reducing diluted EPS by approximately $0.02. Adoption of the revenue recognition standard had no material impact.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal numerical earnings or premium guidance. Management continues to emphasize disciplined underwriting, workplace safety reviews, intensive claims management, and premium audits. Management stated that favorable development was driven largely by case reserve development on closed claims and claims where workers had reached maximum medical improvement, but did not intend to modify reserve assumptions based solely on recent results.
Loss reserves totaled $777.3 million at March 31, 2018, including $89.2 million recoverable from reinsurers. Reserve estimates remain inherently uncertain, particularly because the company writes relatively infrequent but more severe claims. Key risks include adverse claims frequency or severity, unfavorable reserve development, competition and pricing pressure, economic and interest-rate changes, investment market losses, reinsurance availability or collectability, regulatory and legal changes, cybersecurity events, agency relationships, and changes in accounting standards.
The investment portfolio had $11.0 million of gross unrealized losses on available-for-sale and held-to-maturity securities. Management attributed these losses primarily to market interest rates, capital-market conditions, and liquidity effects, and recognized no other-than-temporary impairment losses during either comparative quarter. The company held 448 fixed-maturity securities in an unrealized loss position, including 44 that had been in such a position for more than 12 months.
The company had $25.0 million remaining under its share repurchase authorization but repurchased no shares during the quarter. On April 24, 2018, the board declared a $0.22 per-share dividend payable June 22, 2018.
Important Facts for Investors to Verify
- Whether favorable prior-year reserve development of $9.3 million is sustainable or reverses in future periods.
- Current accident-year loss trends, including the increase in the current accident-year loss ratio to 71.5% from 69.0%.
- The effect of lower earned premiums and future premium growth on underwriting profitability.
- Liquidity and regulatory capital at the insurance subsidiaries, including the reduction in cash during the quarter and the absence of a clearly stated debt balance.
- Exposure to interest-rate movements and unrealized losses in the available-for-sale securities portfolio.
- Reinsurance recoverability and the adequacy of the $777.3 million loss and loss adjustment expense reserve.
- The impact of the 21% corporate tax rate on future effective tax rates and earnings.
- The potential use of the remaining $25.0 million share repurchase authorization and its effect on capital allocation.