Business Context and Reporting Period
AMERISAFE, Inc. 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 company markets insurance in 27 states through independent agencies and its wholly owned agency subsidiary. This Form 10-Q covers the three and six months ended June 30, 2018; financial statements are unaudited.
Financial Results and Key Metrics
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Gross premiums written | $93.7 million | $87.0 million | $191.0 million | $182.1 million |
| Net premiums earned | $89.0 million | $82.7 million | $176.3 million | $173.7 million |
| Total revenues | $95.4 million | $89.9 million | $189.6 million | $187.5 million |
| Income before taxes | $20.9 million | $22.2 million | $40.3 million | $40.9 million |
| Net income | $17.0 million | $15.5 million | $33.1 million | $29.0 million |
| Diluted EPS | $0.88 | $0.81 | $1.72 | $1.51 |
| Net combined ratio | 83.6% | 81.9% | 84.7% | 84.4% |
| Return on average equity | 15.5% | 13.1% | 15.2% | 12.4% |
Q2 net income margin was approximately 17.8% of total revenues, compared with approximately 17.2% in the prior-year quarter. Six-month net income margin was approximately 17.5%, compared with approximately 15.5% in the prior-year period.
- Q2 net loss ratio was 58.5%, compared with 56.1% in Q2 2017; the expense ratio improved to 23.9% from 24.4%.
- Six-month net loss ratio was 59.7%, compared with 59.1%; the expense ratio improved to 23.6% from 23.8%.
- Current accident-year loss and LAE ratio increased to 71.5% from 69.0% for both the quarter and six-month period.
- Favorable prior-year reserve development was $11.6 million in Q2 and $20.8 million for the first six months, versus $10.7 million and $17.2 million, respectively, in 2017.
- Net investment income was $7.3 million in Q2 and $14.5 million for the first six months. The reported pre-tax investment yield was 2.5% for Q2 and 2.4% for the first six months.
- Income tax expense declined to $4.0 million in Q2 and $7.2 million for the first six months, primarily reflecting the reduced federal corporate tax rate. Effective tax rates were 19.0% and 17.9%, respectively.
Balance Sheet, Cash Flow, Debt and Liquidity
- Total assets were $1.554 billion at June 30, 2018, compared with $1.518 billion at December 31, 2017.
- Total investments were $1.167 billion, including $605.9 million of held-to-maturity securities, $440.8 million of available-for-sale fixed maturities, $13.6 million of equity securities, and $106.8 million of short-term investments.
- Cash and cash equivalents were $21.2 million, down from $55.6 million at year-end. Including investments, the portfolio totaled $1.188 billion.
- Shareholders’ equity was $445.4 million, up from $425.4 million. Book value per share was $23.11 versus $25.02 in the prior-year comparable period.
- Reserves for loss and loss adjustment expenses were $783.6 million, compared with $771.8 million at December 31, 2017. Amounts recoverable from reinsurers were $99.0 million.
- Net cash provided by operating activities was $37.0 million, compared with $40.8 million in the first six months of 2017.
- Net cash used in investing activities was $62.8 million, primarily reflecting $194.7 million of investment purchases partially offset by $132.8 million of sales and maturities.
- Net cash used in financing activities was $8.6 million, including $8.6 million of shareholder dividends.
- The filing does not identify material debt or borrowings; it presents no debt balance or credit facility information.
- The quarterly dividend was increased to $0.22 per share from $0.20 in the prior-year quarter. A further $0.22 per share dividend was declared on July 31, 2018, payable September 21, 2018.
Material Changes Versus the Prior Comparable Period
- Gross premiums written increased 7.7% in Q2 and 4.9% for the first six months. Management attributed the growth principally to payroll audits and related premium adjustments, with additional effects from assumed premiums and voluntary policy premiums.
- Net premiums earned increased 7.5% in Q2 but only 1.5% for the first six months, reflecting the timing of premium recognition.
- Net income increased 9.5% in Q2 and 14.2% for the first six months, despite lower pre-tax income, because of the lower effective tax rate.
- The combined ratio deteriorated by 1.7 percentage points in Q2 and 0.3 percentage points for the first six months, driven primarily by higher current accident-year loss ratios.
- Operating cash flow declined $3.8 million, while investing cash usage increased $24.8 million because of higher investment purchases.
- Accumulated other comprehensive income declined to a loss of $2.1 million from income of $3.6 million at year-end, primarily from unrealized losses on available-for-sale debt securities as interest rates rose.
- ASU 2016-01 adoption resulted in an immaterial $390,000 reduction in net income, or $0.02 of diluted EPS. Other newly adopted revenue and OCI guidance had no material reporting impact.
Outlook, Commentary, Risks and Unusual Items
Management reported no formal earnings or premium guidance in the filing. It expects investment portfolio unrealized losses to recover because it does not expect to be required to sell affected securities before recovery of amortized cost. No other-than-temporary investment impairments were recorded during the periods presented.
- Reserve estimates are inherently uncertain, particularly because the company writes relatively lower-frequency, higher-severity workers’ compensation business. Actual claims development may differ materially from estimates.
- Favorable prior-year development materially reduced reported loss expenses; future development could be less favorable or unfavorable.
- At June 30, 2018, 5,022 claims were open, 181 more than a year earlier. The company noted more favorable-than-expected development in accident years 2014 through 2016 but did not modify its reserve assumptions based on recent experience.
- Investment risks include interest-rate changes, credit risk, equity-price volatility, and market liquidity. The company held 419 fixed-maturity securities in unrealized loss positions, including 46 with losses continuing for more than 12 months.
- Key stated risks include competition, economic conditions, agency relationships, regulatory and accounting changes, cybersecurity events, claim frequency and severity, catastrophe exposure, reinsurance availability and collectibility, rating-agency actions, and legal developments.
- The company stated that disclosure controls and procedures were effective as of June 30, 2018, and that no material changes to internal control over financial reporting occurred during the period.
Important Facts for Investors to Verify
- Whether current accident-year loss ratios stabilize or continue to rise, and whether favorable prior-year reserve development persists.
- The adequacy of the $783.6 million loss and LAE reserve balance and the collectibility of $99.0 million in reinsurance recoverables.
- The effect of interest rates and credit conditions on the investment portfolio, accumulated other comprehensive income, and future realized or unrealized investment results.
- Whether premium growth from payroll audits and policy adjustments is recurring or represents nonrecurring catch-up activity.
- Liquidity trends, including the decline in cash to $21.2 million, operating cash flow, claim payments, investment purchases, and dividend funding.
- The absence of material debt disclosed in this filing and whether subsequent filings identify any borrowings or capital commitments.
- The sustainability of the reduced effective tax rate following the Tax Act.