AMERISAFE, Inc. — Q3 2023 Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE is a holding company providing workers’ compensation insurance through its subsidiaries, primarily to small and mid-sized employers in hazardous industries such as construction, trucking, logging, agriculture, manufacturing, telecommunications and maritime. The filing covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Gross premiums written | $70.8 million | $68.2 million | $225.0 million | $220.5 million |
| Net premiums earned | $66.6 million | $67.8 million | $201.4 million | $205.6 million |
| Total revenues | $72.6 million | $71.4 million | $226.7 million | $215.0 million |
| Net investment income | $8.1 million | $7.0 million | $23.3 million | $19.6 million |
| Net income | $10.0 million | $11.4 million | $42.9 million | $34.8 million |
| Diluted EPS | $0.52 | $0.59 | $2.23 | $1.80 |
| Net combined ratio | 90.6% | 85.4% | 86.1% | 84.1% |
| Return on average equity | 11.8% | 12.0% | 17.5% | 12.0% |
Net income margin was approximately 13.7% in Q3 and 18.9% for the first nine months, based on total revenues. The Q3 net loss ratio was 55.8%, versus 55.6% in the prior-year quarter; the nine-month ratio improved to 55.5% from 56.3%. The Q3 expense ratio increased to 33.6% from 28.9%, and the nine-month expense ratio increased to 29.5% from 26.6%.
At September 30, 2023, total assets were $1.297 billion, shareholders’ equity was $335.9 million and book value per share was $17.51. The investment portfolio, including cash and cash equivalents, totaled $948.3 million, consisting primarily of fixed-maturity securities. Cash and cash equivalents were $59.2 million. The balance sheet does not separately disclose material conventional debt borrowings; liabilities primarily consist of insurance reserves and other insurance-related obligations.
Net cash provided by operating activities was $25.9 million for the first nine months, compared with $36.1 million in 2022. Investing activities used $7.4 million, compared with $14.4 million of cash provided in 2022. Financing activities used $20.7 million, including $19.7 million of dividends. Ending cash declined by $2.2 million to $59.2 million.
Material Changes Versus the Prior Comparable Period
- Gross premiums written increased 3.9% in Q3 and 2.1% for the first nine months, primarily from payroll audits and related premium adjustments.
- Net premiums earned declined 1.7% in Q3 and 2.0% year to date, mainly because higher reinsurance costs increased ceded premiums. Ceded premiums were 5.8% of gross premiums earned in Q3 and 5.7% year to date, compared with 3.6% and 3.7%, respectively, in 2022.
- Investment income increased 16.1% in Q3 and 18.8% year to date because of higher yields, despite lower average invested assets.
- Net realized investment gains increased to $5.1 million in Q3 and $5.5 million year to date. These gains were partly offset by $7.3 million of Q3 unrealized losses on equity securities; year-to-date unrealized losses were $3.9 million.
- Q3 net income declined 12.3% and diluted EPS declined from $0.59 to $0.52, primarily reflecting higher operating costs, commissions and investment-related volatility. Year-to-date net income increased 23.3% and diluted EPS increased from $1.80 to $2.23.
- The net combined ratio deteriorated to 90.6% in Q3 and 86.1% year to date, compared with 85.4% and 84.1% in the respective 2022 periods.
- Prior accident-year reserve development remained favorable at $10.2 million in Q3 and $31.2 million year to date, compared with $10.4 million and $30.2 million in 2022.
- Shareholders’ equity increased from $317.4 million at December 31, 2022 to $335.9 million at September 30, 2023, although accumulated other comprehensive loss increased to $20.4 million, principally from unrealized losses on available-for-sale debt securities.
Guidance, Outlook, Commentary and Risks
Management maintained its initial accident-year 2023 loss and loss adjustment expense ratio estimate at 71.0% of net premiums earned, consistent with the initial 2022 estimate. The filing does not provide formal revenue, earnings or combined-ratio guidance.
Management attributed favorable reserve development to case reserve improvements on closed claims and claims where workers reached maximum medical improvement. The company cautioned that reserves are inherently uncertain and may be more volatile because its target markets generally produce fewer but more severe claims.
Key risks include competition and pricing pressure, economic conditions and inflation, interest-rate and equity-market changes, claim frequency and severity, reserve estimation risk, reinsurance availability and counterparty performance, regulatory and legal changes, cyber incidents, agency relationships, changes in rating agency practices, pandemics and other industry or geopolitical events.
On October 24, 2023, the board declared a special cash dividend of $3.50 per share and a quarterly dividend of $0.34 per share, both payable December 15, 2023 to shareholders of record December 1, 2023. The company had $12.6 million remaining under its share repurchase authorization and made no repurchases during the first nine months of 2023.
Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting reported during the period.
Important Facts for Investors to Verify
- Whether higher reinsurance costs continue to suppress net premiums earned and underwriting margins.
- The sustainability of favorable prior-year reserve development and the adequacy of reserves for severe workers’ compensation claims.
- Future combined-ratio performance, particularly the increase in the Q3 expense ratio.
- The effect of interest rates and equity-market movements on investment income, realized gains, unrealized losses and accumulated other comprehensive loss.
- Liquidity and capital adequacy after the $3.50-per-share special dividend and ongoing quarterly dividends.
- Reinsurance recoverable balances of $127.7 million and the credit quality and payment performance of reinsurers.
- The company’s large fixed-income portfolio, including $35.3 million of gross unrecognized losses on held-to-maturity securities and $26.0 million of unrealized losses on available-for-sale securities at September 30, 2023.