AMERISAFE, Inc. 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2021. AMERISAFE underwrites workers’ compensation insurance for small and mid-sized employers in hazardous industries, including construction, trucking, logging, manufacturing, agriculture, maritime, and oil and gas. The company markets insurance in 27 states through independent agencies and its wholly owned agency subsidiary.
Financial Performance and Position
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Gross premiums written | $73.7 million | $80.3 million | $155.2 million | $167.4 million |
| Net premiums earned | $69.9 million | $76.0 million | $140.6 million | $155.0 million |
| Total revenues | $81.2 million | $89.1 million | $164.5 million | $168.3 million |
| Net income | $23.8 million | $23.9 million | $43.1 million | $34.7 million |
| Diluted EPS | $1.23 | $1.24 | $2.22 | $1.80 |
| Net combined ratio | 74.4% | 78.5% | 79.6% | 81.1% |
| Return on average equity | 20.8% | 21.3% | 19.0% | 15.6% |
- Second-quarter net income declined slightly despite improved underwriting results, primarily because of lower premium volume and investment income. Six-month net income increased 24.0% year over year.
- Net investment income was $6.7 million in the quarter and $13.3 million for the six months, down 8.1% and 11.7%, respectively, due to lower fixed-income and cash yields. Portfolio pre-tax yield was 2.3% versus 2.5% in the comparable periods.
- Net realized investment gains were $1.2 million in the quarter and $1.5 million year to date. Net unrealized equity-security gains were $3.3 million in the quarter and $8.8 million year to date, compared with a $3.2 million loss in the first six months of 2020.
- Loss and loss adjustment expenses declined 13.6% in the quarter and 11.4% year to date. The current accident-year loss ratio assumption improved to 72.0% from 72.5%.
- Expense ratios improved to 26.4% in the quarter and 26.6% year to date, compared with 27.8% and 27.4%, respectively.
- Net favorable prior-year reserve development was $17.9 million in the quarter and $29.3 million year to date, compared with $17.5 million and $31.2 million in the prior-year periods.
Cash Flow, Liquidity, Investments, and Capital
- Net cash provided by operating activities was $26.0 million for the six months, down from $42.2 million in 2020. Management attributed the decline primarily to higher amounts held by others, higher federal taxes paid, lower premium collections, and lower investment income.
- Investing activities used $18.9 million, compared with $34.8 million of cash provided in the prior-year period. Purchases of investments totaled $134.4 million, versus $145.5 million, while sales and maturities generated $116.1 million.
- Financing activities used $11.3 million, including $11.3 million of shareholder dividends. The quarterly dividend was increased to $0.29 per share from $0.27 in the comparable period. A $0.29 per-share dividend was declared on July 27, 2021, payable September 24, 2021.
- Cash and cash equivalents were $57.5 million at June 30, 2021, compared with $61.8 million at December 31, 2020.
- Total investments, including cash, were $1.17 billion. The portfolio consisted primarily of fixed-maturity securities: 47.8% held to maturity and 31.6% available for sale, with 11.0% in short-term investments and 4.7% in equity securities.
- Total assets were $1.51 billion and shareholders’ equity was $468.4 million at June 30, 2021. Book value per share was $24.19.
- The filing does not identify outstanding debt borrowings. Liabilities were primarily insurance reserves of $745.0 million and unearned premiums of $138.9 million.
- The company had $25.0 million available under its share-repurchase authorization, although no shares were repurchased during the first six months of 2021.
Material Changes Versus the Prior Comparable Period
- Gross premiums written decreased 8.2% in the quarter and 7.2% year to date, mainly from lower annual premiums on voluntary policies and lower payroll-audit adjustments. COVID-19-affected periods were included in this year’s payroll audits.
- Net premiums earned decreased 8.0% in the quarter and 9.2% year to date.
- Underwriting performance improved, with the combined ratio declining 4.1 percentage points in the quarter and 1.5 percentage points year to date.
- Investment yields and investment income declined, but equity-market gains were substantially better year to date than in 2020.
- Loss reserves declined to $745.0 million from $760.6 million at December 31, 2020. Open claims at June 30, 2021 totaled 4,573, down from 4,621 at June 30, 2020.
- Accumulated other comprehensive income declined to $16.9 million from $21.0 million at year-end, reflecting unrealized losses on available-for-sale debt securities during the first six months.
Outlook, Commentary, Risks, and Unusual Items
- No quantitative earnings or premium guidance was provided. Management stated that interim results are not necessarily indicative of full-year results.
- Management expects reserve estimates to remain subject to significant uncertainty because the company writes relatively low-frequency, high-severity workers’ compensation business. Favorable development reflected improved case-reserve information, closed claims, and claims reaching maximum medical improvement.
- Management has not modified its reserve assumptions based on recent favorable development, but future experience could affect assumptions and reserves.
- Key risks include industry cyclicality, competition, changes in policyholder activity, claim frequency and severity, medical inflation, reserve estimation, reinsurance availability and collectability, investment-market and interest-rate risk, regulatory changes, cybersecurity events, pandemics, and economic conditions.
- The company reported no material change in its market-risk profile since December 31, 2020 and has no foreign-currency exposure.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes in internal control over financial reporting.
- The company recognized no new accounting guidance in 2021, and issued but not yet effective standards were not expected to have a material effect.
Important Facts for Investors to Verify
- Whether declining premium volume persists and how voluntary policy growth, payroll audits, pricing, and the effective loss cost multiplier affect future premiums.
- Whether favorable prior-year reserve development continues or reverses, particularly given the company’s high-severity claims profile.
- The sustainability of the 74.4% quarterly and 79.6% year-to-date combined ratios excluding favorable reserve development.
- The effect of low interest rates and portfolio yields on recurring investment income and future earnings.
- Liquidity and statutory-capital requirements of the insurance subsidiaries, including the availability and collectability of reinsurance recoverables.
- The company’s ability to maintain dividends while operating cash flow declined to $26.0 million year to date.
- Exposure to pandemic-related changes in policyholder payroll, claims activity, audits, and premium collections.