AMERISAFE, Inc. — 2019 First-Quarter Form 10-Q
Business context and reporting period
AMERISAFE is a workers’ compensation insurance holding company serving small and mid-sized employers in hazardous industries, including construction, trucking, logging and lumber, manufacturing, agriculture, maritime, and oil and gas. The company markets insurance in 27 states through independent agencies and its wholly owned agency subsidiary. This report covers the three months ended March 31, 2019, compared with the same period in 2018. The financial statements are unaudited.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Gross premiums written | $93.1 million | $97.3 million | Down 4.4% |
| Net premiums earned | $84.9 million | $87.3 million | Down 2.7% |
| Net investment income | $8.0 million | $7.2 million | Up 11.2% |
| Total revenues | $95.2 million | $94.2 million | Up 1.1% |
| Total expenses | $71.4 million | $74.8 million | Down 4.5% |
| Income before taxes | $23.8 million | $19.4 million | Up 22.6% |
| Net income | $19.4 million | $16.2 million | Up 20.0% |
| Diluted EPS | $1.01 | $0.84 | Up 20.2% |
| Net combined ratio | 84.0% | 85.6% | Improved 1.6 points |
| Return on average equity | 18.5% | 15.1% | Improved 3.4 points |
| Cash dividends per share declared | $0.25 | $0.22 | Up $0.03 |
Net income margin was approximately 20.4% of total revenues, compared with approximately 17.2% in the prior-year quarter. The net loss ratio improved to 58.4% from 60.9%, while the expense ratio increased to 24.3% from 23.2%.
Current accident-year loss and loss adjustment expenses were $61.6 million, or 72.5% of net premiums earned, compared with $62.4 million, or 71.5%, in the prior-year period. Favorable prior-year reserve development reduced loss expenses by $12.0 million in Q1 2019, compared with $9.3 million in Q1 2018.
Liquidity, investments, capital, and debt
- Net cash provided by operating activities was $20.3 million, compared with $12.7 million in Q1 2018.
- Net cash used in investing activities was $20.8 million, compared with $27.9 million in the prior-year quarter.
- Net cash used in financing activities was $4.9 million, primarily reflecting shareholder dividends.
- Cash and cash equivalents were $34.9 million at March 31, 2019, compared with $40.3 million at December 31, 2018.
- Total investments, including cash and cash equivalents, were $1.197 billion at March 31, 2019. Fixed-maturity securities represented approximately 89.9% of this portfolio.
- Total assets were $1.559 billion and shareholders’ equity was $430.4 million at March 31, 2019, compared with $1.516 billion and $409.8 million, respectively, at December 31, 2018.
- Loss and loss adjustment expense reserves were $800.6 million, compared with $798.4 million at year-end 2018; amounts recoverable from reinsurers were $111.2 million.
- The filing does not present a separate material debt balance; reported liabilities primarily consist of insurance reserves, unearned premiums, policyholder-related balances, taxes, and other operating liabilities.
Material changes versus the prior comparable period
- Premium volume declined, principally because annual premiums on voluntary policies decreased by $5.2 million and assumed premium from mandatory pooling arrangements decreased by $0.2 million.
- The effective loss cost multiplier for voluntary business declined to 1.59 from 1.63.
- Investment income increased because of slightly higher fixed-income yields; pretax portfolio yield increased to 2.7% from 2.4%.
- Q1 2019 included $2.2 million of net unrealized gains on equity securities, compared with $0.4 million of net unrealized losses in Q1 2018.
- Favorable reserve development increased by $2.7 million year over year, largely reflecting favorable case reserve development on closed claims and claims reaching maximum medical improvement.
- Share-based compensation increased to approximately $0.6 million from $17.8 thousand, contributing to higher operating costs and salaries and benefits.
- Comprehensive income was $25.2 million, compared with $10.3 million, driven primarily by a $6.0 million after-tax improvement in unrealized gains on available-for-sale debt securities.
Guidance, outlook, commentary, risks, and unusual items
The filing provides no formal earnings or revenue guidance. Management stated that interim results are not necessarily indicative of full-year results. The company expects to continue paying regular quarterly dividends; on April 29, 2019, the board declared a $0.25-per-share dividend payable June 21, 2019.
Key risks include the cyclical nature of workers’ compensation insurance, competition and pricing pressure, claim frequency and severity, reserve estimate volatility, economic and interest-rate conditions, investment-market losses, reinsurance availability and collectability, regulatory and legal changes, agency relationships, cybersecurity events, and dependence on key employees.
The company adopted the new lease standard in Q1 2019, recognizing approximately $0.4 million of right-of-use assets and $0.3 million of lease liabilities with no material overall financial statement impact. The company is evaluating the credit-loss standard effective in Q1 2020; its eventual impact has not yet been determined.
At March 31, 2019, fixed-maturity securities had $2.3 million of gross unrealized losses, compared with $7.8 million at December 31, 2018. Management reported no other-than-temporary impairment losses during either quarter and stated that it did not expect to be required to sell impaired securities before recovery.
Important facts for investors to verify
- Whether favorable reserve development remains sustainable, given the inherent uncertainty and severity of the company’s claims.
- Underlying premium trends, retention, pricing, policy growth, and the effect of the lower effective loss cost multiplier.
- The effect of investment yields, interest rates, equity-market movements, and unrealized investment gains or losses on future earnings and equity.
- Reinsurance recoverables, reinsurance costs, and the company’s exposure to reinsurer credit or collection risk.
- The implementation impact of the new credit-loss accounting standard in 2020.
- Capital deployment, including the $25.0 million remaining authorization under the share repurchase program and ongoing quarterly dividends.