AMERISAFE, Inc. 2022 Form 10-K Summary
Business context and reporting period
AMERISAFE is a specialty workers’ compensation insurer focused on small and mid-sized employers in hazardous industries, principally construction, trucking, logging and lumber, agriculture, manufacturing, telecommunications and maritime. The filing covers the fiscal year ended December 31, 2022, with comparisons to 2021 and 2020. The company operates through insurance subsidiaries domiciled in Nebraska and Texas, all rated “A” (Excellent) by A.M. Best.
- More than 8,100 voluntary policyholders and over 2,300 independent agencies at year-end.
- Voluntary policy renewal rate was 93.8% in 2022.
- Gross premiums were geographically diversified; no state represented more than 11.8% of gross premiums written.
Financial performance and key metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Gross premiums written | $276.1 million | $278.3 million | (0.8%) |
| Net premiums earned | $271.7 million | $276.0 million | (1.6%) |
| Net investment income | $27.2 million | $25.4 million | 7.0% |
| Total revenues | $294.7 million | $315.9 million | (6.7%) |
| Income before taxes | $67.6 million | $79.4 million | (14.8%) |
| Net income | $55.6 million | $65.8 million | (15.4%) |
| Diluted EPS | $2.88 | $3.39 | (15.0%) |
| Net combined ratio | 83.6% | 85.7% | Improved 2.1 points |
| Return on average equity | 15.5% | 15.7% | Down 0.2 points |
| Net cash from operating activities | $28.2 million | $38.0 million | (25.8%) |
- Current accident-year loss ratio improved to 71.0% from 80.7%, while favorable prior-year development was $40.6 million versus $61.9 million in 2021.
- Net loss ratio improved to 56.1% from 58.3%; the underwriting expense ratio increased to 26.5% from 26.1%.
- Cash and investments totaled approximately $950.5 million at December 31, 2022, including $61.5 million of cash and cash equivalents. Fair value of the portfolio was $926.9 million.
- Shareholders’ equity was $317.4 million, down from $399.3 million, primarily reflecting shareholder dividends and a $27.4 million after-tax decline in accumulated other comprehensive income from unrealized debt-security losses.
- Gross loss and loss-adjustment reserves declined to $696.0 million from $745.3 million; net reserves were $583.5 million.
- Cash paid for claims, net of reinsurance, was $194.8 million. Operating cash flow was reduced by claim payments, operating expenditures, taxes and policyholder dividends.
- The company had no outstanding borrowings or letters of credit under its $20.0 million unsecured revolving credit facility at year-end.
Material changes versus the prior comparable period
- Premium volume continued to decline, primarily because of lower state-approved workers’ compensation loss costs. Payroll audits and related prior-period premium adjustments partially offset the reduction.
- Investment results were mixed: net investment income increased with higher interest rates, but equity securities produced an $8.1 million unrealized loss versus a $12.3 million gain in 2021.
- Net income declined despite improved underwriting metrics because of lower premium revenue, lower overall investment results and the 2021 period’s larger favorable reserve development.
- Net cash from operations decreased to $28.2 million from $38.0 million, while investing activities provided $75.4 million, primarily from investment maturities and sales exceeding purchases.
- Financing cash use increased to $112.9 million, including $100.4 million of shareholder dividends and $12.4 million of share repurchases.
- The company repurchased 264,449 shares in 2022 at an average price of $46.84 and had $12.6 million remaining under its repurchase authorization.
Guidance, outlook, commentary and risks
Management did not provide formal earnings or premium guidance. Management expects operating cash flow to fund claims, operating expenses and other holding-company needs for at least the next 18 months. The company intends to maintain underwriting discipline, expand selectively in existing markets, manage capital prudently and continue regular quarterly dividends.
- For 2023, the reinsurance program provides up to $100.0 million of coverage per loss occurrence, subject to retentions, deductibles, limits and exclusions; the company’s retention is $2.0 million per occurrence.
- The company expects its insurance subsidiaries could pay up to $56.0 million of dividends to AMERISAFE in 2023 without regulatory approval, subject to applicable conditions.
- The regular quarterly dividend was increased to $0.34 per share in February 2023, implying $1.36 per share on an annualized basis. The filing does not establish that future dividends are guaranteed.
- Loss reserves are the most significant estimate and critical audit matter. Severe, low-frequency claims, medical and wage inflation, litigation, regulatory changes and changes in claims development could produce unfavorable reserve development.
- At year-end, reinsurance recoverables were $125.7 million, of which $45.1 million was unsecured. Reinsurance does not discharge the company’s primary obligation to policyholders.
- Investment risks include interest-rate changes, unrealized losses on fixed-income securities, credit losses, equity-market volatility and liquidity risk. A 200-basis-point increase in rates was estimated to reduce shareholders’ equity by 10.6%.
- Other material risks include workers’ compensation industry cyclicality, declining policyholder payrolls, competition, agency dependence, cybersecurity incidents, regulatory assessments, terrorism exposure, reinsurer credit risk and the company’s dependence on dividends from regulated insurance subsidiaries.
- State insurance examinations of the Nebraska and Texas subsidiaries were ongoing for periods covering 2018 through 2021; management did not identify a presently material adverse legal or administrative proceeding.
Most important facts for investors to verify
- Whether premium declines from lower approved loss costs continue and whether payroll audits can offset the pressure.
- Whether favorable reserve development persists without masking deterioration in current or future accident years.
- The adequacy and volatility of the $696.0 million gross reserve and $583.5 million net reserve balances.
- Actual claims severity, medical-cost inflation, claim frequency and development of the 2022 accident year.
- The collectability and collateralization of the $125.7 million of reinsurance recoverables, including the $45.1 million unsecured balance.
- The effect of interest rates and equity markets on investment income, accumulated other comprehensive income and capital.
- Regulatory capital, dividend capacity and the ability of insurance subsidiaries to continue funding AMERISAFE’s dividends and share repurchases.
- Continuation of the $0.34 quarterly dividend and the remaining $12.6 million share-repurchase authorization.
- 2023 reinsurance pricing, capacity, exclusions and terrorism-related limits.