AMERISAFE, Inc. — 2020 Q3 Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE is a workers’ compensation insurer serving small to mid-sized employers in hazardous industries, including construction, trucking, logging and lumber, manufacturing, agriculture, maritime, and oil and gas. The filing covers the three and nine months ended September 30, 2020. Results were affected by the COVID-19 pandemic, lower policyholder business activity, reduced interest rates, and related economic uncertainty.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Gross premiums written | $72.6 million | $82.6 million | $240.0 million | $262.8 million |
| Net premiums earned | $74.8 million | $82.7 million | $229.7 million | $250.6 million |
| Total revenues | $83.0 million | $91.5 million | $251.3 million | $278.4 million |
| Net income | $23.4 million | $21.4 million | $58.1 million | $58.7 million |
| Diluted EPS | $1.21 | $1.11 | $3.00 | $3.04 |
| Net combined ratio | 72.8% | 78.4% | 78.4% | 82.1% |
| Return on average equity | 19.8% | 18.6% | 17.0% | 17.8% |
Q3 net income increased 9.2% year over year despite lower premiums and investment income. Net income for the first nine months declined 1.0%. Based on reported net income and total revenues, net income margins were approximately 28.1% in Q3 2020 versus 23.4% in Q3 2019, and 23.1% for the first nine months versus 21.1% in the prior-year period.
- Net investment income decreased 14.5% in Q3 to $7.1 million and 9.5% for the nine months to $22.1 million, primarily because of lower fixed-income and cash yields.
- Loss and loss adjustment expenses declined 10.2% in Q3 to $39.8 million and 15.3% for the nine months to $121.0 million.
- Current accident-year loss and LAE represented 72.5% of net premiums earned in both comparable periods. Favorable prior-year development was $14.4 million in Q3 and $45.6 million for the nine months.
- At September 30, 2020, total assets were $1.55 billion, shareholders’ equity was $481.9 million, and book value per share was $24.93. Cash and cash equivalents were $88.2 million.
- Total investments were $1.13 billion, including $572.5 million of held-to-maturity securities, $426.2 million of available-for-sale securities, $35.8 million of equity securities, and $90.8 million of short-term investments.
- The filing does not provide a separate corporate debt balance; the balance sheet lists total liabilities of $1.06 billion, primarily insurance reserves and other operating liabilities.
Material Changes Versus the Prior Comparable Period
- Gross premiums written decreased 12.1% in Q3 and 8.7% for the nine months, mainly due to lower voluntary policy premiums and reduced payroll-audit adjustments. The effective loss cost multiplier declined to 1.59 in Q3 from 1.62 and to 1.58 for the nine months from 1.61.
- Net premiums written decreased 12.8% in Q3 and 9.3% for the nine months. Ceded premiums increased to 3.2% of gross premiums earned in Q3 and 3.3% for the nine months, versus 2.6% in both prior-year periods, reflecting higher 2020 reinsurance pricing.
- The Q3 net loss ratio improved modestly to 53.2% from 53.6%, while the nine-month ratio improved to 52.7% from 57.0%. The expense ratio declined to 18.6% in Q3 but increased to 24.5% for the nine months from 23.8%.
- Q3 underwriting and other operating costs declined substantially, partly because a $5.7 million assessment related to a state multiple injury fund was terminated early. This is an unusual item and may not recur.
- Operating cash flow declined to $50.9 million from $62.5 million for the nine months, primarily due to lower premium collections and investment income. Ending cash was $88.2 million versus $125.9 million at September 30, 2019.
- Shareholders’ equity increased from $430.2 million at December 31, 2019 to $481.9 million at September 30, 2020, including $65.8 million of comprehensive income, $15.7 million of dividends, and a $0.6 million opening retained-earnings reduction from CECL adoption.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no formal earnings, premium, or combined-ratio guidance.
- COVID-19 risks include lower demand for insurance, reduced policyholder payrolls, collection difficulties, investment-market declines, lower yields on new investments, policy cancellation restrictions, expanded coverage interpretations, and potentially higher COVID-19 claim frequency or severity.
- Insurance reserves are inherently uncertain and may be materially affected by claim frequency, severity, medical and disability developments, litigation, regulation, and changes in historical loss patterns. AMERISAFE focuses on lower-frequency, higher-severity risks, which can increase reserve volatility.
- Reinsurance availability, pricing, counterparty credit quality, and the ability of reinsurers to pay recoverables are material risks. The company recorded a $379 thousand allowance for credit losses on reinsurance recoverables.
- On January 1, 2020, the company adopted CECL, recording a $594 thousand reduction to retained earnings. At September 30, 2020, it had a $288 thousand allowance for credit losses on held-to-maturity securities and no allowance on available-for-sale securities.
- On October 26, 2020, the board declared a $3.50 per share extraordinary dividend and a $0.27 per share quarterly dividend. These distributions were declared after the reporting date and are payable in November and December 2020, respectively.
- The company had $25.0 million available under its share repurchase authorization, but repurchased no shares during the first nine months of 2020.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes in internal control over financial reporting.
Investor Verification Checklist
- Verify whether premium growth and payroll trends recover as COVID-19 economic effects diminish.
- Assess the sustainability of favorable prior-year reserve development and the 72.8% quarterly combined ratio.
- Evaluate the effect of lower interest rates on recurring investment income and portfolio reinvestment yields.
- Review reinsurance pricing, recoverables, counterparty ratings, and coverage terms.
- Consider the cash and capital impact of the $3.50 extraordinary dividend and ongoing quarterly dividends.
- Monitor future changes in COVID-19-related claims, regulatory actions, premium collections, and investment valuations.
- Confirm that the early termination of the $5.7 million state assessment adjustment is nonrecurring.