Business Context and Reporting Period
AMERISAFE, Inc. filed its Form 10-K for the fiscal year ended December 31, 2023. The company is an insurance holding company specializing in workers’ compensation coverage for small to mid-sized employers in hazardous industries, principally construction, trucking, logging and lumber, agriculture, manufacturing, telecommunications and maritime. Its insurance subsidiaries are rated “A” (Excellent) by A.M. Best.
The filing is an annual report, not a quarterly filing, although fourth-quarter information is included in the full-year results.
2023 Financial and Operating Metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Gross premiums written | $285.4 million | $276.1 million | +3.3% |
| Net premiums written | $268.7 million | $265.6 million | +1.2% |
| Net premiums earned | $267.1 million | $271.7 million | -1.7% |
| Total revenues | $306.9 million | $294.7 million | +4.1% |
| Net income | $62.1 million | $55.6 million | +11.7% |
| Diluted EPS | $3.23 | $2.88 | +12.2% |
| Net cash from operating activities | $29.8 million | $28.2 million | +5.8% |
| Net combined ratio | 85.9% | 83.6% | +2.3 points |
| Net loss ratio | 55.5% | 56.1% | -0.6 points |
| Net underwriting expense ratio | 29.3% | 26.5% | +2.8 points |
| Return on average equity | 20.4% | 15.5% | +4.9 points |
- Net investment income increased to $31.3 million from $27.2 million, while the average pretax investment yield rose to 3.4% from 2.7%.
- Net realized investment gains were $6.6 million, compared with $3.4 million in 2022. Net unrealized gains on equity securities were $1.2 million versus a $8.1 million loss in 2022.
- Current accident-year loss and LAE ratio remained 71.0%. Favorable prior-year reserve development was $41.4 million, compared with $40.6 million in 2022.
- Gross loss and LAE reserves were $674.0 million at year-end, including $119.8 million of IBNR. Net reserves were $554.2 million after $119.7 million of reinsurance recoverables.
- Cash and cash equivalents were $38.7 million, investments were $857.8 million, and total investments including cash were $896.5 million. Shareholders’ equity was $292.5 million and book value per share was $15.28.
- The company had no outstanding borrowings under its unsecured $20.0 million Frost Bank revolving credit facility at December 31, 2023. The facility expires in December 2024 unless renewed.
- Cash dividends paid to shareholders totaled $93.3 million, including the $3.50-per-share extraordinary dividend. The company repurchased 46,741 shares for $2.2 million, with $10.4 million remaining under the repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Gross premiums written increased primarily because of $10.1 million of additional premiums from payroll audits and related adjustments on prior-period policies. Voluntary premiums increased to $277.3 million from $266.2 million, while assigned-risk premiums declined materially as the company stopped accepting direct assignments and shifted to mandatory pooling arrangements.
- Net premiums earned declined despite higher gross written premiums because ceded premiums increased to $16.6 million from $10.5 million as the company purchased higher and more expensive reinsurance coverage.
- Revenue and net income benefited from higher investment income, realized investment gains and the reversal of the prior-year equity-market losses.
- Operating efficiency weakened: the underwriting expense ratio rose to 29.3% from 26.5%, primarily reflecting higher insurance-related assessments, commissions, professional fees and compensation.
- Net income increased, but shareholders’ equity declined to $292.5 million from $317.4 million, principally reflecting substantial shareholder dividends and share repurchases, partially offset by net income and improved accumulated other comprehensive income.
- Gross reserves declined by $22.0 million, and open claims decreased to 4,003 from 4,275. New claims reported declined to 3,948 from 4,104, while claims closed declined to 4,220 from 4,423.
Outlook, Commentary, Risks and Unusual Items
- Management intends to maintain underwriting discipline through industry cycles, focus on profitable hazardous-industry business, expand market penetration selectively and preserve capital strength. The filing does not provide quantitative earnings or premium guidance for 2024.
- Management expects projected operating cash flow to fund operations, claims, operating expenses and holding-company expenses for at least the next 18 months.
- The company declared a regular quarterly dividend of $0.37 per share in February 2024, implying an annualized regular dividend of $1.48 per share. Insurance subsidiaries could pay up to $52.6 million of dividends to AMERISAFE in 2024 without regulatory approval, subject to applicable limitations.
- The 2024 reinsurance program provides occurrence coverage up to $100.0 million, with a $2.0 million retention and a $20.0 million maximum for a single claimant, subject to deductibles, aggregate limits and other restrictions. Terrorism coverage is limited and subject to applicable sublimits and statutory program conditions.
- Reserve estimation is the principal critical audit matter. A 30% change in selected paid or incurred loss-development factors would change the net loss and DCC reserve by approximately $31.1 million, or 5.9%. A 300-basis-point increase in severity trends would increase the reserve by $9.2 million, or 1.8%.
- Key risks include the cyclical and competitive workers’ compensation market, pricing inadequacy, severe-claim volatility, medical and wage inflation, adverse reserve development, investment-market and interest-rate risk, reinsurance availability and credit risk, regulatory restrictions, guaranty-fund and residual-market assessments, litigation, terrorism, cybersecurity and dependence on independent agencies.
- Reinsurance recoverables totaled $130.0 million net of the credit-loss allowance; $48.4 million was unsecured. The largest recoverable was $65.0 million from Hannover Reinsurance Ireland Limited.
- The company reported no material adverse legal proceedings, no known cybersecurity incident that materially affected or was reasonably likely to materially affect the company, and no material findings in the 2022–2023 state insurance examinations. Management and Ernst & Young concluded that internal control over financial reporting was effective.
Most Important Facts for Investors to Verify
- Whether favorable prior-year reserve development remains sustainable and whether current accident-year claims develop consistently with the 71.0% loss ratio assumption.
- The adequacy, cost and terms of the 2024 reinsurance program, including the $2.0 million retention, aggregate limits, terrorism sublimits and reinsurer credit quality.
- The effect of higher underwriting expenses and insurance-related assessments on future combined ratios and underwriting profitability.
- The company’s ability to fund regular and extraordinary dividends while maintaining insurance-subsidiary statutory capital, liquidity and risk-based capital ratios.
- Exposure to interest-rate changes and unrealized losses in the investment portfolio, particularly the $800.6 million fixed-maturity portfolio and its 4.2-year duration.
- Future premium growth, policyholder payroll trends and concentration in hazardous industries and states, particularly Florida and Georgia.