AMERISAFE, Inc. — 2022 First-Quarter Form 10-Q
Business Context and Reporting Period
AMERISAFE is a holding company that markets and underwrites workers’ compensation insurance through subsidiaries, primarily for small and mid-sized employers in hazardous industries such as construction, trucking, logging and lumber, agriculture, manufacturing, telecommunications and maritime. The filing covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The company marketed insurance in 27 states and was licensed in additional jurisdictions.
Financial Performance and Position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Gross premiums written | $77.8 million | $81.5 million | Down 4.6% |
| Net premiums earned | $67.6 million | $70.7 million | Down 4.5% |
| Net investment income | $6.1 million | $6.6 million | Down 7.1% |
| Total revenues | $75.6 million | $83.4 million | Down 9.3% |
| Total expenses | $54.1 million | $59.7 million | Down 9.4% |
| Income before taxes | $21.4 million | $23.6 million | Down 9.3% |
| Net income | $17.3 million | $19.3 million | Down 10.3% |
| Diluted EPS | $0.89 | $0.99 | Down 10.1% |
| Net combined ratio | 80.1% | 84.6% | Improved 4.5 points |
| Return on average equity | 17.4% | 17.4% | Unchanged |
The net loss ratio was 55.9% in both periods, while the expense ratio improved to 22.4% from 26.8%. The current accident-year loss and loss adjustment expense ratio was estimated at 71.0%, compared with 72.0% initially set for accident year 2021.
Net cash provided by operating activities was $7.1 million, down from $16.6 million. Investing activities used $39.0 million, primarily reflecting net purchases of investments. Financing activities used $8.1 million, including $6.0 million of dividends and $2.1 million of share repurchases. Cash and cash equivalents declined to $30.7 million from $70.7 million at December 31, 2021.
At March 31, 2022, total assets were $1.391 billion, total investments were $1.030 billion, and shareholders’ equity was $395.3 million. Book value per share was $20.46, compared with $23.16 at March 31, 2021. The filing does not report outstanding corporate debt; liabilities were primarily insurance reserves and other insurance-related obligations. Reserves for loss and loss adjustment expenses were $728.6 million, including $114.7 million recoverable from reinsurers.
Material Changes and Unusual Items
- Premium volume declined, primarily because annual premiums on voluntary policies decreased by $5.9 million and assumed premium from mandatory pooling arrangements decreased by $0.4 million. Payroll audits and related adjustments added $2.5 million.
- Ceded premiums represented 3.6% of gross premiums earned, up from 3.4%, reflecting changes in 2022 reinsurance treaties.
- Net investment income decreased because of lower yields on fixed-income securities and cash and lower average invested assets. The portfolio’s pre-tax yield remained 2.3% per annum.
- Net unrealized equity-security gains fell to $1.0 million from $5.5 million, reducing reported revenue and earnings growth.
- Favorable prior accident-year reserve development was $10.2 million, compared with $11.4 million. Management attributed the development primarily to favorable case reserve development on closed claims and claims reaching maximum medical improvement.
- Underwriting and other operating costs declined substantially, including a $3.8 million benefit from the expected return of assessments from the Minnesota Workers’ Compensation Reinsurance Association.
- Rising interest rates reduced the market value of the bond portfolio. Unrealized losses on available-for-sale debt securities, net of tax, were $13.5 million and reduced accumulated other comprehensive income to $57,000 from $13.5 million at year-end.
- The company repurchased 43,893 shares for $2.1 million at an average price of $46.90 per share. Approximately $22.9 million remained available under the authorization.
- The board declared a quarterly dividend of $0.31 per share on April 26, 2022, payable June 24, 2022.
Guidance, Outlook, and Risks
The filing does not provide formal financial guidance. Management stated that the current accident-year loss ratio estimate reflects long-term claim frequency and severity trends and medical inflation. Management did not change its estimate for the catastrophic claim incurred in the fourth quarter of 2021 and did not presently intend to modify reserve assumptions based on recent favorable development.
Key risks include the cyclical and competitive nature of workers’ compensation insurance; claim frequency and severity exceeding assumptions; uncertainty in loss reserves; inflation, interest rates and investment-market volatility; changes in regulation, laws, rates and taxes; reinsurance availability and counterparty performance; agency relationships; economic conditions and policyholder activity; cyberattacks; pandemics; legal and accounting developments; and rating-agency actions. The company emphasized that its focus on lower-frequency, higher-severity risks may produce greater reserve volatility.
Management concluded that disclosure controls and procedures were effective as of March 31, 2022, and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether premium contraction continues and whether voluntary-policy pricing, payroll growth and audit adjustments offset lower written premiums.
- The sustainability of the 80.1% combined ratio, including the extent to which favorable prior-year reserve development contributed to results.
- Future development of the catastrophic claim and other high-severity workers’ compensation claims.
- The effect of rising interest rates on the fair value of available-for-sale securities, accumulated other comprehensive income and capital.
- Operating cash flow and liquidity after claims payments, dividends, investment purchases and potential share repurchases.
- Reinsurance recoverables, treaty changes and the financial strength and payment performance of reinsurers.
- The company’s ability to maintain the $0.31 quarterly dividend and any continued use of the share-repurchase authorization.