AMERISAFE, Inc. 2018 Q3 Form 10-Q Summary
Business Context and Reporting Period
AMERISAFE is a workers’ compensation insurance holding company serving small and mid-sized employers in hazardous industries, principally construction, trucking, logging and lumber, manufacturing, and agriculture. The filing covers the three and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods. The financial statements are unaudited.
The company markets insurance in 27 states through independent agencies and its wholly owned agency subsidiary. Its strategy emphasizes disciplined underwriting, workplace safety services, claims management, and premium audits.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Gross premiums written | $85.3 million | $87.0 million | $276.4 million | $269.2 million |
| Net premiums earned | $85.2 million | $85.1 million | $261.5 million | $258.8 million |
| Total revenues | $93.5 million | $92.8 million | $283.1 million | $280.3 million |
| Net income | $19.7 million | $16.6 million | $52.8 million | $45.6 million |
| Diluted EPS | $1.02 | $0.86 | $2.74 | $2.37 |
| Net combined ratio | 81.1% | 81.4% | 83.5% | 83.5% |
| Return on average equity | 17.4% | 13.6% | 15.9% | 12.8% |
| Cash dividends declared per share | $0.22 | $0.20 | $0.66 | $0.60 |
Q3 net income margin was approximately 21.1% of total revenue, compared with approximately 17.9% in Q3 2017. The nine-month net income margin was approximately 18.7%, compared with approximately 16.3% in the prior-year period.
Loss and loss adjustment expenses were $47.6 million in Q3 and $152.8 million for the nine-month period. The net loss ratio was 55.9% in Q3 and 58.4% for the nine months. Expense ratios were 24.2% and 23.8%, respectively.
Cash Flow, Liquidity, Capital, and Investments
- Net cash provided by operating activities was $70.7 million for the nine months ended September 30, 2018, down from $102.3 million in 2017.
- Net cash used in investing activities was $80.1 million, primarily reflecting investment purchases of $293.0 million, partly offset by $213.8 million of investment sale and maturity proceeds.
- Net cash used in financing activities was $12.9 million, including $12.9 million of shareholder dividends.
- Cash and cash equivalents declined to $33.3 million at September 30, 2018 from $55.6 million at December 31, 2017.
- Total investments were $1.19 billion at September 30, 2018, and investments including cash totaled $1.224 billion.
- Total assets were $1.587 billion, total liabilities were $1.128 billion, and shareholders’ equity was $459.0 million at September 30, 2018.
- The filing does not provide a clear value for conventional corporate debt or debt borrowings; the principal liabilities disclosed are insurance reserves, unearned premiums, policyholder-related balances, assessments, and other operating liabilities.
- Held-to-maturity and available-for-sale fixed-maturity securities had fair values of $599.9 million and $468.0 million, respectively. Rising interest rates increased unrealized losses, but no other-than-temporary impairment losses were recorded.
Material Changes Versus the Prior Comparable Period
- Q3 gross premiums written decreased 2.0% and net premiums written decreased 2.4%, primarily due to lower payroll-audit adjustments and lower assumed premiums from mandatory pooling arrangements.
- Nine-month gross premiums written increased 2.7% and net premiums written increased 2.6%, driven mainly by payroll audits and higher voluntary-policy premiums, partially offset by lower pooling premiums.
- Net premiums earned increased 0.1% in Q3 and 1.0% for the nine-month period.
- Net income increased 18.8% in Q3 and 15.9% for the nine-month period. The principal earnings benefit was the reduction in the federal corporate tax rate, which lowered the effective tax rate to 19.5% in Q3 and 18.5% for the nine months, compared with 29.6% and 29.3%, respectively, in 2017.
- Q3 loss and LAE declined 1.6%, while the current accident-year loss ratio increased to 71.5% from 69.0%. Favorable prior-year development increased to $13.3 million from $10.3 million.
- For the nine-month period, loss and LAE increased 1.2%, while the current accident-year loss ratio also increased to 71.5% from 69.0%. Favorable prior-year development increased to $34.1 million from $27.5 million, keeping the reported net loss ratio unchanged at 58.4%.
- Operating cash flow decreased by $31.6 million, partly because 2017 benefited from the return of a $26.8 million appeal bond and because of higher amounts held by others and losses paid.
- Accumulated other comprehensive income declined to a loss of $4.2 million from income of $3.6 million at year-end 2017, primarily due to unrealized losses on available-for-sale debt securities.
- The company adopted ASU 2016-01, resulting in equity-security fair-value changes being recognized in net income; Q3 and nine-month unrealized gains were $0.6 million and $0.3 million, respectively.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal earnings, premium, or combined-ratio guidance. Management stated that results are not necessarily indicative of full-year performance.
- Favorable reserve development was largely associated with case-reserve improvements on closed claims and claims where injured workers reached maximum medical improvement. Reserve estimates remain inherently uncertain, particularly because the company writes lower-frequency, higher-severity risks.
- Loss reserves totaled $791.1 million at September 30, 2018, including $104.4 million recoverable from reinsurers. Management believes reserves are adequate, but actual claim payments may differ materially from estimates.
- Open claims increased to 5,285 at September 30, 2018 from 5,079 a year earlier.
- Key risks include workers’ compensation industry cyclicality, competition and pricing pressure, economic and interest-rate changes, investment-market losses, claim frequency and severity, catastrophic events, regulatory and legal changes, reinsurance availability and collectability, agency relationships, cybersecurity incidents, and dependence on key personnel.
- The company declared a regular quarterly dividend of $0.22 per share and an extraordinary dividend of $3.50 per share on October 23, 2018, both payable December 28, 2018 to shareholders of record December 14, 2018.
- The share repurchase authorization had $25.0 million remaining at September 30, 2018; no shares were repurchased during the first nine months of 2018.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether favorable prior-year reserve development continues and how current accident-year loss ratios develop.
- The sustainability of premium growth, particularly after the impact of payroll audits and mandatory pooling arrangements.
- The effect of interest rates on available-for-sale securities, accumulated other comprehensive income, and statutory capital.
- Liquidity after payment of the $3.50-per-share extraordinary dividend and the regular dividend.
- The composition, duration, credit quality, and unrealized-loss exposure of the $1.19 billion investment portfolio.
- Reinsurance recoverability and the adequacy of the $791.1 million gross loss and LAE reserve.
- Whether the lower effective tax rate following the Tax Act persists in future periods.
- The filing’s lack of a clearly presented conventional debt balance should be reconciled with statutory and subsidiary-level financial statements if leverage is a key investment consideration.