AMERISAFE, INC. The following discussion should be read in conjunction with the accompanying unaudited consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q, together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2022 .
We begin our discussion with an overview of our Company to give you an
understanding of our business and the markets we serve. We then discuss our
critical accounting policies. This is followed with a discussion of our results
of operations for the three months ended
Business Overview
AMERISAFE is a holding company that markets and underwrites workers' compensation insurance through its insurance subsidiaries. Workers' compensation insurance covers statutorily prescribed benefits that employers are obligated to provide to their employees who are injured in the course and scope of their employment. Our business strategy is focused on providing this coverage to small to mid-sized employers engaged in hazardous industries, principally construction, trucking, logging and lumber, agriculture, manufacturing, telecommunications, and maritime. Employers engaged in hazardous industries pay substantially higher than average rates for workers' compensation insurance compared to employers in other industries, as measured per payroll dollar. The higher premium rates are due to the nature of the work performed and the inherent workplace danger of our target employers. Hazardous industry employers also tend to have less frequent but more severe claims as compared to employers in other industries due to the nature of their businesses. We provide proactive safety reviews of employers' workplaces. These safety reviews are a vital component of our underwriting process and also promote safer workplaces. We utilize intensive claims management practices that we believe permit us to reduce the overall cost of our claims. In addition, our audit services ensure that our policyholders pay the appropriate premiums required under the terms of their policies and enable us to monitor payroll patterns that cause underwriting, safety or fraud concerns. We believe that the higher premiums typically paid by our policyholders, together with our disciplined underwriting and safety, claims and audit services, provide us with the opportunity to earn attractive returns for our shareholders.
We actively market our insurance in 27 states through independent agencies
(including retail and wholesale brokers and agents), as well as through our
wholly owned insurance agency subsidiary. We are also licensed in an additional
20 states, the
Critical Accounting Policies
Understanding our accounting policies is key to understanding our financial statements. Management considers some of these policies to be very important to the presentation of our financial results because they require us to make significant estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. Some of the estimates result from judgments that can be subjective and complex and, consequently, actual results in future periods might differ from these estimates. Management believes that the most critical accounting policies relate to the reporting of reserves for loss and loss adjustment expenses, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from reinsurers, premiums receivable, assessments, deferred policy acquisition costs, deferred income taxes, credit losses on investment securities and share-based compensation. These critical accounting policies are more fully described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2022 . 20
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Results of Operations
The following table summarizes our consolidated financial results for the three
months ended
Three Months Ended
March 31,
2023 2022
(dollars in thousands, except per share data)
(unaudited)
Gross premiums written $ 82,487 $ 77,791
Net premiums earned 69,181 67,556
Net investment income 7,433 6,113
Total revenues 78,438 75,560
Total expenses 56,903 54,138
Net income 17,339 17,331
Diluted earnings per common share $ 0.90 $ 0.89
Other Key Measures
Net combined ratio (1) 82.2 % 80.1 %
Return on average equity (2) 21.3 % 17.4 %
Book value per share (3) $ 17.38 $ 20.46
(1)
The net combined ratio is calculated by dividing the sum of loss and loss
adjustment expenses incurred, underwriting and certain other operating costs,
commissions, salaries and benefits, and policyholder dividends by net premiums
earned in the current period.
(2)
Return on average equity is calculated by dividing the annualized net income by the average shareholders' equity for the applicable period.
(3)
Book value per share is calculated by dividing shareholders' equity by total outstanding shares, as of the end of the period.
Consolidated Results of Operations for Three Months Ended
Gross Premiums Written. Gross premiums written for the quarter endedMarch 31, 2023 were$82.5 million , compared to$77.8 million for the same period in 2022, an increase of 6.0%. The increase was attributable to a$6.1 million increase in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters. This increase was offset by a$0.8 million decrease in annual premiums on voluntary policies written during the period. The effective loss cost multiplier, or ELCM, for our voluntary business was 1.48 and 1.54 for the quarters endedMarch 31, 2023 and 2022, respectively. Net Premiums Written. Net premiums written for the quarter endedMarch 31, 2023 were$78.3 million , compared to$75.2 million for the same period in 2022, an increase of 4.1%. The increase was primarily attributable to the increase in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 5.7% for the first quarter of 2023 compared to 3.6% for the first quarter of 2022. Ceded premiums increased as we purchased higher levels of reinsurance coverage at generally higher prices in 2023. For additional information, see Item 1, "Business-Reinsurance" in our Annual Report on Form 10-K for the year endedDecember 31, 2022 .
Net Premiums Earned. Net premiums earned for the first quarter of 2023 were
Net Investment Income. Net investment income for the quarter endedMarch 31, 2023 was$7.4 million , compared to$6.1 million for the same period in 2022, an increase of 21.6%. The increase was due to higher investment yields on fixed income securities and cash balances compared to prior year. As a result of increased market interest rates, new money yields on a tax-equivalent basis averaged 5.39% in the quareter endedMarch 31, 2023 compared to 2.26% in the quarter endedMarch 31, 2022 . Average invested assets, including cash and cash equivalents, were$960.7 million in the quarter endedMarch 31, 2023 compared to an average of$1,076.4 million for the same period in 2022, a decrease of 10.7%. The pre-tax investment yield on our investment portfolio was 3.1% per annum during the quarter endedMarch 31, 2023 compared to 2.3% per annum during the same period in 2022. The tax-equivalent yield on our investment portfolio was 3.5% per annum for the quarter endedMarch 31, 2023 and 2.7% for the same period in 2022. The tax-equivalent yield is calculated using the effective interest rate and the appropriate marginal tax rate. Net Realized Gains (Losses) on Investments. Net realized gains on investments for the three months endedMarch 31, 2023 were$0.3 million compared to$0.7 million net realized gains for the same period in 2022. Net realized gains in the first quarter of 2023 21
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were mostly attributable to the sale of equity securities. Net realized gains in the first quarter of 2022 were from the sale of equity and fixed maturity securities classified as available-for-sale.
Net Unrealized Gains (Losses) on
Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses (LAE) incurred totaled$39.0 million for the three months endedMarch 31, 2023 , compared to$37.7 million for the same period in 2022, an increase of$1.3 million , or 3.4%. The current accident year loss and LAE incurred were$49.1 million compared to$48.0 million for the same period in 2022. Our loss and LAE ratio for accident year 2023 is estimated at 71.0% of net premiums earned, consistent with the estimate initially set for accident year 2022, and is based on long-term claim frequency and severity trends, as well as medical inflation. We recorded favorable prior accident year development of$10.1 million in the first quarter of 2023, compared to favorable prior accident year development of$10.2 million in the same period of 2022, as further discussed below in "PriorYear Development ." Our net loss ratio was 56.4% in the first quarter of 2023, compared to 55.9% for the same period of 2022. Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for the quarter endedMarch 31, 2023 were$17.0 million , compared to$15.1 million for the same period in 2022. This increase was primarily due to an increase in insurance related assessments of$3.8 million , a$0.6 million increase in commission expense and a$0.5 million increase in professional fees. The increase in insurance related assessments was attributable to a benefit of$3.8 million in 2022 due to a return of assessments from theMinnesota Workers' Compensation Reinsurance Association . Offsetting these amounts was an increase of$3.3 million in profit sharing reinsurance commission. Our expense ratio was 24.5% in the first quarter of 2023 compared to 22.4% in the first quarter of 2022. Income Tax Expense. Income tax expense for the three months endedMarch 31, 2023 was$4.2 million , compared to$4.1 million for the same period in 2022. The effective tax rate for the Company was 19.5% in the quarter endedMarch 31, 2023 and 19.1% for the same period in 2022. The increase in the effective tax rate was due to a lower proportion of tax-exempt income to underwriting income compared to the same period of 2022.
Liquidity and Capital Resources
Our principal sources of operating funds are premiums, investment income and proceeds from sales and maturities of investments. Our primary uses of operating funds include payments of claims and operating expenses. Currently, we pay claims using cash flow from operations and invest the remaining funds. Net cash provided by operating activities was$13.5 million for the three months endedMarch 31, 2023 , which represented a$6.3 million increase from$7.1 million in net cash provided by operating activities for the three months endedMarch 31, 2022 . This increase in operating cash flow was due to a$11.9 million increase in reinsurance recoveries, a$1.0 million increase in net investment income and a decrease in loss and loss adjustment expenses paid of$0.6 million . Offsetting these amounts were a$6.8 million decrease in premium collections and a$0.5 million increase in underwriting and other operating expenses paid. Net cash used in investing activities was$27.2 million for the three months endedMarch 31, 2023 , compared to net cash used in investment activities of$39.0 million for the same period in 2022. Cash provided by sales and maturities of investments totaled$24.1 million for the three months endedMarch 31, 2023 , compared to$34.1 million for the same period in 2022. A total of$51.2 million in cash was used to purchase investments in the three months endedMarch 31, 2023 , compared to$72.8 million in purchases for the same period in 2022. Net cash used in financing activities in the three months endedMarch 31, 2023 was$6.5 million compared to net cash used in financing activities of$8.1 million for the same period in 2022. In the three months endedMarch 31, 2023 ,$6.5 million of cash was used for dividends paid to shareholders compared to$6.0 million in the same period of 2022. In the three months endedMarch 31, 2023 , there were no repurchases of outstanding shares of our common stock compared to$2.1 million in repurchases for the same period in 2022.
Investment Portfolio
Our investment portfolio, including cash and cash equivalents, totaled$961.1 million atMarch 31, 2023 , an increase of 1.1% fromDecember 31, 2022 . Purchases of fixed maturity securities are classified as available-for-sale or held-to-maturity at the time of purchase based on the individual security. The Company has the ability and positive intent to hold certain investments until maturity. Therefore, fixed maturity securities classified as held-to-maturity, as defined by FASB ASC Topic 320,Investments-Debt and Equity Securities , are recorded at amortized cost net of allowance for credit losses. Our equity securities and fixed maturity securities classified as available-for-sale are reported at fair value. 22
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The composition of our investment portfolio, including cash and cash
equivalents, as of
Carrying Percentage of
Amount Portfolio
(in thousands)
Fixed maturity securities-held-to-maturity:
States and political subdivisions $ 411,998 42.9 %
Corporate bonds 53,350 5.5 %
U.S. agency-based mortgage-backed securities 3,606 0.4 %
U.S. Treasury securities and obligations of
U.S. government agencies 11,125 1.2 %
Asset-backed securities 63 -
Total fixed maturity securities-held-to-maturity 480,142 50.0 %
Fixed maturity securities-available-for-sale:
States and political subdivisions 153,434 16.0 %
Corporate bonds 171,814 17.9 %
U.S. agency-based mortgage-backed securities 5,335 0.5 %
U.S. Treasury securities and obligations of
U.S. government agencies 14,505 1.5 %
Total fixed maturity securities-available-for-sale 345,088 35.9 %
Equity securities 63,357 6.6 %
Short-term investments 31,269 3.2 %
Cash and cash equivalents 41,210 4.3 %
Total investments, including cash and cash equivalents $ 961,066 100.0 %
Our debt securities classified as available-for-sale are "marked to market" as
of the end of each calendar quarter. As of that date, unrealized gains and
losses that are not credit related are recorded to Accumulated Other
Comprehensive Income (Loss). Any available-for-sale credit related losses would
be recognized as a credit loss allowance on the balance sheet with a
corresponding adjustment to earnings, limited by the amount that the fair value
is less than the amortized cost basis. Both the credit loss allowance and
adjustment to net income can be reversed if conditions change.
For our debt securities classified as held-to-maturity, non-credit related
unrecognized gains and losses are not recorded in the financial statements until
realized. Effective upon the adoption of ASU 2016-13, Financial Instruments -
Credit Losses (Topic 326): Measurement of Credit Losses, management is required
to estimate held-to-maturity expected credit related losses and recognize a
credit loss allowance on the balance sheet with a corresponding adjustment to
earnings. Any adjustment to the estimated expected credit related losses are
recognized through earnings and adjustments to the credit loss allowance.
Prior
The Company recorded favorable prior accident year development of$10.1 million in the three months endedMarch 31, 2023 . The table below sets forth the favorable development for the three months endedMarch 31, 2023 and 2022 for accident years 2018 through 2022 and, collectively, for all accident years prior to 2018. Three Months Ended March 31, 2023 2022 (in millions) Accident Year 2022 $ - $ - 2021 - - 2020 1.5 - 2019 2.5 3.8 2018 0.1 2.8 Prior to 2018 6.0 3.6 Total net development$ 10.1 $ 10.2 23
-------------------------------------------------------------------------------- The table below sets forth the number of open claims as ofMarch 31, 2023 and 2022, and the number of claims reported and closed during the three months then ended. Three Months Ended March 31, 2023 2022 Open claims at beginning of period 4,275 4,594 Claims reported 984 993 Claims closed (952 ) (1,178 ) Open claims at end of period 4,307 4,409 The number of open claims atMarch 31, 2023 decreased by 102 claims as compared to the number of open claims atMarch 31, 2022 . AtMarch 31, 2023 , our incurred amounts for certain accident years, particularly 2013, 2016, 2019, and 2020, developed more favorably than management previously expected. The revisions to the Company's reserves reflect new information gained by claims adjusters in the normal course of adjusting claims and is reflected in the financial statements when the information becomes available. It is typical for more serious claims to take several years or longer to settle and the Company continually revises estimates as more information about claimants' medical conditions and potential disability becomes known and the claims get closer to being settled. Multiple factors can cause both favorable and unfavorable loss development. The favorable loss development we experienced across accident years was largely due to favorable case reserve development from closed claims and claims where the worker had reached maximum medical improvement. The assumptions we used in establishing our reserves were based on our historical claims data. However, as ofMarch 31, 2023 , actual results for certain accident years have been better than our assumptions would have predicted. We do not presently intend to modify our assumptions for establishing reserves in light of recent results. However, if actual results for current and future accident years are consistent with, or different than, our results in these recent accident years, our historical claims data will reflect this change and, over time, will impact the reserves we establish for future claims. Our reserves for loss and loss adjustment expenses are inherently uncertain and our focus on providing workers' compensation insurance to employers engaged in hazardous industries results in our receiving relatively fewer but more severe claims than many other workers' compensation insurance companies. As a result of this focus on higher severity, lower frequency business, our reserve for loss and loss adjustment expenses may have greater volatility than other workers' compensation insurance companies. For additional information, see Item 1, "Business-Loss Reserves" in our Annual Report on Form 10-K for the year endedDecember 31, 2022 .
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