AMERISAFE INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
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 ended
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
discussion includes an analysis of certain significant period-to-period
variances in our consolidated statements of operations. Our cash flows and
financial condition are discussed under the caption "Liquidity and Capital
Resources."
Business Overview
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 ended
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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,
2022 2021
(dollars in thousands, except per share data)
(unaudited)
Gross premiums written $ 77,791 $ 81,514
Net premiums earned 67,556 70,746
Net investment income 6,113 6,583
Total revenues 75,560 83,351
Total expenses 54,138 59,726
Net income 17,331 19,312
Diluted earnings per common share $ 0.89 $ 0.99
Other Key Measures
Net combined ratio (1) 80.1 % 84.6 %
Return on average equity (2) 17.4 % 17.4 %
Book value per share (3) $ 20.46 $ 23.16
(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
Compared to
Gross Premiums Written. Gross premiums written for the quarter ended
2022
a decrease of 4.6%. The decrease was attributable to a
annual premiums on voluntary policies written during the period and a
million
decreases were offset by a
payroll audits and related premium adjustments for policies written in previous
quarters. The effective loss cost multiplier, or ELCM, for our voluntary
business was 1.54 for the quarter ended
Net Premiums Written. Net premiums written for the quarter ended
were
decrease of 4.8%. The decrease was primarily attributable to the decrease in
gross premiums written. As a percentage of gross premiums earned, ceded premiums
were 3.6% for the first quarter of 2022 compared to 3.4% for the first quarter
of 2021. The increase in ceded premiums as a percentage of gross premiums earned
is a result of a change in our 2022 reinsurance treaties. For additional
information, see Item 1, "Business-Reinsurance" in our Annual Report on Form
10-K for the year ended
Net Premiums Earned. Net premiums earned for the first quarter of 2022 were
of 4.5%. The decrease was primarily attributable to the decrease in net premiums
written during the period.
Net Investment Income. Net investment income for the quarter ended
2022
decrease of 7.1%. The decrease was due to lower investment yields on fixed
income securities and cash balances as well as a decrease in the average
invested assets compared to prior year. Average invested assets, including cash
and cash equivalents, were
compared to an average of
of 7.0%. The pre-tax investment yield on our investment portfolio was 2.3% per
annum during the quarter ended
the same period in 2021. The tax-equivalent yield on our investment portfolio
was 2.7% per annum for the quarter ended
period in 2021. The tax-equivalent yield is calculated using the effective
interest rate and the appropriate marginal tax rate. During the quarter, due to
the rise in interest rates the market value of our bond portfolio
decreased. (See pages 10 and 11.)
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Net Realized Gains (Losses) on Investments. Net realized gains on investments
for the three months ended
realized gains of
in the first quarter of 2022 were attributable to the sale of equity and fixed
maturity securities classified as available-for-sale. Net realized gains in the
first quarter of 2021 were from the sale of fixed maturity securities classified
as available-for-sale.
Net Unrealized Gains (Losses) on
equity securities for the three months ended
compared to net unrealized gains of
Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses
(LAE) incurred totaled
compared to
million
million
ratio for accident year 2022 is estimated at 71.0% of net premiums earned, down
from 72.0% initially set for accident year 2021, and is based on long-term claim
frequency and severity trends, as well as medical inflation. We recorded
favorable prior accident year development of
of 2022, compared to favorable prior accident year development of
in the same period of 2021, as further discussed below in "Prior
Development
compared to 55.9% for the same period of 2021. There was no change to the
estimate on the catastrophic claim the Company experienced in the fourth quarter
of 2021.
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 ended
compared to
primarily due to a decrease in insurance related assessments of
accounts receivable write-offs mostly on assumed premium from mandatory pooling
arrangements. The decrease in insurance related assessments included a benefit
of
amounts was an increase of
fees. Our expense ratio was 22.4% in the first quarter of 2022 compared to 26.8%
in the first quarter of 2021.
Income Tax Expense. Income tax expense for the three months ended
was
effective tax rate for the Company was 19.1% in the quarter ended
and 18.3% for the same period in 2021. The increase in the effective tax rate
was due to a higher proportion of underwriting and taxable investment income
compared to the same period of 2021.
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
ended
million
increase in losses paid, a
a
premium collections.
Net cash used in investing activities was
ended
of investments totaled
compared to
in cash was used to purchase investments in the three months ended
2022
Net cash used in financing activities in the three months ended
was
million
common stock in the amount of
same period in 2021.
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Investment Portfolio
Our investment portfolio, including cash and cash equivalents, totaled
billion
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,
of allowance for credit losses. Our equity securities and fixed maturity
securities classified as available-for-sale were reported at fair value.
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 $ 458,073 43.2 %
Corporate bonds 66,703 6.3 %
U.S. agency-based mortgage-backed securities 4,285 0.4 %
U.S. government agencies 16,215 1.5 % Asset-backed securities 96 - Total fixed maturity securities-held-to-maturity 545,372 51.4 % Fixed maturity securities-available-for-sale: States and political subdivisions 202,236 19.0 % Corporate bonds 113,699 10.7 % U.S. agency-based mortgage-backed securities 6,962 0.7 %
U.S. government agencies 20,075 1.9 % Total fixed maturity securities-available-for-sale 342,972 32.3 % Equity securities 69,156 6.5 % Short-term investments 72,820 6.9 % Cash and cash equivalents 30,741 2.9 % Total investments, including cash and cash equivalents$ 1,061,061 100.0 %
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 adjustment to the credit loss allowance.
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Prior
The Company recorded favorable prior accident year development of$10.2 million in the three months endedMarch 31, 2022 . The table below sets forth the favorable development for the three months endedMarch 31, 2022 and 2021 for accident years 2017 through 2021 and, collectively, for all accident years prior to 2017. Three Months Ended March 31, 2022 2021 (in millions) Accident Year 2021 $ - $ - 2020 - - 2019 3.8 - 2018 2.8 4.5 2017 1.3 2.5 Prior to 2017 2.3 4.4 Total net development $ 10.2 $ 11.4
The table below sets forth the number of open claims as of
2021, and the number of claims reported and closed during the three months then
ended.
Three Months Ended March 31,
2022 2021
Open claims at beginning of period 4,594 4,758
Claims reported 993 1,049
Claims closed (1,178 ) (1,200 )
Open claims at end of period 4,409 4,607
The number of open claims at
to the number of open claims at
amounts for certain accident years, particularly 2018 and 2019, 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 of
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 ended
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