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, 2020 . 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 and nine months endedSeptember 30, 2021 and 2020. This 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."
Company presentation
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
100% subsidiary of the insurance agency. We are also authorized in another
20 states,
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, 2020 . 21
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Results of operations
The following table summarizes our consolidated financial results for the
three and nine months completed
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(dollars in
thousands, except per share data)
(unaudited) Gross premiums written$ 67,185 $ 72,648 $ 222,423 $ 240,008 Net premiums earned 67,626 74,771 208,260 229,725 Net investment income 6,049 7,063 19,362 22,136 Total revenues 73,045 83,005 237,553 251,256 Total expenses 48,324 54,336 160,036 179,955 Net income 19,136 23,353 62,215 58,101
Diluted earnings per common share $ 0.99 $ 1.21
$ 3.21 $ 3.00 OtherKey Measures Net combined ratio (1) 71.5 % 72.8 % 76.9 % 78.4 % Return on average equity (2) 16.1 % 19.8 % 18.1 % 17.0 % Book value per share (3) $ 24.80 $ 24.93 $ 24.80 $ 24.93
(1) The net combined ratio is calculated by dividing the sum of losses and losses
adjustment costs incurred, underwriting and certain other operating costs,
commissions, salaries and benefits and net policyholder dividends
premiums earned during the current period.
(2) The 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 equity by the total
outstanding shares at the end of the period.
Consolidated operating results for the three months ended
Compared to
Gross Premiums Written. Gross premiums written for the quarter endedSeptember 30, 2021 were$67.2 million , compared to$72.6 million for the same period in 2020, a decrease of 7.5%. The decrease was attributable to a$3.2 million decrease in annual premiums on voluntary policies written during the period and a$3.2 million decrease in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters. This decrease was offset by a$1.0 million increase in assumed premium from mandatory pooling arrangements. Payroll audits completed this quarter included periods of activity impacted by COVID-19. The effective loss cost multiplier, or ELCM, for our voluntary business was 1.53 for the quarter endedSeptember 30, 2021 compared to 1.59 for the same period in 2020. Net Premiums Written. Net premiums written for the quarter endedSeptember 30, 2021 were$64.8 million , compared to$70.2 million for the same period in 2020, a decrease of 7.7%. The decrease was primarily attributable to the decrease in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 3.4% for the third quarter of 2021 compared to 3.2% for the third quarter of 2020. For additional information, see Item 1, "Business-Reinsurance" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Net Premiums Earned. Net premiums earned for the third quarter of 2021 were$67.6 million , compared to$74.8 million for the same period in 2020, a decrease of 9.6%. The decrease was primarily attributable to the decrease in net premiums written during the period. Net Investment Income. Net investment income for the quarter endedSeptember 30, 2021 was$6.0 million , compared to$7.1 million for the same period in 2020, a decrease of 14.4%. The decrease was due to lower investment yields on fixed income securities and cash balances. Average invested assets, including cash and cash equivalents, were$1.2 billion in the quarter endedSeptember 30, 2021 and 2020. The pre-tax investment yield on our investment portfolio was 2.1% per annum during the quarter endedSeptember 30, 2021 compared to 2.3% per annum during the same period in 2020. The tax-equivalent yield on our investment portfolio was 2.5% per annum for the quarter endedSeptember 30, 2021 and 2.8% for the same period in 2020. 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 losses on investments for the three months endedSeptember 30, 2021 were immaterial compared to net realized gains of$0.3 million for the same period in 2020. Net realized gains in the third quarter of 2020 were attributable to the call of fixed maturity securities. 22
-------------------------------------------------------------------------------- Net Unrealized Gains (Losses) onEquity Securities . Net unrealized losses on equity securities for the three months endedSeptember 30, 2021 were$0.8 million compared to net unrealized gains of$0.8 million for the same period in 2020. Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses ("LAE") incurred totaled$29.7 million for the three months endedSeptember 30, 2021 , compared to$39.8 million for the same period in 2020, a decrease of$10.1 million , or 25.5%. The current accident year loss and LAE incurred were$48.7 million compared to$54.2 million for the same period in 2020. Our loss and LAE ratio for accident year 2021 is estimated at 72.0% of net premiums earned, down from 72.5% for accident year 2020, and is based on long-term claim frequency and severity trends, as well as medical inflation. We recorded favorable prior accident year development of$19.0 million in the third quarter of 2021, compared to favorable prior accident year development of$14.4 million in the same period of 2020, as further discussed below in "PriorYear Development ." Our net loss ratio was 43.9% in the third quarter of 2021, compared to 53.2% for the same period of 2020. 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 endedSeptember 30, 2021 were$17.9 million , compared to$13.9 million for the same period in 2020. This increase was primarily due to an increase in insurance related assessments of$5.3 million and a$0.6 million increase in accounts receivable write-offs mostly on assumed premium from mandatory pooling arrangements. The increase in insurance related assessments included a benefit of$5.7 million in 2020 due to the early termination of an assessment related to a state multiple injury fund. Offsetting these amounts were an increase of$1.0 million in profit sharing reinsurance commission, a$0.7 million decrease in compensation expense and a$0.4 million decrease in commission expense. Our expense ratio was 26.5% in the third quarter of 2021 compared to 18.6% in the third quarter of 2020. Income Tax Expense. Income tax expense for the three months endedSeptember 30, 2021 was$5.6 million , compared to$5.3 million for the same period in 2020. The effective tax rate for the Company was 22.6% in the quarter endedSeptember 30, 2021 and 18.5% for the same period in 2020. The increase in the effective tax rate was due to a higher proportion of income from underwriting and taxable investment income compared to the same period of 2020.
Consolidated operating results for the nine-month period ended
Compared to
Gross Premiums Written. Gross premiums written for the nine months endedSeptember 30, 2021 were$222.4 million , compared to$240.0 million for the same period in 2020, a decrease of 7.3%. The decrease was attributable to a$12.5 million decrease in annual premiums on voluntary policies written during the period and a$6.5 million decrease in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters. Premium resulting from payroll audits and related premium adjustments in the current year included a$1.3 million increase in anticipated future audit premiums compared to a reduction of$2.1 million in the prior year. While payroll audits completed this year resulted in positive audit premiums, amounts were lower than the same period of 2020. This year's payroll audits included periods of activity impacted by COVID-19. The ELCM for our voluntary business was 1.53 for the nine months endedSeptember 30, 2021 compared to 1.58 for the same period in 2020. Net Premiums Written. Net premiums written for the nine months endedSeptember 30, 2021 were$215.0 million , compared to$232.1 million for the same period in 2020, a decrease of 7.4%. The decrease was primarily attributable to the decrease in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 3.4% for the first nine months of 2021 compared to 3.3% in the same period of 2020. For additional information, see Item 1, "Business-Reinsurance" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Net premiums earned. Net premiums earned for the nine months ended
2021
2020, a decrease of 9.3%. The decrease is mainly attributable to the
decrease in net premiums written during the period.
Net Investment Income. Net investment income for the first nine months of 2021 was$19.4 million , compared to$22.1 million for the same period in 2020, a decrease of 12.5%. The decrease was due to lower investment yields on fixed income securities and cash balances. Average invested assets, including cash and cash equivalents were$1.2 billion in the nine months endedSeptember 30, 2021 and 2020. The pre-tax investment yield on our investment portfolio was 2.2% per annum during the nine months endedSeptember 30, 2021 compared to 2.5% per annum for the same period in 2020. The tax-equivalent yield on our investment portfolio was 2.5% per annum for the first nine months of 2021 compared to 2.8% in the same period in 2020. 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 nine months endedSeptember 30, 2021 and 2020 were$1.5 million . Net realized gains in the first nine months of 2021 were attributable to sales of fixed maturity securities classified as available-for-sale. Net realized gains in the first nine months of 2020 were attributable to sales of fixed maturity securities classified as available-for-sale and calls of fixed maturity securities. 23
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Net unrealized gains (losses) on
equity securities for the nine months ended
compared to the net unrealized losses of
Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled$101.6 million for the nine months endedSeptember 30, 2021 , compared to$121.0 million for the same period in 2020, a decrease of$19.4 million , or 16.0%. The current accident year loss and LAE incurred were$149.9 million compared to$166.6 million for the same period in 2020. Our loss and LAE ratio for accident year 2021 is estimated at 72.0% of net premiums earned, down from 72.5% for accident year 2020, and is based on long-term claim frequency and severity trends, as well as medical inflation. We recorded favorable prior accident year development of$48.3 million in the first nine months of 2021, compared to favorable prior accident year development of$45.6 million in the same period of 2020, as further discussed below in "PriorYear Development ." Our net loss ratio was 48.8% in the first nine months of 2021, compared to 52.7% for the same period of 2020. Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for the nine months endedSeptember 30, 2021 were$55.3 million , compared to$56.3 million for the same period in 2020, a decrease of 1.7%. This decrease was primarily due to a decrease in compensation expense of$1.9 million , a$1.5 million decrease in commission expense, a$1.0 million increase in profit sharing reinsurance commission and a$0.6 million decrease in premium taxes. Partially offsetting these decreases were a$2.5 million increase in insurance related assessments, a$0.9 million increase in accounts receivable write-offs, a$0.3 million increase in management information systems licensing and a$0.3 million increase in travel and travel related items. The increase in insurance related assessments resulted from a benefit of$5.7 million recorded in the prior year due to the early termination of an assessment related to a state multiple injury fund. Our expense ratio was 26.6% in the first nine months of 2021 compared to 24.5% for the same period in 2020. Income Tax Expense. Income tax expense for the nine months endedSeptember 30, 2021 was$15.3 million , compared to$13.2 million for the same period in 2020. The increase was attributable to an increase in pre-tax income to$77.5 million in the first nine months of 2021 from$71.3 million in the first nine months of 2020. The effective tax rate for the Company increased to 19.7% for the nine months endedSeptember 30, 2021 from 18.5% for the nine months endedSeptember 30, 2020 . The increase in the effective tax rate is due to a higher proportion of income from underwriting and taxable investment income for the nine months endedSeptember 30, 2021 compared with the nine months endedSeptember 30, 2020 .
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$29.4 million for the nine months endedSeptember 30, 2021 , which represented a$21.4 million decrease from$50.9 million in net cash provided by operating activities for the nine months endedSeptember 30, 2020 . This decrease in operating cash flow was due to a$10.3 million increase in losses paid,$7.8 million increase in amounts held by others, a$4.8 million increase in underwriting expenses paid, a$2.0 million decrease in investment income, and a$1.3 million decrease in premium collections. Offsetting these amounts were a$3.7 million increase in reinsurance recoveries, a$0.8 million decrease in dividends paid to policyholders, and a$0.6 million decrease in federal taxes paid. Net cash provided by investing activities was$48.9 million for the nine months endedSeptember 30, 2021 , compared to net cash provided by investment activities of$9.4 million for the same period in 2020. Cash provided by sales and maturities of investments totaled$225.5 million for the nine months endedSeptember 30, 2021 , compared to$240.0 million for the same period in 2020. A total of$175.8 million in cash was used to purchase investments in the nine months endedSeptember 30, 2021 , compared to$230.0 million in purchases for the same period in 2020.
Net cash used in financing activities during the nine months ended
2021
shareholders compared to
24
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Investment portfolio
Our investment portfolio, including cash and cash equivalents, totaled$1.2 billion atSeptember 30, 2021 andDecember 31, 2020 . 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 were reported at fair value.
The composition of our investment portfolio, including liquidity and liquidity
equivalent, from
Carrying Percentage of
Amount Portfolio
(in thousands)
Fixed maturity securities-held-to-maturity:
States and political subdivisions $ 469,400 40.6 %
Corporate bonds 51,851 4.5 %
U.S. agency-based mortgage-backed securities 5,060 0.4 %
U.S. Treasury securities and obligations of
U.S. government agencies 14,801 1.3 %
Asset-backed securities 112 -
Total fixed maturity securities-held-to-maturity 541,224 46.8 %
Fixed maturity securities-available-for-sale:
States and political subdivisions 224,259 19.4 %
Corporate bonds 82,737 7.1 %
U.S. agency-based mortgage-backed securities 9,715 0.8 %
U.S. Treasury securities and obligations of
U.S. government agencies 25,127 2.2 %
Total fixed maturity securities-available-for-sale 341,838 29.5 %
Equity securities 56,351 4.9 %
Short-term investments 94,774 8.2 %
Cash and cash equivalents 123,128 10.6 %
Total investments, including cash and cash equivalents $ 1,157,315 100.0 %
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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Before
The Company recorded favorable prior accident year development of$19.0 million in the three months endedSeptember 30, 2021 . The table below sets forth the favorable development for the three and nine months endedSeptember 30, 2021 and 2020 for accident years 2016 through 2020 and, collectively, for all accident years prior to 2016. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) Accident Year 2020 $ - $ - $ - $ - 2019 6.3 - 10.8 - 2018 3.6 2.6 12.1 8.5 2017 0.8 4.8 7.7 10.5 2016 2.3 0.9 6.1 6.8 Prior to 2016 6.0 6.1 11.6 19.8 Total net development $ 19.0 $ 14.4 $ 48.3 $ 45.6
The table below shows the number of open complaints
and 2020, and the number of claims declared and closed during the
three and nine months then ended.
Three Months Ended September 30 ,
Nine months ended
2021 2020 2021 2020 Open claims at beginning of period 4,573 4,621 4,758 5,053 Claims reported 1,142 1,252 3,269 3,358 Claims closed (1,141 ) (1,112 ) (3,453 ) (3,650 ) Open claims at end of period 4,574 4,761 4,574 4,761 The number of open claims atSeptember 30, 2021 decreased by 187 claims as compared to the number of open claims atSeptember 30, 2020 . AtSeptember 30, 2021 , our incurred amounts for certain accident years, particularly 2015 through 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 ofSeptember 30, 2021 , 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, 2020 .
