AMERISAFE, Inc. 2017 Form 10-K Summary
Business context and reporting period
AMERISAFE is a specialty workers’ compensation insurer focused on small and mid-sized employers in hazardous industries, including construction, trucking, logging and lumber, manufacturing, agriculture, maritime and oil and gas. The filing covers the fiscal year ended December 31, 2017, with comparisons to 2016 and 2015. The company operates through insurance subsidiaries rated “A” (Excellent) by A.M. Best.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Gross premiums written | $350.3 million | $373.1 million | Down 6.1% |
| Net premiums earned | $346.2 million | $368.7 million | Down 6.1% |
| Total revenues | $375.2 million | $396.7 million | Down 5.4% |
| Net investment income | $29.3 million | $28.1 million | Up 4.2% |
| Income before taxes | $82.2 million | $112.8 million | Down 27.1% |
| Net income | $46.2 million | $77.9 million | Down 40.6% |
| Diluted EPS | $2.40 | $4.05 | Down 40.7% |
| Net combined ratio | 84.7% | 77.0% | Up 7.7 points |
| Return on average equity | 10.5% | 17.1% | Down 6.6 points |
| Net cash from operating activities | $130.8 million | $114.2 million | Up 14.5% |
The 2017 net loss ratio was 60.5%, compared with 54.0% in 2016. The current accident-year loss ratio increased to 70.5% from 67.9%, while favorable prior-year development was $34.8 million versus $51.3 million. The underwriting expense ratio increased to 22.8% from 21.9%.
At December 31, 2017, total assets were $1.52 billion, shareholders’ equity was $425.4 million, cash and cash equivalents were $55.6 million, and investments were $1.13 billion. Including cash and cash equivalents, the investment portfolio totaled $1.19 billion and had a 2.5% pretax yield. The portfolio was primarily investment-grade fixed-income securities, with an average composite credit rating of “AA.”
Gross loss and loss adjustment expense reserves were $771.8 million, including $687.0 million net of reinsurance recoverables. Reinsurance recoverables totaled $90.1 million, of which $42.4 million was unsecured. The company had 4,982 open claims at year-end.
Net cash used in investing activities was $51.5 million, principally reflecting investment purchases. Net cash used in financing activities was $82.6 million, primarily shareholder dividends. The company had no borrowings outstanding under its $20.0 million unsecured revolving credit facility, which expires in December 2019.
Material changes versus the prior comparable period
- Premium volume declined due to lower voluntary policy premiums, payroll audit adjustments and lower residual-market premiums.
- Net income decreased substantially as premium revenue declined, current accident-year loss costs increased and favorable prior-year reserve development was lower.
- Fourth-quarter 2017 net income was $0.6 million, compared with $19.1 million in the fourth quarter of 2016. The 2017 fourth quarter included a $12.6 million non-cash deferred-tax charge from revaluing deferred tax assets after the Tax Act reduced the federal corporate tax rate from 35% to 21%.
- Shareholders’ equity decreased from $456.2 million to $425.4 million, principally reflecting $82.8 million of dividends, partly offset by $46.2 million of net income and $4.1 million of other comprehensive income.
- Gross reserves increased 3.9% year over year, while open claims declined from 5,195 to 4,982. Claims closed during 2017 exceeded claims reported.
- The regular quarterly dividend increased to $0.20 per share from $0.18. The company also paid a $3.50 per-share extraordinary dividend. No shares were repurchased during 2017.
Guidance, outlook, risks and unusual items
Management expects operating cash flow to fund operations, claims, expenses and holding-company needs for at least the next 18 months. The company intends to maintain underwriting discipline, expand market penetration selectively, pursue prudent geographic expansion, manage capital and continue considering quarterly dividends. A $0.22 per-share quarterly dividend was declared for payment in March 2018, implying an annualized regular dividend of $0.88 per share.
The 2018 reinsurance program provides up to $70.0 million of coverage per loss occurrence, subject to retentions, deductibles, limitations and aggregate caps. Single-claimant coverage is limited to $10.0 million. The company retains the primary obligation to policyholders if reinsurers fail to pay.
- Loss reserves are highly judgmental and exposed to medical-cost inflation, wage inflation, litigation, regulatory changes, claim severity and the development of severe claims.
- The company writes only one principal insurance line and is exposed to workers’ compensation market cycles, competition, rate adequacy and economic conditions in hazardous industries.
- Investment income is important to earnings; low interest rates may constrain yields, while rising rates could reduce investment fair values and shareholders’ equity.
- Reinsurance credit risk is material because the company had $90.1 million of recoverables, including $42.4 million unsecured, and remains liable to policyholders regardless of reinsurer performance.
- State insurance regulation restricts rates, market withdrawals, capital, subsidiary dividends and changes of control. Subsidiaries could pay up to $65.5 million to AMERISAFE in 2018 without prior regulatory approval under the stated calculation.
- Additional contingencies include state guaranty-fund and second-injury-fund assessments, terrorism exposure, asbestos-related claims and obligations related to purchased annuities. Year-end asbestos reserves were $1.7 million; management considered potential environmental-claim exposure remote.
Ernst & Young issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded that disclosure controls and internal controls were effective as of December 31, 2017.
Important facts for investors to verify
- Whether premium declines continue and whether pricing remains adequate in the company’s targeted hazardous industries.
- Whether current accident-year loss ratios stabilize and whether favorable prior-year reserve development persists.
- The adequacy of the $771.8 million gross reserve and sensitivity to adverse loss-development assumptions.
- The collectability and collateralization of the $90.1 million of reinsurance recoverables.
- The effect of interest-rate changes on the $1.19 billion investment portfolio and future investment income.
- The sustainability of regular and extraordinary dividends given subsidiary dividend restrictions and reduced 2017 equity.
- The final tax effects of the Tax Act, including the unresolved impact of new loss-reserve discount factors.
- Renewal terms, pricing and aggregate limits of the 2018 reinsurance program before its January 1, 2019 expiration for the catastrophe layer.