AMERISAFE, Inc. 2014 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, principally construction, trucking, manufacturing, oil and gas, and agriculture. The filing covers the fiscal year ended December 31, 2014, with comparative information for 2013 and 2012. The company operates through insurance subsidiaries rated “A” (Excellent) by A.M. Best and markets coverage in 30 states and the District of Columbia.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Gross premiums written | $393.8 million | $372.2 million | 5.8% increase |
| Net premiums written | $380.0 million | $353.8 million | 7.4% increase |
| Net premiums earned | $375.7 million | $330.0 million | 13.9% increase |
| Total revenues | $404.0 million | $356.3 million | 13.4% increase |
| Net investment income | $27.2 million | $27.0 million | 0.7% increase |
| Net income | $53.7 million | $43.6 million | 23.0% increase |
| Diluted EPS | $2.84 | $2.32 | 22.4% increase |
| Net combined ratio | 87.9% | 90.0% | Improved 2.1 points |
| Return on average equity | 12.4% | 10.9% | Improved |
The 2014 net loss ratio was 65.2%, compared with 69.4% in 2013. The current accident-year loss ratio improved to 71.5% from 73.2%, while favorable prior-year development increased to $23.7 million from $12.6 million. The underwriting expense ratio increased to 22.6% from 20.3%, partly reflecting lower experience-rated commissions, higher commissions, assessments, bad-debt expense and pooling fees.
At December 31, 2014, total assets were $1.46 billion and shareholders’ equity was $447.0 million, compared with $1.33 billion and $416.8 million, respectively, at year-end 2013. Book value per share was $23.65, compared with $22.41. The company reported no debt outstanding, although it maintained an unused $20.0 million unsecured revolving credit facility expiring in December 2016.
Net cash provided by operating activities was $140.4 million, compared with $128.9 million in 2013. Cash used in investing activities was $141.0 million, primarily reflecting investment purchases, and cash used in financing activities was $31.6 million, principally shareholder dividends. Cash and cash equivalents declined to $91.0 million from $123.1 million. Investments, including cash and cash equivalents, totaled $1.107 billion and generated a 2.6% pretax accounting yield.
Material changes versus the prior comparable period
- Premium growth accelerated, driven primarily by higher voluntary-policy premiums, payroll audits and related premium adjustments.
- Ceded premiums fell to 3.5% of gross premiums earned from 5.3%, supporting higher net premium growth.
- Net income and diluted EPS increased substantially, supported by premium growth, improved loss experience and favorable reserve development.
- Underwriting profitability improved despite a higher expense ratio; the combined ratio remained well below 100%.
- Gross loss and loss adjustment expense reserves increased to $687.6 million from $614.6 million. Net reserves were $628.3 million after reinsurance recoverables, compared with $565.9 million.
- Investment portfolio carrying value increased 10.5% year over year, while investment yield declined from 2.8% to 2.6% amid a low-interest-rate environment.
- Shareholder distributions increased materially: the company paid regular quarterly dividends of $0.12 per share and extraordinary dividends totaling $1.50 per share in 2014. No share repurchases occurred.
Guidance, outlook, commentary, risks and unusual items
Management expects modest economic growth in 2015 and believes operating cash flow will be sufficient to fund claims, expenses and other needs for at least the next 18 months. The company expects an annualized regular dividend of $0.60 per share in 2015; a $0.15 quarterly dividend was declared for payment in March 2015. Management’s strategy is to preserve underwriting discipline, expand market penetration selectively, pursue prudent geographic expansion, maintain capital strength and continue investing in information technology.
The 2015 reinsurance program provides up to $70.0 million of coverage per loss occurrence, subject to limits, deductibles, retentions and aggregate caps; coverage for a single claimant is limited to $10.0 million. The company increased its retention from $1.0 million to $2.0 million per occurrence. Reinsurance recoverables totaled $85.9 million, including $38.1 million that was unsecured.
Key risks include the cyclical and competitive nature of workers’ compensation insurance, inaccurate pricing or reserve estimates, unexpectedly severe claims, medical-cost and wage inflation, regulatory and legislative changes, reduced policyholder activity, dependence on independent agencies, reinsurer credit risk, low investment yields, interest-rate volatility, cyber incidents and terrorism. The company reported no material pending legal proceedings and no off-balance-sheet arrangements.
A significant subsequent event involved an adverse Iowa verdict notified on February 11, 2015 relating to a 2009 workers’ compensation claim: $25.3 million total, including $25.0 million punitive damages. The company had $2.7 million reserved at December 31, 2014, believes the reserve and reinsurance are adequate, and plans to appeal. The company also recorded a $0.3 million additional reserve in the fourth quarter of 2014 related to the claim.
Most important facts for an investor to verify
- Whether favorable prior-year reserve development of $23.7 million is sustainable and whether current accident-year claims continue to develop favorably.
- The adequacy and volatility of the $687.6 million gross loss reserve, particularly for severe, long-duration workers’ compensation claims.
- The collectability and collateralization of the $85.9 million in reinsurance recoverables, including the $38.1 million unsecured amount.
- The ultimate financial impact of the Iowa verdict, including the appeal outcome, punitive damages exposure and reinsurance response.
- Whether the higher underwriting expense ratio persists as premium growth continues.
- The effect of low interest rates and potential rate increases on investment income, investment values and shareholders’ equity.
- Regulatory limits on subsidiary dividends, residual-market obligations, guaranty-fund assessments and the company’s ability to fund future shareholder distributions.
- The terms and aggregate limitations of the 2015 reinsurance program, including the higher $2.0 million retention.