AMERISAFE, Inc. 2013 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, 2013, with quarterly information through the fourth quarter. The company operates primarily through its insurance subsidiaries and sells coverage through more than 3,175 independent agencies.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Gross premiums written | $372.2 million | $328.8 million | 13.2% increase |
| Net premiums earned | $330.0 million | $290.7 million | 13.5% increase |
| Total revenues | $356.3 million | $321.2 million | 10.9% increase |
| Net investment income | $27.0 million | $27.0 million | Essentially flat |
| Income before taxes | $59.2 million | $37.1 million | 59.4% increase |
| Net income | $43.6 million | $29.4 million | 48.7% increase |
| Diluted EPS | $2.32 | $1.58 | 46.8% increase |
| Return on average equity | 10.9% | 8.0% | Improved |
| Net combined ratio | 90.0% | 97.5% | Improved by 7.5 points |
| Net loss ratio | 69.4% | 75.6% | Improved by 6.2 points |
| Net underwriting expense ratio | 20.3% | 21.1% | Improved by 0.8 points |
Cash flow from operations was $128.9 million, compared with $81.0 million in 2012. Claims paid, net of reinsurance, were $178.4 million. Cash used in investing activities was $97.0 million, primarily reflecting investment purchases. Cash and cash equivalents increased to $123.1 million from $92.7 million.
Total investments, including cash and cash equivalents, were approximately $1.0 billion, with a 2.8% pretax investment yield. Shareholders’ equity increased to $416.8 million from $381.2 million, and book value per share increased to $22.41 from $20.88.
The company had no debt outstanding at December 31, 2013. It renewed an unsecured $20.0 million revolving credit facility through December 2016; no borrowings or letters of credit were outstanding. The insurance subsidiaries exceeded minimum risk-based capital requirements.
Fourth-quarter results
Fourth-quarter 2013 net income was $17.4 million, compared with $9.2 million in the fourth quarter of 2012. Diluted EPS was $0.92, compared with $0.50. Fourth-quarter results benefited from a $1.1 million after-tax impact from a change in the allowance for doubtful accounts and a $1.0 million after-tax benefit associated with the re-domestication of two subsidiaries to Nebraska.
Material changes versus the prior comparable period
- Premium growth was driven primarily by increased voluntary policy production, with gross premiums written rising 13.2%.
- Current accident-year loss ratio improved to 73.2% from 76.5%, while favorable prior-year development increased to $12.6 million from $2.5 million.
- The combined ratio improved to 90.0%, producing a stronger underwriting profit.
- Investment income remained flat despite growth in invested assets; investment yield declined to 2.8% from 3.1% because of the low-interest-rate environment.
- Net realized investment results shifted from a $3.0 million gain in 2012 to a $1.2 million loss in 2013, including $2.2 million of impairments on four equity securities.
- Gross loss and loss adjustment expense reserves increased to $614.6 million from $570.5 million. Net reserves increased to $565.9 million from $515.3 million.
- Two insurance subsidiaries were re-domesticated from Louisiana to Nebraska in 2013, and the company commuted certain reinsurance agreements without a material income impact.
- The company initiated quarterly cash dividends of $0.08 per share in 2013 and paid $5.9 million in shareholder dividends. No shares were repurchased during 2013.
Guidance, outlook, risks and unusual items
Management described the workers’ compensation market as transitioning toward a harder market and intends to prioritize underwriting profitability, disciplined pricing, selective geographic expansion, market penetration, capital strength, and safety and claims management. Management expects projected operating cash flow to fund operations, claims, and expenses for at least the next 18 months.
Effective January 1, 2014, the reinsurance program increased occurrence coverage to $70.0 million from $50.0 million, while single-claimant coverage remained capped at $10.0 million. The company increased its retention per loss occurrence from $1.0 million to $2.0 million and added coverage for terrorism involving nuclear, biological, chemical, and radiological agents.
- Loss reserves are inherently uncertain, particularly because the company writes relatively fewer but more severe claims. Medical inflation, wage trends, litigation, regulatory changes, claim severity, and judicial interpretations could require additional reserves.
- Reinsurance recoverables totaled $75.3 million, of which $36.0 million was unsecured. The company remains primarily liable to policyholders if reinsurers fail to pay.
- Workers’ compensation coverage generally cannot exclude terrorism losses, creating potential exposure beyond reinsurance limits and statutory programs.
- Low interest rates may continue to reduce investment income, while rising rates could reduce the fair value of fixed-maturity securities. A 200-basis-point rate increase was estimated to reduce shareholders’ equity by 8.0%.
- The business is exposed to competition, industry cyclicality, economic conditions affecting policyholders, state insurance regulation, guaranty-fund assessments, residual-market obligations, agency relationships, and cybersecurity events.
- Management identified no material adverse legal proceedings, no unresolved SEC staff comments, and no material off-balance-sheet arrangements. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
On February 25, 2014, the company declared a special dividend of $0.50 per share and a regular quarterly dividend of $0.12 per share, both payable March 28, 2014. Management indicated an intended annualized regular dividend of $0.48 per share, subject to regulatory and subsidiary dividend capacity.
Investor verification checklist
- Verify the sustainability of the 90.0% combined ratio and the extent to which favorable prior-year reserve development contributed to earnings.
- Assess reserve adequacy relative to the $614.6 million gross reserve balance, severe-claim trends, and the company’s reserve sensitivity analyses.
- Review the credit quality, duration, unrealized losses, and interest-rate sensitivity of the approximately $1.0 billion investment portfolio.
- Evaluate the collectability and collateralization of the $75.3 million of reinsurance recoverables, including the $36.0 million unsecured portion.
- Confirm the terms, retentions, aggregate limits, and counterparty strength of the 2014 reinsurance program.
- Assess the effect of the $1.1 million after-tax allowance change and $1.0 million after-tax Nebraska re-domestication benefit on fourth-quarter comparability.
- Confirm statutory capital, dividend capacity, and restrictions governing distributions from insurance subsidiaries to the holding company.
- Monitor premium growth, pricing adequacy, policyholder payroll trends, agency retention, and workers’ compensation market-cycle conditions.