AMERISAFE, Inc. 2019 Form 10-K Summary
Business Context and Reporting Period
AMERISAFE is an insurance holding company specializing in workers’ compensation coverage for small to mid-sized employers in hazardous industries, principally construction, trucking, logging and lumber, manufacturing, agriculture, maritime, and oil and gas. The filing covers the fiscal year ended December 31, 2019, with comparisons to 2018 and 2017. Its three insurance subsidiaries were rated “A” (Excellent) by A.M. Best.
- More than 8,000 voluntary policyholders and more than 2,400 independent agencies at year-end.
- Voluntary business represented 96.8% of 2019 gross premiums written.
- Policy renewal rate on voluntary business quoted for renewal was 93.1%, compared with 93.6% in 2018.
Financial and Operating Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Gross premiums written | $333.5 million | $351.7 million | Down 5.2% |
| Net premiums earned | $332.9 million | $350.3 million | Down 5.0% |
| Total revenues | $370.4 million | $377.8 million | Down 2.0% |
| Net investment income | $32.5 million | $30.5 million | Up 6.7% |
| Income before taxes | $115.5 million | $87.6 million | Up 31.9% |
| Net income | $92.7 million | $71.6 million | Up 29.4% |
| Diluted EPS | $4.80 | $3.71 | Up 29.4% |
| Net cash from operating activities | $78.8 million | $98.3 million | Down 19.8% |
| Shareholders’ equity | $430.2 million | $409.8 million | Up 5.0% |
- The 2019 net combined ratio was 76.6%, compared with 82.9% in 2018 and 84.7% in 2017. A ratio below 100% indicates underwriting profitability.
- The net loss ratio improved to 53.0% from 58.5%, while the underwriting expense ratio improved to 22.3% from 23.2%.
- Current accident-year loss ratio increased to 72.5% from 71.5%, but this was more than offset by favorable prior-year development of $65.0 million versus $45.6 million in 2018.
- Return on average equity was 22.1%, compared with 17.2% in 2018. Book value per share increased to $22.29 from $21.26.
- Cash and cash equivalents were $43.8 million, and investments were $1.125 billion at December 31, 2019. Including cash and short-term investments, the investment portfolio totaled approximately $1.169 billion.
- The portfolio’s pre-tax yield was 2.8%, compared with 2.6% in 2018; the portfolio was primarily composed of fixed-income securities, with an average composite credit rating of “AA.”
- Gross loss and loss adjustment expense reserves were $772.9 million, down from $798.4 million. Net reserves were $677.5 million, down from $691.2 million.
- There were 5,053 open claims at year-end, with 5,452 claims reported and 5,589 claims closed during 2019.
Material Changes Versus the Prior Comparable Period
- Premium volume declined as annual premiums on voluntary policies decreased by $22.9 million, partially offset by a $5.0 million increase from payroll audits and related adjustments.
- Underwriting profitability improved materially, primarily because of greater favorable development in prior accident years and lower insurance-related assessments. The company cited lower-than-expected claim severity and favorable case reserve development as key drivers.
- Net investment income increased by $2.0 million, while net realized investment losses narrowed to $0.1 million from $1.5 million. Equity securities generated a $4.8 million unrealized gain in 2019 versus a $2.1 million unrealized loss in 2018.
- Operating cash flow declined despite higher earnings, reflecting changes in reserves, reinsurance balances, taxes paid, and other working-capital items.
- Shareholders received $87.0 million in dividends during 2019, including regular dividends of $0.25 per share per quarter and an extraordinary dividend of $3.50 per share. No shares were repurchased during the year.
- The company adopted the new lease standard in 2019, recognizing approximately $0.4 million of operating lease right-of-use assets and liabilities, with no material effect on the financial statements.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal 2020 revenue, earnings, or margin guidance. Management’s stated strategy is to preserve underwriting discipline through market cycles, expand market penetration selectively, pursue prudent geographic expansion, maintain capital strength, and continue investing in underwriting, claims, safety, and information-technology capabilities.
- Effective January 1, 2020, the reinsurance program provided up to $70.0 million of coverage per loss occurrence, subject to deductibles, retentions, aggregate limits, and other restrictions. Single-claimant coverage was limited to $10.0 million.
- The company commuted portions of Hannover reinsurance agreements covering accident years 2009 through 2011. The $8.5 million settlement was completed through an offset against funds withheld and reinsurance recoverables and had no 2019 net-income effect.
- Reinsurance recoverables totaled $95.9 million, of which $37.7 million was unsecured. Reinsurance credit risk remains material because the company remains primarily liable to policyholders if reinsurers fail to pay.
- Management expects operating cash flow to provide sufficient liquidity for operations, claims, expenses, and holding-company obligations for at least the next 18 months. The company had no outstanding borrowings under its unsecured $20.0 million revolving credit facility at year-end; the facility expires in December 2022.
- Insurance subsidiaries could pay up to $88.6 million in dividends to AMERISAFE in 2020 without prior regulatory approval, subject to statutory limitations and solvency requirements.
- Key risks include reserve inadequacy, severity and frequency of hazardous-industry claims, premium-rate competition, cyclical workers’ compensation conditions, lower policyholder payrolls, investment and interest-rate risk, reinsurance recoverability, regulatory restrictions, guaranty-fund and residual-market assessments, cybersecurity, and dependence on independent agencies.
- The filing identifies valuation of loss and loss adjustment expense reserves as the critical audit matter. Reserve estimates involve substantial actuarial and management judgment; a 30% increase in selected development factors could increase the net loss and DCC reserve by approximately $49.6 million to $52.1 million under the disclosed sensitivities.
- The company had no material pending legal proceedings, no off-balance-sheet arrangements, and received unqualified audit opinions on its financial statements and internal controls.
Most Important Facts for Investors to Verify
- Whether the favorable $65.0 million of prior-year reserve development is repeatable or primarily a one-time benefit.
- Trends in the current accident-year loss ratio, severe claims, medical-cost inflation, and reserve development in newer accident years.
- Premium retention, renewal rates, pricing adequacy, and the effect of declining voluntary premium volume.
- Operating cash flow relative to claim payments and the company’s ability to sustain regular and extraordinary dividends.
- Concentration and collectability of the $95.9 million of reinsurance recoverables, including the $37.7 million unsecured portion.
- Capital adequacy, regulatory dividend capacity, and continued “A” A.M. Best ratings for the insurance subsidiaries.
- Investment portfolio duration, municipal and fixed-income concentration, and sensitivity to higher interest rates.
- Implementation effects of the expected-credit-loss standard adopted in the first quarter of 2020, including the estimated $593,000 retained-earnings adjustment.