AMERISAFE, Inc. 2016 Form 10-K Summary
Business context and reporting period
AMERISAFE is a Texas-incorporated insurance holding company reporting for the fiscal year ended December 31, 2016. Through its insurance subsidiaries, it provides workers’ compensation insurance primarily to small and mid-sized employers in hazardous industries, including construction, trucking, logging and lumber, manufacturing, agriculture, maritime, and oil and gas. The company markets insurance in 27 states and is licensed in 47 states, the District of Columbia, and the U.S. Virgin Islands. Its insurance subsidiaries are rated “A” (Excellent) by A.M. Best.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Gross premiums written | $373.1 million | $386.5 million | Down 3.5% |
| Net premiums earned | $368.7 million | $375.9 million | Down 1.9% |
| Total revenues | $396.7 million | $401.0 million | Down 1.1% |
| Net investment income | $28.1 million | $27.9 million | Up 0.7% |
| Income before taxes | $112.8 million | $101.0 million | Up 11.7% |
| Net income | $77.9 million | $70.5 million | Up 10.5% |
| Diluted EPS | $4.05 | $3.69 | Up 9.8% |
| Net cash from operating activities | $114.2 million | $92.9 million | Up $21.4 million |
| Net combined ratio | 77.0% | 79.8% | Improved 2.8 points |
| Return on average equity | 17.1% | 15.6% | Improved 1.5 points |
The 2016 current accident-year loss ratio was 67.9%, compared with 69.8% in 2015. Favorable prior-year reserve development was $51.3 million, compared with $47.8 million in 2015, producing a 54.0% net loss ratio versus 57.1%. The underwriting expense ratio improved to 21.9% from 22.4%, while the policyholder dividend ratio increased to 1.1% from 0.3%.
At December 31, 2016, total assets were $1.519 billion, shareholders’ equity was $456.2 million, cash and cash equivalents were $58.9 million, and total investments were $1.084 billion. Including cash and cash equivalents, the investment portfolio was approximately $1.143 billion, with a 2.5% pretax investment yield. The portfolio was predominantly fixed-income securities, and its average composite credit rating excluding equity holdings was “AA-.”
Gross loss and loss-adjustment reserves were $742.8 million, including $664.5 million net of reinsurance recoverables. The company reported 5,195 open claims at year-end, 5,338 new claims during 2016, and 5,443 closed claims. Reinsurance recoverables totaled $83.7 million, of which $45.2 million was unsecured.
Material changes versus the prior comparable period
- Premium volume declined, primarily because of lower annual premiums on voluntary policies, payroll audit adjustments, and lower premiums from mandatory pooling arrangements.
- Profitability improved despite lower premiums. Net income rose 10.5%, driven mainly by lower current-year loss costs, favorable prior-year reserve development, and lower underwriting expenses.
- Loss and loss-adjustment expenses declined 7.2% to $199.0 million. The current accident-year loss ratio improved, and favorable reserve development increased to $51.3 million.
- Operating cash flow increased to $114.2 million from $92.9 million, while cash used for investing remained approximately $50.5 million.
- Cash used in financing increased to $74.3 million, primarily reflecting $76.1 million of shareholder dividends. The company paid regular dividends of $0.18 per share quarterly and an extraordinary dividend of $3.25 per share in 2016.
- The company’s investment portfolio increased 2.6% from year-end 2015, while cash and cash equivalents declined from $69.5 million to $58.9 million.
- No share repurchases occurred in 2016. The company had $25.0 million available under its repurchase authorization at year-end.
Guidance, outlook, commentary, risks, and unusual items
Management expects operating cash flow to provide sufficient liquidity for future operations, claims, operating expenses, and holding-company expenses for at least the next 18 months. The company expects to continue considering regular quarterly dividends; the filing states that the expected annualized 2017 regular dividend is $0.80 per share. Insurance subsidiaries could pay AMERISAFE up to $78.9 million in 2017 without regulatory approval under the prescribed calculation.
The company renewed its 2017 excess-of-loss reinsurance program. The program provides coverage of up to $70.0 million per loss occurrence, subject to deductibles, retentions, aggregate limits, and other restrictions; coverage for a loss involving a single claimant is limited to $10.0 million. The company retains $2.0 million per loss occurrence and participates with 19 reinsurers.
In December 2016, AMERISAFE commuted portions of reinsurance agreements covering accident years 2011 through 2013 with Hannover Reinsurance and Tokio Millennium Re. It received $0.2 million in cash and an additional $25.4 million through an offset to funds withheld. Management reported that the effect on 2016 net income was immaterial.
A significant contingency involves an adverse Iowa verdict against AIIC arising from a 2009 workers’ compensation claim. The verdict included $25.0 million of punitive damages and $0.3 million of actual damages. AIIC is appealing, has posted a $27.8 million appeal bond, and had a total claim reserve of $2.4 million at December 31, 2016. Previously paid amounts plus the reserve totaled $5.4 million, and management believes the reserve and reinsurance coverage are adequate.
Principal risks include workers’ compensation industry cyclicality, competition and rate pressure, adverse claim frequency or severity, reserve inadequacy, medical and wage inflation, investment and interest-rate risk, reinsurer credit risk, regulatory restrictions, guaranty-fund and residual-market assessments, dependence on independent agencies, cybersecurity events, terrorism exposure, and potential changes in workers’ compensation laws.
The company had no outstanding borrowings under its unsecured $20.0 million Frost Bank credit facility at year-end. It reported no material off-balance-sheet arrangements, no unresolved SEC staff comments, and no legal or administrative proceedings believed likely to have a materially adverse effect beyond ordinary-course claims matters. Management and Ernst & Young reported effective internal control over financial reporting, and the financial statements received an unqualified audit opinion.
Most important facts for investors to verify
- Validate the sustainability of the $51.3 million favorable prior-year reserve development and the sensitivity of the $742.8 million gross reserve balance to adverse claims development.
- Review the Iowa litigation, appeal status, appeal bond, reserve, and applicable reinsurance coverage.
- Assess premium-growth prospects in a declining or competitive workers’ compensation market and the effects of lower loss costs and rate levels.
- Evaluate the quality, duration, interest-rate sensitivity, and unrealized losses of the approximately $1.1 billion investment portfolio.
- Monitor the $83.7 million of reinsurance recoverables, including $45.2 million of unsecured exposure and the financial condition of major reinsurers.
- Confirm the regulatory capacity of insurance subsidiaries to upstream dividends and support the company’s regular and extraordinary dividend policy.
- Reconcile the filing’s subsequent-event disclosure: one section states a February 21, 2017 quarterly dividend of $0.20 per share and an annualized $0.80, while Note 21 contains unresolved placeholder text (“$0.xx” and “$x.xx”).