AMERISAFE, Inc. 2015 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, agriculture and oil and gas. The filing covers the fiscal year ended December 31, 2015; the request’s “2015 Q4” corresponds to the fourth-quarter data reported within the annual filing. The company operates through insurance subsidiaries rated “A” (Excellent) by A.M. Best and markets coverage primarily through independent agencies.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Gross premiums written | $386.5 million | $393.8 million | Down 1.9% |
| Net premiums earned | $375.9 million | $375.7 million | Up 0.0% |
| Total revenues | $401.0 million | $404.0 million | Down 0.8% |
| Net investment income | $27.9 million | $27.2 million | Up 2.5% |
| Income before taxes | $101.0 million | $73.7 million | Up 36.9% |
| Net income | $70.5 million | $53.7 million | Up 31.3% |
| Diluted EPS | $3.69 | $2.84 | Up 29.9% |
| Net combined ratio | 79.8% | 87.9% | Improved 8.1 points |
| Return on average equity | 15.6% | 12.4% | Improved 3.2 points |
Loss and loss adjustment expenses declined to $214.6 million from $244.9 million. The current accident-year loss ratio improved to 69.8% from 71.5%, while favorable prior-year development increased to $47.8 million from $23.7 million. The net underwriting expense ratio was 22.4%, compared with 22.6% in 2014, producing an underwriting margin reflected in the 79.8% combined ratio.
Cash and cash equivalents were $69.5 million at year-end, compared with $91.0 million in 2014. Investments totaled $1.045 billion, and investments including cash and cash equivalents totaled $1.115 billion. Shareholders’ equity was $454.0 million, compared with $447.0 million. The company reported no debt outstanding and maintained a $20.0 million unsecured revolving credit facility, which expires in December 2016.
Net cash provided by operating activities was $92.9 million, compared with $140.7 million in 2014. Cash claims payments, net of reinsurance, were $189.7 million. Net cash used in investing activities was $49.8 million, while net cash used in financing activities was $64.5 million, primarily due to $68.6 million of shareholder dividends.
Material changes versus the prior comparable period
- Premium volume weakened modestly, primarily because of lower payroll-audit adjustments and lower annual premiums on voluntary policies. Voluntary gross premiums written declined to $372.6 million from $379.4 million.
- Profitability improved substantially because of lower current accident-year loss ratios and greater favorable reserve development.
- Net realized investment results shifted from a $0.7 million gain in 2014 to a $2.5 million loss in 2015, including $2.7 million of other-than-temporary impairment charges on four fixed-maturity securities.
- Gross loss and LAE reserves increased to $718.0 million from $687.6 million, while net reserves increased to $653.2 million from $628.3 million. The increase was primarily attributable to the 2015 accident year.
- The investment portfolio grew modestly, but the pretax investment yield declined to 2.5% from 2.6% amid a low-interest-rate environment.
- Regular quarterly dividends increased to $0.15 per share from $0.12. The company also paid a $3.00 per-share extraordinary dividend in 2015. No share repurchases occurred during 2015.
Fourth-quarter information
For the quarter ended December 31, 2015, premiums earned were $95.0 million, total revenues were $101.8 million, income before taxes was $33.8 million, net income was $23.1 million and diluted EPS was $1.21. The quarter included a $3.00 per-share extraordinary dividend declaration.
Guidance, outlook, commentary, risks and unusual items
Management did not provide formal earnings or premium guidance. Management stated that operating cash flow was expected to provide sufficient liquidity for operations, claims, operating expenses and holding-company expenses for at least the next 18 months. The company intends to maintain underwriting discipline, focus on hazardous industries, pursue measured market penetration and preserve capital strength.
- Management emphasizes the favorable 2015 reserve development but cautions that workers’ compensation reserves are inherently uncertain, particularly for severe claims with long settlement periods. Sensitivity analysis showed that changes in selected loss development factors could change net loss and DCC reserves by several percentage points.
- The 2016 reinsurance program provides occurrence coverage up to $70.0 million, subject to limits, deductibles, retentions and aggregate provisions; single-claimant coverage is limited to $10.0 million. The company retains $2.0 million per loss occurrence before the first layer of reinsurance.
- Reinsurance recoverables were $91.1 million, of which $37.5 million was unsecured. Reinsurer credit quality and collectability remain material risks.
- The company disclosed an adverse Iowa verdict related to a 2009 workers’ compensation claim: $25.3 million, including $25.0 million of punitive damages. The verdict is under appeal. The company had incurred total expenses and reserves of $5.4 million, including a $2.5 million reserve, and maintained an appeal bond of $27.8 million. Management believed existing reserves and reinsurance were adequate.
- Other principal risks include industry cyclicality, pricing inadequacy, competition, economic weakness in policyholders’ industries, medical-cost and claim-severity inflation, regulatory changes, cyber incidents, terrorism, investment-market volatility, limitations on subsidiary dividends and potential guaranty-fund or residual-market assessments.
- On February 23, 2016, the company declared a regular quarterly dividend of $0.18 per share, implying an annualized regular dividend of $0.72 per share, subject to future board action and regulatory constraints.
Most important facts for investors to verify
- Whether favorable prior-year reserve development remains sustainable and whether current accident-year loss trends deteriorate.
- The adequacy of the $718.0 million gross loss and LAE reserve and the effect of severe claims, medical inflation and legal changes.
- The collectability and security of the $91.1 million in reinsurance recoverables, including the $37.5 million unsecured portion.
- The ultimate outcome and insurance recovery related to the Iowa punitive-damages verdict and $27.8 million appeal bond.
- The effect of low interest rates, investment impairments and interest-rate movements on investment income, capital and book value.
- The ability of insurance subsidiaries to remit dividends, including the stated $57.1 million of dividends available without regulatory approval in 2016.
- Whether premium growth resumes in construction, trucking, manufacturing, agriculture and oil and gas, which together represented 76.2% of gross premiums written.