AMERISAFE is a holding company that markets and underwrites workers’ compensation insurance through its insurance subsidiaries. Workers’ compensation insurance covers statutorily prescribed benefits that employers are obligated to provide to their employees who are injured in the course and scope of their employment. Our business strategy is focused on providing this coverage to small to mid-sized employers engaged in hazardous industries, principally construction, trucking, manufacturing, agriculture and oil and gas. Employers engaged in hazardous industries pay substantially higher than average rates for workers’ compensation insurance compared to employers in other industries, as measured per payroll dollar. The higher premium rates are due to the nature of the work performed and the inherent workplace danger of our target employers. Hazardous industry employers also tend to have less frequent but more severe claims as compared to employers in other industries due to the nature of their businesses. We provide proactive safety reviews of employers’ workplaces. These safety reviews are a vital component of our underwriting process and also
Two of the key financial measures that we use to evaluate our performance are return on average equity and growth in book value per share adjusted for dividends paid to shareholders. We calculate return on average equity by dividing annual net income by the average of annual shareholders’ equity. Our return on average equity was 15.6% in 2015, 12.4% in 2014 and 10.9% in 2013. We calculate book value per share by dividing ending shareholders’ equity by the number of common shares outstanding. Our book value per share was $23.73 at December 31, 2015, $23.65 at December 31, 2014 and $22.41 at December 31, 2013. We paid cash dividends of $3.60 per share in 2015, $1.98 per share in 2014 and $0.32 per share in 2013.
The use of reinsurance is an important component of our business strategy. We purchase reinsurance to protect us from the impact of large losses. Our reinsurance program for 2016 includes 19 reinsurers that provide coverage to us in excess of a certain specified loss amount, or retention level. Our 2016 reinsurance program provides us with reinsurance coverage for each loss occurrence up to $70.0 million, subject to limitations, applicable deductibles, retentions and aggregate limits. However, for any loss occurrence involving only one claimant, our reinsurance coverage is limited to $10.0 million for any single claimant, subject to applicable deductibles, retentions and aggregate limits. In 2014, we raised our retention from $1.0 million to $2.0 million for each loss occurrence. Losses in the layer between $2.0 million and $10.0 million are ceded to a multi-year reinsurance cover with an aggregate annual deductible of approximately $5.7 million and an aggregate limit of coverage of approximately $30.5 million for 2016. As losses are incurred and recorded, we record amounts recoverable from reinsurers for the portion of the losses ceded to our reinsurers.
Our focus on providing workers’ compensation insurance to employers engaged in hazardous industries results in our receiving relatively fewer but more severe claims than many other workers’ compensation insurance companies. Severe claims, which we define as claims having an estimated ultimate cost of more than
$1.0 million, usually have a material effect on each accident year’s loss reserves (and our reported results of operations) as a result of both the number of severe claims reported in any year and the timing of claims in the year. As a result of our focus on higher severity, lower frequency business, our reserve for loss and loss adjustment expenses may have greater volatility than other workers’ compensation insurance companies.
Net Investment Income and Net Realized Gains and Losses on Investments. We invest our statutory surplus funds and the funds supporting our insurance liabilities in fixed maturity, equity securities and alternative investments. In addition, a portion of these funds are held in cash and cash equivalents to pay current claims. Our net investment income includes interest and dividends earned on our invested assets, amortization of premiums and discounts on our fixed-maturity securities and returns on our other investments. We assess the performance of our investment portfolio using a standard tax equivalent yield metric. Investment income that is tax-exempt is increased by our marginal federal tax rate of 35% to express yield on tax-exempt securities on the same basis as taxable securities. Net realized gains and losses on our investments are reported separately from our net investment income. Net realized gains occur when our investment securities are sold for more than their costs or amortized costs, as applicable. Net realized losses occur when our investment securities are sold for less than their costs or amortized costs, as applicable, or are written down as a result of other-than-temporary impairment. We classify the majority of our fixed maturity securities as held-to-maturity. The remainder of our fixed-maturity securities are classified as available-for-sale, as are our equity securities and other investments. Net unrealized gains or losses on our securities classified as available-for-sale are reported separately within accumulated other comprehensive income on our balance sheet.
Reserves for Loss and Loss Adjustment Expenses. We record reserves for estimated losses under insurance policies that we write and for loss adjustment expenses, which include defense and cost containment, or DCC, and adjusting and other, or AO expenses, related to the investigation and settlement of policy claims. Our reserves for loss and loss adjustment expenses represent the estimated cost of all reported and unreported loss and loss adjustment expenses incurred and unpaid at any given point in time based on known facts and circumstances.
Premiums Receivable. Premiums receivable represents premium-related balances due from our policyholders based on annual premiums for policies written, including surcharges and deposits and adjustments for premium audits, endorsements, cancellations, cash transactions and charge offs. The balance is shown net of the allowance for doubtful accounts and includes an estimate for EBUB. The EBUB estimate is subject to significant variability and can either increase or decrease premiums receivable and earned premiums based upon
The table below summarizes certain operating results and key measures we use in monitoring and evaluating our operations.
(5) The net dividend ratio is calculated by dividing policyholder dividends by the current year’s net premiums earned.
Net Investment Income. Net investment income in 2015 was $27.9 million, an increase of 2.5% from the $27.2 million reported in 2014. The pre-tax investment yield on our investment portfolio was 2.5% per annum for 2015 and 2.6% for 2014. The tax-equivalent yield on our investment portfolio was 3.5% per annum for 2015, compared to 3.5% per annum for 2014. The tax-equivalent yield is calculated using the effective interest rate and a 35% marginal tax rate. Average invested assets, including cash and cash equivalents, increased 7.2%, from an average of $1,064.4 million for 2014 to an average of $1,140.7 million for 2015.
Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled $214.6 million for 2015, compared to $244.9 million for 2014, a decrease of $30.3 million, or 12.4%. The current accident year losses and LAE incurred were $262.4 million, or 69.8% of net premiums earned, compared to $268.6 million, or 71.5% of net premiums earned for 2014. We recorded favorable prior accident year development of $47.8 million in 2015, compared to $23.7 million in 2014. This is further discussed below in “Prior Year Development.” Our net loss ratio was 57.1% for 2015 and 65.2% for 2014.
The Company recorded favorable prior accident year loss and loss adjustment expense development of $47.8 million in calendar year 2015, $23.7 million in calendar year 2014 and $12.6 million in calendar year 2013. The table below sets forth the favorable or unfavorable development for accident years 2010 through 2014 and, collectively, all accident years prior to 2010.
The table below sets forth the number of open claims as of December 31, 2015, 2014 and 2013, and the numbers of claims reported and closed during the years then ended.
At December 31, 2015, our incurred amounts for certain accident years, particularly 2012 and accident years prior to 2010, developed more favorably than management previously expected. Multiple factors can cause loss development both unfavorable and favorable. The favorable loss development we experienced across accident years was largely due to favorable case reserve development from closed claims and claims where the worker had reached maximum medical improvement. We believe the favorable loss development in 2015, 2014 and 2013 resulted primarily from an intensive claims management focus with the company actively seeking to settle claims, leading to favorable development.
The assumptions we used in establishing our reserves for these accident years were based on our historical claims data. However, as of December 31, 2015, actual results for these accident years have been better than our assumptions would have predicted. We do not presently intend to modify our assumptions for establishing reserves in light of recent results. However, if actual results for current and future accident years are consistent with, or different than, our results in these recent accident years, our historical claims data will reflect this change and, over time, will impact the reserves we establish for future claims.
Our principal sources of operating funds are premiums, investment income, and proceeds from maturities of investments. Our primary uses of operating funds include payments for claims and operating expenses. We pay claims and operating expenses using cash flow from operations and invest our excess cash in fixed maturity, equity securities and other investments. We expect that our projected cash flow from operations will provide us sufficient liquidity to fund future operations, including payment of claims and operating expenses and other holding company expenses, for at least the next 18 months.
Net cash provided by operating activities was $92.9 million in 2015, as compared to $140.7 million in 2014, and $129.2 million in 2013. Major components of cash provided by operating activities in 2015 were net premiums collected of $368.6 million and investment income collected of $44.3 million, offset in-part by claim
payments of $190.1 million, $75.4 million of operating expenditures, $27.8 of an increase in amounts held by others, federal taxes paid of $26.1 million and dividends to policyholders paid of $0.5 million.
Net cash used in financing activities was $64.5 million in 2015, as compared to net cash used in financing activities of $31.6 million in 2014 and net cash used in financing activities of $1.5 million in 2013. Major components of cash used in financing activities in 2015 included $1.8 million of proceeds from the exercise of stock options and $2.2 million of tax benefit from share-based compensation, offset by cash used for dividends paid to shareholders of $68.6 million. Major components of cash provided in financing activities in 2014 included $2.7 million of proceeds from the exercise of stock options and $2.8 million of tax benefit from share-based compensation, offset by cash used for dividends paid to shareholders of $37.1 million. Major components of cash provided in financing activities in 2013 included $2.3 million of proceeds from the exercise of stock options and $2.0 million of tax benefit from share-based compensation, offset by cash used for dividends paid to shareholders of $5.9 million.
minimum solvency and liquidity thresholds. Based upon the prescribed calculation, the insurance subsidiaries could pay to AMERISAFE dividends of up to $57.1 million in 2016 without seeking regulatory approval. See “Business-Regulation-Dividend Limitations” in Item 1 of this report.
On February 23, 2016 the Company declared a regular quarterly cash dividend of $0.18 per share payable on March 28, 2016 to shareholders of record on March 14, 2016.
The Board intends to continue to consider the payment of a regular cash dividend each calendar quarter. On an annualized basis, the cash dividend is expected to be $0.72 per share in 2016.
As of December 31, 2015, our investment portfolio, including cash and cash equivalents, totaled $1.1 billion, an increase of 0.7% from December 31, 2014. The majority of our fixed maturity securities are classified as held-to-maturity, as defined by FASB ASC Topic 320, Investments-Debt and Equity Securities. As such, the reported value of those securities is equal to their amortized cost, and is not impacted by changing interest rates. The remainder of our fixed maturity securities and all of our equity securities are classified as available-for-sale and reported at fair value.
On January 1, 2008, we adopted FASB ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As disclosed in Note 19 of the financial statements, our securities available-for-sale are classified using Level 1, 2 and 3 inputs. We did not elect the fair value option prescribed under FASB ASC Topic 825, Financial Instruments, for any financial assets or financial liabilities in 2014 or 2015.
The following table summarizes the fair value of, and the amount of, unrealized losses on our investment securities, segregated by the time period each security has been in a continuous unrealized loss position as of December 31, 2015 and 2014:
(1) The loss and loss adjustment expense payments due by period in the table above are based upon the loss and loss adjustment expense estimates as of December 31, 2015 and actuarial estimates of expected payout patterns and are not contractual liabilities as to a time certain. Our contractual liability is to provide benefits under the policy. As a result, our calculation of loss and loss adjustment expense payments due by period is subject to the same uncertainties associated with determining the level of loss and loss adjustment expenses generally and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our loss and loss adjustment expense process, see “Business-Loss Reserves” in Item 1 of this report. Actual payments of loss and loss adjustment expenses by period will vary, perhaps materially, from the amounts shown in the table above to the extent that current estimates of loss and loss adjustment expenses vary from actual ultimate claims amounts and as a result of variations between expected and actual payout patterns. See “Risk Factors-Risks Related to Our Business-Our loss reserves are based on estimates and may be inadequate to cover our actual losses” in Item 1A of this report for a discussion of the uncertainties associated with estimating loss and loss adjustment expenses.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AMERISAFE, Inc. and Subsidiaries at December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Cash equivalents include short-term money market funds and corporate bonds with an original maturity of 90 days or less.
The direct costs of successfully acquiring and renewing business are capitalized to the extent recoverable and are amortized over the effective period of the related insurance policies in proportion to premium revenue earned. These capitalized costs consist mainly of sales commissions, premium taxes and other underwriting costs. The Company evaluates deferred policy acquisition costs for recoverability by comparing the unearned premiums to the estimated total expected claim costs and related expenses, offset by anticipated investment income. The Company would reduce the deferred costs if the unearned premiums were less than expected claims and expenses after considering investment income, and report any adjustments in amortization of deferred policy acquisition costs. There were no adjustments necessary in 2015, 2014 or 2013.
including when the policy is renewed. The purpose of these audits is to verify that policyholders have accurately reported their payroll expenses and employee job classifications, and therefore have paid the Company the premium required under the terms of the policies. The difference between the estimated premium and the ultimate premium is referred to as “earned but unbilled” premium, or EBUB premium. EBUB premium can be higher or lower than the estimated premium. EBUB premium is subject to significant variability and can either increase or decrease earned premium based upon several factors, including changes in premium growth, industry mix and economic conditions. Due to the timing of audits and other adjustments, ultimate premium earned is generally not determined for several months after the expiration of the policy.
All advertising expenditures incurred by the Company are charged to expense in the period to which they relate and are included in underwriting and certain other operating costs in the consolidated statements of income. Total advertising expenses incurred were $0.7 million in 2015, $0.5 million in 2014 and $0.5 million in 2013.
that must be paid for the current period related to the Company’s common and participating common shares. Participating common shares include unvested share-based payment awards that contain nonforfeitable rights to dividends, whether paid or unpaid. Any remaining undistributed earnings are allocated to the common and participating common shareholders to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. The amount of earnings allocable to each security is divided by the number of outstanding shares of the security to which the earnings are allocated to determine the EPS for the security. In a period of loss, no losses are allocated to the participating common shareholders. Instead, all such losses are allocated to the common shareholders.
Basic EPS is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. The diluted EPS calculation includes potential common shares assumed issued under the treasury stock method, which reflects the potential dilution that would occur if any outstanding options or warrants were exercised or restricted stock becomes vested, and includes the “if converted” method for participating securities if the effect is dilutive. We determine diluted EPS as the more dilutive result of either the treasury method or the two-class method.
Amerisafe holds an investment in a limited partnership hedge fund accounted for under the equity method. The carrying value of this investment is $12.2 million at December 31, 2015.
The gross unrealized gains and losses on, and the cost or amortized cost and fair value of, those investments classified as available-for-sale at December 31, 2014 are summarized as follows:
At December 31, 2015, there were $20.3 million of held-to-maturity investments and $1.5 million of cash on deposit with regulatory agencies of states in which the Company does business.
how long and by how much the fair value of the security has been below its cost or amortized cost;
In 2015, the Company impaired four fixed maturity securities in the amount of $2.7 million. The impairment charge is included in “Net realized gains (losses) on investments” for 2015. We impaired the securities due to a downgrade of the securities and the amount of the accumulated unrealized loss.
Furniture and equipment included property held under capital leases of $0.1 million at December 31, 2015. Accumulated depreciation includes $97,000 that is related to these properties at December 31, 2015. Furniture and equipment included property held under capital leases of $0.1 million at December 31, 2014. Accumulated depreciation includes $49,000 that is related to these properties at December 31, 2014. The capital lease obligations related to these properties are included in accounts payable and other liabilities. The Company had no capital lease obligations at December 31, 2013.
The Company cedes certain premiums and losses to various reinsurers under quota share and excess-of-loss treaties. These reinsurance arrangements provide for greater diversification of business, allow management to control exposure to potential losses arising from large risks, and provide additional capacity for growth. Ceded reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. To minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers on a continual basis. The effect of reinsurance on premiums written and earned in 2015, 2014 and 2013 was as follows:
In 2013, the Company returned previous recoveries of $2.3 million due to a single closed claim. Excluding this impact, the Company received reinsurance recoveries of $1.0 million in 2015, $1.5 million in 2014 and $2.1 million in 2013.
Property and casualty insurance companies are subject to certain risk-based capital (“RBC”) requirements specified by the National Association of Insurance Commissioners. Under these requirements, a target minimum amount of capital and surplus maintained by a property/casualty insurance company is determined based on the various risk factors related to it. At December 31, 2015, the capital and surplus of AIIC and its subsidiaries exceeded the minimum RBC requirement.
The Company is authorized to issue 10,000,000 shares of preferred stock, par value $0.01 per share. At December 31, 2015, there were no shares of preferred stock outstanding.
The Company recognized compensation expense of $0.1 million in 2015 and $0.3 million in 2014 and 2013, related to awards made under the 2005 Incentive Plan. Total tax benefits realized for tax deductions from vesting of restricted stock in 2015 and 2014 were $81,000 and $38,000, respectively.
The Board approved an amendment to increase the restricted stock award from $30,000 to $45,000, effective with the grants to be awarded at the annual meeting in 2015 with $15,000 of that grant subject to shareholder approval at the annual meeting of shareholders to be held in 2016.
The Company recognized compensation expense of $0.3 million in 2015, and $0.2 million in 2014 and 2013 related to the 2010 Restricted Stock Plan. Total tax benefits realized for tax deductions from vesting of restricted stock in 2015, 2014 and 2013 were $13,000, $7,000 and $18,000, respectively.
The Company recognized compensation expense of $0.6 million, $0.6 million and $0.3 million in 2015, 2014 and 2013, respectively, related to share-based grants. The Company recognized compensation expense of $0.2 million, $0.4 million and $0.6 million in 2015, 2014 and 2013, respectively, related to long-term incentive awards under the 2012 Incentive Plan. The long-term incentive award is a liability award.
The calculation of basic and diluted EPS for the years ended December 31, 2015, 2014 and 2013 are presented below.
The Company’s 401(k) benefit plan is available to all employees. The Company matches up to 2% of employee compensation for participating employees, subject to certain limitations. Employees are fully vested in employer contributions to this plan after five years. Company contributions to this plan were $0.4 million in 2015, $0.4 million in 2014 and $0.3 million in 2013.
The Company manages risk on certain long-duration claims by settling these claims through the purchase of annuities from unaffiliated carriers. In the event these carriers are unable to meet their obligations under these contracts, the Company could be liable to the claimants. The following table summarizes (in thousands) the fair value of the annuities at December 31, 2015, that the Company has purchased to satisfy its obligations. The A.M. Best Company rating is shown parenthetically.
The Company leases equipment and office space under noncancelable operating leases. At December 31, 2015, future minimum lease payments are as follows (in thousands):
Net premiums earned during 2015, 2014 and 2013 for the top ten states in 2015 and all others are shown below:
value of the interest. The investment objective of the limited partnership is to generate absolute returns by investing long and short in publicly-traded global securities. Redemptions are allowed monthly following a sixty day notice with no lock up periods. The Company has no unfunded commitments related to the limted partnership. This investment is characterized as a Level 3 asset in the fair value hierarchy.
Fair value is defined in ASC Topic 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is the price to sell an asset or transfer a liability and, therefore, represents an exit price, not an entry price. Fair value is the exit price in the principal market (or, if lacking a principal market, the most advantageous market) in which the reporting entity would transact. Fair value is a market-based measurement, not an entity-specific measurement, and, as such, is determined based on the assumptions that market participants would use in pricing the asset or liability. The exit price objective of a fair value measurement applies regardless of the reporting entity’s intent and/or ability to sell the asset or transfer the liability at the measurement date.
The fair values of the Company’s investments are based upon prices provided by an independent pricing service. The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider. Securities reported at fair value utilizing Level 1 inputs represent assets whose fair value is determined based upon observable unadjusted quoted market prices for identical assets in active markets. Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2 during the year ended December 31, 2015.
The following table represents unaudited quarterly financial data for the years ended December 31, 2015 and 2014.
In 2013, the Company’s Board of Directors initiated a quarterly dividend. During 2015, the Company’s Board of Directors declared a quarterly dividend of $0.15 per share compared to $0.12 per share in 2014 and $0.08 per share in 2013. The Company declared extraordinary dividends totaling $3.00 per share in 2015 and $1.50 per share in 2014. There were no extraordinary dividends declared in 2013.
The Board intends to continue to consider the payment of a regular cash dividend each calendar quarter. On an annualized basis, the cash dividend is expected to be $0.72 per share.