AMERISAFE, Inc. (AMSF) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the AMERISAFE Incorporated First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Michael Grasher. Please go ahead.

Thank you, Charlotte. Good morning, everyone. Welcome to the AMERISAFE First Quarter 2014 Investor Call. If you have not received the earnings release, it is available on our website at www.amerisafe.com. This call is being recorded. A replay of today’s call will be available. Details on how to access the replay are in the earnings release. During this call, we will be making forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings release, in the comments made during this call and in the Risk Factors section of our Form 10-K, Form 10-Qs and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. I will now turn the call over to Allen Bradley, AMERISAFE's Chairman and CEO.

Thanks, Mike. Good morning, ladies and gentlemen. Thank you for joining our First Quarter 2014 Earnings Call. As usual, I'll make a few remarks and then turn the call over to Janelle Frost and Mike Grasher to provide more details on the operational and financial aspects of the company. During the first quarter of this year, pricing for workers' compensation continues to rise, although at a slightly slower pace than over the last couple of years. This result is not surprising as we have now lapped ourselves in rate increases 3 times. At some point, these rate increases will subside. According to the Council of Insurance Agents & Brokers first quarter 2014 pricing survey, which by the way, was published last Friday, workers' compensation policies experienced an average rate increase of 4.1% during the quarter. Further, the report indicated an easing of rate increases on most commercial lines. And the CIAB's commentary on workers' comp stated, "The exception to the first quarter good news for commercial buyers was workers' compensation, which was -- which continued to be a tough line to write, coast to coast." As Janelle will provide more detail, pricing was very attractive for us during the quarter. Generally, competitors are pricing accounts at rational levels, although there does seem to be a bit more appetite for larger workers' compensation accounts in certain jurisdictions. Our new business premium volume grew at more than 20% during the quarter, while renewal business premium volume grew 5.8%. Audit adjustments, while still positive, are lower than the same quarter last year, creating somewhat of a headwind to premium growth. On the claims front, recently, companies across the industry have reported improvement on the frequency of workers' compensation claims. We expect that claims frequency in the workers' compensation line nationally has improved, and that information will be available when the definitive 2013 results are released by the NCCI next Thursday. We cannot definitively identify the driver of the lower claims frequency. But regardless of the cause for the decline in frequency in work-related claims, we are encouraged. Now I'm going to turn the call over to Janelle to discuss the operational metrics of the company.

Thank you, Allen, and good morning, everyone. Our top line grew $6.6 million or 6.6% during the quarter. Voluntary policies written in the quarter accounted for $8.5 million of the $6.6 million growth. The renewal component of this increase was driven by a policy retention of 90.7% compared to 92.6% in the first quarter of 2013. Premium retention was 88.8% in the quarter compared to 89.3% for the first quarter of 2013. And as Allen mentioned, new business grew 21% in the quarter in terms of dollars of premium. Audit premium and related adjustments remained positive this quarter at $3.3 million, a decrease of $2.7 million from last year's first quarter. This result was not unexpected as we discussed over the last few calls. In addition, our effective lost cost multiplier, or ELCM, for voluntary premium in the quarter was $1.86 million compared to $1.72 million in the first quarter of 2013. This is the highest ELCM that we've reported since we began tracking this measure for those states that use this mechanism for pricing. Relative to losses, we continued to experience a decrease in claims frequency on earned-premium basis. Our claims reported in the calendar year 2014 were up 4.8% from 1,260 to 1,320. The encouraging frequency trend, coupled with sustained pricing, led to our loss and loss adjustment expense ratio for the current accident year of 71.5%, down 1.7 percentage points from accident year 2013. Another positive impact in the quarter was favorable development from prior accident years. Case development led to $2.5 million of favorable loss development in the quarter compared to $2.4 million in the first quarter of 2013. This year's favorable development was primarily attributable to accident years 2008 and 2009. Overall, our operating trends were positive and led to a solid 92.7% combined ratio in the quarter, down 2 percentage points from the first quarter last year. That concludes my prepared remarks. I will now turn the call over to Mike.

Thank you, Janelle. For the first quarter of 2014, AMERISAFE reported net income of $10.5 million or $0.56 per diluted share compared to $8.9 million or $0.47 per diluted share in the first quarter of 2013. As Janelle mentioned, gross premiums written rose 6.6% from the year-ago quarter, while net premiums written declined 8.2%. The difference in the increase between gross and net reflects the impact of our new 2014 reinsurance treaty, as we retained an additional $1 million on the first layer and, thus, seed less premium to the reinsurers. Net premiums earned increased to 11.2% from the year-ago quarter and were also favorably impacted by the reinsurance treaty. Our net investment income totaled $6.7 million in the first quarter of 2014, basically flat with last year's first quarter. The tax equivalent yield on our investment portfolio was 3.8% in the first quarter of 2014, down 40 basis points from the first quarter of 2013. Our portfolio continues to carry a AA- rating with an average duration of approximately 3.9 years and remains quite liquid with roughly 20% rolling off over the next 15 months. In total, the revenue for the first quarter of 2014 was $96.2 million, up 11.1% from the year-ago period. Turning to the expenses. Our current accident year loss ratio for the quarter was 71.5% compared to the 73.2% a year ago. Our incurred loss and loss adjustment expenses totaled $61.3 million for the quarter, which included $2.5 million of favorable prior year development. This compares to loss and loss adjustment expenses of $56 million in last year's first quarter, which included $2.4 million of favorable prior year development. In total, our net calendar year loss ratio for the first quarter of 2014 was 68.7% compared to 70.3% 1 year ago. With regard to operating expenses. Total underwriting and other expenses increased 13.2% to $21.4 million compared to $18.9 million in the first quarter of 2013. The increase in expenses reflects a few specific items for the quarter, in particular: a $400,000 under-accrual of 2013 bonus compensation; the timing of other expenses related to meetings, licensing and fees of approximately $365,000; and most impactful of all, a change in our reinsurance treaty, which resulted in approximately $1.7 million of lower seeding commissions and lower accruals for contingent profit commission than we had in the first quarter of 2013. By category, the 2014 first quarter expense components include $6.7 million of salaries and benefits, $6.7 million of commissions and $8 million of underwriting and other costs. The expense ratio increased 20 basis points to 23.9% from 23.7% in the same quarter a year ago. In total, our combined ratio was 92.7% for the first quarter versus 94.7% for the same period in 2013. Return on average equity for the first quarter of 2014 was 10.1% compared to 9.2% for the first quarter of 2013. Book value per share at March 31, 2014, was $22.54, an increase of 6.3% from March 31, 2013, and modestly ahead of our year-end number of $22.41. Importantly, in addition to our regular dividend of $0.12 per share, we also paid an extraordinary dividend of $0.50 per share in the first quarter. Combined, these dividend payments totaled $11.5 million and are a reflection of the board and management's proactive approach to returning capital to stakeholders, as well as the favorable outlook for the company. Cash flows from operations remained strong during the first quarter of 2014 at $30.3 million compared to $21.8 million in 2013's first quarter. And finally, our statutory surplus grew to $364 million at quarter end. Those concluded my prepared remarks on the financials. I will now turn the discussion back to Allen. Allen?

Thanks, Mike. The first quarter was a solid and respectable quarter for AMERISAFE. We experienced, on a year-over-year basis, the following improvements in our performance: a growth in the gross premiums written, an increase in the pricing of the business we wrote during the quarter, a reduction in the current accident year loss ratio, an increase in favorable prior year claims development, an improved calendar year combined ratio, a 19-plus percent increase in operating earnings per share and an increase of 50% in our regular shareholder dividend. We expect our expense ratio to trend down slightly over the next 3 quarters, which should add additional momentum to our financial performance. With that, let's open the call for questions.

[Operator Instructions] Our first question will be coming from the line of Matt Carletti from JMP Securities.

The question I want to ask was just related to top line. I think it was probably just still a nice growth, for sure, but maybe a little bit lighter than what we had paced for and, quite honestly, I think what a lot of people have been expecting. New business growth was strong, but there is a big delta between that and the renewals. Can you maybe talk a little bit about what you think is going on with the renewals? Why the growth wasn’t stronger? And I know you don't like to give forward guidance, but any color you can give on -- do you think this quarter is representative of kind of a forward growth rate? Or is it -- I know you've talked in the past about really pushing the pricing and finding where that elasticity is. Have we hit that point? And will there be changes that -- should we expect that growth to be accelerated somewhat going forward?

Okay. Matt, I'll start off then let Janelle give you probably more detail on it. We have indeed pushed pricing. We have never been known as being the cheapest house in town. We're the kind of a company that will write the tougher classes of business. The renewal pricing, we have pushed hard. We were reviewing our pricing initiatives there. I anticipate -- I would certainly hope those initiatives would create a change in that. We are clearly -- the pricing is clearly at attractive levels. But it's not an unlimited -- doesn't have unlimited elasticity. At some point, you're going to hit the wall, and we're reviewing that. I can tell you, there's still a lot of business out there on the new business side that is less pricing-sensitive because it's -- underwriters have gone through their books and have looked at the underwriting portfolios and are trying to make sure that they underwrite to a profitable level. Renewal books are a little different because you know what that account's like. And other people sometimes are a bit more competitive on that. I think -- and Janelle, maybe you could speak to this, I think most of our change on that side came in the larger accounts, not in accounts that are usually in our sort of wheelhouse, but those account counts over $100,000.

That's correct. That's actually what I was going to add. We -- obviously, our goal here is to protect the margin, and 92.7% is a nice margin. Where we've seen on the renewal book, our retention start to slip, are those larger policies $100,000-plus, which as we know, is not our sweet spot. Our average policy size is somewhere in the $30,000 to $40,000 range. As you mentioned, Matt and Allen did too, there is a price point at which we have to say, "Okay. We've reached that point." We're analyzing that daily and, particularly, in relation to industries. In the quarter, we grew in construction. Trucking was relatively flat, so we're looking into that as well. And then from the audit premium side, where the work activity come -- where is the work activity coming from. From audit premium perspective, construction was relatively flat. Oil and gas was actually a little bit of a decrease, and trucking was relatively flat because the audit premium -- there wasn't that much difference between the 2 quarters. So work activity-wise, the industry didn't seem to shift as much. But on the renewal side or even the policy that we wrote in the quarter, the growth was specific to certain industries, where there's -- the things that we were lacking in were specific to certain industries as well. It wasn't across-the-board.

Matt, one other kind of comment on the pricing and our approach to it. Because we like our hazard business and because that business can be a bit lumpy, I would say that if we erred, we want to err on the side of being overly conservative on the pricing. Because if you miss this one, you're going to miss it really badly. And so I'm very comfortable that we've protected the margins, and the shareholders investment in AMERISAFE is not a risky one. And I think, long term -- and this is a long-term business, it's not a 3-month business. And so looking at it, long term, I'm pleased where we were. We are a bit disappointed on the top line obviously. But we are not fearful that we've undermined our profitability.

And as far as the long term look, I think it's important to add that sustained pricing is one of the reasons we're able to -- or we feel comfortable lowering the current accident year loss ratio.

Right. Absolutely. Okay. No, that's very helpful. And I think, well, on the growth opportunities, I mean, Allen, there's been, I think, a lot of press lately about a lot of infrastructure spending in your guys' neck of the woods and a lot of the energy related classes that you guys have a good footprint in. How -- is that an opportunity for AMERISAFE? How soon might you know if that's an opportunity for AMERISAFE and kind of tying that into capital management, both that and all the other growth opportunities? I mean, we sit here and look at premium-to-surplus leverage that's less than optimal, very high-quality problem to have. I appreciate that the board started to recognize that with a small special dividend. But can you give us some idea of -- is there a kind of a time line in mind, by which if these growth opportunities don't become huge -- I mean, if you just do the math, it's tough to come up with such big growth numbers that you grow into that capital base. I mean, it's just -- can you help us kind of frame that?

I don't think, with the return on equity, where we are and the growth of where we are, that we're going to grow into it. Yes, I understand.

Right. You said that better than I did. Absolutely.

Yes. Even though I'm lawyer, I got that one. Okay? There's about -- as you may be aware, there's about $65 billion of construction that is scheduled for the area -- the geographic area right where we are. It's Southwest Louisiana. This morning's Lake Charles Paper indicated that the Federal Energy Regulatory Commission approved the first of the LNG facilities that are scheduled to be started. Even with that approval, it will be at least a year before it kicks off. There is some infrastructure development going on now. We certainly intend to try to take advantage of as much of that business as possible. You would be surprised how broad the impact of that sort of spending is. It's everything from roads, streets, bridges, water sewer, all forms of infrastructure, all the way through supplies, trucking and many, many, many services in that area. So we would like to take advantage of that. I would tell you that we -- that there's probably a year off before it starts rolling. And then when it starts rolling, it will go on for 5 or 6 years. So it's not immediate. We are aware of our capital position. The board is very aware of it. That's why they raised the regular dividend 50% and made our first-ever extraordinary dividend. I think they'll be reviewing that on an annual basis. What they will do, I would not want to try to predict. But we are aware, and our shareholders, certainly, are entitled to a superior ROE. And we're going to do our best to make sure they get that. We've done pretty well with that over the last 8.5 years, and we're going to stay with that model.

Our next question will be coming from the line of Mark Hughes from SunTrust.

Allen, I have to say, it was a little bit of a shock to see redomestication to Nebraska in your press release. I'm not sure how to think about that.

Well, let me tell you, the folks in Nebraska have been absolutely wonderful. It is -- it was a tax issue for us being domesticated. Our insurance companies, 2 of them, being domesticated here. And we couldn't have asked for a better treatment there.

You've, in times past, commented on the behavior of some of your more meaningful competitors, given what you've said here about the maybe some retention among your larger policies slipping a little bit. Anything we should be aware of in terms of the aggressiveness of the other players?

I don't see -- in the marketplace, there's always competitors. But I don't see competitors acting like they did there in the height of the soft market. I really don't see that. I suspect, on those larger accounts, that, that competition is probably not coming from mono-line carriers. It's probably coming from larger multi-line national carriers. The biggest drop-off was over $250,000 policies. Okay? Percentage-wise, that was the biggest drop-off. And typically, those are large national multi-line carriers. And if the CIAB study is accurate, and I suspect it is, that there is more competitiveness in the other lines of business, it's not surprising to see people reaching out to the workers' comp line because that may be an opportunity for supporting the premium volume and the performance. I think the other thing that I would suggest some people may be looking at, I've noticed that the commentary around workers' comp is a bit more positive now than it's been. I think you're going to see in this year that the industry is going to report somewhere between a 10.5% and a 10.7% for the workers' comp lines on the numbers released next week by the NCCI. I don’t know what they're going to be, but I think it'll be somewhere near. That's down from 10.9%, 11.1% range last year. And I think you're also going to see that the premiums grow -- the premium has grown. The growth in premium has come from a slightly improved economic circumstance. But I think, probably as much, if not more, from rates, as rates have risen. So the initial reports, I think indicated on a net basis, there's a $37.2 billion of workers' comp, and that was up about -- in 2013, that was up about 7%, I want to say. It was up 18.2% from 2000 -- into 2011 to -- into 2013. So that's coming back. And with that growth and then with softness in the other lines, Mark, perhaps some people are reacting there. But we don't see any really bizarre behavior in the industry. In fact, we see some of the folks that were pretty aggressive the last couple of years still continuing to withdraw from the business and being replaced instead with more cautious and more stable writers.

Let me ask you this. The -- your pricing has been improving consistently. You've been very active in pushing pricing, as you say. The industry combined ratio, you suggest will be down 400 basis points. Shouldn't your losses be coming down a little bit faster?

Well, one would think if you just did it on a pure math basis. I think the industry's pricing increases were at a rate much higher than our increases because they started at a lower number. I still don't think a 10.5% to a 10.7% is a very acceptable performance, and I think our board would agree with that. So yes, maybe it should have come down a little bit more, but we have experienced favorable development in older years. And part of the reason you have favorable development in the older years is that you're not overly aggressive in the current year. And we still want to make sure that we get the current year right, and that we're not overly aggressive. And I would tell you also, Mark, remember, there's a time delay between when we write an account and when it earns out. So there's a bit of a lag on the performance.

Our next question will be coming from the line of Bob Farnam from KBW.

Allen, it sounds like you've been talking about the expense ratio, and it should be trending down over the next few quarters. Do you have like kind of half year run rate expense ratio?

No. We don't give forward-looking guidance. I think one of the things I noticed, obviously, that most of the folks on the street missed the number, which was largely a reinsurance difference. That was one thing in there, and we probably didn't emphasize that enough in our fourth quarter call. But there were some expenses that were -- our timing issues in the first quarter that were normally in other parts of the year. And I think the other thing is that the volume is going to rise, and we will get some benefit from that as well. So I think, if you look at last year, I don't remember, Mike, our first quarter expense ratio was 23.7%, and then we ended the year at 20.6%. I'm not sure that will move in that sort of range because we have a new reinsurance structure. But if you look at our expense ratio experience over the last 5 years, you see pretty much sort of that sort of downward trend when you get to the year end. I'd help you out more than that, but I just -- I think there's [indiscernible]. Earn [ph] is respectable and solid, both.

[Operator Instructions] Our next question will be coming from the line of Jon Evans from JWest, LLC.

So you guys alluded to in your fourth quarter that the weather had been pretty poor, and especially in your neck of the woods, and that had maybe caused you the construction workers and some of the workers that you have insured not to have jobs, et cetera, or -- can you talk a little bit about as the weather has broken? Have you seen any kind of uptick in that because you have a lot of seasonal workers that are more weather-related?

We haven't yet seen it. The -- probably, one of the reasons we hadn't seen it is that the reports on payroll come in on the 10th -- they start about the 10th of the month on the month following when the work is done. So we haven't gotten the April's numbers yet. The last numbers we have were March, and weather here was not very good in March. And of course, not just here, but all across the country. In fact, this morning, here, I think it was 46 or 47 degrees on May 1 in 90 miles off the Gulf of Mexico. That's pretty unusual. And -- but certainly, we expect to see an uptick in the payroll and the reported premium for the months -- that we receive in May for the month of April. And certainly, we insure lots of folks that have a nonfixed workplace environment and that work outside. And the weather has improved dramatically. And although it's a little cool right now, it's not that cool, it's actually pretty comfortable. So we're hoping that we'll see an uptick in that. And we actually track it seasonally. And this year has been slower recovery than it has been in the past. But it really does seem to lineup some with the weather.

And then last question I have for you, you've alluded before just about some of the stresses in the industry. A couple quarters ago, you talked about maybe that'd give you a potential to use some of that capital and buy something, et cetera. Can you just tell us, do you see any of those kind of stresses that are out there, or are you just going to grow organically?

No. Well, we...

We fully intend to grow again.

We intend to grow organically, and we would like to make an acquisition that makes sense. So we would like to take advantage of both of those. I -- we've seen a lot of books of business. We've seen a lot of opportunities to take over books from MGAs and to appoint MGAs. And we could grow the business without any question very quickly. The challenge is to grow it and protect your margin. That's the challenge. And so far, we haven't seen that opportunity. But we're looking. And if you’ve got any ideas, give me a call. We really are interested in doing that. But it's -- for us, it's always the same approach, profit first and then volume later.

Thank you. And at this time, I'm not showing any further questions. I would now like to turn the call back over to Mr. Allen Bradley.

Thank you. Gosh, I wrote this closing before I knew Jon was going to ask that question. So it plays well into it. AMERISAFE continues to grow its premium base. We would have liked for it to have grown more in the first question -- first quarter. But as we've discussed in the past on numerable occasions, we intend to first focus on improving our underwriting margins and profitability during this time of expansion of premium growth. Thank you for your interest, and we appreciate your call and participation today.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.