AMERISAFE, Inc. (AMSF) Q2 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the AMERISAFE Incorporated Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your first speaker today, Vincent Gagliano for opening remarks. You have the floor sir.

Good morning. Welcome to the AMERISAFE's second quarter 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 factor 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 statements. I will now turn the call over to Allen Bradley, AMERISAFE'S Executive Chairman.

Thanks, Vincent. Good morning ladies and gentlemen. Thank you for joining AMERISAFE's quarterly earnings call. I will make a few remarks about the marketplace and then turn the call over to Janelle Frost for details on the company's performance. On May 13 through 15 this year, the National Council on Compensation Insurance held its annual issue symposium in Orlando, Florida. During that symposium, the Group released its state of the line report which provides the most definitive annual analysis of the Workers Compensation market in this country. The headline news was that the combined ratio for what they call private carriers which excludes state funds and residual pools, was 98% for calendar year 2014 which by the way was a little bit higher than I had expected. The portion of that report that surprised me the most was the lack of aggressive use of carrier discounting and pricing during 2014. According to the report which contained added states where the NCCI collects data. Direct written premium rose 4.5%.The components of that change were what surprised me. 4.7% of the growth - of the total premium growth was a result of change in carrier estimated payroll. In other words the increase in exposures or growth and wages pay. That was partially offset by 1.4% drop in premium related to change in bureau loss costs and the mix of businesses moving away from heavier construction and heavier risk to more service oriented risk. There was a 4% increase in the use of carrier discounting in terms of the total premium written, that was quite surprising. The lack of the aggressive use of schedule rating in 2014 indicates that pricing discipline had not yet gone out of the window. And there was other good news in the report. The direct premium written indicated that the economy is moving ahead at a relatively good pace. Also in the report there was a report that there was three percentage points of prior period adverse development moving the accident year combined ratio from 95% to 98%. Additionally the schedule fee efficiencies for insurance company reserves and workers comp decreased only from $11billion to $10 billion. I find these factors encouraging as it should slow carrier from becoming overly aggressive in terms of pricing. The claims metrics of falling frequency and muted increases and severity were also very good news. As usual to offset the good news there was some not so good news contained in this report. The excessive capital and surplus in the general property and casualty market coupled with record low operational leverage indicates that the probability of a soft market is very high. The workers compensation markets underwriting profit could lower additional carriers into the line. Loss cost, which have been falling may continue to fall thereby amplifying the impact of increased compensation. And finally, a shrinking residual market is a sure sign that some carriers are comprising underwriting discipline. Despite the challenges listed above we believe Workers Compensation market remains relatively attractive. We expect industry pricing to slide downwards over the next few quarters. However, with favorable trends and frequency in severity, we do not view this decreased pricing as unwarranted. All things considered is a pretty good time to be in the Workers Comp business. With that I’ll turn it over to our CEO, Janelle Frost.

Thank you, Allen, for the market commentary, and good morning everyone. I will now move onto the operational and financial results specific to AMERISAFE this quarter. Overall we were pleased, our operating trends were positive and it led to an 83.6% combined ratio in the quarter down 5.8 percentage points from the second quarter last year. Our topline grew $2.2 million or 2.1%. This growth was driven by a renewal premium, which grew 11.4%. Our retention was up both on a policy count and premium basis. Policy retention was 92.8%, up from 90.8% and premium retention was 87.4% up from 83%. In addition, audit premium and related adjustments remained positive this quarter contributing $0.2 million to growth. Offsetting the quarter growth our new premium however - new business declined 21.2%. Our favorable pricing continued this quarter of reflecting a decline from the previous year’s quarter. Our Effective Loss Cost Multiplier or ELCM for voluntary premium in the quarter was 1.81 compared to 1.86 in the second quarter of 2014. This decline in pricing was deliberate, appropriate, and reflective of the market. Net premium earned increased 2.2% from the year ago quarter to $95.6 million reflecting net premium written growth over the past year. Relative to losses, we remained at a 69.8% loss in LAE ratio for the current accident year. Our claims reported in calendar year 2015 were down 4.3% to 2,603 claims. Declining frequency was a pleasant surprise since our expectation for the year was flat. As for prior accident years, the quarter was impacted by favorable development. Significant case development led to $9.4 million, a favorable loss development in the quarter, which lowered the loss from also LAE ratio by 9.8 percentage point. This compared to $4.4 million of favorable development in the second quarter of 2014, which lowered the loss in LAE ratio by 4.7 percentage points. Accident years 2006, 2007, and 2012 were the primary drivers of the favorable development. With regard to operating expenses, total underwriting and other expenses increased 5.1% to $22.1 million. The increase was primarily attributable to less contingent profit commission in the second quarter of 2015, which typically acts as an offset to expenses. By category the 2015 second quarter expense components included $5.9 million of salaries and benefits, $6.9 million of commissions, and $9.3 million of underwriting and other costs. Overall the expense ratio increased to 23.1% from 22.5% in the same quarter a year ago. Our net investment income totaled $6.9 million in the second quarter of 2015 a 0.7% increase from last year's second quarter. The tax equivalent yield on the investment portfolio was 3.6% this quarter down 10 basis points in the second quarter of 2014. Including cash and cash equivalents, the company's portfolio was valued at $1.1 billion with 62.2% of the securities classified it held to maturity with an unrealized gain of $18.3 million. As of June 30, 2015 municipal bonds comprised 55% of the investment portfolio. In the quarter we did recognize $2.6 million of realized losses primarily due to other than temporary impairment of certain Puerto Rican securities. Overall, the investment portfolio continues to carry a AA minus rating with an average duration of approximately 3.4 years. Our tax rate included 28.8% in the quarter from 25.1% a year ago. This increase largely reflected the increase in taxable income relative to tax exempt interest, as the ratio rose in the quarter due to the favorable development. The end result was operating net income of $16 million or $0.84 per diluted share compared to $12.6 million or $0.67 per diluted share in the second quarter of 2014. On a reported basis net income grew 12.1% to $14.3 million or $0.75 per diluted share from $12.8 million or $0.68 per diluted share in the second quarter of 2014. Operating return on average equity was 13.8% for the quarter up from 11.8% in the same quarter of 2014. On a reported basis return on average equity for the second quarter was 12.3% compared to 11.9% in the second quarter of 2014. Book value per share at June 30 was $24.87, an increase of 6.9% and our statutory surplus was $404.9 million at the quarter end. Regarding capital management, the company paid a regular quarterly cash dividend of $0.15 per share on June 26. On July 28, the Board of Directors declared a quarterly cash dividend of $0.15 per share payable on September 25 to shareholders of record as of September 11, 2015. Before I open the call for questions I would like to reaffirm our commitment to making an underwriting profit using a disciplined approach to our business through varying market cycles. Yes this quarter we were able to grow topline with favorable pricing. More importantly our underwriting margin benefited from favorable case development, spurred by intensive claims management and continued control over operating expenses. However, we’re mindful it is a quarter's result. Our long term results carry more rate. Such as we were recently chosen by Ward's as one of the top 50 P&C Company. This was our 7th time to be honored and while it was indeed an honor, this recognition also served as a challenge to remain focused. This is a sprint not a marathon. We will now open the call for questions.

[Operator Instructions] Our first question comes from the line of Matt Carletti with JMP Securities. Your line is open.

Thanks. Good morning. Janelle, you had spoken a little bit I think about – talk about loss trends, I heard you mentioned frequency being little better than expected maybe you expect a flat and it is down a little. I might have missed it but how is severity looking versus your expectations and kind of when you put the two together, how is that we are thinking about where the asking a loss ratio is it six months versus how you progress through the rest of the year?

Good question. I will caution that it is as you said at six months. Yes, frequency is down so we are now in the summer months which we consider – months, so that's when accidents tend to happen. We were fortunate by the end of second quarter. We had only one claim in excess of $1 million which was lower than we were at the same point in time in 2014. So we are in a lumpy business. So for us current accident year is something that we are very cautious about because those claims can happen up until the very end of the year. At this point although I will say at this point severity given that we only had one claim in excess of $1 million, was improving from the prior accident year but that remains to be seen what will happen at the end of the year.

Okay. That will make sense. And my other question just on the development of – the favorable development. You mentioned that a lot of it came from case. Was it all case, was there some idea on there, can you give us any idea the split on what’s driving that?

It was our most entirely case.

Perfect. All right, great. Well, thanks and congrats on a very nice quarter.

Thank you.

Thank you. Our next question comes from the line of Mark Hughes with SunTrust. Your line is open.

Thank you. The 4.3% decline in claims, was that year-to-date?

That was for the quarter.

For the quarter. And then was that adjusted for premium or was that raw number?

That was raw number. That was strictly claim count.

Okay. And then, the pricing, Allen you would say you expect to slide downwards. Is that because you’re seeing that start the slide downward, there are tangible signs that people are getting more aggressive competitively or is this the pro forma turbulence ahead, it always happens, -

It's not numeric's its real Mark. We have seen pricing at AMERISAFE. We have seen a slide down, so we hear discussion in the marketplace. As well as the lost cost themselves going down and as they go down, that tends to pull the premium down. One of the things that’s really unique in the marketplace now I think, and you could see it in AMERISAFE numbers and you can see it in the market as a whole and that is the carriers are very focused on keeping the business they have on the books. There seems to be a lot of focus on the renewal book and so we saw a very healthy growth in our renewal book as Janelle outlined. And we saw fewer submissions for new business. And we think all of that is consistent with it and I think that you see carriers giving more price concession to renewal accounts because they know that business better.

Right. In terms of price competition I guess this is a good time to mention that the 1.81 LCM still seems like it's pretty healthy and looking back at the peak of the last cycle, say 2004, 2005 your LCM was 1.50 or so? You current accident year loss back in 2004 was 69% coming off a kind of 14, 15 LCM. Is there some reason I think that the times are different and so the LCM does it mean mathematically what it used to mean. Or is 1.8 still quite good and much better than you got at the peak of the last cycle when you had some similar current accident year loss picks?

Yes, I would say the 1.8 is still quite good. We still have rooms there. We are never going to be leader as far as price sensitivity and dropping prices. I think what we’re doing as I said in my comment is very deliberate and very methodical and may be not too everyone’s pleasure is not as fast as they would like it to be, but our end goal is to produce a profit margin and that is extremely important to us.

One other point I would make Mark on, you asked questions or anything this changed our view of loss cost as it was oppose in 2004, 2005, and 2006 since those time periods. And the answer is yes. We saw a definite shift in claims characteristics during the recession. We saw elongation claims, we saw the problems returning people to work, we saw businesses going out of work and therefore claims become elongated. We’ve seen the rapid growth of prescription medications as a component of claims costs. So we've seen a lot of those things and we’re not necessarily sure picked up in the loss cost yet.

So there may be elongation that NCCI has missed is what you’re saying, but may be -

It’s a retrospective making a rates and sometimes it’s hard to catch the terms through that process. Other state is that one thing that we’ve seen a lot of in the Workers Comp business is adverse development, prior period adverse development and that begins that is born the day that you have taken aggressive current accident year loss ratio.

Right. I am looking at your operating expenses were in the mid 20s back then your operating expenses are lower today. Is there something about LAE that’s higher, I am just trying to make sure that I got the right perspective that when I saw 1.8 is better than 1.5 that there is not something I am missing?

It is definitely better. There is no question about it. 1.8 is definitely better and it will slide down and you will be surprised sometimes maybe how fast it slides, but I’ll tell you that claims durations are longer. Medical costs are high. And while we have seen improvements in the claims dynamics we have not seen them return to the same characteristics they existed during full employment days.

That's still captured in the loss costs. You may say there is more to come, but it’s still the elongation, the higher medical all that is still captured in the loss costs.

We hope it is.

And there is always some lag and

You always miss a turn every time.

Sorry to be beat on that. The operating expenses Janelle a little bit higher sequentially this quarter I think ceding commissions are a little lower, how do we think about that going forward.

That's correct. If you recall last quarter we had I think three to four what Mike terms in as onetime adjustments we have some premium basis assessment that adjust in premium taxes. And there was actually a change in the accrual due to our long term incentive plan all in the last quarter. And during the last quarter's call I actually went back to read before today that he said being on the normalized basis the expense ratio was 23:2. So sequentially, the two quarters are relatively the same without those one-time adjustments that we had in the first quarter.

So would 23 be a good assumption going forward?

I like 23.

Okay, all right, very good. Thank you.

[Operator Instructions] Our next question comes from line of Randy Binner from FBR. Your line is open.

Hi, good morning, thank you. I guess I want just follow up on the PUID that’s favorable on accident 12, I guess this kind was asked by Matt Carletti, but what's happening to the more recent accident years are not as mature, but 2012 is a little bit kind of that 36 month window I guess were asses what get better and so. If you talk about cases is this you're resolving the settlement faster, there is less volume involvement, there is less - the guy taking pills, is that's what happen here as more orderly kind of case claims management and is that what you're observing call the '11, '12, and '13 accident years in general.

It’s a great question Randy. Let me talk about accident year 2012 case reserves because I think it is a heart of your question. If you recall, we bring this up often because it's painful and I like bringing up the painful thing. Coming out of accident in year 2010, we experienced we AMERISAFE and the industry experienced a lot of - add a lot of adverse development, we got it wrong. Our accurate got it wrong, we got it wrong, we had underestimated what the impact of those claims were going to be from a loss ratio standpoint. We also, as Allen was talking about in the industry, we also came into a time period where we started seeing the elongation of claims return to work issues, pain management issues. So going back to the case reserves that I said in 2012, I would say all of those things, those things that Allen was talking about as far as the industry were true for AMERISAFE, we're in the minds of our field case managers when they were setting those case reserves. The flipside of that is, yes I do think I’d love to attribute the case favorable case development that we’re experiencing from the accident year from the way we handle claims. I think that’s a very big part of the case development that we had. Our goal is to return the claim to maximum medical improvement return them to work and our claims department does a very good job with that. And fortunate for us and our shareholders that’s resulted in favorable case development for the company.

So I guess what you’re saying is that kind of mini-hard market of call it '11, '12, and '13 is looking like that and retrospect so there is also a little more benefit from a macro perspective.

I would absolutely say that’s true.

And let me just add this to Randy. I think the industry as a whole, is seeing some improvement in claims dynamics is just they are not going back to where they were in '04, '05, and '06. So I think that what you're seeing its better than it was, but it’s not as good as it could be.

Right.

So when you go into a year like we went into 2012, like we went into 2013, 2014, and 2015, 15 less so because we think those at least '12, '13, and '14 may indicate a turn in that. We’re just a little cautious about getting overly aggressive about bringing that current accident year down or bringing back those years but you still got a number of large claims.

Right, understood. You mentioned '04, '05, and '06, I mean 2006 developed loss ratio is 20% lower I think than '12. So there is a lot of room between those two goal posts. I wanted to ask two more questions, one is just a detail thing. You mentioned the Puerto Rican bonds can you just update us on how much the exposure is where your write-down puts you on the dollar and those what type of bounds there are that sought of thing?

Sure. They are sales tax bonds and we owned four of those. And I think everyone in the industry knows at this point that the, as governor came out and said that everyone is going to share the pain, so we have an experience of loss, but we have deemed that it is likely that, that is going to happen. So we chose this quarter to impair them.

And so what's your aggregate exposure and did you impair them like $0.70 or dollar something like that.

I think it was $0.47, it was $2.6 million, hold on just a sold, I will get it for you.

I mean you own what $6 million of these things, 6 million

I think it was around $6 million. I'm sorry, I don't have that right here hold on, just a second.

While you’re looking for that, just the other kind of kind of specific question I have is, I think you brought on a new head of sales or marketing and how is that transition go and what kind of initiatives are you starting there that are different then what you have done in the past?

Yes, we are really excited about our higher but it is still early in the process. By the end of the second quarter he had just reached his 90 days. So, we were excited about the prospects of what's going to happen, we definitely laying the groundwork but certainly not true impact to the results at this point.

What sort of stuff is he doing maybe different than the past.

That's a good question, I don’t want to give out any competitive information. We are working on our agent relationships, I think that’s the fair way to summarize the question.

Okay. Got it.

Randy it looks like our exposure to Puerto Rico was about 6.2 million, 6.9 million and we wrote -off 6.2.

I got you. Perfect. That's all I have. Thanks so much.

Thanks Randy.

Thank you. That's all the questions that we have in the queue at this time. So I would like to turn the call back over to Janelle Frost for closing remarks.

Well thank you for your interest in the quarter. And thank you for joining the call today.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect your telephone lines. Everyone have a great day.