AMERISAFE, Inc. (AMSF) Q3 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the AMERISAFE's 2017 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Vincent Gagliano, Chief Risk Officer. Please go ahead. [Technical Difficulty].

Good morning. Welcome to the AMERISAFE 2017 third 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 may differ materially from the results expressed or implied in these statements if the underlying assumptions prove to be incorrect or as the result of risks, uncertainties and other factors including 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 Janelle Frost, AMERISAFE's President and CEO.

Thank you, Vincent. My prepared remarks were so profound, I think I'll share them with you again. Insurance is a cyclical industry. This fact is easily proven looking at historical results regardless of the view is underlying loss costs, premium volume or profitability. We are currently in a soft market, we're at that point in the cycle when companies begin to have what I call an identity crisis, chasing premiums at prices inadequate to cover long-term losses. AMERISAFE is not having an identity crisis. We are focusing on underwriting discipline and managing our claims to provide returns to our shareholders while providing exceptional service to our policyholders. Our return of capital to shareholders this quarter they were $3.50 per share special dividend is a reflection of our capital strength and our view of current market conditions which we are well positioned for the future. This quarters operational results are reflective of our consistent approach to the workers compensation throughout market cycles. Premiums written in the quarter were down 2% driven by a decline in new business as competition remained intense. We were successful in protecting our renewal policies this quarter by increasing renewal policy count. Our policy retention was 93.7%, up from 92.7% in the same quarter last year. What slippage we did have was from policies with greater than $100,000 in premium, annual premium. Our pricing as represented in our effective loss cost multiplier was $1.69 compared to $1.71 in the third quarter last year. Audit and related premium adjustments decreased premiums $1.1 million on par with last year. Relative to losses, we've remained at 69% loss in LAE ratio for the current accident year. As projected frequency was up. Our claims reported in the calendar year were down 5.8% yet net earned premiums were down 6.4%. Severity was higher for accident year 2017 which was also projected at the beginning of the year. We have often stated that losses are lumpy, so severity bears monitoring as the accident year progresses into the last quarter. As for prior accident years, we experienced favorable case development in the quarter which lead to a reduction in losses incurred of $10.3 million. Accident years 2013, 2014 and 2015 experienced the most favorable development as we focused on closing claims and returning injured workers to work. Our open claim count at the end of September 30, 2017 was 2.7% lower than the end of third quarter 2016. After the favorable development our loss in LAE incurred ratio for the quarter was 56.9% compared to 56.2% last third quarter. The best summary of this operational metrics is a combined ratio of 81.4% and pretax underwriting profit of $15.9 million. I will now turn the call over to Neal to discuss the financial results.

Thank you, Janelle, and good morning, everyone. For the third quarter of 2017, AMERISAFE reported net income of $16.6 million or $0.86 per diluted share compared with $17.9 million or $0.93 per diluted share in last year's third quarter, a decrease of 7.4%. Operating net income in the third quarter of 2017 totaled $16.7 million or $0.87 per share lower than last year's $0.93 per share. Revenues in the quarter decreased 5.5% to $92.8 million compared with last year's third quarter. Net premiums earned decreased 5.3% to $85.1 million when compared to the third quarter of 2016. Net investment income was $7.8 million in the third quarter of 2017, a decrease of 2.7% when compared with last year's third quarter. The decrease was due to a large position change in the value of a limited partnership hedge fund investment in last year's third quarter. This limited partnership is mark-to-market through net investment income each quarter. The tax equivalent yield on our investment portfolio at the end of the quarter was 3.2%, no change from the end of the third quarter of 2016. There were no impairments or significant realized gains or losses during the quarter. Our investment portfolio continues to be high quality carrying an average AA rating, our duration of the portfolio is 3.73% and we hold 55% in municipal bonds, 23% in corporate bonds, 13% in U.S. Treasuries and Agencies, and the remainder in cash and other investments. Over the past year, our allocation to municipal bonds and treasury securities has increased slightly and our allocation to corporate bonds has decreased slightly. Approximately 52% of our investment portfolio is classified as held to maturity which is in a net unrealized gained position of $11.5 million. These gains are not reflected in our book value as these bonds are carried at amortized costs. With regard to operating expenses, our total underwriting and other expenses decreased 7.1% in the quarter to $19.3 million compared with $20.8 million in the same quarter last year. We saw decreases in assessments and commissions this quarter compared with last year's third quarter. By type of expense, the third quarter of 2017 expenses included $6 million of salaries and benefits, $6 million of commissions, and $7.2 million of underwriting and other costs. Our expense ratio for the third quarter was 22.7% compared with 23.1% in the third quarter of last year. Our tax rate decreased to 29.6% in the quarter, down from 31.2% in the third quarter last year. The decrease reflects the larger amount of tax exempt income compared with underwriting income during the quarter. Return on equity for the third quarter of 2017 was 13.6% compared to 14.2% for the third quarter of 2016. Operating ROE for the quarter was 13.8%. On October 23, 2017 the Company's Board of Directors declared a regular quarterly cash dividend of $0.20 per share payable on December 28, 2017 to shareholders of record as of December 14, 2017. In addition, as part of our ongoing capital management efforts, and as Janelle mentioned earlier, the Company's Board declared a special dividend of $3.50 per share for shareholders with the same record and payable dates. This brings the total amount of special dividends paid out in the last four years to $11.25 per share. And finally, just a couple of other items to note; book value per share at September 30 was $25.72, up 8.4% from year-end. Our statutory surplus was $421.2 million at September 30, 2017, up $27.2 million from year-end. And then finally, our 10-Q will be filed tomorrow after markets closes for AMERISAFE. That concludes my remarks, and we'd now like to open the call up for our question-and-answer session. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Mark Hughes from SunTrust. Your line is open.

Thank you, good morning. Janelle, the ELCM was 1.69 in the quarter?

Correct.

Could you admit that the retention was better, it sounded like it was quite strong but this was obviously quite a turnabout from last two or three quarters where you've seen more of a down draft in the written premium? Anything different out in the market, new strategies you're undertaking that drove that?

No, not new strategies that we're taking, we're just keep trying to maintain our discipline and price our product appropriately, they are still quite competitive in the marketplace.

Any competitors of note that maybe bagging off a little bit or brokers shifting more of their business elsewhere anything like that?

Yes, that's a really good question. We continue to run into the multi-line carriers as the P&C industry results continue to deteriorate, more and more carriers are seeking workers compensation which is unprecedented for our industry. So we continue to compete against multi-line carriers.

Right. So the down 16 last quarter to the down 2 from your perspective would just be kind of the [indiscernible] of the marketplace?

Yes, that's a good way to put it. I know we like to use the word lumpy when we talk about our losses, and in this case, you know, from a premium perspective because there is certainly nothing that has improved in the marketplace as far as competition has gone. You can tell by the ELCM, I think we're at once we were put at 1.68 last quarter, we had 1.69 this quarter; so now there is a tremendous amount of differentiation in terms of pricing, yet we were more able to buying more of our renewal policies. So that has been a particular focus for us but that has been throughout the softening cycle trying to protect that renewal book making the adjustments necessary to make sure that we're protecting those accounts.

You've seen any post-storm bump [ph], any construction activity; Florida, Texas, is that helping you at all?

Yes, it's a good question. So keep in mind, the way I would monitor that is audit premiums or pay rolls that are being reported and those are a month in arrears. So at this point I would start to suspect that we'd start seeing some increased payrolls. We think some anecdotal things thus far but nothing that off note that I could tell you, I could point to it and say, yes, we're definitely seeing payroll or exposure growth from those particular areas, not at this point.

When you said the frequency, did you say premium down 6%, claims down 5%, therefore frequency up a little bit; was that your point?

Roughly, yes. That was when we originally talked about the 69% loss ratio at the beginning of the year, we kind of talked about what our assumptions were about that frequency being one, that even if my claim count stayed the same under the planning premium base, I would -- that would put pressure on frequency to go up. My claim counts have actually gone down but yet, it's so putting pressure on frequency.

Severity, are you seeing a few more large claims? I think you haven't had kind of a bad quarter in that way in quite a while.

I'm knocking on this table as you say that Mark. We are up to 12 claims known as a large claims as claims at this point we're estimating over $1 million in incurred losses. I think we ended the year last year with 17 if I'm not mistaken for exiting year 2016. So that's on par, we've picked up a few this quarter but that's expected because summer months are our full employment months so that's when we have -- I think more people outdoing the hazardous things that they do. So not unusual for us. But as I mentioned in my prepared remarks, something that bears watching is severity.

The investment income of $7.8 million down year-over-year but up last quarter and up from Q1. Is this a reasonable run rate without any -- expecting any of these kind of mark-to-market benefits?

Yes. I think it is -- I think our investment income can be a little bit volatile, we've seen that with the hedge fund mark-to-market but I think looking at sort of maybe a training 12 months would be -- maybe a better run rate than just this most recent quarter.

Okay. And then on the expense ratio little lower this quarter sustainable or is this also just a variability?

I think we saw some variability to positive. I think from that standpoint as we talked about, we're continuing to focus on managing our expenses as best we can as we expect in this soft market. So our expectation would be to continue to see the expense ratio running in the 24 to 25 range. We're trying to do the best we can to manage that down. And you can also see that our policyholder dividend ratio is continuing to climb up a little bit because we compete in certain states on the basis of dividends that we pay out to policyholders. We don't mind that because those payouts typically mean that customers had a good loss history but it does effect in certain states.

Thank you.

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

Thanks, good morning. Mark covered a lot of what I had but maybe difficult to follow-up. On the discussion about some potential, kind of increased work activity coming out of some of the storm areas, I mean obviously Texas and Florida are big states for you; where would you expect to see at the most, will it be -- I know you aren't big and say residential construction but obviously there is a commercial impact, there is trucking to get materials around; what part of your book would you expect to see any impacts that might have arised?

To your point, I think trucking is some place we definitely see getting materials in and out, as well as in terms of what we call logging and slumberous [ph], people that are in part dealing with down vegetation and cleanup in those regards, I think we would see an uptick from there. But you're right, we don't really participate in the residential playing field.

Okay. And that would take a few quarters probably to show up just because of the nature of the premium audits and how it comes through, is that -- am I thinking about that right?

Right. Because our [indiscernible] is a month in arrears, so we're still early in the process, so we will definitely keep you posted.

Okay, great. And then one other question, just on premium audits themselves, I know it was -- I think the number was negative $1.2 million this quarter which was kind of equal with what it was a year ago quarter. As we move forward to Q4 and Q1, do you have the premium audit numbers from last year -- the year ago periods, so I know what we're stacking up against?

Yes, absolutely, I do have it. And I should keep in mind that premium audits themselves were positive. So they were basically in line with what they were last quarter, it's what makes it that thing such as cancellations endorsements, that sort of thing. So Neal, you want to reach out for me [ph]?

Yes. So last year in the third quarter our premium audit and other adjustments were minus $1.2 million. In the fourth quarter of 2016, they were a positive $1.2 million, and in the first quarter of 2017 they were a positive $2.2 million.

Okay, great, very helpful. Congrats on the nice quarter and best of luck going forward.

Thank you, Matt.

Thanks, Matt.

There are no further questions at this time. I would now like to turn the conference back over to Janelle Frost, Chief Executive Officer.

Well, first and foremost, I would like to thank you for your patience in staying with us on the line through our technical difficulties. I should tell you it is a beautiful day here in De Ridder, Louisiana, obviously while we have phone problems. When we discuss AMERISAFE, I tend to focus on five distinctions; one, our high hazard niche; two, our focus on small to mid-size employers; three, our underwriting expertise; four, our comprehensive safety services; and five, our intensive claims management. We are also consistent and stable, we are frugal with our expenses and our level of service is critical to our successful retention. These distinctions coupled with our expert employees are built to proceed through out-market cycles. Thank you for joining us today.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.