AMERISAFE, Inc. (AMSF) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the AMERISAFE's 2018 First 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 call is being recorded. I would now like to introduce your host for today's conference, Ms. Kathryn Shirley, General Counsel. Ma'am, you may begin.

Good morning. Welcome to the AMERISAFE 2018 First 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 results of risks, uncertainties and other factors, including factors discussed in today's earnings release, and 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 statement. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.

Thank you, Kathryn. And good morning, everyone. Thank you for joining us today as we discuss the financial results for the first quarter of 2018, and operational metrics supporting those results. I will begin by saying this was a good start to 2018. At AMERISAFE, we pride ourselves on our focus, consistency, frugality and service. And our financial performance this quarter is the result of our dedicated employees executing on those fundamental attributes. The results demonstrate our ability to maintain discipline while navigating a competitive Workers' Compensation environment. Pricing pressure continued as approved loss costs declined and carriers aggressively searched for premium. AMERISAFE, however, focused on retaining and serving our valued policy holders through risk selection, proactive safety expertise and claims management. It was the retention of those valued policy holders that in large part, enabled gross premiums written to grow 2.4% in the first quarter. Voluntary policy count grew 2% and the related premium grew 1.6%. The growth was supported by a historic policy retention rate of 94%, compared to 92.8% in 2017's first quarter. This was somewhat offset by a decline in new business of 10.4% as new business submissions were down. Overall, pricing on the policies written in the quarter was at 1.63 ELCM, down slightly from a 1.65 in the year ago quarter. Keep in mind our ELCM decrease has been a gradual decrease in a market when underlying loss costs have been on the decline for three years. In addition to the policies we wrote this quarter, top-line also benefited from $1 million tailwind from audit and related premium adjustments. Audit premium remained positive and we had less cancellation premium this quarter than one year ago. We see positive audit premium as a sign of a growing economy for some of the classes we underwrite. Our loss ratio for the quarter was a 60.9% compared to 61.8% in the first quarter of 2017. The quarter's loss ratio was comprised of a current accident year loss ratio of 71.5% and prior year development ratio of a negative 10.6%. Our initial estimate for accident year 2018 is 1 percentage point higher than accident year 2017 as measured at the end of the accident year. Our estimate assumes we will continue to see pressure on frequency and severity. Pressure on frequency is more a result of less-earned premium rather than increased claims counts. Our reported claims for the first three months were up 2.2%, but earned premium was down 4%. As for severity, we expect a modest increase in severity in line with what we saw in accident years 2014 through 2016. In the first quarter, we did have five claims with excess of $1 million in incurred losses. This compares to three such claims at the end of 2017 first quarter and 17 large claims for the full year. We certainly cannot determine a trend of three months of data. As we've seen in prior years, the occurrence and severity of such losses are lumpy, but bears monitoring as the accident year progresses. As for prior accident years, we had strong favorable case development from accident years 2015 and '14 in the quarter, which led to overall favorable development of $9.3 million. Our open inventory of claims at the end of the quarter was relatively unchanged from last year's first quarter. We continue to focus on maximum medical improvement for our claimants, return to work and closing claims. That concludes my prepared remarks. I'll now turn the call over to Neal.

Thank you, Janelle. And good morning, everyone. For the first quarter of 2018, AMERISAFE reported net income of $16.2 million or $0.84 per diluted share, compared with $13.5 million or $0.70 per diluted share in last year's first quarter. During the quarter, we implemented the new accounting standard requiring the changes in the value of equity securities be included in net income. As a result, you will see a new line item in the financial statements, net unrealized gains or losses on equity securities. This amount will be excluded from operating net income, along with any realized gains or losses on our fixed income investment securities. Operating net income for the quarter was $16.5 million or $0.86 per share, an increase of $0.15 from $0.71 in the first quarter of 2017. Revenues in the quarter declined 3.5% to $94.2 million, compared with the first quarter of 2017. Net premiums earned decreased 4% to $87.3 million, when compared to last year's first quarter, which was a better result this quarter than our recent trend. Turning to our investment portfolio. Net investment income increased 7.4% in the first quarter to $7.2 million, compared with $6.7 million in the first quarter of 2017. The increase was largely due to the decrease in value of a hedge fund investment in last year's first quarter. Net investment income without the hedge fund impact was up 1.8%, compared to last year's first quarter. The tax equivalent yield on our investment portfolio was 2.9% at the end of the quarter. The pre-tax yield on the portfolio was 2.59% at quarter end, up slightly from 2.54% at year end. There were no impairments on any of the securities held in the portfolio during the quarter, and there were no significant realized gains or losses during the quarter. The investment portfolio continues to be high quality, carrying an average AA rating with a duration of 3.98 with 59% in municipal bonds, 22% in corporate bonds, 13% in U.S. treasuries and agencies and the remainder in cash and other investments. Approximately 57% of our bond portfolio is comprised of held-to-maturity securities, which were in an overall unrealized gain position of $1.5 million at quarter-end. These unrealized gains are not reflected in our book value as these bonds are carried in amortized cost. Moving now to operating expenses. Our total underwriting and other expenses were $20.3 million in the quarter, compared with $21.2 million in the first quarter of 2017. The decrease was largely due to lower compensation and insurance-based assessment, compared to last year's first quarter. By category, the 2018 first quarter expenses included $5.9 million of salaries and benefits, $6.5 million in commissions and $7.9 million of underwriting and other costs. As a result of these lower expenses in the quarter, our expense ratio was 23.2%, compared with 23.3% in the first quarter of 2017. Our tax rate for the quarter was significantly lower as a result of the tax reform bill and the new lower 21% federal corporate tax rate. Our tax rate for the quarter was 16.7%, compared to 27.8% for last year's first quarter. The difference in the tax rate benefited earnings per share by $0.10, compared with the first quarter of 2017. Return on equity for the first quarter was 15.1%, compared to 11.7% for the first quarter of 2017. And operating ROE for the quarter was 15.4%. In capital management, our company paid its regular quarterly cash dividend of $0.22 per share in the first quarter, which represented a 10% increase over last year's amount. This quarter, the board declared a quarterly cash dividend of $0.22 per share payable on June 22, 2018, to shareholders of record as of June 8, 2018. And finally, just a couple of other topics. Book value per share at March 31 was $22.43, up from $22.10 at year-end. Our statutory surplus was $391 million at quarter-end, up from $382 million at December 31, 2017. And finally, we will be filing our Form 10-Q with the SEC tomorrow, April 27, after the market close. That concludes my remarks, and we'd now like to open the call up for the question-and-answer session. Operator?

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

Just have a few questions. Neal, first one might be for you. Just as we think about audit premium, you're looking at kind of Qs 2, 3, 4 of '17. Do you have those numbers handy for what audit premium was in those quarters as a base to compare for what we might expect going forward?

Yes. In second quarter of 2017, audit premium was minus $2.6 million, third quarter was minus $1.1 million and the fourth quarter of 2017 was a positive $2.1 million.

Okay. Great. On competition in the market, are you seeing any change in kind of where it's coming from whether that be from type of competitor, national versus more of a mutual or regional or geographically? Just trying to get your feel for how the market might be changing, if at all.

That's really good question, Matt. We really haven't seen a change first quarter versus what we're seeing in the fourth quarter. We still see pockets of -- and this is very anecdotal, we still see pockets of what we consider slightly irrational pricing when I look at my quoted and failed ELCMs and where I'm missing on accounts. So those are more one-offs here and there. There is no particular pockets that I would say the competition is any more intense than others. It's very broad. But one of our concerns is, as we've talked about many times to your point about the multi-line carriers is, how long that's going to last for workers' comp. NCCI will put out their year end 2017 results in a couple of weeks as well as their -- the trends they saw in the data. A.M. Best has already preliminarily put out their estimates for ‘17 and the combined ratio was a 95.1%. So many times those numbers start getting published and start getting in the news, we start thinking what will -- how will carriers respond because this will be their third year of underwriting profits for workers' compensation. So I think that makes it attractive to those multi-line carriers. So if that were to -- if we were trying to time when the market will turn, how long the soft cycle will last, there's part of me that says “Oh, no, another profitable year” and then there's part of me that says, "Okay, people will start becoming irrational because they're going to be chasing those profits, trying to increase their top lines and obviously that leads to adverse development eventually."

Right, okay. How about by like sub-segment, like transportation versus agriculture versus logging and so forth? Are you seeing any -- are you having a lot of success whether it be just economic conditions or competitive conditions in one area versus another? Is that also pretty bar based?

Right. Well, I'll tell you the audit premium, which you know, which we try to use that as judge of how the economic conditions are for the classes that we write, in terms of audit premium, again this quarter, we saw the larger increases coming from the trucking line of business. We saw it more from trucking and services. And whenever I say services that's like cell tower repair, window washers, that type of classes of business. But audit premium still remains strong even in construction and roofing. Just the change quarter-over-quarter, the increases seem to be coming more so from the trucking line.

Got you. Those are turning the most. Got you. And then this last question. On frequency severity trends, I mean, what -- anything different that you're seeing in Q1? I know in Q4 you'd brought the accident year up for last year more on some severity concerns and I caught your comments on just the number of over $1 million. But more kind of the deeper level. Are you seeing any changes there for better or for worse?

No. I'll caveat that with -- it’s three months' worth of data for the accident year. So there's nothing that's pretty much that causes me to change my estimate for what we -- obviously the number we came up with for accident year 2018.

Our next question comes from Mark Hughes with SunTrust. Your line is now open.

Anything in the back book? I hear what you're saying, it sounds like inflation, there wouldn't necessarily be any new data points. It sounds like the 71.5% incorporates the view of inflation that you had last quarter and that's obviously up 100 basis points from the full year loss pick. So I guess you're saying no change in view? You think inflation is still in the system, but this loss pick is covering it?

I do. I do think that. And as far as frequency, my concern, my thoughts or assumptions going into the accident year are not unlike what I thought in '17. I know that my earned premium was going to be declining, because of what we wrote in 2017. And so even though my claim counts may not increase or rate remain relatively flat, that will put pressure on our frequency numbers.

When you think about the back book, the older accident years, we had good favorable development in the quarter. What's your view on inflation there? The potential increase in severity and longevity of claims. Does that seem like it's under control and stable? Or is there a risk that you see, I mean there's always risk, but is there some reason to think there could be movement there?

In terms of the ultimate picks for those accident years. Is that what you're referring to?

Yes. Exactly. Is there some sort of uptick in the bad things' longevity, severity in the older accident years?

You know, to your point, obviously, I think that risk is always there. But when I think of it in terms of the loss costs that we're covering the premiums for those years, I think that we're coming off all-time highs off of the recession. So, I mean, I think those years, '14, '15 are going to be good years for the industry. Like I said earlier, I think it would be interesting to see what NCCI comes out within a couple of weeks. I think that was all built into the pricing of that book of business as far as the inflation assumptions.

The ELCM, the 1.63, it sounds like you think the competition is not much changed. Some pockets, et cetera, that may happen if people get incrementally more excited. But is the 1.63, do you think it should stabilize here? Or do you think there continues to be downward pressure on that?

I think there's probably going to be downward pressure on that simply because we're continuing to see the latest filings on loss costs are still declines. I mean there are not to the same impacts as they were a 1.5 years ago, but we're still seeing declines in the loss costs come through. See I think that pressure is going to be there.

Right. And your pricing, this takes into account the lower loss costs. So you are reducing the denominator when those lower loss costs come out. Is that right?

That's correct.

Yes. Kind of an interesting situation, the retention being so high, but then new business, new submissions. Could you talk about that dynamic? I guess it implies not much business is moving, but it seems like there's more competition out there and so it's kind of some contradictory moving or not moving parts in your business?

Yes. I think you're exactly right. I think the fact that our retention was at a historical level and our new business was down, it was just what you said. I don't think there's a lot of business moving from carrier to carrier. People are getting rate decreases when they come up for renewals. So unless they have a service issue or something to that effect, they have no real -- no need to actively pursue moving carriers. So that makes the job of the sales department a little bit more difficult, but doable. But we've really been focusing, as we've been talking about the last few quarters, really trying to focus on retaining those valued policy holders -- tenured policy holders that we want to retain. And if we're going to be aggressive, that's where we need to be aggressive because those are the accounts we know the best versus new businesses, where we're walking into the unknown.

Did you get any boost off of the storms, anything perceptible in terms of rebuild in your, say, construction?

Yes, I think I would like to say yes simply because I saw the uptick in trucking, particularly in trucking payrolls and trucking audit premium from those states that I think were impacted by the storms. So from that aspect, I would say yes.

[Operator Instructions] Our next question comes from Randy Binner with B. Riley FBR. Your line is now open.

This is Ryan Aceto filling in for Randy today. Just wanted to follow up on two quick points. Severity in 2017. Is there any specific segment you guys are seeing most -- I guess most prevalent or was it more across the board? I know you guys had mentioned something about elevated single-vehicle accidents in prior quarters.

Yes. In the fourth quarter, we mentioned on the call that we're having sort of the same number of accidents, but just sort of seemed to see more severe incidents. And it wasn't in any one particular pocket of business. It was really across the board. I think we saw, maybe, a few more young people get injured. And those tend to cost more because you are also thinking about the lifetime medical for those individuals versus someone who is an older worker. But there wasn't any particular area other than what we mentioned before on the fourth quarter call.

That's helpful. And then one quick note on the expense ratio. Little bit lower this quarter year-over-year, is -- I know you guys guided to about 24% to 25%, is that still in play for this year?

Yes, it is. End of quarter we had some pretty significant benefits on expenses. Our loss-based assessments, which are in different states and it depends upon your reserve development in those states that drives that expense, and those loss-based assessments were $1.1 million lower this first quarter than last year in the first quarter. So if you take that out of the equation, our expense ratio really would've been around 24.5%. And that's kind of where we expect to be for the full year, somewhere in the 24% to 25% range. And that does not include the policyholder dividends, which adds another 1.5 points. So that's still what we expect, we did see some unusual benefit I think in the first quarter on expenses.

[Operator Instructions]. Our next question comes from Christopher Campbell with Keefe, Bruyette, Woods. Your line is now open.

I guess like just my first question would be on the audit premiums. Janelle, I think you mentioned you're seeing larger increases from trucking and then your service industries, which I'm assuming is mostly kind of newer employees. So is there any changes that you're thinking about just in terms of your loss picks for those industries, assuming you're getting more presumably less-experienced and potentially higher-frequency employees?

Yes. I think it's more related to payroll growth than new employees per se. So payroll growth, wage inflation are things that are, to your point about the severity of the losses or frequency of the losses are things that we would prefer rather than newer employees.

Yes. We've seen some wage inflation in the trucking industry, particularly it's still very competitive. And truckers who insure with us have had to raise wages for existing employees somewhat. So it's more that than it is new employees.

Got it. That makes sense. So it's the good, it's a good type of growth.

Yes.

Right now. But we're watching it.

Got you. And then I noted there was, just talking kind of at a macro level, I know there's an increasing trend for multiline carriers to try to tie workers' comp into the larger accounts. Are you seeing more aggressive price competitiveness from those multiline carriers than you would from regionals or monolines?

Yes. It's a little bit more difficult for me to measure that simply because with a multiline carrier, you know they're going to give and take on certain lines of business. So I don't really have an apples-to-apples comparison, my price versus what they're price was on the workers' comp product. So the only way I can really measure that they're being more competitive is the fact that they're taking account, they'll take an account from us. But as far as the exact pricing on that account, it's a little bit hard for me to compare because they're pricing it all the lines together as a one package. So they may say, Oh, we're giving a 30% discount on the work comp, but really they're making up somewhere else in the package.

Okay. Got it. And is there a trend that you're, that potentially you're losing more of like those head-to-head competitions against the multiline than you would, the regionals or the monolines?

Yes. We talked a lot about that in third and fourth quarter last year and there really wasn't any change in the first quarter. So we've been talking for probably a year now in terms of our retention, the fact that we were losing those, what we call, larger accounts, maybe not large account to other carriers, but large to us. But that has seemed to sort of moderate now. It's just the environment that we're working in. It's not more aggressive than it was 2 quarters ago.

At this time, I'm showing no further questions. I'd like to turn the call back over to Ms. Janelle Frost for closing remarks.

Thank you for joining us today. I'd like to take this opportunity to publicly wish the AMERISAFE employees happy early anniversary. It is your dedication, expertise and service that provides quality insurance services to our policyholders, care for the injured and consistent returns for our shareholders. 32 years of being safe above all. Congratulations.

Thank you.

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