Amerisafe Inc (AMSF) 2005 Q4 法說會逐字稿

Good morning and welcome to the AMERISAFE Fourth Quarter Earnings Conference Call.

At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded today Tuesday, February 28, 2006. I would now like to turn the conference over to Mr. Ken Dennard with DRG&E. Please go ahead, sir.

Thanks Jeff and good morning everyone. We appreciate you joining us for AMERISAFE's conference call to review fourth quarter and full-year 2005 results. We'd also like to welcome our Internet participants listening to the call as it is being simulcast over the web.

Before I turn the call over to management, I have the normal housekeeping items to cover. You should have received a fax or an email of the earnings release this morning. Occasionally, there are technical difficulties experienced during these broadcasts. So if you didn't get your release, please call our offices at DRG&E and that number is 713-529-6600, and we'll get one out to you and get you on the appropriate list. Also if you would like to be on that permanent email distribution list, relay that information to us.

There will be a replay of today's call, and it will be available by webcast by going to the company's website at www.AMERISAFE.com or there is a telephonic recorded replay until March 14th, and that information is in today's press release of how to access that feature. Please note that information reported on this call speaks only as of today, February 28, 2006, and, therefore, you are advised that time sensitive information may no longer be accurate as of the time of any replay listening.

Statements made in this press release that are not historical facts, including statements accompanied by words such as "will, believe, anticipate, expect, estimate," or similar words are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding AMERISAFE's plans and performance. These statements are based on management's estimates, assumptions, and projections as of the date of this release and are not guarantees of future performance.

Actual results may differ materially from the results expressed or implied in these statements as the results of risks, uncertainties, and other factors including but not limited to the factors set forth in the company's filings with the Securities and Exchange Commission, including AMERISAFE's prospectus dated November 17, 2005.

AMERISAFE cautions that you do not place undue reliance on forward-looking statements contained in the release or in the conference call. AMERISAFE does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of this release and call. For further information, please refer to the company's filings with the Securities and Exchange Commission.

Now with that behind us, let me introduce today with me Allen Bradley, the company's President and Chief Executive Officer; and Geoff Banta, the Chief Financial Officer. Now, I'd like to turn the call over to Allen.

Thanks, Ken, and good morning, ladies and gentleman, and by the way, happy Mardi Gras. Welcome to our first investor conference call since completing our IPO last November. I will make a few comments this morning and then turn it over to Geoff Banta, our Chief Financial Officer, to discuss financial results of the fourth quarter and 2005.

Suffice it to say that 2005 was an exceptional year for AMERISAFE. We accomplished a number of important objectives during the year. During the year of 2005, we produced record total revenues while maintaining our underwriting discipline and selectivity. We achieved higher effective loss cost multipliers, and of course as you know that means higher pricing in 2005. We increased our pre-quotation safety inspections to historically high levels. We experienced a slightly lower claims frequency, and we managed our underwriting expenses while providing a high level of service to our customers.

During 2005, we infused capital, into both our holding company and our insurance subsidiaries, which will support future growth in revenues and earnings. We were able to simplify our capital structure in the company, eliminating the company's obligation to pay dividends on our outstanding redeemable preferred stock. We were able to reduce the company's credit risk by commuting the largest reinsurance recoverable and bringing the company's reinsurance recoverables to their lowest level in more than five years. Significantly, we were able to strengthen our prior year loss reserves during the first half of the year to a level that we believe puts this issue behind us.

Further, late in the fourth quarter after the initial public offering, we were able to have our A invest rating of A minus affirmed and placed on a stable outlook. Certainly, the successful completion of the public offering was a critical factor in obtaining all of these objectives. However, I would be remiss at this point in time not recognizing the extraordinary contributions of the staff and employees of AMERISAFE in obtaining these successes.

Now I'm going to turn it over to Geoff to provide you some details on our fourth quarter and the 2005 results. After his comments, I will address our outlook guidance for 2006. Geoff?

Thank you, Allen, and good morning, everyone. Before I begin discussing our results of operations, I would like to mention one notable item for 2005. I believe everyone on the call is familiar with our fourth quarter IPO, but I want to highlight the relevant numbers resulting from that transaction.

On November 23, 2005, we issued 8 million shares of common stock at a price of $9 per share. Our net proceeds from the offering were $63.2 million. Of that, we contributed $45 million of the proceeds to our insurance company subsidiaries. We used $10.2 million of the proceeds to redeem all of our Series E preferred shares and a portion of our Series A preferred share, and we retained 8 million within our holding company for future business needs. The remaining Series A preferred shares were exchanged for $9.1 million of common shares.

As I will discuss later, the issuance of 17.1 million common shares in the IPO and the preferred stock exchange has had a marked effect upon our reported earnings per common share.

Turning to our results now for the fourth quarter of 2005, we had net income of $5.4 million compared to $3.8 million for the fourth quarter of 2004, an increase of almost 42%. This increase was driven primarily by the following factors.

As measured by gross premiums written, our top line measure, we increased by almost 18% from $50.7 million to $59.7 million as pricing continued to hold and market demand remains strong. Net premiums earned also increased by almost 8% from $62.3 million to $67.2 million.

Net investment income also grew by almost 38% from $3.6 million to $4.9 million in 2005 fourth quarter. Our investment income growth was largely the result of a 33% increase in average cash and invested assets in 2005 fueled by operations the $61.3 million we received from Converium in the third quarter and the proceeds from the IPO.

While our incurred losses and underwriting expenses also increased in the fourth quarter, that growth was slower than our revenue growth. Overall revenues increased quarter over quarter by 9.3% while losses and expenses during the same period increased by only 6.4%.

In terms of our insurance operating ratios, our net loss ratio for the fourth quarter of 2005 was 72.1%, compared to 73.6% for that same period in 2004. For the current accident year, our loss ratio decreased from 75.6% in the fourth quarter of 2004 to 72.1% for the fourth quarter of 2005. For prior accident years, we had zero development in the fourth quarter of 2005.

Our net underwriting expense ratio for the fourth quarter of '05 increased by one percentage point to 25.3% from 24.3% in the fourth quarter 2004. This increase was due mainly to an increase in our loss based assessments, primarily from state second injury funds. The final component of our insurance ratios is our dividend ratio, which was actually negative in the fourth quarter, due to reduced volume of dividend related policies. Our fourth quarter dividend ratio was negative 0.7%.

All together, our combined ratio for the fourth quarter of 2005 was 96.7%, compared to 98.2% for that same period in 2004. Now we feel very good about that fourth quarter result.

In terms of earnings per share, our diluted earnings per share allocable to common shareholders were $0.39 compared to $3.83 for the fourth quarter of 2004. This disparity was mainly a function of the significant change in number of shares outstanding. As I mentioned earlier, a total of 17.1 million of common shares were issued in the IPO and the exchange of our Series A preferred stock.

For purposes of the EPS calculations, weighted average diluted shares outstanding for the fourth quarter were 7.7 million compared to only 300,000 in the fourth quarter of 2004. For clarification, the total number of shares of common stock outstanding at December 31, 2005 was 17.4 million. I will now discuss our results for the full year.

In 2005, net income was $5.9 million compared to $10.6 million in 2004. As Allen alluded to in his introductory remarks, we significantly strengthened our prior year loss reserves during the first half of the year by $21.9 million on a pre-tax basis. This amount includes $13.2 million we recorded in connection with the commutation of three of our five reinsurance contracts with Convarium. This was the major factor in the decrease of net income for 2005.

As Allen also mentioned, we feel very comfortable with our carried reserves at year-end 2005. For the full year 2005, gross premiums written increased by 9.8%, from 265 million to 291 million, while net premiums earned increased by 9.3%.

Total revenues for the year increased by 11%, from 249 million to 276.3 million. Net investment income for the year was $16.9 million, compared to $12.2 million in 2004, an increase of 38%. As I mentioned earlier, this increase was due to an increase in cash and invested assets, which grew from $390 million at year-end 2004 to $583 million at year-end 2005.

I want to point out that we receive the cash from the Convarium computation midway through the third quarter, and the net proceeds from our IPO late in the fourth quarter. As a result, we will not see the full benefits from the investment of this cash until the first quarter of 2006.

In terms of our operating ratios, our net loss ratio in 2005 was 79.5% compared to 74.2% in 2004. As mentioned earlier, the increase was due mainly to reserve strengthening for prior accident years. Our net expense ratio in 2005 increased by only 0.1% from 2004. Our full-year dividend ratio was 0% for that year compared to 0.5% for 2004 for reasons I alluded to earlier. For 2005, overall our combined ratio was a 104.2%, compared to 99.5% in 2004, principally the result of our reserve strengthening.

Diluted earnings per share applicable to common shareholders was negative $1.25 for 2005 compared to $2.14 in 2004. As I mentioned earlier, reported EPS is impacted by the issuance of 17.1 million shares in the fourth quarter for purposes of our full-year EPS calculations, weighted average diluted shares outstanding for 2005 were 2.1 million compared to approximately 255,000 shares for 2004.

As mentioned in this morning's press release, the issuance of more than 98% of our currently outstanding common shares in the IPO and the Series A exchange, combined with the elimination of the obligation to pay dividends on our preferred stock going forward will impact period to period comparisons of our reported earnings per share for the next four quarters.

Turning to our balance sheet, we made very significant strides in strengthening our balance sheet in 2005. We decreased our recoverable from reinsurers by 38.4%. For the first time since 1998, our recoverable balance is less than total shareholders equity and redeemable preferred stock.

As we mentioned earlier, we also strengthened our reserves in 2005 and finally, in connection with the IPO, we simplified our capital structure, contributed $45 million of new capital into our insured subsidiaries and eliminated the preferred dividend obligation that has existed since 1997. That concludes my remarks. I will now turn the presentation back over to Allen.

Thanks, Jeff. Now I thought we'd talk a little bit about 2006. We are very optimistic about 2006. We remain committed to our strategy of providing workers' compensation insurance to employers engaged in hazardous occupations. These employers typically are small to mid-size. We will stay our course providing intensive comprehensive safety reviews prior to quoting new business, intensive claims management practices, which involve a high touch approach to the claims business.

We believe that there are significant opportunities in the states we currently operate to grow our business profitably. Should we identify opportunities outside our current markets, we would, of course, consider in doing so. We do expect some increases in our field staffing, particularly in safety services necessary to serve our growing premium base. We believe that we have adequate home office infrastructure to support the anticipated growth. With respect to the specifics of that growth, we expect our gross premiums written to increase in the range of 9% to 12% in 2006.

Now that the company has adequate capital, we can pursue business that we had to forego in prior years while not compromising our underwriting standards. We will not compromise our safety standards in pursuing this business. We expect our growth to be organic. However, as I've said before, should an acquisition or an opportunity arise outside of the organic growth of the company, we would certainly consider it.

We would anticipate a combined ratio of 96% or better for 2006. As we indicated in our prospectus, we would anticipate and expect a return on equity of 15% or greater on a fully converted or as if all outstanding shares has been converted basis, including the conversion of our preferred shares.

We calculate ROE by dividing the net income by the average shareholder equity plus our redeemable preferred stock, and as you, I'm sure, recognize an ROE calculation that excludes this redeemable preferred stock would result in significantly higher ROEs. I guess at this point, we'll open it up for any questions that you may have.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question and answer session. [OPERATOR INSTRUCTIONS]Our first question comes from Bijan Moazami with Friedman Billings Ramsey. Please go ahead.

Good morning everyone. Allen, I was wondering if you could comment on the appointment of the new insurance commissioner in the State of Louisiana. What would be the impact of Jim Donelon taking over, and is he more or less consumer advocate than the prior commissioner?

Good morning Dijan.

Good morning.

I'd be happy to comment on that. Jim Donelon has served in a number of governmental capacities over the years, including the legislature. He has been general counsel for the Department of Insurance. He's been chief deputy for the Department. He is quite knowledgeable of the insurance industry, and I would tell you that I would consider him to be eminently fair and reasonable. He is extremely knowledgeable in the business. In terms of pro-consumer and pro-industry, I would say that and you can I imagine being insurance commissioner in Louisiana now after the hurricanes that struck the state, there are significant issues on the property side of the business. In the casualty side, there is less controversy now. I would not anticipate anything from Jim that would really change the direction of the Department, which has been stable now for several years. He is a Republican and is seeking election to that post in October during the special elections.

Wonderful. Also Allen, could you comment on the frequency and severity trend in the workers' compensation market? Have you seen any changes in those trends?

As I've said in the prepared remarks Dijan, we saw a slight decrease in the frequency of claims during 2005. Severity has shown a slight increase. We believe that the largest component of the severity increase is medical cost inflation and that is apart of our business that we spend a lot of time trying to contain those medical costs and we have met with some success in that area but that is - in preparing for this call one of the things I thought about was what keeps me up at night, and certainly medical cost inflation is something we have to remain very aware of.

Thank you.

Yes sir.

Thank you. And our next question comes from Mark Lane with William Blair and Company. Please go ahead.

Good morning. This actually Ryan Smith for Mark Lane.

Good morning, Ryan.

Morning. Quick question. Where do you see your best opportunities from the states perspective in 2006 and has that changed in the last three months?

It has not really changed Ryan. I would tell you that our best opportunities for growth would be in the Midwest, in Florida, and Georgia on the Atlantic seaboard, excluding South Carolina, Pennsylvania, Oklahoma and perhaps Tennessee.

Okay and then-

By the way, it is shrinking in Louisiana. Clean it up with Louisiana being the second largest state this year. It dropped from about 10.6% of our business in 2004 to about 8.3% of our business in 2005.

Okay and then quick question on the loss ratio in comparison to last quarter, it was about 200 basis points higher. Is there anything we should be looking into that or is that just-

No sir, and I knew that question would come up. The loss ratio is about 200 basis points and when you look at the earned premium in that quarter, you will see that it is roughly 1.35 -- $1.35 million, which by the way is about the amount of a retention that we would have in the event of a large claim. We did have a large claim late in the quarter. We had this particular claim and quite frankly, we have done a lot of work in the last few years to deal with prior year reserves, and we wanted to take a very conservative and appropriate approach posting these reserves. So that's the reason for that particular difference.

Okay, thank you.

Yes sir.

Thank you. [OPERATOR INSTRUCTIONS] Your next question comes from Matt Barnes with Synova Capital. Please go ahead.

Hi Allen. First of all thanks for a good quarter. We're off to a good start. WE appreciate it. Just two questions. When you said the 15% ROE when you were doing the outlook for '06 on the fully converted book, is that fully converted book roughly the $8 with the preferred converting? So are you doing it off the $8 base?

Yes sir. On a share count basis, it would be about 19.9 million shares.

Great. So 19.9 million and roughly would be like an $8 book if that was fully converted?

Yes, I think $8 was the figure we were using at the $10 - we'll that would be right. That would be $8, yes.

Okay, so its off that. Great and then on the pre-quotation safety inspections, I am curious at what level are you up to now as a percentage for the pre-quote safety inspections versus maybe just one or two years ago?

I've got general counsel glaring at me.

Just roughly.

91.88%. I will not take it to the thousandth. 91.88% in 2005 for the year as a whole.

What would that have been a couple of years ago just roughly?

I think in 2004, it was 84%. Hold on just a half a second. I have that in front of me. Just a second. Well, I cannot put my hands right on it.

That's okay. That's close enough but thanks. I've got the sense of the trend. Thank you.

Yes sir.

Thank you. And our next question is a follow-up question from Mark Lane. Please go ahead.

In your 2006 guidance, you stated that you expect a combined ratio of around 96 - less than 96%. What are your expectations for a loss ratio or expense ratio within that?

I would expect a loss ratio of 70 to maybe slightly over that and I mean less than 70.5%. I would expect an expense ratio of 725% or less and a dividend ratio of .02, 0.3%.

Could you discuss your new business written in the fourth quarter versus fourth quarter 2004 and what your client retentions were and your renewal rate?

Client retentions. I do not know that I have it for the fourth quarter alone Ryan. For the year, as a whole, on that business in our renewal business where we offered renewal, we retained 90.6% and that compares to 93% in 2004 and 91.5% in 2003. I would point out to you that our effective LCM for the year was 1.56 and that would basically be 156% of the anticipated losses. That was higher than the pricing in 2004. So a slightly lower retention is not to be unexpected. That was one question - one part of the question. What was the other part? I'm sorry.

Just new business in this quarter compared to 2004 fourth quarter.

I do not know if I could give it to you quarter by quarter, but let me just tell you, in general. The growth of our business is occurring in the construction area. Of our total business, including our assigned risk business, 40.3% of our business in 2005was in the construction business. In 2004, that was 38.3%. In 2003, that was 36.1%. Trucking was down slightly from 21.8% to 20.4%.

The big drop was in logging and the logging drop was basically 11.5% down to 9%. That reflects two things. Number one, logging business is a somewhat finite business. The market is of a limited size and as we grow it becomes smaller and number two, we have let some of that business go because of pricing and competition and we just didn't feel like it made sense to try to keep that business at lower prices.

Okay. And then can I ask a couple of modeling questions real quick?

Sure.

Your retentions were in the high 80s this quarter. Is that something we should expect going forward? Also, what type of tax rate should we model for 2006? Finally, if you could possibly break out commissions and salaries paid? The growth operating expenses?

This is Geoff. I will take the tax question. Frankly, I would model 27.5. I think that gets you in the ballpark. Allen?

With respect to commissions paid, our commissions paid in 2005 to independent agents was 7.1% and to our captive agency was 8%. Captive agency made up about 17.7% of our total business. Those percentages of course are for earned premiums.

Okay and then retention?

Retention, I would say 90%.

Ninety percent. Okay great. Thank you very much.

Yes sir.

Thank you and at this time, I so no further questions. I would like to turn the conference back over to Mr. Allen Bradley for any concluding remarks.

Thank you very much. Thanks to everyone participating today. We are happy to conclude a very successful fourth quarter and look forward to a very successful 2006 and to all of you that joined us [inaudible]. Enjoy the rest of Mardi Gras Day.

Ladies and gentlemen this concludes the AMERISAFE fourth quarter earnings conference call. If you would like to listen to the replay of today's conference you may dial 303-590-3000, and you'll need to enter the access code of 11051103 followed by the pound sign. Once again that phone number was 303-590-3000, and the access code is 11051103 followed by the pound sign. Thank you for participating in today's conference and at this time, you may now disconnect.