Amerisafe Inc (AMSF) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Amerisafe second-quarter 2006 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, Monday, August 14th of 2006.

I would now like to turn the conference over to Mr. Ken Dennard with DRG&E.

Good morning, everyone. We appreciate you joining us for Amerisafe's conference call to review 2006 second-quarter results. We would 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 details to run through.

You could have received or should have received a fax or an e-mail of this 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. We'll get that out to you and get you on the appropriate list. Also, if you would like to be on that permanent e-mail distribution list, provide that information.

There will also 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 August 28th. That number is in today's press release how to access that feature. Please note that information reported on this call speaks only as of today, August 14th, 2006, and therefore you're advised that time-sensitive information may no longer be accurate as of the time of any replay listing. Also, 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 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 17th, 2005.

Amerisafe cautions you that you do not place undue reliance upon 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 is Allen Bradley, the Company's President and Chief Executive Officer; and Geoff Banta, the Chief Financial Officer. Now I would like to turn the call over to Allen.

Good morning, ladies and gentlemen. Welcome to our second-quarter investor conference call. I'm going to make a few comments this morning and then turn it over to Geoff Banta, our CFO, to discuss the financial results in more detail.

We had a very good second quarter. Our gross premiums written increased 3.6% over 2005 with an effective LCM of 1.55. That pricing is consistent with the year end 2005 and our first quarter of 2006. The second-quarter net investment income and total revenues increased significantly during the quarter. For the fourth consecutive quarter, we have had no adverse prior-year development. Further, during the second quarter we continued to enjoy a decline in both frequency and severity. As a result, our loss and loss adjustment expense ratio declined slightly while we maintained a very prudent approach to our loss reserving. Our expense ratio remains in line with expectations.

At this point I'm going to turn it over to Geoff Banta, our Chief Financial Officer.

Good morning, everyone. As Allen mentioned, we had a very good second quarter. Our net income for the quarter was $7.8 million compared to a net loss of $7.5 million in the second quarter of 2005. The primary components of our net income were an increase of 14.2% in net premiums earned attributable to an increase in premiums written over the last four quarters.

Related to this is a 19.1% increase in our unearned premium reserve since year-end 2005. An increase of 48.6% in net investment income, which was due to increased yields and a total cash and invested asset balance that grew to $616.8 million in the second quarter of 2005. An increase in net realized capital gains from $547,000 in 2005 to $1.1 million in 2006. These gains were due to sales of common equities. A 21.9% decrease in incurred loss and loss adjustment expenses from $64.5 million in the second quarter of 2005 to $50.4 million for the same period for 2006. Additionally, loss development attributable to prior accident years decreased from $19.2 million in 2005 to zero in 2006, which, by the way, is our fourth straight quarter of zero prior-year development. Finally, adding to net income in the second quarter was a $571,000 tax accrual takedown related to an outstanding payable from our 1999 amended return, a return for which the statute of limitations has passed.

In terms of our key insurance operating ratios, our net loss ratio for the second quarter of 2006 was 69.9% compared to 102.2% for that same period in 2005, and 70.5% in the first quarter of 2006. As a result, our year-to-date 2006 accident year loss ratio has decreased from 70.5% to 70.2%. As I mentioned earlier, we had no prior-year development, so through 6-30-2006, our calendar year loss ratio equals our 2006 accident year loss ratio. Our net underwriting expense ratio for the second quarter of 2006 increased by 1.9 percentage points over the same period in 2005 from 23.2% to 25.1%. Actual expenses for the second quarter of 2006 totaled $18.1 million compared to $14.6 million for the same period in 2005. This increase was partly due to a $2 million increase in loss and premium-based assessments from the states in which we do business. Also contributing to the increase was a $548,000 increase in agents' commissions and a $259,000 increase in salaries and benefits. The increase in commissions was due to increased business, and the salaries and benefit increase was due to share-based compensation expense, which was zero in the second quarter of 2005.

In spite of these increases, our expense ratio was 24.7% for the six months ended 6-30-2006, which we feel is very competitive. We have achieved this while incurring substantial new costs related to our first year as a public company.

The final component of our insurance ratios is our dividend ratio, which was 0.2% in the second quarter, a decrease of 0.1 points from 2005. All together, our combined ratio for the second quarter of 2006 was 95.2% compared to 125.7% for that same period in 2005. For the six months ended 6-30-2006, our combined ratio was 95.1% compared to 112.2% for the six months ended 6-30-2005.

We continue to see healthy cash flow in the second quarter of 2006. Cash flow from operations was $18.8 million for the second quarter of 2006, which was just slightly down from the second quarter of 2005, in which operating cash flow totaled $19.5 million.

Premiums collected for the second quarter of 2006 were up by $11.4 million over 2005, but this was offset by a $4.2 million reduction in recoveries from reinsurance, an increase of expense disbursements of $11.8 million and a decrease of $4 million in claim payments. Included in the $11.8 million expense disbursement increase was an $8.9 million increase in estimated tax payments.

In terms of earnings per share, our second-quarter 2006 diluted earnings per share allocable to common shareholders was $0.39 compared to -$33.03 for the second quarter of 2005. This difference was mainly a function of the significant change in number of shares outstanding and the Company's net loss in 2005, driven in part or mainly by the commutation of our reinsurance contracts.

For the six months ended June 30, 2006, our diluted earnings per share allocable to common shareholders stands at $0.76 per share compared to -$30.04 per share for the same period in 2005. As I mentioned during our year-end conference call, a total of 17.1 million common shares were issued in the IP0, and the exchange of our Series A Preferred Stock. For purposes of the EPS calculations, weighted average diluted shares outstanding for the second quarter were 17.4 million compared to approximately 300,000 in the second quarter of 2005. For clarification, the total number of shares of common stock outstanding at 6-30-2006 was 17.4 million.

That concludes my prepared remarks. I will now turn the presentation back over to Allen.

Now I want to make a few comments about the outlook we have provided to you earlier. I would acknowledge some increase in competition and competitive pressures in some states, in particular, class codes. We see, however, continued opportunity to grow and to expand our market presence and do not see this competition impairing our abilities to make an underwriting profit, increase our gross premiums written or produce attractive returns on equity.

At the end of the second quarter we had $148 million in unearned premiums on our books, and this favorably priced business will, of course, be earned over the next 12 months. We remain confident in our ability to reach the previously announced guidance for 2006 of $317 to $325 million gross premiums written, a 96% or better combined ratio, and return on shareholder equity of 15% or better.

We also remain committed to our core strategy of providing Workers' Compensation insurance to small and midsized employers engaged in hazardous occupations utilizing intensive safety services, claims management practices, and we believe there are significant opportunities to grow in the states where we currently operate. We are exploring expanding into several additional states, probably for the 2007 policy year.

At this point we want to open the call up to questions.

(OPERATOR INSTRUCTIONS). Bijan Moazami with Friedman, Billings, Ramsey.

It's Randy Binner for Bijan. I just wanted to follow up on the competition comments that Allen made. Is there certain class codes specifically that are becoming more competitive? Are there new codes you're looking to write? Maybe if you could expand a little more on your key states in competition there in Georgia, Louisiana, North Carolina and maybe what the new states you're looking at are?

We're going to be here for a couple of minutes.

Sorry about that. I know that's a long question.

Let's talk a little bit about why the growth in gross premiums written in the second quarter wasn't higher than 3.6%, and I will work that back into the industries. There were two main reasons that our gross premiums written in the second quarter didn't grow faster. The first one, and the foremost, was our determination to hold our pricing and to test the market to see what opportunities existed out there to write business at levels consistent with our prior write. Let me break the quarter down a little bit for you.

In April, we had an effective LCM of 1.54 and experienced a 5% decrease of gross premium written over the prior April 2005. We then made some adjustments, not necessarily reducing pricing, but through the aid of our Underwriting Department and our Business Intelligence unit and our Sales and Marketing unit, identified those areas where we had opportunities in given states. In May, the LCM, effective LCM, the pricing actually went up to 1.55, and we experienced about a 3% growth in gross written premium. We made some further adjustments. We saw some other opportunities. We did not compromise on our underwriting standards. In June, the pricing actually rose to 1.56, and we enjoyed a 17% growth in gross premiums written over the prior year.

Normally, we would not comment beyond the end of the second quarter, but I will make a comment on this point that we made these adjustments we carried through to July. Our effective loss cost multiplier was 1.54, and we were 22% higher than July of 2005. So we think we made those adjustments.

You asked -- the second factor in that slower growth in the second quarter was the decrease in our nonvoluntary business. Now, this is assigned risk business that comes to us in one of two ways -- either a direct assignment in those states where we're allowed to do that, or through our participation in various assigned risk pools in some states.

During the second quarter we had a 3.2% decline in our direct-assigned business and a 61% decline in our pool participation in that time period. We view the decline of this business as favorable long-term to our combined ratios. The shrinkage of residual markets, however, is an indication of a softer market in the Workers' Compensation arena. Of course, that brings us back to our strategy of trying to write business in small to midsize employers in hazardous industries. By the way, I want to go back. With respect to the growth in premiums that I gave you, those were all with respect to our voluntary business, not with respect to our nonvoluntary business.

Understood. On the pool participation, it sounds like that may not return but, all things being equal, that would free up capital to go after your standard book of business. Is that correct?

That is correct. As you know, any of the reports you read, the combined ratios of the assigned risk pools are significantly higher than 100%. So we see an opportunity there with that being smaller.

Now, you asked about industry codes and states, right? The largest area of growth has been -- and this will come as no surprise -- the oil and gas business, with a 28.8% increase over the first six months of that voluntary business in place as compared to the first six months of 2005. Trucking, another nonsurprise, is about 11.4% increase. Logging, surprisingly, was up 10.5% over the prior six months in 2005, and construction was up 8%.

In the other category, which is kind of a mix of other hazardous occupations but not a single [FIC] group, there was about an 18% growth. Areas that did not grow -- sawmills did not grow, Maritime business did not grow, agriculture did not grow. I mean, they grew, but not by any significant percentage.

Now, you talked about -- you were curious about states. Just in general, the Gulf states grew well, with the exception of Louisiana. Mississippi, Texas, Florida, Alabama all grew significantly. Areas that did not grow, Louisiana -- and that is due mainly to some competition -- and Missouri, Iowa, which is a very small state for us, and, of course, South Carolina. Pennsylvania, again, is a fairly competitive state, and we had a slight decrease of premium written in the first six months there.

That's all very helpful. I'm sorry; did you mention Georgia in one of those?

I'm sorry, I did not. Georgia had only a 4.5% growth.

So, there may be some diversification away from Georgia going forward, is that it?

Georgia is a relatively high tax state. So, there's a little more competition there. Part of that involves focusing on where the opportunities are and maintaining our pricing and maintaining our underwriting discipline.

Mark Lane, William Blair & Company.

It's actually Ryan Smith for Mark Lane. A quick question on investment income. Just curious, why was that down sequentially in the quarter, given higher yields and positive cash flow?

Very good question. We've experienced, as our portfolio has grown and our -- we hold to maturity. As cash has been produced from that portfolio in the form of MBS paydowns, calls and maturities, we've experienced some reinvestment risk. In other words, the blended yield of the monies coming out has been greater than the yields on the money we've put back into the market. We believe that phenomenon, combined with the fact that historically we've bought most bonds at a premium and that premium is amortizing, has led to this rather unusual phenomenon. We also believe we're at the point of sort of the apex of that, and we'll see increased investment returns more in line with what has happened to our cash flow and what is happening in the marketplace in terms of interest rates.

On the fully converted share count that you disclosed in your 10-Q in the first quarter, do you have that number offhand now, or will that be in the 10-Q?

That will be in the 10-Q.

You don't have that offhand? Like, 19.9 to 20 million shares still reasonable?

19.856. So, you're right in the ballpark. By the way, we've got two pages of disclosure instead of one for our EPS, because we realize that the two-class method is a little hairy, so we've tried -- you'll see that in the 10-Q which we'll be releasing today, of course.

(OPERATOR INSTRUCTIONS). Our next question is a follow-up from Bijan Moazami.

New states that you're potentially looking at going forward?

I'm sorry, you did ask that. Particularly, Colorado, selected areas that we feel are consistent with our focus, perhaps Nevada. We're looking, perhaps, to return to some areas in the Northeast.

So Colorado would be -- would that be oil and gas and energy?

And construction. It really hits -- it's not really logging so much.

I would imagine not.

Well, there's actually some but that's actually in some rural areas. But the construction, trucking and perhaps some oil and gas.

Thank you. Management, if there are no further questions I will turn it back to you for any closing comments.

We want to thank everyone for their participation today. We are very pleased with the second quarter. As we have indicated earlier, we are reaffirming our guidance for 2006. We thank you very much for your participation.

Ladies and gentlemen, that concludes today's teleconference. Once again, if you would like to listen to a replay of today's conference, you may dial in at 303-590-3000 and followed by the access code of 11067062 and then followed by the #. We thank you again for your participation, and at this time you may disconnect.