Amerisafe Inc (AMSF) 2007 Q4 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Amerisafe fourth-quarter 2007 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded Thursday, February 28, 2008. I would now like to turn the conference over to Mr. Ken Dennard with DRG&E.

Thank you, Rob, and good morning everyone. We appreciate you joining us for Amerisafe's conference call to review 2007 fourth quarter and year-end results. We would also like to welcome our Internet participants that are listening to the call as it is big 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 an e-mail of the earnings release yesterday afternoon, but occasionally there is technical difficulties. If you did not receive your release or you would like to get placed on our e-mail distribution list, please call our offices at DRG&E, and that number is 713-529-6600. Also there will be a replay of today's call that will be available via web cast by going to the Company's web site, and that site is www.Amerisafe.com, or there will be a telephonic recorded replay available for seven days, and details how to access that feature in the press release.

Please note that information reported on this call speaks only as of today, February 28, 2008, and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay listening. Also, statements made in the press release or in this conference call that are not historical facts, including statements accompanied by the 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 upon management's estimates, assumptions and projections as of the date of this call and are not guarantees of future performance. Actual results may differ from the results expressed or implied in these statements as a result 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 10-K dated March 5, 2007 and future and other filings. Amerisafe cautions you that you do not safe place underline upon forward-looking statements contained in the release or in this conference call. Amerisafe does not undertake any obligation to update or publicly revise any forward-looking information or statements to reflect future events, information or circumstances that may arise after the date of this release and call. For further information, please see the Company's filings with the SEC.

Now with me this morning are Allen Bradley, the Company's Chairman, President and Chief Executive Officer and Geoff Banta, the Company's Executive Vice President and Chief Financial Officer. Now I will turn the call over to Allen.

Thanks, Ken, and good morning ladies and gentlemen. Thank you for joining us for our quarterly investment conference call.

I am going to make a few general comments about 2007 before turning it over to Jeff to discuss the financials.

2007 was a record year for Amerisafe. Our net income was up over 34% and our combined ratio improved to 85.9% from 92.4% in 2006. We produced a return on average shareholder equity of just over 24% and ended the year with a book value per share of $11.66. Our book value per share has increased 61% in the 26 months since our initial public offering.

Our gross premiums written of $328 million were at the low end of our revised guidance that we provided in the third quarter. This lower premium was due to reduced loss cost, lower work activity and increased competition. I am especially pleased that we maintained our underwriting and pricing discipline in this market as is evidenced by our 2007 effective loss cost multiplier of 1.51, or 151% of the approved loss cost in the states that use that mechanism for pricing. Our effective loss cost multiplier for the fourth quarter declined slightly to 1.47. On an in-force basis, our voluntary workers compensation policy count was 6.9% higher at December 31, 2007 than at the same time in 2006. Our in-force premium was up 3.6% and our insured payroll had increased 7.6 percent. Our average premium size declined by about 3.1% from 2006 to 2007, reflecting lower loss cost and competitive pressures. Our loss frequency for the year was well within our expectations. The great news is that at the end of the year we had only 5214 open workers compensation claims as opposed to 5727 at the end of the third quarter of 2007, a reduction of over approximately 500 claims.

Our total open claims as of December 31 were the lowest year-end open claims count in a decade. This number has consistently trended downward over the last year as we have been very focused on improving our claims handling processes by reviewing and aggressively closing our older claims.

At this time, I'm going to turn it over to Jeff.

Thank you, Allen, and good morning everyone. As Allen stated, we had a terrific year in 2007 and I will begin my remarks by focusing on the fourth quarter. In that quarter, we reported record net income of $18.6 million compared to $14 million in the fourth quarter of 2006 for an increase of 32.6%. This increase was due mainly to a $9.5 million prior year reserve takedown and a decrease in policyholder dividends of $6.8 million. Offsetting these positive changes was a decrease in net premiums earned in the fourth quarter of $10 million.

In terms of operating ratios, our net loss ratio for the fourth quarter of 2007 was 51% compared to 58.7% for the same period in 2006. The decrease in 2007 included 12.8 points of favorable prior-year development compared to 2.6 percentage points in the fourth quarter of 2006. The favorable prior-year loss development was primarily from accident years 2004 through 2006. For the 2007 accident year, our loss ratio increased from 61.3% in the fourth quarter of 2006 to 63.8% for the fourth quarter of 2007. This increase was a function of our decreased premiums earned. Our net underwriting expense ratio for the fourth quarter of 2007 increased to 23.8% from 22% in the fourth quarter of 2006 although actual fourth quarter expenses were lower by $874,000.

Our policy dividend ratio did decrease from 6.4% in 2006 to a negative 1.8% in 2007 which was largely the result of changes to our estimate for accrued dividends payable to Florida policyholders in 2006 and 2007 under a statutory formula unique to that state. On February 15, 2008, we received an order from the Florida Insurance Commissioner calling for us to pay approximately $3 million for the 2006 year, enabling us to reduce our carried 2006 accrual as of year end 2007. Our calculation for 2007 dividends for Florida policyholders constituted an additional $900,000. The combination of this 2006 accrual takedown and the 2007 accrual addition resulted in a net reduction in dividends payable of $1.5 million which we recorded in the fourth quarter of 2007. The effect of these changes was a decrease in dividends incurred for the fourth quarter of $6.8 million when comparing 2007 to 2006.

Pulling all of these operating components together, our combined ratio for the fourth quarter of 2007 was 73% compared to 87.1% for that same period in 2006. In terms of earnings per share we recorded fully diluted EPS of $0.92 per quarter versus -- for '07 versus $0.70 for the same quarter in 2006. We continue to use the two-class method in calculating EPS and will be providing the details of that calculation in our 2007 Form 10-K. For the full year 2007 we recorded net income of $50.2 million compared to $37.4 million in 2006, an increase of 34.4%. In terms of top line, gross premiums written decreased by 1.4% from $332.5 million to $327.8 million in 2007. Our 2006 gross premiums written included $13 million of premiums resulting from payroll audits and related adjustments. In 2007 those same adjustments totaled $2.4 million. Also included in our 2006 total was an inception to date adjustment of $5.3 million for estimated earned but unbilled premiums, or EEBUP. In 2007, we recorded EEBUP of a positive $3.7 million.

Finally our gross premiums written for 2006 included assigned risk premium from pools and direct assignments of $16.4 million compared to that same similar number of $11.7 million in 2007. Net investment income for the year was $30.2 million compared to $25.4 million in 2006, an increase of 19%. This increase was mainly due to an increase in cash and invested assets which grew from $666 million at year-end to $759 million as of December 31, 2007. Net realized gains decreased in 2007 to $147,000 from $7.4 million in 2006. Total revenues for the year increased by 1.7% from $332.7 million to $338.3 million in 2007.

Our net loss ratio for 2007 was 64.7% compared to 66.6% in 2006. The 2007 ratio included 3.1 percentage points of favorable loss development applicable to prior accident years compared to a 0.7 percentage point favorable development in 2006. Our underwriting expense ratio in 2007 decreased by 2.5 percentage points from 23.8% in 2006 to 21.3% in 2007. The decrease was mainly due to $3.7 million from the commutation of several reinsurance agreements, a $1.5 million decrease in insurance related assessments and a $1.1 million decrease in professional fees. The decrease in professional fees was a function of higher 2006 fees from our secondary offering and our implementation of Sarbanes-Oxley controls and procedures in that year. Our full-year dividend ratio was negative 0.1% in 2007 compared to 2% in 2006 due to the change in our accrual for the Florida dividend that I discussed earlier. For the full year 2007, our combined ratio was 85.9% compared to 92.4% in 2006.

For the full year 2007, we recorded fully diluted earnings per share of $2.47 versus $1.88 for 2006. Book value per share increased in 2007 by $2.43 from $9.23 at December 31, 2006 to $11.66 as of year-end 2007, an increase of 26.3%.

With respect to cash flow, in 2007 we generated $100.4 million in cash flow from operations, including $26.5 million from our 2007 commutations. This compared to $81.8 million in cash flow from operations in 2006. There were no significant commutations in 2006.

Turning finally to our balance sheet, at December 31, 2007, our total investment portfolio, including cash and cash equivalents, was $759 million which represented an increase of $93 million or 14% over the 2006 year-end balance. We did not impair any of our invested assets in 2007 and all securities in our portfolio are current with regard to principle, dividend and interest payments. Also in 2007, our reinsurance recoverables decreased from $109.6 million to $76.9 million and we remain very comfortable with the credit quality of those recoverables.

On the liability side, our unearned premium reserve totaled $138.4 million as of December 31, 2007, and that balance net of premium adjustments will earn out at approximately 1.5 times loss costs in 2008.

As a final note, our capital structure remains unchanged from the year end 2006. And with that I will turn the discussion back to Allen.

Thanks, Jeff. In summary of course 2007 was an outstanding year. As I mentioned in our earlier press release, looking ahead, we expect the current competitive market environment to continue through 2008. While our effective LCM may decline somewhat in 2008 we intend to continue to price our policies to appropriately cover the risk that we insure. One important reason that we can pursue this policy and this strategy is the strength of our investment portfolio which totaled almost $760 million at the end of 2007. This portfolio generated over $30 million of net investment income in 2007 and we believe that this investment ratio provided by our portfolio differentiates us from other small cap insurance companies.

We believe that in spite of the increasingly competitive market, Amerisafe will continue to produce an underwriting profit and outstanding returns for our shareholders.

As for guidance in 2008, we are providing guidance of a combined ratio of 94% or lower and a return on average shareholder equity of 15% or greater.

With that, I think we should open the call for questions.

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

Impressive results. Allen, could you tell us what LCM you were charging on your workers compensation premium on average during the quarter?

For the quarter? 147.

147? Last quarter you had some level of optimism in terms of the ability of the Company to maybe show some level of topline growth. Do you still have that some level of optimism?

We're not giving topline guidance for 2008 just because we're not sure about the competitive market, how long the current environment will stay and the impact of the lower loss cost which in the states where we do business is -- they are more prevalent that the states had lost cost reductions than increases. So we're not having guidance on the top line.

I understand. You have a high class problem -- massive level of profitability, maybe a little top line. What is your plan in terms of using the excess capital?

That's a good question. We believe that we will produce return on average shareholder equity in 2008 of 15% or greater as we have indicated in our guidance. By the end of 2008, we think that should we not take any steps to manage the capital through either an acquisition, a share repurchase or a common shareholder dividend, that achieving long-term 15% ROE could be challenged. But we do not believe that will be a problem for 2008. We continue to look at acquisition possibilities, but quite frankly at this point what we have seen we feel is a bit overpriced.

I understand. Thank you.

Matt Carletti, Fox-Pitt Kelton.

Bijan got a couple of my questions, but I have a couple number one to follow up with. In the investment portfolio, what is the new money rate right now that you're putting cash flow?

It's right around 4%, Matt. The actual short-term stiff rate is around 3.5%, I believe, because we are building cash as well.

The other one, I apologize if I missed it. What was the impact of the convert shares in the quarter, and what's your fully diluted book value that you're coming up with?

Fully diluted book value is 1166. And Matt, remember that with the two-class method, we take the -- let's use the example. We had $50.2 million -- did you ask for the fourth quarter or the whole year?

The fourth quarter.

So, we take the fourth quarter net income and the percentage -- 84 -- 94% of the theoretical undistributed earnings applies to the preferred shareholder. So we take our full boat shares, which is around $20 million, multiply that times 94% and multiply the net income times 94%, and that's how you get that. If you remember, we go into quite a bit of detail in trying to explain that -- how should I characterize it -- rather unorthodox two-class method in our 10-K. Did that answer your question, Matt?

Yes, I was calculating the same book value. I just wanted to make sure that I had the components of it right.

The actual share count at 12/31/07 was 20,027,810 shares.

Excellent. Thanks very much and congrats on a great quarter.

Mark Lane, William Blair.

Can you tell us how much of the reserve development came from '06?

Yes, let me look at it here.

$8.6 million.

$8.6 million -- of the 9. ---.

Hold on a second. I think it was $2.1 million.

$2.1 million

For the quarter.

In the quarter, yes.

$8.6 million for the full year.

For the full year. Which were you asking, Mark?

So $8.6 million favorable development from '06 for all of '07?

That's correct.

$8.6 million, yes.

So in looking at the fully developed '06 accident year, so you've provided this current accident year for '07, 67.8, 67.3 for '06, right?

I believe that's a good figure, Mark.

But the $8 million, what I'm trying to get at is, your '06 accident year fully developed as of December 31, '07 is roughly, what, around 65%?

Yes, that's roughly correct. Obviously, you take our '06 actual calendar year in '06, or our accident year in '06, divide by that net earned premium and then adjust downward for the reserve takedown.

So your accident -- your loss ratios this year are almost 300 basis points higher?

How do you get that one?

I'm saying, your fully developed '06 accident years is coming down quite a bit from what you booked this year.

But keep in mind, we are always very -- I will use the word prudent, which I like to use -- on the current accident year, it's the greenest year. And we're not going to make any moves until we really see how that current year is developing, and that was true in '06.

Can you just repeat, you had given some numbers regarding the payroll adjustments for '07 versus '06?

Yes, this is on an in-force basis, Mark, and actually I misspoke. The in-force written premium I said was up 3.6% on an in-force basis. This is voluntary workers' comp only, not including the assigned risk. It was actually 3.7% up. The payroll percentage was up 7.6%.

But then you made some comments about what flowed through gross written premium. There were three components that you listed, a third of which was the assigned risk pool business, what impact it had on gross written premium.

Yes.

What was the first component?

Are you talking about -- we had three components. We had payroll, premium audit-related adjustments, we had EEBUP and we had the decline in the assigned risk, both pool and direct assignment.

So what was the audit impact?

The first one was -- let's go back here -- we had $13 million of such adjustments, positive $13 million of such adjustments adding to gross written premiums in 2006. That same number in 2007 was $2.4 million.

That reflects lower (multiple speakers) payrolls.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Al Copersino, Madoff Securities.

Thank you very much. I have a question about your guidance. Your guidance for '08, as far as ROE and combined ratio, is actually quite similar to what it was a year ago for '07. And of course the '07 year turned out to come in much stronger than guidance. Obviously the top line is to some extent out of your hands, given whatever the competitive situation is but presumably the ROE and combined ratio are much more in your hands. So my question is, could you help characterize for us the level of confidence or conservatism you feel like is built into the '08 guidance versus whatever level of confidence or conservatism you had a year ago for the '07 guidance?

Okay. Al, my father always told me, never go back on your word, just be careful when you give it. So I'm trying to be careful about the word we give. We know that competitive pressures will impact us in 2008, but we're very dedicated to our underwriting discipline to produce an underwriting profit. I feel very confident at this point that a 94% combined ratio is a promise that we can make to our shareholders that we have a very, very high probability of delivering.

With respect to some of the trends that we have been seeing, and I hope you picked those up in my comments, we are seeing lower claims counts, and accelerating closure rate and no explosion in severity. Will that continue? I don't know. But I can tell you that we feel comfortable that our reserve selections are adequate and that we have not have been overly aggressive in making promises to our shareholders that we can't deliver. So we feel like if the trends continue, perhaps it could be better than the numbers we give, but we can't -- we insure high hazard business, Alan. Sometimes it's difficult to try to predict how that will develop.

That's more than fair. Thanks very much.

Thank you.

At this time, we have no further questions in queue. I would like to turn the conference back to Mr. Bradley for any concluding comments. Please go ahead.

Thank you Rob, and thank you ladies and gentlemen for joining us this morning.

I want to make a few closing comments that I think are particularly relevant, particularly in light of what Al just asked. I'm as excited about the quality of our earnings in 2007 as I am about the quantity of those earnings. If you will just review our pretax earnings, you will note that we've produced about $30 million of pretax earnings from net investment income. This net investment income did not receive the benefit of any significant net realized gains. Additionally, we've produced about $43 million of underwriting income. In that $43 million of pretax underwriting income, there is included about $9.5 million of prior-year favorable development and about $3.7 million of commutation benefits. Fee income amounted to about $1 million and our interest expense cost us about $3.5 million. The balance of these components, of our pretax earnings, will provide stability to Amerisafe's earnings in the current and coming soft markets.

I don't know said this first, but I have heard it said -- no one knows who's swimming naked until the tide goes out. Well I believe Amerisafe is properly attired for the low tide of a soft insurance market. Thank you for joining us today.

Thank you. Ladies and gentlemen, that does conclude Amerisafe fourth quarter 2007 earnings conference. If you would like to listen to a replay, you may dial 303-590-3000 and use pass code 11106963 # to access the conference. Thank you again for your participation today and you may now disconnect.