Amerisafe Inc (AMSF) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AMERISAFE first-quarter 2008 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 be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded today, Friday, May 2, 2008.

I would now like to turn the conference over to Mr. Steve Gray with DRG&E.

Thank you, operator, and good morning, everyone. We appreciate your joining us for AMERISAFE's conference call to review 2008 first-quarter results. We would also like to welcome our Internet participants listening to the call, as it is being simulcast live over the web.

Before I turn the call over to management, I have the normal housekeeping details to cover. You could have received an e-mail of the earnings release yesterday afternoon, but occasionally there are technical difficulties, so if you did not receive your release or if you'd like to be 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 and it will be available via webcast by going to the Company's website, and that is www.amerisafe.com, or there will be a telephonic recorded replay available until May 9. Details on how to access that feature are in yesterday's press release.

Please note that information reported on this call speaks only as of today, May 2, 2008, and therefore you are advised that time-sensitive information may no longer be accurate as of 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 words such as will, believes, 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 risk, 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 6, 2008, and future and other filings.

AMERISAFE cautions that you do not place undue reliance 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 information or statements to reflect future events, information, or circumstances that may arise after the date of the 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. And now I will turn the call over to Allen.

Thanks, Steve, and good morning, ladies and gentlemen. Thank you for joining us on our quarterly investor conference call. Today is a special day for those of us at AMERISAFE, as yesterday was the 22nd anniversary of the issuance of our first policy in 1986, and we have been in the hazardous industry workplace since that time. I'm going to make a few general comments about the first quarter before turning it over to Geoff to discuss the financials.

The first quarter of 2008 represents the most profitable first quarter in the Company's 22-year history. Our net income was up more than 41% and our combined ratio improved more than 5 percentage points from the same quarter last year. We produced a return on average shareholder equity of 20% and ended the quarter with a book value per share of $12.13. Our book value per share has increased more than 67% in the last 29 months, since we went public in November of 2005.

Our gross premiums written in the first quarter were $81 million, down more than 10% from the first quarter of last year, reflecting three things -- number one, the impact of lower loss costs; the increased competition, number two; and lower work activity, as reflected in lower audit premium.

I am especially pleased that we maintained our underwriting and pricing discipline in this market, as evidenced by our effective LCM of 1.48, or 148% of the approved loss cost in the states that use that mechanism for pricing. Our effective LCM in the first quarter last year was 1.54. I am very pleased that the drop in the effective LCM was only 4%.

On an in-force basis, our voluntary Workers' Compensation policy count was up 0.3% at March 2008 as compared to the same time period in 2007. Our in-force premium was down 2.3% and our insured payroll increased only 0.3%. Our average premium size, as you might well expect, has declined 2.6% over the same time period. In terms of loss frequency and severity, the quarter was very well within our expectations.

As a company, we believe that claims are not like wine; they don't get better with time. Therefore, we work very hard to bring our claims to resolution as soon as practical. We continued to meet with good success in those efforts.

At the end of March, we had only 5118 open Workers' Compensation claims, as opposed to 5477 at the same point last year, a drop of more than 6.6%. More than just claims counts, however, we continue to see improving signs in terms of favorable claims development. We recorded a very modest $1.7 million reduction in reserve during the first quarter.

At this time, I'm going to turn it over to Geoff to talk about the financials.

Thank you, Allen, and good morning, everyone. As Allen mentioned, in the first quarter of 2008, our net income increased by 41.6% over the comparable prior-year period, even though we experienced a 10.5% decrease in gross premiums written. Net premiums earned also decreased quarter-over-quarter by 2.1%, while our other major component of revenue, net investment income, increased 12.9%.

The increase in net investment income was due mainly to a $96 million increase in our average invested assets to an average of $766.5 million for the 2008 first quarter. The most significant contributors to our net income increase, however, were on the expense side of the income statement. First, our incurred loss in loss adjustment expenses decreased by 4.9% from last year's first quarter. And our loss LAE ratio decreased from 69.2% to 67.2%.

While our projected current year lost in LAE ratio was 0.3 percentage points higher than that projected at the same time in 2007, we also recorded a $1.7 million favorable loss development for prior accident years, amounting to 2.3% of net premiums earned. This is the first time as a public company that we have taken down prior year reserves this early in a calendar year, but we felt that this modest takedown was justified by the experience we saw in accident years 2005 and prior.

The other major contributor to our first-quarter net income was our underwriting expenses, which decreased from $17.2 million in the first quarter of 2007 to $14.5 million in the first quarter of 2008, a reduction of 15.4%.

Our expense ratio for quarter 1 '08 was 19.5%, compared to 22.6% for the same period in 2007. The decrease was primarily due to $2.4 million of experience rated commissions from our 2008 reinsurance agreements, which act as offsets to our expenses.

We also recorded $458,000 less in insurance-related assessments in Q1 '08 versus Q1 '07, due mainly to favorable gross loss experience in the states to which those assessments apply. All together, our net combined ratio was 87.1% in the first quarter of 2008 versus 92.5% for the same period in 2007.

In terms of earnings per share, our first-quarter 2008 diluted earnings per share allocable to common shareholders were $0.59 compared to $0.42 for the first quarter in 2007. For purposes of the EPS calculations, weighted average diluted shares outstanding for the first quarter were up very slightly.

Book value per share also increased in the first quarter, from $11.66 as of year-end 2007 to $12.13 at March 31, 2008. This book value calculation includes the after-tax effect of unrealized losses incurred in our equity portfolio during the quarter.

That concludes my prepared remarks on the financials. I will now turn the discussion back over to Allen.

Thanks, Geoff. As you know and can see in the summary, our first quarter was an excellent one. With respect to the marketplace, it continues to be very competitive. We see both the impact of competition showing up in our effective LCM, as it has dropped from 1.54 in the first quarter of 2007 to 1.48 in the first quarter of 2008. The additional impact of declining loss costs in a number of the states where we do business exacerbates the impact of that competition. While our effective LCM may decline somewhat in 2008, we will continue to price our policies appropriately to cover the risks we insure.

As I mentioned to you at the end of our last call, we believe that AMERISAFE is well-attired to avoid the difficulties of the current market. With that, let's turn it over for questions.

(OPERATOR INSTRUCTIONS) Matt Carletti, Fox-Pitt Kelton.

Good morning, guys. A couple questions. First one is probably for you, Geoff. Could you go back to -- you had some comments on the new reinsurance policy and the benefit it had to the expense ratio. Could you just give a little bit more color on how that works? And is the kind of 20% range, is that a run rate going forward or is that more related to just experience in this quarter?

No, let me tell you -- I'll try to keep my comments brief but to the point, Matt, on this rather interesting agreement that is, by the way, documented in the 8-K that we released on February 15. But if you take our gross earned premium, the gross rate that we are being charged for this [4X] of one cover is 4.85%. We then get a 30% ceding commission, which brings our net rate down to 3.4%. By the way, this ceding commission runs back through the expense lines as well, but it is different from the experience rated commission.

So we now pay a net rate of 3.4% on a quarterly basis. The reinsurers under this three-year agreement get a 14% profit share. The remaining 86% goes into an experience fund that, until losses occur over the $20 million aggregate annual deductible, remain as an offset to expenses.

Should losses exceed the $20 million AAD, that commission, that experience-rated commission, those monies begin moving to ceded losses from expenses. So you can see that if we were to hit $25 million, let's say, for the first year in the fourth quarter, there would be a little bit of a change, and expense ratio would go up and loss ratio would go down accordingly.

Got you.

But the EITF and the FASB do not allow us to accrue toward some sort of projection. You can't make that. You can't begin depositing into that loss fund until you actually have those losses -- those recoverables recorded.

Okay, that's very helpful.

Let me just talk a little bit about the strategy that we employed in purchasing this product. There were two objectives we wanted to accomplish with respect to this working layer, which is a layer that attaches at $1 million and covers the next $4 million of subject losses.

The first objective was we felt like we had reliable experience over the last six years, a steady book of business, and we had fairly predictable burn cost. So we do not want to trade dollars with our reinsurers. So we retained the first $20 million of losses as it respects the 4X1 layer.

The second objective was that during this time period of a softer market, we thought it prudent to move down retention from $2 million to $1 million once you get past what could be expected losses. So we moved that down.

These two strategies combined were what led us to purchase this product, which is a three-year product.

Three years, great. That's very helpful. Thank you. Then just one other question. Just put this in the category of high-class problems. You are growing the balance sheet nicely and obviously the markets aren't as willing to comply for growth. How do you look at capital here? So out a year even, kind of just talk broadly about capital management and how you view that.

Well, we -- as you know and as we've discussed on prior calls, in terms of capital management as it respects common shareholder dividends and stock repurchases, we will be required to secure the consent of our preferred shareholders of the C&D preferred shares.

That is not true with respect to acquisitions. But I do not think you go out and make a bad acquisition just to manage your capital. That is certainly one way to do it. Poor underwriting is another. Not something we are interested in doing there.

But we certainly are aware and are interested in viable acquisition possibilities out there, although I will have to tell you, just as I commented at the last conference call, I believe, the pricing I've seen on these acquisitions appears to be a bit rich for our taste.

Okay, wonderful. Thanks very much and congrats on a really nice quarter.

Mark Hughes, SunTrust.

Thank you very much. Very good on the underwriting expenses. How should those trend in the next few quarters in absolute terms? Any changes we should expect?

Well, looking forward, there is not a lot I can say, Mark. I do not anticipate huge, huge fluctuations in the market we are in and with the plans we currently have in place.

Got you. And then your outlook, the 94 combined ratio, I assume you're just sort of sticking with your prior statement. It doesn't sound like you anticipate any sort of meaningful changes in the P&L of the company.

It is a bit early to say that. And you know, Mark, we insure the highly severe classes, and earnings could be a bit lumpy if we were aggressive in projecting that. We feel comfortable that making that projection at this point and that guidance, that we can support that. As in the last two years, if that changes later in the year, we will give notice of that.

Understood. Any weighted average change in loss costs in Q1 across your markets? Is that a number you calculate or can share?

It is a number that -- every time a state announces a new loss cost, whether it be an increase or a decrease, you understand that the loss cost announcements that you see are the average across all class codes. At that point, we do internally project the impact on AMERISAFE's business, if everything remained the same. The problem, Mark, it is it never does remain the same. Marketshare in states goes up-and-down. Industry scatter changes. All of which makes that a very difficult number to project.

I would tell you that, just directionally, I look at the changes in our gross written premium and first look at the change in the effective LCM, which is the impact of competition. The rest of it is either audit premium caused by slower work activity or lower payrolls, or, number two, the effect of loss cost. But we do not publish that number, and quite frankly, it would be very difficult to track from time to time, because of the shifting base of which the loss costs are applied.

Right. So payroll up 0.3%, loss costs down 6 -- 1.48 from 1.54. Is that right?

(multiple speakers) Yes. Policy count up 0.3%, payroll down 0.3%. In-force premium down 2.3%. And of course, as you know, that is a very important metric not to have that in-force premium move up in the -- sorry, the in-force premium move down and the in-force payroll move up. Because you're just getting more exposure and enjoying it less.

Got you. Thank you very much.

(OPERATOR INSTRUCTIONS) Mark Lane, William Blair.

Good morning. Geoff, the reserve release you suggested was '05 and prior, correct?

That is correct.

So the accident year loss ratio that you are booking in the first quarter is -- looks to be lower than last year.

No -- it is 0.3. The current accident year ratio is 0.3 percentage points higher. The effect when you throw in the 2.3% of net earned premium from prior-year development then takes the combination, your calendar year loss ratio down by 2 points.

Right, so your accident and your loss ratio is 67.2, right?

Yes.

So last year you had 9.5 --

That is calendar year. Accident year is 69.5.

Right, right -- okay,

(multiple speakers) current year is 69.5.

Okay. So 2.5% increase from last year, right? Okay.

No. 0.3 of a percent if you are comparing -- 2007 at Q1 -- 2007 --.

No, I am looking at the full year, the full year.

Yes, you're right.

That's correct.

Okay, all right. So back on the expense side, so the basic message is that the expense ratio has some experience associated with it. So as we go along for this year, if the loss ratio continues to be good, should you still continue to enjoy some of those benefits, both on the assessment side and also the reinsurance side?

Exactly right.

So this is not like a front-end loaded or anything like that? It is ongoing?

It is ongoing, and we are required to make it ongoing by the accounting guidance. But let me just say that, as you probably know, the loss-based assessments which benefited us handsomely in the first quarter are probably the most predictable item in expense we have. Because you not only are subjected to ups and downs of case development in the states that assess those, but part of the equation is also the losses of all the other companies operating in those states. So it is fairly unpredictable, but as a rule, if our gross experience continues to look good, we should benefit in those states that are hitting us hardest with these loss assessments.

Mark, let me mention -- this is Allen -- let me mention one other thing, a point on the loss expenses. If you look at the impact of the experience count, that was $2.4 million. And our actual expenses, underwriting expenses in the first quarter after applying that, were $14.5 million.

Last year, our underwriting expenses for the first quarter were $17.2 million. So even the ignoring that, there has been some downward adjustment in the expenses.

Okay, perfect. Thank you.

Jody Hansen, Silvercrest Asset Management.

Good morning, gentlemen. I am a glass-half-empty type guy. On the accident year loss ratio, just going up 0.3 of a percentage point, I am surprised that it didn't go up more given that your payrolls were up a little bit. The policy count was up. And you are in a lumpy business. Is the reinsurance contract what is keeping that down?

No, it is not. Let me tell you the reason we moved it up and the reason we didn't move up more. Number one, it was moved up because we monitor very closely our case losses as we go along. And to tell you the truth, it was a bit hotter in the first quarter of 2008 than it was in 2007, than it was in 2006. But not by much. It was very marginal.

There's a couple of things that impact that. Number one, our claims department has done an excellent job of getting the reserves up, and we have had an initiative to try to close the older claims, and one that has been remarkably successful. That has lowered our claims count. We have not reduced the size of our claims department. And I really, honestly believe that those people have more time to spend on the claims that come in.

And because they've been questioned about the older claims, they are getting those reserves up more adequately. Last year, our case reserve development in the second half of the year was remarkably low. And so I think that is a tribute to Dave Narigon and the folks in the claims department that have done such a great job.

The second thing, that is -- we moved it up because it was a little bit hot. The reason we didn't move it up more is that we have to look back, as Mark Lane so accurately put out, at what our loss ratio ended up for last year. So we did not want to be overly conservative on moving it too high.

Now, as you point out well, Jody, this is a lumpy business. And I can't tell you what the poor roofers in North Carolina are going to do this afternoon when they get off from work. So we feel it is a conservative number, it is an appropriate number, and we think all of the internal metrics we use for fixing that number support it.

I appreciate you walking me through that. As for the roofers in North Carolina, maybe they should go out and buy your stock.

Well, I hope so. I just hope they don't buy any beer on the way home.

Thank you very much.

(OPERATOR INSTRUCTIONS) Ron Bobman, Capital Returns.

I think beer on the way home is okay. Beer on the way to work is the problem that you need to be concerned about.

Ron, I will have to tell you, you are right, as long as you have made it to the shop and dropped off the company truck. Don't buy it in the company truck.

Well, it's nice to see the stock up after the press release this quarter. I had a question just about competition. What is the nature of the competition? And I'm sorry if you covered this, but are you seeing new entrants or at least an increased activity level for some sort of the passive players in these high-risk categories? Or are you just seeing more aggressive rate action from sort of the usual faces that I assume you bump into regularly in different markets.

That's a great question. If you will allow me to -- I will kind of take a broad answer to that. It varies based on geography and it varies on policy size. I will tell you that in terms of the new entrants into the hazardous Workers' Comp market, we have seen some writers in certain areas that are willing to write high-hazard business that have traditionally not been in that marketplace.

We see some -- in some marketplaces, we see the same faces that we've seen in the past, but their appetite for smaller policies has increased. So where you used to see a particular national player, for example, at $100,000, you may now see them at $75,000 or at a $50,000 account.

We see more intense competition, as you will not be surprised to hear, on those accounts that are larger than we do on the ones that are smaller. The most aggressive pricing we see generally does not come from publicly-traded companies. It generally comes from single-state writers, very small multistate writers, self-insurance funds, and some state funds -- although not all, not all. I want to be sure that that's clear. Some are more cautious than others.

But you see competition in other ways, Ron. You see lower deposits. You see relaxed underwriting standards. Speed to market has become the big mantra. I can write your 100-unit trucking account in 8 minutes. I'm sure you can. But I don't know that you can underwrite it. You may write it, but I'd don't think you can underwrite it in that time period.

So those of the some of the things we're seeing in the competitive marketplace. We are also -- I think it would be unfair to characterize as being ubiquitous -- there are some underwriters that are cautious and are acting appropriately, and I think they are doing well with it.

Did you give us a retention figure for the quarter?

I did not.

I did not. I can tell you that the policy count retention is consistent with prior years. The premium dollar retention is down -- impact of competition, lower loss costs, and then that intense competition on the very large accounts.

I'm sorry -- and policy count retention, when you say it is consistent -- so, I'm sorry (multiple speakers) --

90% range, 90%, 91% of those we offer renewal quotes to.

Okay. And, Allen, when you look at the 10% that you lost, approximately 10% of account numbers you lost this quarter, is there any sort of common theme, whether it be a particular state or the new players coming in, or it's spread across the various points you made to my first question?

It is spread a little bit, Ron, but there are some particular, notable parts dealing with one particular industry in one particular state, and I'd don't want to let our competitor know which one it is. But where we have seen someone say, as it has been reported to us, we are targeting their accounts. And quite frankly, they are not using loss control, so they get the benefit of our efforts in that regard.

And that is something we see. But we do see from time to time particular companies targeting particular accounts. But I would say that is probably 25% or 30% of that loss, and the rest is just spread across the rest of the country.

Any signs of people pulling back or any incumbents getting burned that you see some conservative practices?

The problem with the incumbents getting burned is that sometimes they don't know they've been burned for a year. We do see some stabilization in Illinois, Kansas, and Missouri. Also some -- a few underwriters that I think are prudent underwriters that have pulled back from -- that got into some high-hazard stuff and have pulled back in Oklahoma, Kansas and maybe some in Texas.

But there's plenty of other folks right now to take their place. You know, this is a business of deferred gratification and deferred pain, and right now, some people are underwriting, I think, at levels that are unsupportable.

Got you. I trust that you will stick to your knitting and sit on your hands when that, unfortunately, keeps happening.

I think that's --

Best of luck.

Bijan Moazami, FBR Capital Markets.

A couple of questions. In particular, I'm wondering if you guys have seen any increase in litigation costs, any change or any reversal in the reforms, or any increase in the time period that people are staying on disability, given the economic environment?

I think the answer to all three of those questions is we are not experiencing that. We have, as you know, very low percentage of our claims that are in litigation. We believe that is directly attributable to our practice of when we receive notice of a lost-time injury to be face-to-face with the claimant, within 48 hours -- 48 business hours of notice of the claim -- two days.

So we haven't seen the unwinding of those. I will tell you that in terms of reserving for those, shall we say in some states, some reformations in the statutes. We have not been quite as aggressive as booking those changes; we have maybe taken a bit more pessimistic view in terms of the case reserve than some.

We are not seeing -- we are seeing some slight increase in severity, partially offset of course by lower frequency. The increase in severity -- and if you ask me what keeps me up at night with respect to claims, its medical costs -- both utilization in the number of procedures, as well as just the inflation in the cost.

Thank you.

I am showing that we have no further questions at this time. Please continue.

Thank you, ladies and gentlemen. Thank you very much for joining us this morning on our earnings conference call. In keeping with the comments that have just been asked in the questions, during the current soft cycle, we constantly hear many people comment about the competitive activities of others in the marketplace. These comments usually are centered around pricing or coverage extensions or speed to market or security deposits and the like.

In thinking about these comments and how we might react to those, I am reminded of the words of the British writer and satirist Malcolm Muggrich, who said, "never forget -- only dead fish swim with the stream." Thank you very much.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.