Amerisafe Inc (AMSF) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you so much for standing by. Welcome to the Amerisafe Fourth Quarter 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).

As a reminder, the conference is being recorded today on Monday, the 23rd of February. I will now turn the conference over to Mr. Ken Dennard from DRG&E. Please go ahead.

Thank you, Michael, and good morning, everyone. We appreciate you joining us for Amerisafe's conference call to review fourth quarter and 2008 full year results.

We would also like to welcome our Internet participants as this call 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 an e-mail of the earnings release this morning, but occasionally there are technical difficulties. So if you did not get your release or you would like to be placed on the e-mail distribution list, please call our offices at DRG&E. That number is 713-529-6600.

Also there will be a replay of today's call. It will be available via Webcast by going to the Company's Web site and that address is www.amerisafe.com.

There will also be a telephonic recorded replay available for seven days until March 2nd. Details on how to access that feature are in today's press release.

Please note that information on this call speaks only as of today, February 23rd, 2009. 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 on this conference call 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 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 the 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 for the year ended December 31st, 2007, and all subsequent filings. Amerisafe cautions that you do not place undue reliance upon forward-looking statements contained in the release or in this 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 the release and call. For further information, please see the Company's filings with the SEC.

Now I would like to turn the call over to Allen Bradley, the Company's Chairman, President and Chief Executive Officer. Allen?

Thanks, Ken, and good morning, ladies and gentlemen. Thank you for joining us for our 2008 year end investor conference call. I am going to make a few comments about the quarter and the year before turning it over to our Chief Operating Officer, Geoff Banta, and then our CFO, Janelle Frost, for more details.

We are very pleased with our fourth quarter and full year results, which were achieved in an environment of significant market upheaval. Amerisafe's fourth quarter was highlighted by an increase in gross premiums written, of 5.3%, the first year-over-year increase for us in 2008. We also achieved a net combined ratio of 73.7% and operating return on equity of 27.8%. Our reported results, however, were impacted by after-tax realized investment losses of $13.4 million in the fourth quarter, most of that the result of other than temporary impairments to our equity securities which Janelle will discuss more in a few minutes.

Excluding the effect of those realized losses, our fourth quarter earnings were $0.94 per share.

During 2008, we continued our focus on disciplined risk selection and pricing, aggressive claims management, and controlling our expenses. And as a result of those efforts, we produced an excellent combined ratio of 81.4% for the year.

For the full year, excluding the after-tax impact of realized losses of over $15 million, our operating earnings per share were $2.90 and our operating ROE was 23.2%. Even after accounting for realized losses, we produced an earnings per share of $2.15 on a reported basis and grew our book value per share almost 19% during 2008.

As I said on our third quarter earnings call, I am cautiously optimistic that pricing in the marketplace is firming. That optimism is based upon early signs of improvements, such as sequential improvement in our third quarter LCM, along with a year-over-year increase in our voluntary workers comp business written and an increase in new business submissions. All of these positive factors must be considered in the light of the national economic recession that is impacting payrolls and, thus, workers compensation premium.

We continued to see improvements in the fourth quarter. Again, new business submissions were up, this time by about 4%. Our new [bound] policies were up almost 7% and new written premiums increased more than 12%.

At the same time, our policy count retention for our renewal business was 91% and the premium retention was 84%. Both figures were marked improvement over the fourth quarter of 2007.

At this point, I'm going to turn the call over to our Chief Operating Officer, Geoff Banta, for some operational metrics. Geoff.

Thank you, Allen, and good morning, everyone. I will make several comments about Company performance and trends before turning to Janelle to review our financials in more detail.

I join Allen in stating that we're very pleased with our fourth quarter results, especially given the current state of the economy and the continued downward pressure on workers compensation rates. As we stated throughout 2008, our experience in the high hazard subsegment of the market, along with our adherence to stringent underwriting standards and pricing discipline, have enabled us to generate superior returns even in the soft market cycle.

As Allen mentioned, we are especially pleased that our topline actually grew in the fourth quarter by 5.3%, when compared to the 2007 fourth quarter. And we accomplished this premium growth while maintaining our pricing at an effective loss cost multiplier, or ELCM, of 1.46, exactly the same as achieved in the third quarter.

Regarding business on the books, our voluntary workers compensation policy count was up 1.5% in the fourth quarter and 5.3% for the 2008 calendar year. Our voluntary in-force premium declined for the year by 2.1%, but increased slightly during the fourth quarter by 0.3%.

Our insured payroll, which can be viewed as a proxy for economic activity among our insureds, increased 7.3% for the entire year.

Finally, our average premium for voluntary workers comp business decreased both in the fourth quarter and for the full year by 1.2% and 7%, respectively. These decreases reflect increased competition as well as continued decreases in state-mandated loss cost. While most of the loss cost decreases have been justified by regulatory reforms and decreasing loss frequency, we believe that escalating medical costs as well as a flattening of downward frequency trends will soon bring an end to the period of decreasing loss cost and we're seeing signs that that is starting to occur.

Regarding losses, the third quarter was the fifth consecutive quarter in which we have experienced favorable loss development for prior accident years. In the fourth quarter, our favorable development totaled $9.3 million and for the whole year we had favorable development of $20.4 million.

This favorable development reflects not only our decrease in claims frequency, but also the continued improvement of our claims management and adjudication process as manifested through increased speed in closing claims. In 2008, we had almost 600 fewer claims reported to us than in 2007 and as of December 31st, 2008, our open claim count was 4,793, down 9.6% from year end 2007 and at its lowest year-end point in more than a decade.

Needless to say, we will continue to pursue our aggressive approach to closing claims. As my boss Allen Bradley likes to say, claims are not like wine. They don't get better with time.

In addition to favorable reserve development, our expense management efforts continue to produce benefits. Even as our net premiums earned dropped 3.4% in the fourth quarter versus the prior year's fourth quarter, our expense ratio decreased by 6 full percentage points to 17.8% from 23.8%.

Actual fourth quarter underwriting expenses decreased year over year by $4.9 million or 27.6%. Our competitively low expense ratio reflects the impact of our aggressive expense management, as well as our 2008 working layer reinsurance treaty, which acts as an offset to overall expenses. We should continue to see benefits from this three-year treaty through the next two years as we have locked in almost 85% of our reinsurance costs through 2010.

Janelle will provide more detail on the performance of our invested assets. But I will tell you that we incurred $16 million in net realized losses in the fourth quarter and $18.9 million for the full year, almost all as a result of losses from our equity portfolio.

Our pretax investment yield was a respectable 4% per annum as of year end. While it is impossible to predict the duration of the economic downturn we have all been witnessing, we at Amerisafe believe that we are strongly positioned for the near term with a very conservative invested asset base, a book of business that is strongly priced and expenses that are carefully managed.

Overall, and in spite of daunting external challenges in 2008, the insurance professionals of Amerisafe produced a return on average equity of 17.1%, and a combined ratio of 81.4%. We are extremely proud of these results.

And with that, I will turn the presentation over to Janelle.

Thank you, Geoff, and good morning, everyone.

In the fourth quarter of 2008, Amerisafe reported net income of $5.7 million compared to $18.6 million in the fourth quarter of 2007. When we exclude net realized after-tax capital gains and losses, our fourth quarter 2008 operating net income was $19.1 million, an increase of 2.6% over the fourth quarter of 2007.

Now on to the components of earnings. As Allen has just mentioned, gross premiums written in the fourth quarter of 2008 were $65.1 million compared to $61.8 million in the fourth quarter of 2007. This was a 5.3% increase from a year ago.

Also this follows five successive quarters of year-to-year declines in gross premiums written. Net premiums earned decreased 3.4% from the year ago quarter. Earnings lag writings and our decreased earned premium in the fourth quarter was the result of decreases in written premium from previous quarters.

Our net investment income totaled $8.1 million, which was 1.7% higher than the same revenue component in the fourth quarter of 2007.

In the 2008 fourth quarter, we recognized $1.2 million of realized losses primarily from the sales of equity securities, and $14.7 million in other than temporary impairments of certain equities and asset-backed securities. These impairments pertain specifically to one subprime mortgage-backed security and four broad market exchange traded funds.

As of December 31st, unrealized gains and losses on the investment portfolio totaled $16.8 million or 2.1% of our total cash and invested assets. Keep in mind, our fixed maturity portfolio of $680 million is classified as held to maturity. Any unrealized gains or losses on those securities do not affect income or equity unless such securities are deemed other than temporarily impaired.

In total, revenue in the fourth quarter of 2008 was 22.3% lower than the same period in 2007. Our incurred loss and loss adjustment expenses were essentially flat when compared to last year's fourth quarter. Our net loss ratio rose slightly to 51.8% from 51% in the fourth quarter of 2007.

This increase was mainly a function of our decreased premiums earned. Our 51.8% overall loss ratio includes a current accident year loss ratio of 64.8% and favorable prior year development of 13%.

Underwriting expenses decreased 27.6% in the fourth quarter of 2008 to $12.8 million from $17.7 million in the fourth quarter of 2007. The primary component of this decrease was $2.4 million of experience rated commission from our $4 million excess of $1 million layer reinsurance contract.

This experience rated commission acts as an offset to expenses, as long as the Company does not penetrate the $20 million annual aggregate deductible. Should the deductible be reached, the benefit would switch from the expense ratio to the loss ratio in the form of ceded losses. This contract is a structured product in effect for 2008, '09 and '10.

In a period of rising insurance costs, we have locked in our costs for three years and at the same time gained benefit to our expense ratio. Our underwriting expense ratio decreased to 17.8% from 23.8% in the same period a year ago.

Our policy holder dividend ratio was 4.1%, an increase from a negative 1.8% in the fourth quarter of 2007, primarily the result of dividends payable to Florida policyholders under a statutory formula unique to that state.

In total, our combined ratio was 73.7% in the fourth quarter of 2008 versus 73% for the same period in 2007.

In terms of earnings per share, our reported fourth quarter 2008 diluted earnings per share allocable to common shareholders was $0.28 compared to $0.92 for the fourth quarter in 2007. Excluding net realized gains and losses, our operating earnings per share were $0.94 in the fourth quarter of 2008 compared to $0.92 in the fourth quarter of 2007. Book value per share was $13.86 at the end of the fourth quarter, representing a growth of 18.9% over the past year and 91.4% since our IPO in November of 2005.

For the full year 2008, we reported net income of $43.8 million compared to $50.2 million in 2007. When we exclude the net realized after-tax capital gains and losses, our 2008 operating net income was $59.1 million, an increase of 17.8% over 2007.

Our gross premiums written in 2008 decreased 16 -- 6.1% to $307.8 million from $327.8 million in 2007. Net premiums earned for 2008 decreased 5.7% to $289.5 million from $306.9 million.

Net investment income for 2008 was $31 million compared to $30.2 million in 2007, an increase of 2.6% mainly due to an increase in our average cash and invested assets to $778 million from $713 million in 2007. Offsetting this increase was a slight decrease in pretax investment yield to 4% versus 4.2% a year ago.

Net realized losses in 2008 consisted of $1.6 million in realized losses, primarily on the sale of equity securities, and $17.3 million in other than temporary impairments, as I discussed in relation to the fourth quarter. In total, revenue in 2008 was $302.4 million versus $338.3 million in 2007, a 10.6% decline.

Offsetting the annual revenue decline were lower losses in underwriting expenses. Our incurred loss and loss adjustment expenses declined 11.2% for the year. Our 2008 net loss ratio declined to 60.9% from 64.7% in 2007. Our 2008 overall loss ratio of 60.9% included a current accident year loss ratio of 68% and favorable prior year development of 7.1%.

Underwriting expenses decreased 14.6% in 2008 to $55.9 million from $65.5 million in 2007. Our underwriting expense ratio decreased to 19.3% from 21.3% in 2007.

In total, our combined ratio was 81.4% in 2008 versus 85.9% for 2007.

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

Thanks Janelle. The outlook for the workers compensation industry in this country in 2009 is uncertain.

On the one hand, lower investment returns are forcing underwriters to focus on producing an underwriting profit. And that will help stabilize pricing.

By most estimates, the United States property and casualty industry lost more than 15% of its statutory capital in 2008. And that, too, should help stabilize pricing.

We are aware that underwriters are exiting certain classes of risk. And doubts about carrier viability have caused agents and brokers to shop accounts providing many carriers, including Amerisafe, with the opportunity to quote on additional business and increase market share. These factors should provide Amerisafe with an opportunity.

On the other hand, the economy is in a serious recession. The impact of the recession on the exposure units for workers compensation, namely payrolls, is critical. Amerisafe insures infrastructure builders and to the extent that that activity is diminished, the impact is adverse to us. Declining loss cost approved by a number of states will exacerbate the impact of reduced payrolls.

Only time will tell which of these opposing forces has the greatest impact on Amerisafe. I have often heard we cannot change the wind, but we can adjust the sails.

For our part, Amerisafe will remain focused on risk selection and appropriate pricing, intensive safety services, personalized claims administration, diligent expense management and conservative investment policies.

I believe that Amerisafe is well-positioned to weather the current financial turbulence and to return superior results to our shareholders.

With that, we'll be happy to try to answer your questions.

(Operator Instructions). Matt Carletti with Fox-Pitt Kelton.

Good morning. Couple of questions. First relates to the favorable reserve development.

Following the fourth quarter development, can you give us an update on where the accident year ratios now stand for, say, the past couple of accident years, '07 and '06?

Certainly. For 2008, the accident year loss ratio on a net basis is 52.8%. And of course the numbers I am giving you are loss in DCC, not including AO.

Got you.

For 2007, 66.6% and for 2006, 54.6%.

54.6. And what was '08 again?

62.8.

Great. And then on the expense ratio, it was kind of going along at, say, 20 points for most of the year and dropped in the fourth quarter. Is there a seasonality to the reinsurance contract? Or is that something else?

No, there is not really a seasonality to the reinsurance contract. The two things that mainly attributed to the decrease in the fourth quarter were the experience rated commission as well as a decrease in our loss and premium base assessments.

Okay. Great. Thanks a lot.

And we should probably point out, those loss-based assessments are very hard to predict because they depend in part on experience within the whole state that makes those assessments of all carriers. And they may or may not be one-time. We may see them again some additional quarter.

All right. Great. Thank you.

Mark Hughes with SunTrust.

Thank you very much. Do you have any insight into the payroll trends of your policyholders in, say, December and January? And what does that imply in terms of gross premium for the first quarter?

Well, I really can't comment on January, but let me just say this. I have been poring over the changes in payroll by class code over the last couple of days. And I'm not seeing -- Allen may want to jump in here, but I am not seeing material changes in payroll either positively or negatively in our major classes of business.

There are some classes that are down. There are some classes that are up. Nothing -- this is my opinion -- nothing causes me concern yet that we are falling off of the cliff in terms of the national economy.

I would agree. With what we're seeing so far, Mark, you know, the economy is not monolithic. It is not the same in each and every state we serve and each and every industry we serve, but so far we have not seen dramatic changes.

It's just difficult to predict where it is going to go from here.

For the fourth quarter, how much did the change in audit premium affect the gross premium?

I think Geoff has those numbers. As I recall, we had negative audit premium in the fourth quarter of 2007 of roughly $2.1 million and I think that was around $400,000 negative this year or maybe $500,000. So the difference was -- it was actually an improvement of about $1.5 million.

Okay. Thank you.

Yes, I think that is right, Allen.

Mike Grasher with Piper Jaffray.

Good morning, everyone, and congratulations on a great quarter and year.

Could you talk a little bit more about the market disruption that you're seeing out there? And I think if you could compare and contrast with some of your comments around the competition in the workers comp marketplace and some of your own classes, would -- that would be good to get some insight on that.

Sure. Be happy to. I'll give you some numbers. I've been holding off on giving numbers on this issue, but --. One of the -- as you know, one of the competitors that we have that we see in virtually every market is AIG. Their average policy size is generally a lot larger than Amerisafe's, but we do see them in all markets.

We started tracking new business from AIG, where AIG was the expiring carrier in middle of September, shortly after some of their announcements. And since the middle of September through the end of the year, we wrote 142 new accounts from AIG totaling about $7.3 million.

So that is a specific competitor and a specific event.

By the way, I want to comment on one thing there. I cannot say if -- I've heard some comments in the industry that perhaps AIG has been overly aggressive on pricing. I am not in a position, I'm not -- don't think that we have necessarily seen that sort of behavior. For what that's worth.

There has been other disruption in the market, as you know. Liberty Mutual has gotten out of the direct distribution business and has transferred that out to, on renewal rights transactions, to several different agencies. There is some indication that they are also restricting their writings in terms of class codes.

There are other national carriers who have decided to pull back from some of the more high hazard workers comp events. And then we've seen some local or smaller regional type carriers -- I think Michigan Miller's was an example of that -- that have started -- well, have had some market disruption.

All of these things provide us with opportunity. I think it goes back to the general comments that I made earlier is that if you're not receiving earnings through your investment portfolio, you have to look even more closely at your underwriting procedures. And quite frankly, over the last couple of years with the collapse of the housing market, a number of carriers that were involved in the residential construction industry have chosen to get involved in the heavier construction and the more dangerous types of risk.

And I think perhaps some of those folks are looking at the prudence of that decision.

Okay, and that leads me to sort of my follow-up question here which would be that, what line of business or which class of business do you see being most impacted in here right now?

I will tell you that in 2007, 41.7% of our business was construction. In 2008, it was 41.5%. So there is no significant movement there. Trucking had dropped from 22.3% of our portfolio to 21.8%. Agriculture rose to the third-largest of our SIC -- of our industry groups and logging dropped from third to fourth.

I would expect logging would contract even further with some of the things that are occurring in the housing industry and the construction trades, perhaps. Oil and gas is up. Maritime is pretty flat. And the other thing that is remarkable is if you look back at 2006 and you look at our total portfolio, our industry scatter of business we wrote, almost 5% -- 4.9% -- of our business was -- came out of the residual market. That was only 2.8% for this year.

So carriers have gone in and pulled a lot of risk out of the residual market and it is now in the voluntary market. You might look to see that begin to reverse itself in the coming year.

Okay. That's very helpful.

Final question here, then. Opportunities out of the administration spending package?

Well, to the -- as I said in my prepared remarks, we insure infrastructure builders. Heavy construction, trucking, oil and gas business, maritime risk, the like. To the extent that the President's stimulus package will involve building infrastructure, then those things should benefit us.

It's hard to put a percentage around it, but I will tell you that looking at some of the construction projects that are listed for this part of the country, a lot of those deal with hurricane evacuation-type building. And those are in areas in which we have a certain geographical density of business.

Mark Lane with William Blair & Company.

Good morning. My first question is regarding premium growth in the quarter. You highlighted the ambiguity and the outlook this year and, potentially, have seen a flattening of claims frequency trends and the market's maybe stabilized, but hasn't changed dramatically. I was very surprised that your business actually grew in the quarter.

Why are you so confident that you are -- feel like you are comfortable growing the business right now when still the outlook seems pretty ambiguous and we really haven't -- if we've hit a bottom it's not a very deep one yet.

I agree with that part. Two things -- Number 1, the pricing on the business, the hit ratios, the declination ratios, the success ratios when we quoted business did not materially change from any other point of the year. So I don't think there was any compromising of risk selection. Number 1 point.

Number 2 point. If you look back at the fourth quarter of 2007, you would see we had a rather precipitous drop in premium written over the fourth quarter of 2006. So the bar wasn't extremely high.

I don't think that taking advantage of disruptions in the marketplace and taking advantage -- which largely by the way we showed up in October, November -- were -- represented any compromise whatsoever in the risk selection process. I think it was opportunistic and we took advantage of it.

The other thing that was interesting as I mentioned earlier the audit premium adjustments were an improvement of about $1.5 million. And I think that reflects employers being more realistic in their estimation of annual premium going forward. Because those audit premiums reflect audits on policies that were written in prior periods outside of the fourth quarter of 2008.

But was there a difference in the profile of the business flow in the fourth quarter? Because you did state that your new business growth was higher than your new submission growth, which is kind of a contra trend to what we've seen in the rest of the industry this quarter.

I would tell you that we got to look at some business in the fourth quarter that we did not have an opportunity to look at in the past. And some of those policies were larger. The quick math on the numbers I gave you a while ago would indicate that the average policy that we took from AIG in terms of new business was over $50,000 a policy. And our average policy size for the year is about $36,600.

And what about the expense ratios? So if -- this is the first year for the reinsurance treaty, so have we seen the big delta on the impact there then if we are looking (multiple speakers).

Right. Correct. You'll see that impact each quarter for the three years. So 2008, '09 and '10.

But, then, meaning that there shouldn't be much positive incremental impact in '09 versus '08?

No.

Right. Okay. And what about the favorable development? You gave the accident, you are excluding LAE. So it doesn't look like -- how much of the $20.4 million favorable development was attached to the '07 accident year?

'07 was actually unfavorable development of $10 million. 2006 was favorable development of $16.1 million. And 2006 and prior was $14.3 million.

'07 had unfavorable development of $10 million?

Correct.

Yes, we actually strengthened there.

Any particular reason why?

It was largely related to one very large claim that adversely developed from -- on us.

Bijan Moazami with FBR.

Good morning, everyone. Just wanted to stay on the same line of question and in particular about the frequency trend. Is this recession any different than previous recessions? In other words are you seeing people staying out of jobs for a longer period of time, an increase in severity of medical claims?

What are the trends that you're seeing if you have any specifics?

I don't have any numbers to put around that, but I would tell you that -- specific numbers. I will tell you that the frequency trends that we are seeing are down to flat. We are not seeing any increase in frequency of new reported claims. Number 1.

Number 2. In terms of -- I'm going to call it duration. My concern has been for some time that, in a slowing economy, it is difficult for us to resolve claims. Because it is difficult to convince people they are ready to go back to a job that doesn't exist. And I think that's the biggest challenge that we look -- that we have going forward in terms of claims is what do we do with claims that are already in our inventory as opposed to the new claims coming in?

Medical cost inflation, as you know, for workers comp is -- according to the NCCI -- increasing at about roughly 6% as opposed to 4.4% for general health CPI. So that is of course a concern.

So anything that stretches out duration is a concern.

Let's talk about how we've tried to manage that a little bit. At the end of 2008, we had open workers comp claims of 4,732 claims. Now of those, 56.6% were 2008 claims. And if you add in 2007 claims, that covers 73.9% of all of our open claims are claims that are in the last two years. 2007 accident year and 2008 accident year.

So we have reduced our inventory of older claims. You have heard his talk about this oldest 75 initiative. And we have been able to reduce our open claims of the older inventory and we think that mitigates, as much as possible, that risk of the duration stretching out on the claims.

Okay, and that reserve addition that you took on 2007. Is it all related to that one claim, one large claim? Which I doubt it would be the case because your retention ratio is way below that. Or is it your conservatism and just wanting to be a little bit more careful with newer accident years and the trends that are happening there?

It's more the latter than the former. That one claim -- the case incurred increase was either $3.4 million or $3.7 million. And it was quite a surprising development. But that can happen when you are in the severity driven business. And yes, we are conservative about that and we are very, very comfortable with the level of our reserves, both case reserves as well as IBNR.

Just one last question. You talk about frequency flat to down still, what about severity? (multiple speakers) As I remember when the frequency was dropping previously, you had the frequency of the more serious accidents dropping at a faster rate than the frequency of the less serious accidents.

Right. We had -- it was an interesting year in 2008. And I think you'll be able to see more color on this when the K comes out. But as I recall, we had for years 2004 through 2008, we had an average of 27 claims per year that had reserves, incurred amounts of greater than $500,000.

The highest year was 31 and the lowest year was 2008 at 18. So in 2008, we had a relatively low number of severe claims.

So those severe claims tend to be a little lumpy. I would have to tell you that we begin each year with the assumption that the average claim size in that year is going to be slightly higher than the previous year as a result of medical cost inflation and wage inflation. But that doesn't always play out, but that is our assumption going in. And that plays into our reserving.

Michael Nannizzi with Oppenheimer.

Hi guys. Quick question about the investment loss. When I look at the number, it looks like the tax rate is maybe like 18% comparing the gross to net.

Am I calculating that right? Or can you walk through the tax implication or the tax component of that realized loss on the income statement?

Sure. One of the things we had to do was we had to put up a valuation allowance on our deferred taxes. So that is what is driving the tax rate.

I see.

That was $3 million. If you were to exclude that from the new tax rate, we would have been at a 26.9% effective rate.

Okay. All right. So I did see that. So the deferred tax balance (inaudible) went up $2.5 million or so. So that was primarily driven by this piece?

Correct.

Would you have the investment (inaudible) -- the investment portfolio yield average for the quarter?

For the quarter? No. I can tell you our new money rate.

Okay.

Cash, we are about a 1.7, and on the fixed maturities about a 3.3.

Okay, 3%. Then just in terms of cash. I mean there's about $100 million at the end of the quarter. How much of the -- does that include stuff that matures in the forward 12 months? Or is that another component of the investment portfolio?

Cash and cash equivalents is 11.9% of the portfolio. And that would [equivalate] three months or less (multiple speakers).

Okay. So there's probably another group of investments in the portfolio that do mature in the next 12 months -- (multiple speakers).

Oh yes, yes. Turnover is about 14% per year.

19 -- 9.2% of the portfolio is going to mature in less than one year.

So 9.2%, and that is in addition. So that's the 3 month to 12 months or is that the whole --? Yes, I guess that would be. Because three months or less is in the cash side and --.

Yes, 9.2% of the $680 million in fixed maturities.

Got it. Perfect. That's what I was looking for. And what's the duration of the portfolio right now?

About four.

Including cash.

Right. And that was my perfect follow-up. Great. Thank you very much.

(Operator Instructions). Mark Hughes with SunTrust.

Do you have cash from operations for the full year?

$65 million.

$[55] million? Okay. Then the inflation and medical expenses. Allen, how has it been lately? Seems like broader medical inflation trends have decelerated just a little bit in the recent months.

I don't have a number around that, but that's my impression. That's my impression.

My main concern about medical cost inflation is going to be around utilization as opposed to just pure inflation on the same unit of delivery. As duration of claims extend out, we get more doctor visits, more hospital visits, more prescriptions, more durable medical equipment. All of those sort of factors can drive that.

And you know it is different from state to state. Some states do a better job of controlling medical cost than others. The NCCI studies on that indicate that states that have medical fee programs and effective cost-containment do much better than the reasonable and customary states.

So it's affected by some geographical scatter as well.

Got you. Thank you.

Ron Bobman with Capital Returns.

Good morning. Congrats.

Thank you.

I had a quick question. Could you explain again the multiyear reinsurance protection that you mentioned, I think at least two times in the prepared remarks? I didn't fully understand it.

We entered into a three-year agreement as -- effective as of 1/1/2008. Now that agreement was what we call structured product and it said that we would fix the premium and our share of the premium, and the expense on -- the margin for the reinsurer. Our premium would be -- our piece would be 86% of the ceded premium we pay remitted and theirs would be 14%.

That 86% is what we take back against expenses on a reported basis. The cash stays in both funds withheld and funds transferred until we decide to commute the contract. And every year the aggregate annual deductible is $20 million.

So in other words between $[5] million and $1 million, between that corridor, we have to pierce $20 million in that corridor before the reinsurance kicks in.

: The reinsurance provides $40 million of coverage of any one year and $60 million maximum over the three-year time period. You can tell from the accounting that we did not pierce the $20 million layer in 2008.

And there's no inflationary kicker on the premium. It's $11 million every year for the three years. We are locked in.

One other thing you need to know about that is that that -- as respects our [4X1] layer. For 2009, '10 and '11, we entered into a similar product for the [5X05] layer. Without an annual aggregate deductible but a similar type structure. It won't have much impact on the financials, because the ceded premium at that layer is significantly less.

The 4X1 layer represents 80 to 85% of the cost of our reinsurance.

I'm sorry. So what's the economic impact,A? And then, B, the sort of reporting impact, if under the scenario you have horrible loss development in this window of time, and then in contrast, if you have great loss, favorable, great favorable loss experience over this period of time?

What are you giving up and what are you getting under those two scenarios? I assume there is a plus and a minus.

If we have horrible loss development, what will happen is the expense -- the expense offset that we build up will start moving from expenses to ceded losses. The expense ratio will go up and the net loss ratio will go down as we start eating into the losses above the annual aggregate deductible.

There is a limit to those. If we had a year, for example, where we had $60 million, which we've never had before, we would take quite a big hit in terms of expense ratio, lowering that loss ratio. And then we would take the losses back ourselves over $60 million.

The good side of this is if we did not pierce the layer in any of the three, the three categories -- the three years, we would have, in terms of the funds withheld -- is it the funds withheld? Yes. In terms of the funds withheld, if we could decide now we are going to commute this contract, which we can do after three years, we take that cash back.

And by the way, we are earning interest rate on the cash that is withheld. So economically it's, we -- economically and financially we thought it was a very good deal for us.

Okay. Thanks a lot.

Mike Grasher.

I guess to Geoff and Allen, if you could update us on the governance review or if there is anything you can share with us at this time?

Just an update. The matter of the corporate governance review is being handled by the nominating corporate governance committee. They are -- have retained counsel to assist them in doing this review. They are proceeding in a deliberate fashion. It's more important for Amerisafe to do this right than to do it quick, but I don't look for it to be an unusual delay in proceeding through the process of making the assessments.

And with all of that would you care to throw out any timeframe?

No. Since they're doing it, I had better be quiet.

Thank you.

Michael Nannizzi.

One housekeeping question. Can we get the expense component numbers for the commissions, salaries and other underwriting? Is that possible?

Hold on just a second.

On a year-to-date basis?

For the quarter, if that's okay.

Quarter. Do not have those handy.

Okay. Or the year-to-date? I mean I can figure out the quarter if you have the year-to-date number.

I do. Just a moment. Commissions $20,592,000. Salaries and benefits $20,411,000. Underwriting and other operating $[14,933,000].

Fantastic. Thank you.

Thank you. Management, there are no further questions at this time. Please continue with any closing comments.

Thank you all for joining us this morning. We appreciate your interest and your support of Amerisafe. And we look forward to continuing to return superior shareholder returns over the coming year.

Thank you , ladies and gentlemen. This concludes the Amerisafe fourth-quarter earnings conference. You may now disconnect. We thank you for using (inaudible) Conferencing. Have a very pleasant rest of your day.