Amerisafe Inc (AMSF) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Amerisafe, Inc.'s fourth-quarter earnings call. At this time, all participants are in a listen-only mode. Later, we'll have a question-and-answer session, and instructions will follow at that time. (Operator instructions) As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Janelle Frost. Ma'am, you may begin.

Good morning. Welcome to Amerisafe's fourth-quarter 2011 investor call. If you have not received the earnings release, it is available on our website at amerisafe.com. This call is being recorded. A replay of today's call will be available. Details on how to access the replay are in the earnings release.

During this call, we will be making forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings release, in comments made during this call, and in the Risk Factors section of our Form 10-K, Form 10-Q, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

I would now turn the call over to Allen Bradley, Amerisafe's Chairman and CEO.

Thanks, Janelle, and thanks to you, ladies and gentlemen, for joining us for our fourth-quarter 2011 earnings call. As usual, I will make a few remarks and then turn the call over to Geoff Banta and Janelle Frost for more details.

During the fourth quarter, the Workers' Compensation market continued to improve. The public commentary on the firming of the P&C market in general, and the Workers' Compensation market specifically has gathered momentum over the last few months. While there remains differing views as to the extent and the duration of the cycle term, very few commentators, if any, deny that the market is firming. As has been the case in similar situations in the past, it appears the impact of the turn in the market is first being felt in the high hazard occupations. This trend is indeed good news for Amerisafe.

We have noticed changes in three aspects of our business. First, pricing is rising. The impact of this change is clearly shown by the increase in our effective loss cost multiplier, which Geoff Banta will discuss in a few minutes.

Second, regulatory rate filings have swung predominantly from one of rate decreases to one of increases. For example, in the 2009/2010 rate filing cycle, statistical agents in the various states filed 28 rate increases with only 8 rate increases. So far, in the 2011/2012 filing cycle, there have been 8 decreases and 25 rate increases. We expect the ratio to continue to improve in the coming quarters.

Finally, the demand for our products, the product we sell -- monoline Workers' Compensation insurance -- is improving. It appears that 2011 net premium written for the Workers' Compensation line will rise nationally for the first time in five years. We know our gross premiums we have written during 2011 have risen by more than 19%. And based upon what we see right now, expected payroll on renewal accounts continues to move upward. There are several caveats, however. These factors do not mean that there remains no competition, nor does it imply that the loss costs are necessarily adequate.

New exposures do not automatically mean better results. And of course, there's no guarantee that the national economy will continue to improve. However, the winds of change, of positive change, are moving through the Workers' Compensation market and moving in the right correction.

With that, I'll turn the call over to Geoff Banta.

Thank you, Allen, and good morning, everyone. I'll make a few comments about our operational performance and trends before turning things over to Janelle to present a summary of our financials.

In terms of underwriting results, we increased our gross premiums written, as Allen indicated, by 19.1% in Q4 '11 year-over-year -- the fifth straight quarter in which our top-line has grown. We also had a good quarter for losses. Our premium-based claim frequency was down by almost 8%, and we had only four claims with estimated incurred totals greater than $500,000. This was a much welcomed change for us. I'm sure you all have gotten tired of me whining about our bad luck relative to reported losses in fourth quarters past. Happily, this was not the case in Q4 '11.

The fourth-quarter increase in top-line was due to two factors -- first, a 6.5% increase in premium on policies written during the quarter -- what we refer to as deck sheet premium; and two, a strong year-over-year increase in payroll audits and related premium adjustments. Our deck sheet premium has now grown for four straight quarters and we have had six straight quarters of year-over-year increases in our premium adjustments. Importantly, these increases have occurred while we have been increasing our pricing.

We also benefited from substantially higher average premium for our new and renewal business as well as markedly higher renewal premium retention. Regarding our renewal business, our fourth-quarter premium retention was 96.3% versus 79.2% in the fourth quarter of 2010. We believe this provides early evidence of an overall firming of prices in our high hazard niches.

Our policy retention, meanwhile, was 90.5% in the 2011 fourth quarter, lower than the 93.2% in the 2010 third quarter/fourth quarter, but a strong figure, nonetheless. As mentioned above, our average premium for new and renewal business also increased year-over-year in the fourth quarter, from 29,800 to 33,700, an increase of 13.1%. This increase was due to a rise in average payroll for renewal business and increased pricing for policies written during the quarter.

Relative to pricing, our effective LCM for voluntary Work Comp in the fourth quarter was 1.56, or 156% of the approved lost cost of the states that use this mechanism for pricing. This was our highest quarterly ELCM since Q1 '06, and it represented a year-over-year quarterly increase of 9.1% over Q4 2010. We have now had year-over-year pricing increases in all four quarters of 2011.

In terms of losses, our fourth-quarter results continued to show a slowing of gross case incurred loss development on both an accident and policy year basis. I will break down our loss results in the prior and current accident years.

For accident years 2010 and prior, we experienced overall favorable gross case development in Q4 '11 in that calendar quarter, especially for accident years 2007, '08 and '09. Although 2010 has been a troublesome accident year by itself, with unfavorable development throughout calendar year 2011, for all prior accident years including 2010, we have now had two straight quarters of overall favorable development.

By the way, we believe that the 2010 accident year, as it moves toward ultimate, will go down as one of the worst accident years for the entire Work Comp industry. For our current accident year 2011, the news has been more encouraging, as year-over-year claim, severity and frequency are down when compared to 2010, and our claims closure ratio is up. We also experienced the lowest number of claims over 500,000 since our 2008 accident year.

Due to our pricing actions and the development we have seen in the first 12 months of the accident year, we remain cautiously optimistic about our ultimate 2011 loss experience. As we move into 2012, we continue to live in a demanding environment for claims management -- one characterized by high medical cost inflation, increased medical and pharmaceutical utilization, and increased difficulty in returning injured claimants to work in times of high unemployment. We believe these factors will continue to challenge our claims operations and put pressure on claims costs into the foreseeable future. But we are encouraged by lower average severities and lost cost increases in many of our key states in 2011, as Allen discussed.

With that, I will turn to Janelle to present details on our financials. Janelle?

Thank you, Geoff. Before I discuss the results for the fourth quarter, I would like to clarify that the results for 2010 included in our earnings release have been corrected for the accounting of our estimate of guarantee fund assessments. In total, this correction increased net income by $4.9 million and book value per share by $0.27 per share, all of which has been recorded in years prior to 2011. For more details, there was a reconciliation supplement provided in our earnings release.

Now on to the results -- for the fourth quarter of 2011, Amerisafe reported net income of $8.1 million or $0.44 per share, compared to $7.3 million or $0.39 per share in the fourth quarter of 2011. Our gross premiums written grew 19.1%. We had favorable audit and premium-related adjustments of $3.8 million, up from $6.4 million from the year-ago quarter. Premiums for policies written in the quarter also grew 5.9% from the fourth quarter of 2010. Net premiums earned increased 17.3% from the year-ago quarter.

Our net investment income totaled $6.7 million in the fourth quarter, up 3.8% from the year-ago quarter. Average invested assets for the quarter were $847 million compared to an average of $816 million in the fourth quarter of 2010. The tax-equivalent yield on the investment portfolio was 4.6% for the fourth quarter of 2011, compared to 4.4% for the fourth quarter of 2010. We also had $1.5 million of net realized gains in the fourth quarter of 2011 compared to $165,000 in the year-ago quarter.

In total, revenue for the fourth quarter of 2011 was $74.9 million, up 18.6% from the year-ago period. Our current accident year loss ratio was 78.2% from 2011 compared to 83.5% for the fourth quarter of 2010, and 81.8% for the full year of 2010. Our incurred loss and loss adjustment expenses totaled $49.6 million for the quarter, which included $2.2 million of favorable prior-year developments.

Accident years 2009 and prior experienced favorable development of $5 million, offset by $2.8 million of unfavorable development in accident year 2010. This compares to loss in loss adjustment expenses of $39.4 million in last year's fourth quarter, which included $7.7 million of favorable prior-year development. In total, our net loss ratio for the fourth quarter of 2011 was 75% compared to 69.8% for the fourth quarter of 2010.

Total underwriting and other expenses increased to $15 million in the fourth quarter of 2011 from $10.8 million in the fourth quarter of 2010. The 2011 fourth-quarter expense component included $5.1 million of salaries and benefits, $5 million of underwriting and other costs, and $4.9 million of commissions.

Expenses were impacted by lower experience-rated commissions related to our 2011 first layer reinsurance. As you may recall, these commissions act as an offset to our expenses, and in the fourth quarter of 2011, experience-rated commissions offset our underwriting expense ratio by 2.7 percentage points, compared to 4.2 percentage points in the fourth quarter of 2010. In total, the expense ratio increased to 22.7% from 19.2% in the same quarter a year ago.

Our combined ratio was 98.4% for the fourth quarter versus 89.2% for the fourth quarter of 2010. Return on average equity for the fourth quarter was 9.3%, and book value per share at December 31, 2011 was $19.33, an increase of 7.5% from December 31, 2010. Finally, our statutory surplus was $314 million.

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

Thank you, Janelle. Beginning in the fourth quarter of 2010 and in the following quarters up till today, we have articulated to you, our shareholders, our view that the Workers' Compensation market was turning, and turning in a favorable fashion. The premium growth and pricing improvements we have experienced during 2011 supports the comments that we made on that topic. There is nothing we see in the fourth quarter of 2011 or at this time that causes us to revise our outlook.

Most importantly, Amerisafe has the capital strength, underwriting capacity, distribution systems, and human resources to take advantage of these opportunities over the next few years.

With that, I'll open the call for questions.

Jack Sherck, SunTrust.

Very nice quarter. On the payroll audits, you've had improvements there for six straight quarters. I guess, how long should we expect that to continue? I mean, as long as the job market continues to get better? Or any change there?

Good question, Jack, and I'll just give my opinion. And I look at this stuff religiously. It's been a big part of our premium equation over the past several quarters.

I think we're going to have pretty positive increases for the first half of the year, but as much because of our insureds getting a better handle on what their future payrolls are going to be after the -- in the aftermath of the recession, and because we had such an outstanding second half of 2010. From -- so, you can imagine, from a year-over-year perspective, it's going to be a higher bar the second half of the year. So I would expect that, year-over-year, the second quarter is not going to be nearly -- the second half of the year is not going to be nearly as positive as the first half of the year. The first half of the year should be a continuation of what we've seen in 2011.

Do you agree, Allen?

I do. I do. I think that's an important distinction to make. It will, I think, remain positive, but it may not remain as positive as it was in the year-ago comparable quarter.

Yes. Is that helpful?

Yes. And then going back to the 2010, with that being such a bad year industrywide in terms of claims and activity versus 2011, which was much more moderate, is that more of a function of -- in 2010, when the job market really or unemployment snapped back off the bottom, you had a rapid increase in new hires versus incentives more moderated on into more steady growth. Is that kind of what you expect to see in the cycle?

This is Allen. Let me tell you -- the earlier question you asked and the answer to this question are related. There is not for 2010, accident year, a good matching of exposures and premiums. Largely in 2010, what you had were negative audits for policies written in prior periods, which pulled down the net written premium. We suffered, I want to say, $27 million or something like that (multiple speakers) --

Yes.

-- in terms of negative audit premium. At the same time you were getting negative audit premiums, which show up in your earned premium, you had an improving job market where there were more exposures, just like you mentioned in your question, in the marketplace. So you didn't have a perfect matching of premium and losses.

Now, if you were to look at the results on what is called a policy year basis, where you match policies to exposures after the audit is over, I think you will see that it was a bad year, but not nearly as bad as it looks like on a accident year basis. So yes, it was a change in the exposures which was not reflected in the premium recorded.

Jack, I'll add to Allen's answer in terms of just the numerator, the claims. 2010 will go down as one of our toughest years in terms of the number of severe claims as a percentage of that premium. So if you think about frequency of severe claims, it was high. We had a lot of bad claims. And the return to work issue in 2010 was just very, very tough in that year of very high unemployment. It's been a constant struggle for our claims professionals to get workers back to work and close out the -- especially the temporary total disability part of the indemnity payments.

And my final question is just on -- on kind of on the market, you mentioned it's better pricing in the high hazard area and you'd expect -- that's always kind of expected to be the canary in the coal mine and move first to Workers' Comp. Are you even seeing that among your own class codes? Or is that more of a market comment, i.e., are you getting better pricing on your higher hazard classes versus your less higher hazard classes?

It is specifically marketwide as well as specifically on our class codes. What is interesting is that you get information that is publicly released that everyone knows about. AIG announced this week that they were no longer going to pursue excess Workers' Comp. Well, that's not a line for us, but it is just -- I mean, everyone knows that.

Then there are what are called market rumors and -- what we call market rumors that we get from underwriters that you receive calls from agents and comment on the fact that this company is no longer writing this, or they won't write this sort of risk without a debit or surcharge to it. So we're hearing lots and lots of that.

But I thought there was a very interesting article, and I might quote from it. It was an agent/broker magazine in January of this year, in which it said something that I couldn't agree with more. It said that the beginning stages of a heartening trend will be to round up the usual suspects. The initial salvo will be directed to clients in high-hazard, high-risk injured industries, and those with adverse loss ratios. Insurance companies, usually at the behest of their reinsurers, will non-renew and stop writing selected classes of business. They will set strict standards for staying with or writing accounts with three to five-year loss ratios over certain levels.

That comment from that article I couldn't agree with more, as what we're seeing right now in the marketplace. I think that's a pretty accurate description of it.

Great. Thanks very much for answering my questions.

Matthew Carletti, GMP Securities.

I just had one question on looking forward in terms of -- I guess what you're describing as -- I guess, my words, not yours -- but could be the beginnings of a capacity crisis or at least a shrinkage of capacity in your markets. And I've got to think that that's not just specific to the states you're in, but even some states that you're not in. Might we see you at some point in some new territories? And specifically, I'm thinking of one large populated West Coast state.

Yes, sort of (laughter) -- sort of west of Louisiana, LA?

A little bit, yes.

Certainly, these opportunities -- I think we are in a period where capacity may constrict. And it probably is not going to constrict in the sense that there will be just huge -- there will be a loss of underwriting capacity, period. I mean, I think there will be constriction of underwriting capacity.

But with low investment yields, longtail line of business, and the industry performing at what the Insurance Information Institute estimates for 2011 at 118% combined ratio, I think there will be very few underwriters that will say, gosh, let's go over and write Workers' Comp, because we can make it up on investment income. So I think that will create somewhat of a constriction.

And that provides a couple of interesting outcomes. There may become states that are troubled. And one of them, California, I don't know that much about the California market, but it has been in a great state of turmoil. It does appear to be one that's transitioning. There may be opportunities there.

But what also happens is, without doing a lot in your existing jurisdictions, your revenue rises because the rates go up and the effective LCM goes up. So that's a compounding impact. And that increases your underwriting leverage without really expanding your operational costs. So it can increase your efficiency.

You lose some of that efficiency when you go into a new jurisdictions, particularly if you don't have a critical mass of business. But it is certainly something we're open to. We have lots of capital. I think we're writing right now, on a GAAP basis, at about 0.7-to-1 net basis -- or is that statutory? (multiple speakers) Net on GAAP. So that's a very -- we're not overleveraged at all. And there's great opportunity to expand that writing without expanding the expense side.

And then kind of a follow-up, shifting gears a little bit. Just kind of your comments on that capacity tightening and how reinsurers could impact some of that going forward. Do you suspect that rating agencies could play a role there? Or are we not in kind of a dire enough situation yet that it rises to that level?

Well, I'll be meeting with A.M. Best next week (laughter) (multiple speakers) --

Not for you guys specifically, but for peers.

(multiple speakers) We don't anticipate any problems there. But I will say this. A.M. Best has a negative outlook on the Workers' Comp industry. These rising rates and rising pricing can put some carriers at risk, because you have an increase in your underwriting leverage almost artificially. And you've got to be able to separate the difference between exposures and rates.

So the exposures may not go up, but the rates go up. And if they're already at sort of the breaking, 1.5, 1.6 -- we've seen some as high as 3.0. If those guys get rate increases, they're going to run out of risk-based capital. And they will have rating problems. So I -- with the outlook that A.M. Best has on the Workers' Comp industry, I would not be at all surprised to see more people be moved down than up.

All right. Thanks a lot and best of luck.

Okay. Thanks.

Randy Binner, FBR.

This is actually [Thomas Latrin] on behalf of Randy. I had to hop off for a couple minutes during your prepared remarks, so I apologize if you covered this. But for the 2.2 million in favorable reserve development in the quarter, could you break that out for '07, what was favorable and what was unfavorable in '10, dollar-wise?

For '07, you said?

Yes. What piece -- so the favorable was 2007 and the unfavorable was 2010. I'm just trying to get a sense of what the numbers for each year was.

Sure. So $5 million of the prior-year development was favorable development for accident years 2009 and prior, then the adverse was 2010.

Okay. And was there any in '11? Or just 2010?

No. We kept 2011 at 78.2, which was our loss ratio as in the third quarter as well.

Okay. Perfect. That's all I have. Thank you.

Thanks, Tom.

(Operator instructions) Eric Swergold, Firestorm Capital.

I have two questions. First question is you've sort of touched on some of the people who have moved out of the market or stopped writing. Do you have some estimate of what percentage of capacity might have been taken out of the market?

And then the second question is, looking at your lines of business, a number of them appear to be somewhat tied to housing, whether it's the lumber industry or the construction industries. If you totaled up what percentage of your business is tied to housing, what would that number be, given the veritable depression housing has had over the last couple of years? It would seem that any even stabilization of housing would be very positive for you. Thank you.

Yes, and good morning, Eric. Good to hear from you. We do not have an estimate as to how much the companies that have withdrawn from the marketplace or quit writing monoline or have restricted coverage -- there is not a real good estimate that I can give you for that. I can tell you that -- and this is -- I'm not trying to dodge the question; I just don't have a better number for you in that regard. But I can tell you that in the fourth quarter of 2011, our submissions or applications we got for new business writings were up 14.1%.

That's not a direct connection, but those submissions or increases are a result of two things -- number one, the work of the Sales and Marketing Department to make sure we access the distribution network to do that; and, number two, agents beginning to worry about where to send this business. And we hear both sides of it. We have accounts -- and I can't give you a specific number -- but we have lots of accounts are submitted to us and tell us their expiring carrier is non-renewing or is raising pricing to levels that they don't think are attractive, those sort of things.

So I don't have a direct number as to that, but I can tell you it is showing up in the applications for new business.

If I could add to, Allen, a point on that -- and I talk to our underwriters daily. And there are two very large carriers who began in 2011 -- I'll say mid-2011 -- to pull away in a pretty large fashion. And this is having quite an effect on our ability to write the submissions and the ability to quote on those submissions since those pullouts. So -- and we hear a lot of small companies pulling out, but it's really the big companies who have reduced supply to such an extent that we're getting a lot more opportunities there.

Okay. The -- one other thing on that -- Hartford is a big company. They have made a significant move in constricting writing.

And that was just recently.

Just recently. And CNA has done so over the last year or so. AIG, of course, has done it over a period of time. Ace is no longer writing monoline Workers' Comp. We're seeing -- and then you've probably seen the comments from Evan Greenberg in his -- I think it was third-quarter call when he said that they were constricting that. So we see some big folks moving in big ways as well as small carriers and other people you really wouldn't see.

Back to your question about construction and the housing industry -- as you may recall, we do not focus on the housing industry construction; we focus more on commercial construction. Having said that, people building things like to build whatever they can build to make a living. And I'm sure there has been -- there is some tie of some of our business to the residential construction area.

We've seen construction as sort of the overall piece of our pie constrict down for several years. I do think it's stabilizing at this point. And as you may recall, we have increased our interest in the agricultural area, which has replaced lumber as our third -- and logging and the timber-related business -- as our third-largest industry group.

Thanks, guys.

Okay, thanks, Eric. I hope that answers your question, Eric.

It did, thank you.

Thank you. I show no further questions in queue, and I'd like to turn the conference back to Mr. Allen Bradley for closing remarks.

Well, thank you, everyone. We appreciate you joining us today. We have worked diligently at this company over the last few years to make sure that we've properly positioned Amerisafe as we went through the cycle, the extended soft cycle of the market. That now looks like it's changing. And we understand and appreciate the fact that now it is an opportunity for us to grow. And we intend to take advantage of it. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.