Amerisafe Inc (AMSF) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Amerisafe Incorporated's first-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions)

As a reminder, today's conference may be recorded. And now I'll turn the program over to Janelle Frost. Please go ahead.

Good afternoon. Welcome to Amerisafe's first-quarter 2012 investor call. If you've 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 on 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, and the comments made during this call, and in the risk factors of our Form 10-K, Form 10-Q and other reports filed with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

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

Thank you, Janelle, and thank you, ladies and gentlemen. Thanks for joining our first-quarter earnings call. After my initial remarks, I will turn the call over to Geoff Banta and Janelle Frost, who will talk about additional operational and financial details.

For Amerisafe, the first quarter continued to show improvement in the Workers' Compensation market. Pricing increased markedly over the same quarter a year ago, and demand for the product remained strong, as indicated by our 19% growth. We are in the middle of a change in the marketplace, which continues as we have discussed with you in the past four quarters. Suffice it to say, none of the information that was released this morning by the NCCI in their Annual Issues Symposium State of the Line Address, could give any proof of any need for reduced pricing or any adequacy in terms of the existing loss cost.

With that, I'm going to turn it over to Geoff to talk about operational details.

Thank you, Allen, and good afternoon, 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. I will begin by discussing our top line. As Allen noted, gross premiums written were up strongly in the first quarter by 19.0% year-over-year. This is the sixth straight quarter in which our top line has grown. Our first-quarter increase in the top line was due to two factors. First, an 11.3% increase in premiums on policies written during the quarter -- what we refer to as deck sheet premium.

And secondly, a strong year-over-year increase in payroll audits and related premium adjustments. Our deck sheet premium has now grown for five straight quarters, and we have had six straight quarters of year-over-year increases in premium adjustments. And very importantly, these increases have occurred while we have continued to increase our pricing. We have also benefited from some substantially higher average premium for both new and renewal business, as well as markedly higher renewal premium retention.

Regarding our renewal business, our first-quarter premium retention was a very strong 97.2% versus 83.3% for the year-ago quarter. This was due to increases in average policy premiums, and we believe this provides more evidence of an overall firming of prices in our high-hazard market segments. Our policy retention, meanwhile, was 91.4% in the 2012 first quarter, lower than the 92.7% in the 2011 first quarter, but a strong figure nonetheless. As mentioned above, our average premium for new and renewal business went up year-over-year in the first quarter, from $30,800 per policy to $37,200, a 20.8% increase. This increase was due to a rise in both average payroll, and to increased pricing for policies written during the quarter.

Relative to pricing, our effected LCM for voluntary work comp in the first quarter was 1.59, or 159% of the approved loss cost of the states that use that mechanism for pricing. This compared to an ELCM of 1.45 in the first quarter of 2011, or a 9.7% increase. This compares to an increase of less than 1% year-over-year in Q1 2011. We are encouraged by the fact that our business is growing, even in the face of the significant increase in our pricing.

Relative to losses, our 2012 accident year has begun with both lower severity and lower premium-based frequency than our 2011 accident year at three months -- or at the first quarter. As a result, we have made an initial estimate for 2012 that assumes a slightly lower net loss ratio -- 76.5%, than we estimated for the first quarter of accident-year 2011. If we are correct, 2012 will become the fourth consecutive year in which Amerisafe has posted accident year loss ratios higher than 70%.

We firmly believe that our results, and the results of the industry as a whole have been significantly impacted by the cumulative effects of the deficient loss cost and increases in claims duration. And that the impact of these factors won't really be known until the end of 2012, at the earliest. In the meantime, we are going to continue to push our pricing, tighten our underwriting, and adjust claims as aggressively as we have in the past.

In terms of prior-year losses, our first-quarter financial results benefited from favorable overall development for accident years prior to 2012. The loss ratio for our 2011 accident year, which is still green, remained at the 78.2% estimate we established in Q3 2011. Accident-year 2010, the worst in our public history, is still developing on a case basis, but at a much slowing rate. Case development for accident years 2009 and prior have been basically flat for the past four quarters. We believe that our combination of prudent bulk reserving and aggressive claim management will serve us well as we work through our -- all of our open accident years. But we face very tough conditions in the claims world, 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.

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

Thank you, Geoff. For the first quarter of 2012, Amerisafe recorded net income of $9.6 million, or $0.52 per share, compared to $6.6 million, or $0.35 per share in the first quarter of 2011. As Geoff discussed, gross premiums written rose 19% from the year-ago quarter, attributable to 11.3% growth in policies written in the quarter, and over $5 million of positive audit and weighted adjustments. Keep in mind, last year's first quarter included gross premiums written of $4 million from a renewal rights and assumption agreement with Cooperative Mutual.

Net premiums earned increased 16.1% from the year-ago quarter. Our net investment income totaled $6.9 million in the first quarter of 2012, an increase of 5.6% from the first quarter of 2011. Average invested assets were $863 million compared to an average of $825 million in the first quarter of 2011. The tax-equivalent yield on our investment portfolio was 4.5% compared to 4.6% for the first quarter of 2011. In total, revenue for the first quarter of 2012 was $78.7 million, up 17.5% from the year-ago period.

Our current accident year loss ratio for the quarter was 76.5% compared to 77% a year ago, and 78.2% for the full-year 2011. Our incurred loss and loss adjustment expenses totaled $51.8 million for the quarter, which included $1.6 million of favorable prior-year development, attributable to favorable development of $5.2 million in accident years prior to 2010, and unfavorable development of $3.6 million for accident-year 2010 in the quarter. This compares to loss and loss adjustment expenses of $44.2 million in last year's first quarter, which included $2.1 million of favorable prior-year development. In total, our net loss ratio for the first quarter of 2012 was 74.3% compared to 73.5% in the first quarter of 2011.

Total underwriting and other expenses increased 1.1% to $14.7 million, compared to $14.6 million in the first quarter of 2011. The 2012 first quarter expense component included $5.1 million of salaries and benefits, $5.3 million of commissions, and $4.3 million of underwriting and other costs. The expense ratio decreased to 21.1% from 24.2% in the same quarter a year ago. One element benefiting our expenses is our experience rated commission, which contributed 4.1 percentage point decrease to the expense ratio in the first quarter of 2012, compared to 2.2 percentage point decrease in the first quarter of 2011. In total, our combined ratio was 96% for the first quarter versus 98.3% for the same period in 2011.

Return on average equity for the first quarter of 2012 was 7.8% compared to 8% for the first quarter of 2011. Book value per share at March 31, 2012 was $19.78, an increase of 8.4% compared to $18.24 at the first quarter a year ago. While discussing book value per share, I would like to point out that in the first quarter of 2012, we retrospectively adopted the new accounting standards for deferred acquisition costs. The adjustment to shareholders' equity reduced book value per share $0.08 as of December 31, 2011. Deferred policy acquisition costs were decreased $2.2 million, and deferred tax liabilities decreased $0.8 million.

Finally, our statutory surplus was $302 million, after paying a $21 million dividend to the holding company. Cash at our holding company is held for our share repurchase program, retiring debt, or future acquisitions. As previously announced, we will retire $12.9 million of our debt in the second quarter of 2012. Also, our Board has now authorized us to retire the remaining $12.9 million in the third quarter of 2012.

That concludes my prepared remarks; I now turn the call back to Allen.

Thank you, Janelle. This afternoon, we are speaking to you from the National Council on Compensation Insurance's Annual Issues Symposium in Orlando, Florida. As I mentioned earlier, this morning the NCCI released their Annual State of the Line presentation, which provides an exhaustive and complete examination of the full Workers' Compensation line across this country. NCCI's CEO characterized the 2011 Workers' Comp market as conflicted, with both positive and negative factors emerging during 2011. On the positive side, he noted that loss time claims frequency decreased, but it was by only 1%. Net written premiums rose by 7.9% for the first time in five years. There was a slight improvement in the accident year combined ratio for private carriers -- and by the way, private carriers to them means anyone other than a state fund -- and that the industry had an extremely strong capital position.

There were other factors that were not positive. Underwriting results for private carriers and state funds across the country was essentially the same as it was last year at 117%. Frequency, while down 1%, did not match up with the 3% increase that occurred in 2010. And medical cost inflation, while moderate at 5.4%, did increase along with an indemnity cost increase of 2%. A number of those factors indicate that the Workers' Compensation market has yet to come to the point that it recognizes the rates that it -- that the industry is charging are not adequate. Discounting on Workers' Comp premium this year by the voluntary market continued to be at roughly 8%, although that's markedly less than the previous three years.

For our position, we have anticipated for some time that the market would decline, and would go into this sort of capital destructive phase. Amerisafe continues to operate with the human resources, with the capital, with the distribution capacity, and with the reputation to meet the challenges. Now, please remember the same caveat we discussed last quarter. Just because the market is improving does not mean there is no remaining competition, nor do I in any way want to imply that the loss costs are adequate, and writing more premium doesn't necessarily mean we'll have better results. And of course, our national economy may falter, and that would cause problems across the Workers' Compensation industry. However, we believe that the market has made a significant turn, even to a hardening cycle, at least with respect to the high-hazard Workers' Comp industry, and we're prepared to meet that opportunity.

With that, let's open it up for questions.

Thank you, Sir. (Operator Instructions) Our first questioner in queue is Matt Carletti with JMP Securities. Your line is open, please go ahead.

Just a few questions. First, I guess, Allen, I'll start off on the last topic you ended with, which was NCCI. Was there anything in what was discussed this morning in the State of the Line that you would found -- that you would find particularly surprising, that you didn't expect? Or maybe, stated another way, that might be a trend that the market's seeing that maybe Amerisafe isn't?

I wasn't particularly surprised with anything. If anything I would have thought that perhaps the combined ratio may have climbed from 117 to 118, 119. Some were projecting 120 previous to this. Suffice it to say that a 115 on private carriers and 117 for the market as a whole, which was 117 fixed last year by the way, Matt, is not an improvement. It's not something upon which people can build capital. It's certainly not something -- it shows that there's a lot of pain being felt out across the market.

It was interesting, also, to note that the filed rate changes across this country -- I'll look it up for you real quickly, but I think it was 7.5%, when you consider the country as a whole. When you eliminate -- largely that is driven by the State of California. When you excluded them, the lost cost changes across the remaining states was 2.5%, and I anticipate that's going to continue for the next several years.

So, the same things we've talked about before, and that is that you have several years of unsustainable underwriting losses, which is what we have, when you couple that with the lower investment income, which we have, that you must produce a lower combined ratio in order to return the cost of capital. The industry coming in at 117 is certainly not going to produce anything close to the cost of capital. In fact, I think the operating -- when the NCCI talks about operating results, unlike the folks in the capital markets, they include investment income and they include realized gains.

And all pretax.

And all on a pretax basis and that number was, I think, -1%. So, it certainly doesn't portend a good performance in the upcoming year.

And one other thing, Matt, the -- that the multi-year decrease in the residual market appears to be at an inflection point. It has now begun growing and that is normally an early predictor for the hardening of the market, of course.

Right. That was one thing. Thanks for mentioning it, Geoff. That was one thing that they pointed out, that in the first quarter of 2012, as compared to the first quarter of 2011, the residual market in this country rose 47% in one quarter, so that's a pretty good run rate. And it was in the 30% range for the second half of 2011.

Okay.

So, that market's growing.

In terms of competition, Allen, you've talked in recent quarters about how some of the larger markets have pulled back or pulled out. Have you seen that continue? Has it happened and quieted a down a little? Or are you continuing to see kind of an acceleration on that side?

I wouldn't say acceleration, but it is definitely continuing, and there doesn't seem to be any abatement on that. Now on the pricing side, we continue to push pricing, we're going to continue to push pricing. I think you know us well enough that we always prefer margin over volume, and there'll probably be at some point where we push it too far, but it certainly wasn't in the first quarter, as the premium grew dramatically.

And we're -- one other thing I'd like to point out to you, and we mentioned this in our last call, so it's another indication that the market continues to change. We had an increase of 22.6% in applications for new business in the first quarter of 2012 over the first quarter of 2011. And those applications are coming in, not because we dramatically expanded our distribution network, they're coming in because other carriers are getting out.

And if I recall that's maybe an acceleration from -- the number you gave last quarter was more like -- I want to say 14% or something closer to that?

It is a marked acceleration, but remember now, January 1st is a big day in the insurance business so --

Very true.

-- that accounts for some of that. But on a percentage basis there was a January 1st last year, too.

Absolutely. Just one last numbers question, if I could, this one probably for Janelle. On the expense ratio, is 21 a reasonable run rate for us to expect going forward this year, or was anything in the quarter, the two points step down from last year, more one time in nature?

There are a couple, I think -- not one-time things, a little bit different from first quarter this year versus first quarter last year. Obviously, we still had the experience-rated commissions. But at first quarter last year we weren't accruing that on the buyback supplies layer because of some of the losses that we had had in the (inaudible) program to those layers; whereas this year, it does include the 5X supplies, which is why you see -- partially see the increase in the percentage point difference. Because it's the same -- the 5X supplies was a slightly different treaty this year, but the 4X was one of the same treaties that was in place last year.

Okay, very helpful. Thanks a lot and congrats on a really nice quarter.

Thanks.

Thank you, Sir. Next question in our queue is Mark Hughes with SunTrust. Please go ahead, your line is open.

Hey, Mark.

Hello. In the first quarter pricing is up, frequency and severity are down, but your loss pick's only 50-basis points improved over Q1 last year. Is that the conservatism, is there something else that is driving that?

Well, I think the lawyers will let me use the C-word, Mark, we're being cautious, (laughter) prudent perhaps. But no it -- last year was at 78, too, at the end of the year. The first quarter last year was, I think, 77 and then it deteriorated so much. So, we're trying to not be overly optimistic.

Right. The expense ratio Janelle, how much worse would losses have to get an order for that [feeding] commission arrangement not to keep the expense ratio that low? You were up in the mid-20s (multiple speakers) last year. Yes, that's a really good question. We have to penetrate that million -- that $20 million [low] its averaging, or $15 million or $20 million annual averaging deductible, which we did not to last year. So, should the over a million dollar claims perform as they did last year or slightly better, then we wouldn't -- that wouldn't happen. Right. So, therefore, one would think the expense ratio should stay about this level?

It would have to be a frequency of severity problem, I guess, would be my point.

Geoff, what did you say the deck sheet comparison was in Q1, and then what was it in Q4?

It was up 10.3%, Mark, in Q1, and I don't remember Q -- I think it was 11.3% last year. Do I have last year's --?

Mark, that me remind you of this. Last year in the first quarter, we booked the Cooperative Mutual transaction, which had both some policies written during the quarter, which were not that big of a deal, but we assumed the tail on some in-force policies and that was --.

Did that show up on the deck sheet premium?

That showed up in deck sheet premium last year.

Okay. And you said -- what was that amount again in this quarter last year?

About $4.1 million was off -- $4 million for Coop last year?

Yes.

That's correct.

Right. And so when you adjust for that, it was a nice acceleration in Q1?

Right, it was even bigger than the 19%.

Yes, okay. All right, thank you.

Thank you, you're welcome.

Thank you, sir. (Operator Instructions) Next question in queue is Randy Binner with FBR. Please go ahead, your line is now open.

I'm going to try and follow up on the expense ratio question and maybe ask the question more in layman's terms. But is it safe to say that if your claim experience for more severe claims stays similar to how it's been, then we can plan on expense ratio closer to the level that we saw in this quarter, is that the way we should think about the expense ratio for this year?

Right. As far as accruing the experience-rated commission related to the re-entrance contracts, that would be correct.

Okay good. And then another one -- and this is kind of -- I appreciate all the commentary and the reference to NCCI, and so the question is this. There's a flattish, if you, will combined ratio trend, which is clearly not adequate, but all the commentary that you said on the call makes me think that accident year 2010 probably was the worst, and so is that how you are feeling? Things aren't solved, and they're certainly not adequate from a cost to capital perspective, but can we feel like accident year 2010 was probably rock bottom for this cycle?

Well, in probability, Randy, let me point out a couple of things. Number one, policy year -- not accident year, policy year 2010 will turn out not to be as bad as accident year 2010 was because of the negative audit premiums that were attributable to 2009. At the same token, there will probably be some changes for the policy year 2011, policy year. Now not reported, not financial year, but policy year as the tailwind of the audits for 2010, which were actually much more positive, were reported in 2011. That's those audit adjustments we've been talking about for the last six quarters.

So, what happens is you have a -- when use accident year data you're still talking about a calendar year premium to a certain extent when you're talking about these audits, and so it makes the information a little muted. In fact, last year the reported frequency was 9% based on the raw data, a 9% increase in frequency. The NCCI went in and identified the audits and adjusted that downward to 3%.

This year the frequency was indicated in the raw data is a 4% decrease, up -- actually this year they adjusted last year up to -- it's up 10% and this year is down 4%. But when they took they audits out and made those adjustments, the actual frequency decrease was only 1%. So there's a little noise in that number. I think the point of your question is, what was the bottom of the cycle? It certainly feels like to us 2010 was the bottom of the cycle.

Yes, that's the question, because it's -- look at the result this quarter. You are favorable prior to 2010, you had some adverse in 2010, 2011 picks up better pricing in the audit premiums, as you mentioned. So it's just helpful for us as analysts when we look at all companies together to think about if 2010 was the worst, because that looks like it's the case. And then I had a detail question just on the tax rate.

Before you get to that let me give you one caveat on that last comment.

Oh, sure, of course.

We're in a severity driven business. It's not necessarily straight line. There could be some lumpiness around quarters. I'm not saying there is in the future, I'm just warning that that can happen when we insure people that handle things that blow up and work high off the ground and those sorts of things. I think as the industry it should move into more positive fashion. Now I'm --

Understood. So just on the tax rate, we -- at least for us, we planned on 20%, and maybe that was being cautious or conservative, but -- and it hops around quarter-to-quarter, so just wanted to get some color on what sort of a tax rate in the quarter, and if we should think about it differently going forward?

Sure. The fluctuation in tax rate, if you're comparing it to the first-quarter 2011, is really just the level of underwriting income. Because our tax-free income has stayed relatively steady state? So, the more money we make on an underwriting basis, obviously, the tax rate's going to rise slightly. Not that I think that your 20% is a bad number, but you're right, it does bounce from quarter-to-quarter, depending on what that combined ratio is for the quarter itself and books the year-to-date calculation. So, that's the driver.

Got it. Thanks so much.

Thank you, Sir. And at this time there appears to be no additional questions in the queue. I'd like to turn the program over to Mr. Bradley for any additional or closing remarks.

Thank you. Thank you, ladies and gentlemen, for joining us this afternoon. I would encourage you to access the NCCI's website at www.ncci.com and download the State of the Line Address if you are really interested in finding out more as to what their view is on the state of the Workers' Compensation market in America. Thank you very attendance and interest today.

Thank you, Sir. Again, ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.