Amerisafe Inc (AMSF) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Amerisafe's second quarter earnings call. (Operator Instructions). As a reminder, this conference call is being recorded. Now I will turn the conference over to Janelle Frost, CFO. Please begin.

Good morning. Welcome to the Amerisafe second quarter 2012 investor call. If you have not received an 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 n the earnings release.

During this call, we will be making forward-looking statements. These statements are based on current expectations and assumptions and are subject to various risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings release, in the comments made during this call in and the risk factors section of our Form 10K, Forms 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 will now turn the call over to Allen Bradley, Amerisafe's Chairman and CEO.

Thanks Janelle. Good morning ladies and gentlemen, and thank you for joining our second quarter 2012 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 second quarter, the workers' compensation market continued to exhibit signs of increasing demand and pricing. Consistent with public comments, a number of large carriers have made good on their stated diminished capacity or appetite for workers' compensation exposures. And as we have commented earlier, it appears high hazard risks are among the first to be jettisoned by carriers.

Previous doubters of a turn in the workers' compensation market have now shifted their focus to the length or severity of the cycle rather than the occurrence of the term. Seasoned observers of the workers' compensation market saw residual market volumes expand approximately 89% during the first half of 2012 as compared to the same period in 2011 according to the NCCI's latest report. That increase is an unmistakable indication of a troubled marketplace.

Published market surveys indicate Worker's Compensation pricing is increasing. In the hazardous industries, that trend is even more pronounced as Geoff will discuss with you shortly.

The demand for workers' compensation has improved. For Amerisafe, applications for new business continue to skyrocket as customers react to the change in underwriting appetite and price increases. Nationally, we expect to see the country's premium increase in 2012 over 2011, reflecting both increases in exposures as well as the increases in rates. Now I will turn it over to Geoff Banta for details on our operations.

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

The second quarter was a disappointing one for us, one in which we experience unfavorable prior loss year development for the first quarter since we went public in 2005. In the second quarter, we saw unexpected levels of case development in accident years 2010 and 2011. In the 2010 accident year, most of our second quarter development came from our trucking subsegment and most due to issues related to return to work. In the 2011 accident year, our case loss ratio is much improved over that of our 2010 year, but the second quarter case development we experienced in 2011 was higher than expected and caused us to increase our 2011 ultimate loss ratio selection.

Both the 2010 and 2011 accident years have been problematic for us and for the industry at large. Medical cost inflation, increased medical and prescription drug utilization and difficulties in returning claimants to work have all led to increased claims duration. Our claims organization has made adjustments to this new reality and we firmly believe that the actions we have taken in our claims management and product pricing will bode well for our future performance.

But make no mistake -- the hangover -- the overhang from accident years 2010 and 2011 continues to test our historical assumptions on loss development. On the positive side, we grew gross premiums written 17.2% in the second quarter year-over-year, and year to date our top line is up 18.1%. As in the first quarter, the increase was due to two factors; first, a 9.4% increase in premiums from 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 6 straight quarters and we have had 7 straight quarters of year-over-year increases in premium adjustments. Importantly, our organic growth occurred while we were continuing to increase our pricing, clear confirmation that the overall work comp market is hardening. In another positive turn, our second quarter premium retention was 99.2% versus 85.8% in quarter 2, 2011, a substantial increase and one due mainly to a 16% increase in average renewal premium.

Our policy retention, meanwhile, was a very respectable 91.3% in the second quarter, just slightly lower than Q2 2011 when we retained 92.1% of our policies. Our average premium was due to a continued pricing moves as well as increased payrolls. In the second quarter, our effective LCM for voluntary work comp was 1.63, or 163% of the approved loss costs in the state that used this mechanism for pricing. This pricing has an increase of almost 9% year-over-year and is the highest pricing level we have had in a decade. We are encouraged by the fact that we are growing organically, even while significantly strengthening our pricing.

That concludes my remarks and I will now turn to Janelle to discuss our financial performance.

Thank you, Geoff. For the second quarter of 2012, Amerisafe reported net income of $3.4 million or $0.19 per share, compared to $4.6 million or $0.24 per share in the second quarter of 2011. Gross premiums written grew 17.2% from the year-ago quarter attributable to 8.9% growth in policies written in the quarter and over $4 million in positive audit and related adjustments.

Net premiums earned increased 15.7% from the year-ago quarter. Our net investment income totaled $6.6 million in the second quarter of 2012, a point increase from the second quarter of 2011. Average invested assets were $873 million compared to an average of $829 million in the second quarter of 2011. The tax equivalent yield on the investment portfolio was 4.5% in both the second quarter of 2011 and 2012.

In total, revenue for the second quarter 2012 was $76.6 million, up 14.3% from the year-ago period. Our current accident year loss ratio for the quarter was 76.5% compared to 79.3% a year ago. Our incurred loss and loss adjustment expenses totaled $56.7 million for the quarter which included $3.4 million of unfavorable prior-year development attributable to unfavorable development of $5.3 million for accident years 2010 and 2011 in the quarter and favorable development in accident years prior to 2010 of $1.9 million. This compares to loss and loss adjustment expenses of $46.6 million in last year's second quarter which included $1.2 million of favorable prior-year development. In total, our net loss ratio for the second quarter of 2012 was 81.3% compared to 77.3% for the second quarter of 2011.

Total underwriting and other expenses increased 3% to $15.3 million compared to $14.9 million in the second quarter of 2011. The 2012 second quarter expense component included $5 million of salaries and benefits, $5.4 million of commissions and $4.9 million of underwriting and other costs. The expense ratios decreased to 22% from 24.7% in the same quarter a year ago. In total our combined ratio was 103.8% for the second quarter versus 102.6% for the same period in 2011.

Return on average equity for the second quarter of 2012 was 3.8% compared to 5.5% for the second quarter of 2011. Book value per share at June 30, 2012, was $19.98 an increase of 8% from the same period in 2011, and our statutory surplus was $305 million.

One last comment -- cash flow from operations was $42 million for the first 6 months of 2012 compared to $5 million in the same period in 2011. We keep our cash at the holding company for our share repurchase program, retiring debt or future acquisitions. As previously announced, we will be retiring our remaining $12.9 million of debt in August.

That concludes my prepared remarks on the financials. We'll now turn the discussion back to Allen.

Thank you, Janelle. Unfortunately, Amerisafe recorded its first aggregate prior-year unfavorable claims development as a public company during the second quarter of 2012. Macro factors certainly have exacerbated the claims closure process, lengthening claims duration and impacting claims cost. Quite frankly, that is not an excuse. All companies operate in the same dynamic and complex environment and must deal with those factors.

Despite the relatively small amount of unfavorable development, we are deeply disappointed with the outcome. But it was the right thing to do. We believe that most shareholders care deeply about a company's long-term value and at the same time measure its current performance against the same period in the prior year. For the past 26 quarters, we have consistently produce results that generally met or exceeded both expectations retrospectively and prospectively. We did not achieve both results during this quarter. However, we believe our actions in posting this reserve will promote the Company's long-term value.

And with that, I would like to open the call for questions.

(Operator Instructions). Matt Carletti, JMP Securities.

Thanks, good morning. I just had a couple of questions on the development. I know it is not a big number by any sense, but I just wanted to drill a little deeper on it. Could you give us a little more color, just kind of guidance around looking at what was allocated to 2011 versus -- I know 2010 has been a bit of an enigma over the past several quarters and maybe how 2011 versus 2010 why you think you have a grasp on it here versus 2010 which seemed to be a little bit more of a headache for a little bit longer period?

I will start with start with -- explaining with the numbers where, of the $5.3 million, $3.3 million of that was 2011 and $2 million was 2010.

Okay.

Partially offset by $1.9 million in 2009 and prior. Geoff, do you want to --?

Maybe I will get down a little bit into the weeds. We talked about the claims management change in assumptions, change in perspective on the environment. And in -- I'll say actually in 2009, we started seeing some changes whereby historical assumptions about claimants who had been injured obviously, and let's say that were mostly soft tissue injuries interest the $100,000 to $500,000 range, and we -- of course our claims people vary by state, had certain assumptions about how quickly they could return these folks to work, how quickly they could get them to -- through temporary total disability and to maximum medical improvement. Those assumptions, for whatever reasons, macro is what I certainly believe it is macro reasons, we started seeing those with the same best efforts those -- the duration to maximum medical improvement elongating. And with each claims professional, they start -- while we were starting to see development at an aggregate level, they were starting to see greater movement -- not huge, but greater moment in terms of getting folks through GTD, through maximum medical improvement and back to work. You can just imagine how difficult it might be for a trucker who has hurt his or her back who has a 5th grade education and whose company has no light-duty for that person to return to because of the recession. We were forced to deal with some of those realities.

And so on a micro level, our claims adjusters have been moving ever so gradually but certainly moving toward increasing the move to maximum medical improvement, the elongation to temporary total disability which we have talked about on other conference calls. And we have tried to take that into account as we look at aggregate case development and then set our IB&R. That might be a long-winded explanation, but hopefully that gives some more color to that.

No, that was very helpful. And is there any kind of color or guidance you can give on, as we sit here and look at where 2011 stands today and where 2010 does, the differences to the extent there are any, and where average claim duration expectations are? Kind of where you are taking 2011 to versus where 2010 is now or where 2010 came from?

Let me take a stab at that on a couple of points. The frequency of claims is down, which is good. So therefore we are seeing in fact in the more recent last half of 2011 and 2012 a mix -- shift of mix back to more medical only type claims, or smaller claims which are less problematic. Although the improvement to the economy may not have been what all of us had wished, it clearly has had somewhat of a softening effect.

And the other thing that you need to keep in mind, and there has been much written about this in that industry, but the return to work problems largely seem to be focused around some key issues, one of which was companies going out of business. It is going to be real hard to return this trucker who Geoff is talking about when the trucking company is no longer in business. And the number of business failures in 2009 for the policies that were recorded in 2009 and 2010 were earned out in 2009 and 2010 accelerated significantly. So we hope some of that is behind us. We believe some of that is behind this and that the companies that were now insuring have survived those rather difficult times, and we are seeing them grow in exposures, meaning their payrolls are expanding.

But there are problems that still remain, and Geoff outlined a couple of them in his comments. But I want to go back to one in particular, and that is the use of prescription medications, of opioids, schedule 2 narcotics, and what studies from a high level have indicated our problems with respect to those sort of treatments and the impact they have on duration. Duration increases the cost of claims. People stay out longer, they have to see the doctor more, they take more medications and they get more indemnity payments, and that shows up more on these level of claims that Geoff is talking about. We think that will be less of a factor in the later claims and the more recent claims than it was in that time period where the businesses were going out of -- the companies were going out of business and there was no opportunity to return to work.

And there are some real headwinds in terms of the third parties that we deal with that we have also seen in 2010 and 2011. One is, and Allen mentioned, is the propensity of physicians to prescribe and sometimes dispense more drugs and actually enable an injured worker to continue to be disabled and not return to work. And there are some very tough states in terms of the administrative law rulings that seem to favor claimants when there is a question and a qualitative more than a quantitative question about whether they really are able to return to work even where there is a job. So there are some forces out there that are fighting that. What I can say is that we are taking a much more aggressive stance in dealing with those in trying to settle claims in pushing back on pain management therapy and that sort of thing.

(multiple speakers)

And also remember, Matt, that it is not the very large claims that we are running into a problem now. It is not the 7-digit claims, it is not the paraplegic claims, the quadriplegic, closed head injuries, burn claims as a general rule.

That is really helpful. And I know it is not a big number but, nonetheless, I think it is helpful to get our hands around it and get some color.

Just one other question if I could, and then I will get out of the way. It's just on capital. You guys are running at less than 1 to 1 premium to surplus leverage and I think in the past you have mentioned ballpark 1.5 times leverage as being ideal or what you feel you could take it to and not have too much scrutiny from AM Best. There is no dividend being paid currently. I know, given where the shares are on valuation and not a buyback. What is your view on capital return at this point or do you see the cycle unfolding in that you could -- I mean, if I kind of keep the current growth rate for this year, we will call it rough numbers $300 million of premium and 1.5 times on your current equity suggests something north of $500 million. Is that a number you feel you can grow to business to over the next several years and you want to hold onto that capital?

Well, that is very interesting you bringing that up. That is the question of returning capital to shareholders via some form of dividend. It continues to be a topic that our board is monitoring and is engaging in. No final decision has been made, so I wouldn't be in a position to say that. I do think that is something that is under active consideration and one of the things that's -- I cannot get into the discussion -- but one of the things that you have got to understand, and that of course is what do you need to support the business to grow? That is kind of the starting point.

And so we intend to expand the business so long as we can underwrite it profitably, and it appears that that is clearly happening at this point. So we are going to first do that. But I do think -- and certainly considering the current tax environment that the dividend is certainly a possibility. It is not mine to say. That belongs to the Board of Directors.

Additionally, we have increased the leverage just a bit, I mean a very small -- to 0.8 from 0.78; that is a 14% move. But we do intend to expand that regardless of other capital measures, capital management measures. So, of course M&A is a possibility, but there is nothing I have to report to you in any regard on that.

Okay great. Well thanks so much, and continued best of luck.

Jack Sherck, SunTrust.

Thank you very much. Good morning. You mentioned -- Geoff, you mentioned that pricing was up 9% year-over-year in the second quarter. Just for my memory, what was it in 1Q?

1Q, it was roughly the same thing. Yes, it was yes, 8.7%, 8.6% roughly --

So roughly about the same rate?

Yes (multiple speakers) it's actually a little higher this quarter, but it's against a higher bar.

Okay, and then Janelle, on the positive audit premiums, how long can we expect that to last?

I will be completely honest with you, Jack, and say I was surprised this quarter as I was last quarter and that premium audits continue to come in on a positive year-over-year increase. I have been predicting for the last two quarters that that would slow down because when you are comparing to the prior year quarter-over-quarter, the hurdle is getting higher and higher, so I would expect that to slow down. But I will say that cash coming in the door right now year-over-year is 10% to 11% higher than what we received last year at the same point in time.

Okay. And then my last question, just a bigger picture question, with the passage of the new highway construction bill, in the past when those bills have passed, have you guys seen an uptick, or what sort of associated uptick have you seen in your business with that, if any?

We anticipated more of an uptick, Jack, than we saw. And so we are not counting anything in regard to that. I will tell you that the oil and gas business, the fracking and some of the shale operations and related operations, have stirred economic activity. The offshore production has stirred manufacturing and trucking and welding and fabrication, those sort of businesses significantly. As you can see from our past history, we have shifted more emphasis over to the agricultural side, which has been more resilient than the logging side. So there has been some support there.

But what you are going to see in my estimation Jack, is that you are going to see the underlying loss cost rise, you are going to see the amount that carriers are willing to take these risks on rise, and you are going to see almost an artificial contraction in the market. In other words, there is capital available, yes, but with the performance of the workers' comp market as a whole, carriers are going to be reluctant to put that capital to work in that particular sector, unless they can get a number, unless they can get a rate that they feel like will reasonably produce a return consistent with other lines of business.

Great. Thank you very much.

Randy Binner, FBR.

Thank you. So I guess I'm going to try and summarize if I could everything you covered with Matt Carletti. And so with these charges, it sounds like it is not large cases; it's kind of a higher number of claims staying open longer. And beyond putting up better -- higher reserves against that, the actual claim trend is mitigated by the fact that you are writing more businesses that are providing the opportunity to return to work? Is that a fair way of summarizing it in a couple of sentences?

Well, we see claims frequencies going down. And they go down -- they are going down in 2 areas, 2 particular metrics. They are shrinking as -- correct me, Geoff, if I'm wrong -- but they are shrinking as relates to payroll, which is a very good thing, and dramatically down as it relates to premium, because as premiums rise the earned premium rises, and therefore it's going down even faster there than payroll. So those are both good metrics. That is why I think this lump of claims that Geoff was referring to really is so much impacted by the macro factor of the inability to return to work largely because there is no employer out there to take them. The employer is not there.

Or, there is no light duty. There is no light duty, or if the employer is there, if it is a new employer, that employer would rather not hire somebody that has a history of a loss. Although it is not supposed to be a consideration, as a practical matter it does; it is.

So I guess what I'm trying to drill down to, if there is this body of claims that are having a higher severity because they are not closing so they are staying open as you mentioned for medical costs and indemnity, I guess I'm trying to figure out -- is the light duty or the return to work environment improving in your book, or is it just as bad as it was a year ago?

I would say it is just as bad. We are throwing -- obviously we are raising our prices. You have to price for moves like that. But I personally, in our claims organization, I have not seen that that is improving, as in the $100,000 to $500,000 claims. It is still a tough slog trying to get these back guys back to work.

I will just say that all of our claims adjusters have a heightened sensitivity to that and to manage against that aggressively that, to settle a claim, to get them back to work even in the face of some heavier resistance. But that is still a tough problem.

And then I wanted (multiple speakers)

Again, put that against the backdrop of on a run rate, the frequency of claims coming in is lower now than it was, but correct. And this is truly much more difficult with respect to those claims. But the longer a person stays out, the more they began to consider themselves as disabled.

Sure, and I guess that kind of segues. This is -- dumb to ask a question that -- and analysts have asked on other calls; I have talked to executives about workers' comp. But what is your take, Allen, on the effects that healthcare reform and how people use comp? I mean, I think something we worry about as insurance analysts is that whether it is the insured or their doctor or their lawyer, they find a way to make their workers' comp or even their auto insurance as the way that they access medical care because they are not accessing it well otherwise. I mean, do you worry about that? Do you think that is a trend out there, and if so is there anything that you do to try and mitigate that impact on Amerisafe?

There has always been, in my estimation, a trend to put billing under workers' comp' as opposed to group health or other forms of healthcare. Because, and I can send you a dozen reports on this, but because the discounting, the amount of the physician the healthcare provider of any type gets paid under group health is less than they get paid under workers' comp. Workers' comp is the last bastion of fee-for-service business. And it is for that reason there is an effort to make that push. That is not new.

Okay, what does the impact of the healthcare system do on that, and I think that is out -- that is subject to a great amount of debate, whether it exacerbates the cost shifting or whether or not it actually improves the situation. My approach to that would be to plan for the worst and hope for the best.

So, consequently, we are pricing for that, we are pricing for cost shifting, we are trying to price for this elongation of duration and the difficulty in closing claims.

And we are also -- I will add that we are also extremely aggressive on coverage confirmation issues, because sometimes employers will -- or an employee will say, I was injured in the course and scope of employment, and maybe that is not the case. And so we do very thorough investigations to make sure if we are on the risk, it was work-related.

Understood. Thanks for the commentary. I appreciate that.

(Operator Instructions). Bob Farnam, KBW.

Thanks, good morning. Just one question. There was no change to the accident year 2012 loss ratio, and I was wondering if you considered moving in a higher base than what you saw in the prior two accident years?

Let me put it this way. Bob. There would be absolutely no support for moving it higher at this point. Okay? It is based upon the earned premium and based upon the dollars paid and based upon the change in frequency and reported claims; there would not be support -- there will just would not be support for that.

Why the percentage of medical only claims, for example, is rising, which -- our total medical-only claims as a percent of our total incurred amounts is about 1%, 1.5% --

Which is the first time in about 4 years --

Yes, well the -- so I don't think there is any support for that. But that also is another implication. There is not any support in my mind based upon what has happened with 2011 for us to pull that down, either. (multiple speakers) you understand? Despite increased pricing, despite all these other positive metrics, it is entirely too early to make any sort of judgment to move that, and it is, we believe at this point, a very cautious number.

Great, thanks.

There are no further questions at this time. I would like to turn the call over to Mr. Allen Bradley for any closing remarks.

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

I want to reiterate one thing, that is that our view of the opportunity of the workers' compensation market to provide a profitable expansion still exists and exists even more robustly than before. We believe that there is this significant opportunity to expand our market presence in the coming years, and that Amerisafe is well positioned in all relevant aspects to take advantage of this opportunity on a go-forward basis. Thank you, ladies and gentlemen.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day. Thank you.