Amerisafe Inc (AMSF) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, andwelcome to the Amerisafe, Incorporated Forth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference is being recorded.

I would now like to turn over the conference call to Ms. Janelle Frost. You may begin, ma'am.

Good morning. Welcome to the Amerisafe Fourth Quarter 2012 Investor Call. If you've not received the earnings release, it is available on our website at a amerisafe.comThis 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 the comments during this call, and in the risk factor section of our form 10-K, form 10-Qs 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.

Good morning, ladies and gentlemen. And thank you for joining us for this morning's Fourth Quarter 2012 Earnings Call. With me this morning is Geoff Banta and Janelle Frost, who will be covering the operational and financial performance of Amerisafe for the fourth quarter.

Before I turn the call over to Geoff, I want to make a few general comments. The Workers' Compensation market continues to harden. Improvements in work activity have occurred, but they've been slow, therefore, the demand for our product has not been overly robust.

However, the number of carriers willing to write high-hazard compensation risk is contracting. This change in underwriting appetite appears to be fairly widespread. I suspect, due to our focus on high-hazard risk, we note these changes perhaps a little bit more rapidly than those insurers covering just main street exposures.

On February 4th A.M. Bestreleased at report on the domestic P&C industry. In that report, Best estimated the 2012 calendar year combined the ratio for the Workers' Compensation line to be 117.3%. The third year in a row of that approximate combined ratio.

Their projection for the Workers' Compensation line for 2014 was only slightly improved to 115%. Naturally, pricing is rising. The most recent quarterly pricing survey released by the council of insurance agents and brokers on February 5th, indicated 81% of survey respondents reported rate increases on workers' compensation accounts, nationally.

In the southeastern region of the country, an area where we have a lot of business, 90% of the respondents reported Workers' Compensation rates -- rate increases with half of those respondents reporting increases of greater than 10%. Lost costs are beginning to rise, but only gradually. At the same time investment yields continue to contract and remain at exceptionally low levels, putting greater pressure on underwriting to produce margins.

Based upon the factors I've mentioned above, the [CIA of insurance agents and brokers best estimate and projection of the 2012 and 2013 calendar year results for Workers' Compensation,and the sustained period of low investment returns, I believe that it's reasonable to conclude that both lost costs and the actual pricing on work Workers' Compensation risk will continue a gradual increase for the next two years. With that I'm going to turn it over to Geoff, our Chief Operating Officer, to discuss the Company's operational performance.

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.

From an operating standpoint, we had a solid fourth quarter generating a combined ratio of 92.6%, versus a combined of 98.4% in last year's fourth quarter.

For the entire year, we also saw improvement generating a combined ratio of 97.5%, versus a 100.4% combined in 2011. In terms of more detailed operating results in the fourth quarter of 2012, we increased our gross premiums written year-over-year by a strong 30.6%.

The eighth straight quarter in which our top line has grown by double digits. For the entire year, our gross premiums written grew 20.8% to $329 million, from $272 million in 2011.

As has been the case throughout the 2012, the fourth quarter increase was due to factors. First, we showed a historic 25% year-over-year increase in what we refer to as our debt sheet premium. That is premium for voluntary policies written during the quarter.

Even more encouraging the premium increase occurred during a period of increases in our pricing,continued evidence that our segment of the Workers' Comp market is hardening. The second factor in the increase in our gross premiums was a more than 100% increase in payroll audits and related premium adjustments to $7.9 million in the fourth quarter of 2012 from $3.8 million in Q4 2011.

Regarding payroll audits specifically, we experienced a 60% increase over the year-ago quarter. For several quarters now, we have stated that we expect an end to these year-over-year increases in audit premium,but we were obviously premature in this prediction, and our audit premium increases have been a welcome, if surprising, boost to our top line.

In terms of pricing, our effective lost costs multiplier for voluntary Workers' Comp written in the fourth quarter, was 1.69 or 169% of the approved loss costs in the states that use this mechanism for pricing. This pricing represents a healthy year-over-year increase over our fourth quarter 2011 effective LCM of 1.56. Our increased pricing, along with a year of aggregate increases in state-mandated lost cost has contributed to an increase of 19.9% in our average renewal premium.

In turn this has led to strong increase in our fourth quarter premium retention to 96.4% in the fourth quarter of 2012, from 91.2% in Q4 2011. Regarding losses, we saw a continuation of positive signs that began in the third quarter including decreased claim frequency, both payroll and premium based, decreased reported indemnity claims and increased closure rates.

On the other hand, our claim severities were up reflecting the complex and unpredictable nature of the claims environment in which we operate. Taking the above into consideration, and given the fact that 2012 accident year is still very green, we maintained our net current accident year loss and LAE at 76.5%. Relative to prior accident years, we experienced stabilizing development in the fourth quarter resulting in a lowering of our overall ultimate loss in LAE estimate for these prior years by $2.7 million in the aggregate.

In her comments, Janelle will provide further color around our loss ratio and its components. Finally, in terms of expenses, our total underwriting expenses increased by only 1% in 2012, while our net premiums earned increased 15.8%. We pride ourselves in strong expense management, and in the intelligent application of technology for efficiency gains.

And these factors, along with our top-line growth, yielded an excellent expense ratio of 21.1% in the 2012 calendar year. With that I will turn to Janelle to present details on our financials.

Thank you, Geoff. For the fourth quarter of 2012, Amerisafe reported net income of $9.2 million or $0.50 per sharecompared to $8.11 million or $0.44 per share in the fourth quarter of 2011.

Gross premiums written rose 30.6% from the year-ago quarter, attributable to $14.3 million growth in policies written in the quarter, and over $4 million of growth in positive audit and related adjustments. Net premiums earned increased 18.9% from the year-ago quarter.

Our net investment income totaled $6.7 million for the fourth quarter of 2012, a slight decrease from the fourth quarter of 2011. The tax [equivalent] yield on our investment portfolio was 4.3%, from the fourth quarter of 2012, down 2/10 of 1% from the fourth quarter of 2011.

In total, revenue for the fourth quarter of 2012 was $85.6 million, up 14.3% from the year-ago period. Our current accident year loss ratio for the quarter was 76.5% compared to 78.2% a year ago.

Our incurred loss and loss adjustment expenses totaled $57.5 million for the quarter, which included $2.7 million of favorable prior-year development. This compares to loss and loss adjustment expenses of $49.6 millionin last year's fourth quarter, which included $2.2 million of favorable prior-year developments.

In total, our net loss ratio for the fourth quarter of 2012 was 73% compared to 75% for the fourth quarter of 2011. Total underwriting and other expenses decreased 0.9% to $14.9 million compared to $15 million in the fourth quarter of 2011.

The 2012 fourth quarter expense components included $5.7 million of salaries and benefits, $6.1 million of of commissions, and $3.1 million of underwriting and other costs.

The expense ratio decreased to 18.9% from 22.7% in the same quarter a year ago. In total, our combined ratio was 92.6% for the fourth quarter versus 98.4% for the same period in 2011.

Return on average equity for the fourth quarter of 2012 was 9.8%, compared to 9.4% for the fourth quarter of 2011. Book value per share at December 31st, 2012, was $20.88,an increase of 8.5% from 2011.

And our statutory surplus was $323.9 million at year-end. Finally, we had strong cash flows from operations of $81 million in 2012 compared to $43.7 million in 2011. To that end, we initiated our first quarterly dividend of $0.08 per share.

That concludes my prepared remarks on the financials. We now turn the call back to Allen.

Thanks, Janelle. The fourth quarter was a very strong quarter, indeed.. I want to comment briefly on two other matters.

First, as Janelle mentioned, we have initiated our first shareholder dividend. For some time our Board has taken several actions to manage our capital. First, we retired our convertible preferred shares [at] a cost of about $26 million. Subsequently we entered in a stock repurchase program and redeemed approximately 1.2 million shares at an average cost of $17.87.

Next, we retired all of our outstanding debt at Amerisafe. Now our Board has decided to initiate a common shareholder dividend of $0.08 per quarter -- per share, per quarter.

This decision was based on a number of factors, including, but not limited to, the clarification of national tax policy toward dividend income, our having adequate capital at our operational entities to support appropriate growth in gross premiums written and our book value,and appropriate capital and surplus to maintain our A rating from A.M. Best.

We believe the initiation of this dividend is a positive development for our shareholders. Finally, before I open the call for questions, I want to comment on an 8-K we issued yesterday after the release of our earnings announcement.

Sean Traynor joined Amerisafe's Board of Directors in April of 2001. Sean was a general partner of Wells, Carson, Anderson and Stow, our principal shareholder at the time. Sean remained a member of our Board, even after Wells Carson liquidated its position in 2006 as part of our secondary offering. Sean's contributions to this Company for the last 12 years have been numerous and invaluable.

Sean's commitments to his family and his business have now led him to the decision to not stand for re-election to our Board of Directors. The Board of Directors and management team of Amerisafe wish to express our sincere appreciation to Sean for his many years of dedicated service. We shall miss him very much. With that let's open the call for questions.

(Operator Instructions). Our first question comes from Mark Hughes with SunTrust.

Okay. Good morning. Congratulations on the quarter.

Good morning, Mark.

Good morning, Martin.

Good morning, Mark.

The claims improvement in the quarter, you're continuing a trend that you had seen previously. Could you talk about what may be driving that?Is that some difference in underwriting? Some changes in the broader climate? What's behind that?

It's a great question, Mark, andI'd like to say we have all the answers to the driver. It seems to be quite widespread. It started in 2012. We've seen a, I think, a 4% drop in reported claims this year, which is, of course, very nice when your earned premium is moving the other way. I'm not going to say that it's -- I'd like to say it's very tough underwriting and better underwriting and better claims, better safety, butwe don't know that for sure. It's going to take time for us to analyze that, and all I can say is that it's welcome. It's widespread or amongst our industries. And we're very pleased with it.

Yes. Any comparison you can draw with the last cycle, perhaps, when construction activities started to pick back up? You know, people have things to do; they are less likely to get hurt, let's say. Is that a possibility?

I think there's a couple of things. This is Allen. As you recall, we announced that we had launched a number of underwriting initiatives in late 2010 and 2011. And the results in 2012 start reflecting those changes. So some of it is clearly underwriting, not writing particular types accounts. We analyzed where we were having problems, where we were frequency and try to drill down to those. You don't see the results of that decision, you know, until that's fully implemented and it's in place. But the other thing is I think when people have an opportunity for full work, they're more likely to want to return to work, or perhaps the hiring of employees now is involving hiring more skillful employees or more experienced employees.

But I think one of the things you see now are people are probably working longer weeks. So you've got skilled people working longer weeks. They're having better payroll and those sort of things. I'll tell you one other thing, andI call it sort of jail house religion. I've got a way of putting funny names on things, I guess, butWorkers' Compensation costs are going up. And when it costs an employer more, they pay more attention to it. If the cost is easy, if the risk is easy to transfer for minimal costs, you probably won't pay as much attention to it. And we find that employers are more mindful of a safe workplace.

Right. When you say probably working longer weeks, is that to say that the skilled people are unlikely to be injured, are getting paid more, thus more premiums, but no increased risk of injury.

Well, there's -- our exposure base is payroll.

Yes.

So a long week means more premiums.

Exactly.

But it's not like there's a bunch of really new hires on the job.

Yes.

These existing workers. You know I don't know. As Geoff says, we're going to look at it more closely. It actually -- we've been experiencing a claims frequency decline for a pretty good while,but the fourth quarter, particularly, was remarkable. And as Geoff pointed out in his comments, a 15% rise in earned premium and an actual -- the number of claims reported actually decreased 4%.

Right.

And on an earned premium basis, I mean, the pure number of claims. And that was pretty remarkable.

Well, I guess one more thing, Mark, to add to Allen's comments. In our underwriting initiatives that he pointed out, we have in the last couple of years I'll say gotten tougher on new businesses that may not have as much experience as some of our -- some of the businesses that may generate better claims frequency. And I think that plays a part in our falling claim numbers, as well.

I agree.

One final question. The retention was quite good. 96% retention. A nice jump with 20% average renewal premium increases is an interesting combination. Do you -- you know, how much flexibility does that give you to maybe back off on the retention a little bit, but keepon pushing the pricing. Could you talk about that dynamic?

Well, I just suggest we're going to push the pricing (inaudible). We'll follow along behind whichever way it goes, but you don't want to get above the market. But if you don't know where the market is, that's a concern. We see lost cost rising, but only gradually. So when I made the comment about we see lost cost increasing, as well as pricing, actual pricing is the -- there's discretionary components within the pricing unit beyond just the lost cost and that's the LCM part. the schedule of debits and credits.

And so we're looking to achieve, based upon own data, certain [rates] for certain exposures and we're going to try to retrieve those. And right now those metrics all seem to be going in the right direction. The retentions are there. And I think part of that is because there's not a lot of choices. And number two, the new business applications, you know, are continuing to flow in at a rapid pace, and we have a lot more opportunities.

Right.

So we intend to increase our market penetration in our current jurisdictions.

Great.

Yes.

Thank you very much.

And Mark --

Yes.

Just as obvious in this environment, as Allen pointed out, you have lostcosts. Lost costs have turned the corner in terms of what the states are mandating. That more states are raising lost costs now than 2010 and prior. So number one, your loss -- your base goes up, and number two, we're continuing to, as Allen pointed out, to raise prices. So we get sort of a double, a multiplicative effect, and that -- which obviously raises our average premium, if all other things being equal.

Great. Thank you.

Our next question comes from Christine Worley with JMP Securities.

Hi. Good morning. And congratulations on a great quarter.

Good morning, Christine.

Thank you.

I have just a couple of numbers questions to start off with. The premium momentum that you saw in the fourth quarter, did that sustain into January and February?

Well, we don't like to give the forward numbers. But I don't think the turning of the calendar changes these sorts of things. If you look back on our commentary, and you look back and start in the fourth quarter of 2010, we noted subtle changes in the markets that were causing pricing to rise and volume to begin to increase. Those comments continue in every quarter since then, and every quarter since then on a year-over-year basis, we've increased premiums. And as I said in my opening remarks, I expect this to continue on for a couple more years in terms of the rising price. Now all of my comments were predicated on the economy not falling off the cliff somewhere. I guess I don't have to worry about being politically correct on the Fiscal Cliff, because I'm not talking about -- I'm just saying if the national economy were to stop or to slow down dramatically, that could change it. But assuming the gradual improvement continues, I see the rates continuing to rise and I -- if we're going to have a 115 combined next year, there's going to be very few insurers that will be in a real big hurry to jump into that.

Okay. Great. And then turning to margins. Given the continued strong pricing that you're talking about and somewhat stabilizing lost cost trends, would it be logical to assume that we're going to see the accident year loss ratio come down a little bit next year?

Okay. We just about had an over/under bet on how long it would take for that question. Janelle?

I would expect the loss ratio to improve. Obviously, we don't give forward-looking guidance, but if you recall 2010, we ended (inaudible) the year at 81/8,and unfortunately that developed to a 95 as currently. 2011, we ended at a 72/2 and it has developed to 79/5. We were very prudent about our 76/5 this year, andas you know, we have been getting rate increases since then. So I would expect improvement.

Okay. Okay. Great. That seems fair. And I know you don't give forward guidance, but is -- would you say the full year expense ratio that we saw in 2012, would at least be a good jumping-off point for the coming year

We are starting to see efficiencies in our expense ratio with our fixed costs, as we've been able to keep them at a level that was benefiting from the additional our premium. So, yeah, I mean there's some pressure. But I would expect the expense ratio to be pretty steady.

Okay. Great. Thank you very much.

Thank you, Christine.

(Operator Instructions). Our next question comes from Randy Binner with FBR.

Thanks. Good morning, this is Dan Alcher on for Randy.

Hi, Dan.

How are you doing?

Good, thanks. A quick question on the new dividend policy. I think, Allen, you talked a little bit more higher level what,, I guess the inputs were. But could you maybe go into a little bit more detail as to how the Board thought about $0.08 or, about, I guess, a 1.1% yield versus something maybe a little bit higher given that the surplus is still very substantial?

You know, our head of sales and marketing would refer to it as a Christmas turkey. Once you start giving it, you'll never go back.

Right.

So we wanted to make sure it's a sustainable number. We modeled against a number of companies. The 1% or something above the 1% range was a -- seemed to be in the median range of those companies that we looked atand it seemed to be be a good starting point. We clearly do have excess capital. We -- on a GAAP basis, I think we're levered at 0.8 to 1.

On a stat, I think that's closer to 1 to 1, something like .96. So we have some room to grow with that. This dividend would be basically $6 million, between $6 million and $7 million a year. You know if things improve, opportunities come, we may increase it,but that will be left up to the Board. And we wanted to start the process. And we wanted to start at a reasonable number, but not something that was -- that we couldn't build on.

Sure. That makes sense. I guess also related to capital, you know you had all indicated that 2012 was not going to be a year of share buybacks as, you know, kind of taking care of the remaining debt, which was true. But, you know, how do you think about that now going to 2013 on buybacks and consideration with the new dividend?

Well, we are still interested in buybacks. The question of dilution is a bit of a concern for us.

On a book value basis you mean?

Right. And we would buy back something above book value, where we feel like we can reasonably reach that number in a relatively short period of time.

Right.

But just to say we're going to spend X million, $20 million this year on stock repurchases, regardless of what the price of the stock is, is not something we will pursue.

Okay. And then maybe just one other higher level question.

Sure.

I guess it's been the theme that competition or, you know, competition has really pulled back and really left the market. But at what point do you think that folks come in and say, hey, look, these guys are getting 20% rate increase,and maybe there's something here for us to get back into now?

It will happen. It will happen. I don't think it's going to happen over the next two years,and here's why. We write the most hazardous risk. That's what we specialize in in the industry. That is the last place carriers get during a soft market. That is the last place they enter into the market during a soft market, and it is the first place they exit when the market turns. Therefore, the period in the cycle, you understand, from trough to trough or peak to peak, is longer on the high hazard side, the way it's longer on the upside and it's shorter on the below -- on the soft side. So people have over the last 24, 27 months have been exiting very, very slowly. That is accelerating. And you basically need four things to turn a market, the first one of which is long periods of unsustainable combined ratios, and we have had that.

And so I think people will back away from it. They'll look to see where this line is going. That's why they invest projection of 115 for 2013 is a very important number. I don't think people are going to be jumping at that number to get into it. And you've got to also understand, Daniel, that I mean this is a patchwork quilt sort of market out there. It varies from state to state, from to industry to industry. It can be pretty complex. Sometimes people look and say, oh, California. Look at California. Well, California is a unique market just like Illinois is a unique market, like Louisiana or Maryland. Any state is unique,and they have to be measured and considered on their own.

Great. That was a very complete answer.

I really appreciate it. Thanks.

You're welcome.

Thanks, Daniel.

I'm not showing any further questions at this time. I would like to turn the conference back over to Allen Bradley for any closing remarks.

Thank you, ladies and gentlemen for joining us for our call this morning. I just reiterate that over several years, you have heard this management team talk about the soft market in terms of lower loss costs, shrinking payroll and excess capacity that was leading to irrational pricing. Over the last nine quarters, we have started turning that conversation back to considerations that involve rising payrolls, gradually rising underlying loss costs and a renewed underwriting discipline. We think the fourth quarter is probably the best example of those positive trends that have come back into the marketplace and we see a reasonable expectation of that continuing for the next 12, 24, perhaps even longer in terms of months. Thanks for being with us today.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.