Amerisafe Inc (AMSF) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AMERISAFE second quarter 2013 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 follow at that time. (Operator Instructions)

As a reminder, this conference is being recorded. I will now turn the call over to your host, Mike Grasher. Please go ahead.

Thank you, Stephanie. Good morning, everyone, and welcome to the AMERISAFE second quarter 2013 investor call. If you have not received the earnings release, it is available on our website at www.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 the comments made during this call, and in the Risk Factors 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 statement.

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

Thanks, Mike. Good morning, ladies and gentlemen, and thank you for joining AMERISAFE's second quarter 2013 earnings call. As usual, I will make a few remarks and then turn the call over to Geoff Banta, Janelle Frost, and Mike Grasher for more details on the operational and financial aspects of the quarter for AMERISAFE.

On May 16, the NCCI announced their analysis of the results of the workers' compensation line nationally. This report is the most detailed analysis of the workers' compensation line published during the year. Nationally, the net written premium for workers' compensation grew 9% in 2012. The report indicated the premium growth was divided roughly between rate and exposure factors.

While the calendar year combined ratio improved for private carriers as designated by the NCCI, meaning the voluntary market, from 115% in 2011 to 109% in 2012, the industry fell well short of earning its cost of capital. According to the NCCI, in order for the industry to produce an 8% cost of capital, the combined ratio would have to drop to 94% or a 1,500 basis point improvement over the 2012 level.

As anticipated, the frequency of claims fell 5%, and the cost of claims, the severity, rose but very modestly. There was an unanticipated improvement in the utilization of opioid medications, which was very welcome news to those of us in the industry.

Unfortunately, the industry's aggregate reported reserved efficiencies rose for the fourth consecutive year, and both new money yield and embedded yield for P&C carriers' investments reached a new 30-year low. It appears that these two factors -- that is reported reserved efficiencies and lower investment yields -- coupled with a poor underwriting result should provide support to pricing discipline in the near future.

Ratifying the view of a tough market is the NCCI's recent report on the residual market, which expanded 46.9% during the first quarter of 2013 over the same period in 2012. This market accepts risks that are rejected by carriers in the open market. The premium growth in this sector is confirmation of a favorable change in underwriting discipline in the voluntary marketplace.

On the pricing front, according to the Council of Insurance Agents and Brokers' second quarter pricing survey which was published last week, workers' compensation rate increases were 8.3% and 88% of respondents reported rate increases on workers' compensation policies written during the quarter.

According to the language in the published commentary, and I will quote -- workers' compensation again was a tough sell, particularly where loss experience was poor. A broker in the Northwest reported that workers' compensation was the line with the strongest rate increases and nonrenewals. A similar story played out in most regions of the country with some brokers reporting that carriers were backing away from the line. End of quote.

One might note that workers' compensation rate increases in the second quarter according to the CIAB report dropped from 9.8% in the first quarter to 8.3% in the second quarter. Since workers' compensation policies have a one-year term, the sequential quarterly increases or decreases do not demonstrate the cumulative rate change for a given group of policyholders. For example, using the CIAB data, for workers' compensation policies renewing in the first quarter of 2013, the cumulative rate increase over the three renewal periods of 2011, '12, and '13 was 16%. Using the same data, policies renewing in the second quarter had a cumulative increase over the same time period of 20.3%.

With respect to AMERISAFE, I mentioned in last quarter's call that throughout 2011 and '12, the marketplace improved for us on a gradual but steady pace. That improvement continued during the second quarter and more details will be provided on that by Geoff and Janelle in a moment. Competition is still present in the marketplace, but the pricing is not overly aggressive and certainly not to the nature that we've seen over the last two or three years.

Now let me turn the call over to Geoff to discuss some operational metrics of the Company.

Thank you, Allen. I'm going to be mercifully brief in my remarks. You may remember that on April 1 of this year we announced several management changes, and among those changes Janelle Frost, our then CFO, was named Chief Operating Officer, taking my place in that role effective May 15, 2013. Since that announcement, Janelle and I have been working on the transition from my leadership to hers. To no one's surprise, that transition has proceeded quickly and smoothly. Janelle is an immensely talented leader and a very quick study, and I now proudly turn to her to discuss our operations for the second quarter.

Janelle?

Thank you, Geoff, for those kind words, and good morning, everyone. We were pleased with the operating results in the second quarter. Our top line grew $10.3 million or 12.1% during the quarter. Policies written in the quarter accounted for $10.1 million of the $10.3 million growth. The renewal component of this increase was driven by premium retention of 98% compared to 88.3% in the second quarter of 2012. Policy retention also increased from 91.5% to 92.5% in the second quarter of 2013. New business grew 32% in the quarter in terms of dollars of premium.

Over the last several calls, we've been addressing our anticipated decrease in audit premium and related adjustments. While this quarter it was a decrease from the 2012 second quarter, audit premium and related premium adjustments remained positive. In addition, our effective loss cost multiplier, or ELCM, for voluntary premium in the quarter was 1.76 compared to 1.63 in the second quarter of 2012. This is the highest ELCM we have reported since we began tracking the measure. Keep in mind the ELCM is an index based on the underlying loss costs approved by states that use that mechanism for pricing. As loss costs increase, continued growth in the ELCM can moderate.

Relative to losses, we've often said we are in a lumpy business. In the first quarter, we reported no losses incurred greater than $1 million. However, in the second quarter, we had six claims over $1 million incurred with the largest exceeding $6 million.

We consider the summer months to be full employments month, which are months that we have the most insured employees working. The timing of these claims and the underlying causes has not changed our thoughts about how the current accident year is reserved. We remained at a 73.2% loss in LAE ratio for the current accident year.

Also, we continued to experience a decrease in claims frequency on both a relative and absolute basis. Our claims reported in calendar year 2013 are down 8.9% from 2,894 claims to 2,638 claims. According to NCCI, the industry experienced a 5% decrease in frequency in 2012.

Another positive impact in the quarter was favorable development from prior accident years. Encouraging trends in case development led to $3.2 million of favorable loss development in the quarter compared to $3.3 million of unfavorable development in the second quarter of 2012.

Overall, our operating trends were positive and led to a respectable 93.8% combined ratio in the quarter, down 10 percentage points from the second quarter of last year. Our year-to-date combined ratio was 94.2% compared to 99.8% for the same period in 2012 and 109% from the workers' compensation industry in the full year of 2012.

That concludes my prepared remarks. I now will turn the call over Mike, our new CFO.

Thank you, Janelle. For the second quarter of 2013, AMERISAFE reported net income of $7.6 million or $0.41 per share compared to $3.4 million or $0.19 per share in the second quarter of 2012. On an operating basis, operating net income was $8.5 million or $0.45 per share in the second quarter of 2013 compared to $3.4 million or $0.18 per share in the second quarter of 2012, an increase of 150% year-over-year.

As Janelle mentioned, gross premiums written rose 12.1% from the year ago quarter, attributable to $10.1 million growth in voluntary premiums written in the quarter. Though still positive at $3.7 million, audit and related adjustments declined year-over-year by $0.8 million. Net premiums earned increased 17.6% from the year ago quarter benefitting from the strong growth achieved in prior quarters.

Meanwhile, net investment income totaled $6.6 million in the second quarter of 2013, roughly 1% above the second quarter of 2012. Average invested assets were $926.4 million in the quarter ended June 30, 2013 compared to an average of $873.2 million for the same period in 2012, an increase of 6.1%. The tax equivalent yield on our investment portfolio was 4.1% compared to 4.5% in the second quarter of 2012.

In the quarter, we experienced a realized loss on our investment portfolio of $1.3 million or $0.05 per share net of tax compared to $0.1 million or $0.01 per share of gain in the second quarter of 2012. The loss resulted from our investment committee's decision to impair two equity securities which in sum totaled roughly $1.9 million in losses. Those losses were offset in part by realized gains taken of $0.6 million. In total, revenue for the second quarter of 2013 was $87.5 million, up 14.2% from the year ago period.

Our current accident year loss ratio for the quarter remains 73.2% compared to 76.5% a year ago. Our incurred loss and loss adjustment expenses totaled $56.8 million for the quarter, which included $3.2 million of favorable prior year development. This compares to loss and loss adjustment expenses of $56.7 million in last year's second quarter, which included $3.4 million of unfavorable prior year development. In total, our net calendar year loss ratio for the second quarter of 2013 was 69.3% compared to 81.3% for the second quarter of 2012.

Turning to expenses, the expense ratio increased to 24% from 22% in the same quarter a year ago. Total underwriting and other expenses increased 28.1% to $19.7 million. The 2013 second quarter expense components include $5.7 million of salaries and benefits, $6.2 million of commissions, and $7.8 million of underwriting and other costs. To provide a bit more granularity, the impact of the high severity loss impacted our contingent profit commission by $1.03 million, and a timing issue around the true-up of premium taxes contributed $1.2 million. Taken together, these two items generated 2.6 points of the expense ratio. We continue to anticipate our expense ratio ultimately will track more normalized levels as the year unfolds.

In total, our combined ratio was 93.8% for the second quarter 2013 versus 103.8% for the same period in 2012, a remarkable improvement driven by the improved underwriting performance. With the improvement in the combined ratio, our underwriting results were a higher mix of the total pretax income. Consequently, we experienced an increase in our tax rate to 28.2%, up considerably from 14.5% a year ago and last quarter's 20.1%. For the six months, our tax rate was 24.1%.

Operating return on average equity for the second quarter of 2013 was 8.7% compared to 3.7% for the second quarter of 2012. Book value per share at June 30, 2013 actually grew both sequentially and year-over-year. Book value per share now stands at $21.29, an increase of 6.6% from the second quarter a year ago and up modestly from last quarter's $21.20 book value. In light of the current investment environment and legacy underwriting issues within the workers' comp industry, we are pleased by this result.

Finally, a few line item numbers that always hold relevance. Statutory surplus was $343.3 million. Cash flow from operations remained strong at $59.4 million, up from $41.9 million in the second quarter of 2012. We continue to maintain excellent liquidity at the holding company with over $45 million of cash and cash equivalents. We paid our second quarterly dividend of $0.08 per share on June 26, 2013, and the Board of Directors on July 30 declared an $0.08 dividend to be paid on September 27, 2013 to shareholders of record as of September 30 -- excuse me, as of September 13.

That concludes my prepared remarks on the financials, and I'll now turn the discussion back over to Allen.

Thanks, Mike. The second quarter was a good quarter for AMERISAFE. We experienced the following positives. A growth in gross written premium of 12.1% while securing increased pricing. Secondly, a lower current accident year loss ratio than this time last year. Thirdly, favorable prior year reserve development, unlike the second quarter of 2012. Correspondingly, we had a 10 percentage point improvement in the calendar year combined ratio over the same quarter last year and a 150% increase in operating earnings per share over Q2 2012. Finally, we had growth -- quarterly growth in book value per share in a very difficult economic environment.

Partially offsetting these positive factors are, one, a slightly elevated expense ratio, which we anticipate will improve during the remainder of the year; second, an uptick in claim severity, which by the way is not unanticipated given our predisposition to severity risk; and three, a slower growth in premiums written.

On that last point, AMERISAFE continues to grow its premium base. As we've discussed in the past, it is the appropriate time in the market cycle to expand our market share. However, make no mistake, as I have said many times in the past, AMERISAFE will first focus on improving our underwriting margins and profitability during this period of premium growth.

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

Thank you. (Operator Instructions) Our first question comes from Mark Hughes with SunTrust. Your line is open.

Thank you. Allen, how do you think about that last point at this time in the cycle? How do you balance the rate increases? It's another 2% LCM increase sequentially, but you got some deceleration in written premium growth. Where do those things start to balance out? When do you stop pushing price, and then not focus on volume but then see how you do on volume (multiple speakers) --?

Right. Right. And that's a very good question. And first of all, let me make sure you understand -- we don't apologize for testing the market on pricing. We do intend to push the market on pricing. We, of course, are in the high severity business, which is a different sort of animal than Main Street. But I do think we've probably reached the point in time with a 1.76 effective LCM where you might see that plateau and flatten for a time period as the underwriting loss costs begin to rise. It doesn't mean that rates are going to go down, but it may be the time to look at that.

With respect to our renewal business, Mark, we're still operating at very high levels of retention, both on policy count and premium, and that being the case, there still is a good indication that there's support there. But as far as gaining new business, we may have to review that a little bit.

The six claims over $1 million, how has severity in this quarter compared to what you might have normally expected? Was this an elevated quarter?

Yes.

Yes, it was.

Yes. We had one claim of $6.3 million and one claim of $2.5 million and one of $2.2 million. And when you say -- and I want to comment on that. I know Janelle already did. But whether what we expect in a quarter -- we expect to catch a large claim every year, and we've been fortunate in not having some of those over the last few years.

But if you remember our discussion last quarter about why 73.2 and not maybe somewhat of a lower loss ratio given that you hadn't had these losses, part of the reason for that is we assume that we will have those claims some point during the year. So, it is a higher -- a worse quarter in terms of that loss, but it's not outside of what we would expect in a normal year cycle.

Then how about share buybacks? What's your view on share buybacks at this level?

Well, we have the authorization in place. I think the valuation on the stock is certainly -- it's up there at the moment and probably not a real -- not really particularly motivated here to be re-engaging in that at these levels.

Thank you.

Thank you, Mark.

Our next question comes from Randy Binner with FBR. Your line is open.

Thank you. Good morning. I just wanted --

Hi, Randy.

Good morning, Randy.

Good morning. I just wanted to touch on some kind of basic modeling questions. I appreciate the comments on the unusual items with the expense ratio. But can you give us some kind of color on how that would normalize? And when you talk about normalizing, is that normalizing at something like you ran for full year 2012?

Yes. I think that's -- I think you're headed down the right path there. If you take a look back and look at what we've typically done in terms of our expense ratio, I think that's where you will find us sort of gravitating to as the year unfolds.

I think the other part of your question is basically what we tried to do -- or at least I tried to do in the prepared remarks -- was to say, look, there's a couple of items in here that generally we don't see and experience, and if you sort of take those out then you can sort of get at what the normal run rate might be.

All right. Okay. Understood. And then on the tax rate, I apologize if I missed it, but I didn't grasp what drove that and how that might play out over the back part of the year.

Yes, so the driver there is simply that we had more operating income derived from our underwriting as opposed to the investment income -- lower tax rate on the investment portfolio than the operating income. As we look ahead, you continue to factor in just a normalized -- what we had budgeted throughout the year and that's what we will come away with. We do not sort of factor in the prior year development that maybe pops up from time to time. And that's what will be the key driver in terms of whether or not our tax rate falls below where we reported this quarter or sort of remains in line.

Randy, this is Allen. Two other comments on that. Of course you understand that the second quarter has to catch up for the first quarter with respect to the tax rate. So it's 24%, I think, or thereabouts, for the first six months, but it's 28% in the quarter as we catch up from the first quarter.

The second thing is to the extent that the expense ratio was higher because we lost the profit commission on the [5 x of 5] reinsurance layer, that, too, has a catch-up component that involves both the first quarter and the second quarter.

So, as we look at that going forward, I think looking at things Mike has outlined, if you kind of look at the last four or five years of expense ratio, I think it heads in an area that is going to be more likely where we hope that we'll end up at the end of the year based on what we know right now.

All right. That's all clear. Thanks for that. And did you say -- Mike, did you say on the statutory surplus that it was -- did you say 333, 3-3-3? Is that right?

Three -- grab that again. 343.3.

Okay. Cool. Yes, I was going to be surprised if it had flipped. So I heard that incorrectly. Okay. I'm good. That was just some modeling questions. I'll drop back in. Thank you very much.

Thanks, Randy.

Our next question comes from [Colin] O'Connor with JWest, LLC. Your line is open. Colin, your line is open.

Just a quick thing on the expense ratio. You said there was about 2.6% one-time items that affected that, so if you back that out, that's 21.4. Will that tick down from there or should we expect it to tick down to 2.14 going forward?

Without being specific, I would say that it's going to trend away from this quarter's number and more closely resemble that which we've done historically. And if you take these two metrics or these two issues out of the equation, I think that sort of gets you in the ballpark of where we might end the year.

And what needs to happen to drive that down even further? I know you had this one-time issue and you didn't expect it, but what we've expected is for that to actually tick down from last year, as well. So if we didn't have this one-time item in the quarter, could we be expecting that the expense ratio would be down year-over-year?

I think if you back those couple of items out, I think that's what we would arrive at. And at the same time, I think there's -- there are controllable expenses and there are noncontrollable expenses; and I think what you're seeing this quarter were a couple of noncontrollable expenses, which are part of our makeup. Yet at the same time they don't exactly occur every day. As we move forward, I think that we've got all the efficiencies in place on the controllable side and it's just going to be a matter of the variability that is part of our business structure. So I think -- again, as we go forward I think you'll see it begin to wind out, and we'll be right back in line.

Perfect. Thank you.

Thank you.

(Operator Instructions) Our next question comes from Bob Farnam with KBW. Your line is open.

Hi there. Good morning.

Good morning, Bob.

(multiple speakers) ask more questions on the expense ratio. This is, I think, the second quarter in a row you've had higher assessments, as well. And I was curious, given the market conditions, where things are heading in terms of reserves for the industry and the residual markets and what not, do you see the assessment to continue to go up over time?

I think over the course of the year that's going to be headed the other direction. It's more of a timing issue with assessments, where we sort of accrue what we expect those assessments or how those assessments could or should play out through the course of the year. And then by year end we're sort of taking a look back, resetting the dial, if you will, and -- so I think over time it plays itself out on a timing issue.

Okay, so this is -- it's more like an amortized expense per se than an actual expense. Is that what you're getting at?

That's very accurate.

That would be exactly right, and let me point out one other thing, since the expense ratio has come up. And of course, that is certainly something we were anticipating we'd be questioned about. Just for one simple explanation. If on May 6 the gentleman that got electrocuted and injured so terribly had not been injured, the expense ratio, even with everything else in there, would have been about 23.2 or 23.3. So, it would've trended down from last quarter where we expected it. That's really the difference in this quarter.

Okay.

And we do expect some improvement. Now, Bob, that doesn't say something can't just blow up, but it's not something we anticipate at all.

Right. Okay. In terms of -- I'm getting the feeling that there's really -- you're not seeing new competitors in the space, it's just kind of the same old competitors and you're all being rational. Is that kind of a fair assessment?

I would say that's a fair assessment. I would say probably on a relative basis we've pushed a little more up than they have.

All right. Okay.

In terms of pricing.

Yes.

I know the NCCI's report indicates that there was about a 6 point improvement in the combined ratio, but you know, 109% us not -- for voluntary carriers and a 111% for the market as a whole is not anything to get terribly excited about in this investment environment. Since we're a monoline carrier, we've got one bullet in our gun and we intend to shoot it at the right time. So, pushing the pricing in the high severity business is the appropriate thing to do at this point.

Okay. And last question for me, quarter-over-quarter has there been much change in the business environment of your insureds? Are things getting better? Are things staying the same? Just trying to get some more color there.

This is Janelle. We have seen -- and as far as the industry groups that we write in, we've seen an increase -- the biggest increases we've seen have actually been in trucking, which I don't think that would be much of a surprise to anyone. We have seen increases in construction. Roofing's been relatively flat in the quarter as far as written premium and even payroll to some degree. We're happy -- we're pleased with our growth is more premium than exposure.

You know, another way to think about that -- I think that generally speaking there's been very little change from the first quarter to the second quarter. I think that's pretty -- in terms of competitors, in terms of business. But I think one thing is kind of interesting. Bob, we've talked over the last few years about our expectation that on a year-over-year basis, the audit adjustments would come down. And I think we're on about the second anniversary -- annual anniversary of that prediction, and finally, it's coming true.

But it's very interesting -- think about the implication of that. At one point when they were coming in much over what was originally estimated, that meant the economy was improving much faster than they anticipated. And certainly since there's a component of looking back at what you did over the previous 12 months, it got better than they anticipated.

Now, that wave has kind of ridden its way through the estimates and people are estimating and getting closer to the estimates. But what is important to remember, and Mike made this point in his remarks, was that the audit adjustment still remained positive, meaning that people had greater payrolls than even they anticipated. It's just they were a little more accurate than they were coming out of a more recessionary time.

All right. Good things. That's the key -- the key point there is that the audit premiums keep going up. Okay.

They're still positive.

Yes. That's it for me. Thanks.

Okay. Thanks, Bob.

And I'm currently showing no further questions. At this time, I will turn the call back over to Allen Bradley for closing remarks.

Thank you, Stephanie. We thank you all for joining us this morning. It was a good quarter, and we appreciate your interest and support of AMERISAFE.

Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.