Amerisafe Inc (AMSF) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AMERISAFE, Inc. third-quarter earnings conference call. (Operator Instructions). As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr. Mike Grasher. You may begin, sir.

Thank you. Good morning, everyone. Welcome to the AMERISAFE third-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 from -- 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.

Thank you, Mike. Good morning, ladies and gentlemen. Thank you for joining AMERISAFE's third-quarter 2013 earnings call. I will make a few remarks and then turn the call over to Janelle Frost, our President and Chief Operating Officer, and Michael Grasher, our Chief Financial Officer, to provide more details on the operational and financial aspects of the past quarter.

In the third quarter and continuing to the present day, the workers' compensation market is in a state of flux. Years of weak pricing and aggressive loss selections have resulted in stressed balance sheets. Now, books of business are in play as underwriters turn their focus away from premium growth in market share toward underwriting profitability.

Signs of that refocusing on underwriting discipline can be demonstrated in several ways. For example, residual markets managed by the National Council on Compensation Insurance have reported more than a 30% increase in premium as of September 30, 2013, over the same period in the prior year. Interestingly, the NCCI notes a marked increase in the number of large workers' compensation risk being placed in these assigned risk pools. These large accounts are not the typical assigned risk pool account. Instead these accounts have been parked in the pool as brokers search for voluntary riders willing to undertake the business. I believe brokers are finding the appetite for these accounts, particularly those with unfavorable loss history, very, very selective.

Exceptionally low investment years coupled with multiple years of highly unprofitable calendar year combined ratios will, in my opinion, provide support for pricing discipline for the next two years or so.

Like many others in the industry, I believe carriers will cease reporting favorable prior-year loss development and began reporting adverse loss development. Many industry observers have concluded that workers' compensation is a tricky line to write profitably, an opinion that was recently cited in a Wall Street Journal story. All of these factors together, we believe, should support pricing for the foreseeable future, and we see this as an opportunity for AMERISAFE to profitably expand our business during the time of uncertainty.

Now, I will turn the call over to Janelle Frost to talk about the operational aspects of the Company during the quarter.

Thank you, Allen, and good morning, everyone. We were pleased that the operating results in the third quarter. Our combined ratio was a 92.5% down six percentage points from the third quarter last year. Our top line grew $8.9 million, or 11.5%, during the quarter. Policies written in the quarter accounted for $10.3 million of that growth. The renewal component of this increase was driven by premium retentions of 93.3% compared to 85.3% in the third quarter of 2012. Policy retention was 91.1% compared to 91.3% in the third quarter of 2012. In addition, new premium -- new business grew 34% in the quarter in terms of premium dollars.

Audit premium and related adjustments remain positive this quarter and $0.7 million. However, as expected this represented a decrease of $2.4 million from last year's third quarter.

Our effective loss cost multiplier, or ELCM, for voluntary premium in the quarter was 1.79 compared with 1.66 in the third quarter of 2012. We continue to report our highest ELCM since we began publishing this measurement for those dates that use loss cost as a pricing mechanism. For AMERISAFE, that excludes Florida, Texas, and Wisconsin, although Texas recently began using loss costs.

Relative to losses, our current accident year loss and LAE ratio remained at 73.2% this quarter. We continue to see favorable frequency trends both on a relative and absolute basis. Our claims reported in the calendar year were down 5.4% from 4468 to 4228 claims. The quarter was also positively impacted by favorable development from prior accident years.

Encouraging trends in case development led to $2.7 million of favorable loss development in the quarter compared to $1.6 million of favorable development in the third quarter of 2012. This quarter's favorable development was primarily attributable to accident years 2008 and 2009.

Finally, our expense ratio also decreased to 22.6% in the quarter compared to 22.8% in last year's third quarter. Mike will provide the details on the expenses, but I believe it is important to reiterate our commitment to expense management as evidenced in our lower-than-industry average expense ratio.

That concludes my prepared remarks. I now turn the discussion to Mike.

Thanks, Janelle. For the third quarter of 2013, AMERISAFE reported net income of $9.7 million, or $0.52 per share, compared to $7.1 million, or $0.38 per share, in the third quarter of 2012. On operating basis, operating net income was $10.1 million, or $0.54 per share, in the third quarter of 2013 compared to $6.5 million, or $0.35 per share, in the third quarter of 2012, an increase of 56.2% year over year.

As Janelle mentioned, gross premiums written rose 11.5% to $86.1 million from the year-ago quarter. Net premiums earned rose 12.7% from September 30, 2012, to $81.6 million benefiting from the growth in net premiums written achieved in prior quarters.

Meanwhile, net investment income totaled $6.9 million in the third quarter of 2013, roughly 2.2% above the third quarter 2012. The tax equivalent yield on our investment portfolio was 3.9% compared to 4.5% in the third quarter of 2012. Average invested assets were $961.2 million in the quarter ended September 30, 2013, compared to an average of $880.4 million for the same period in 2012, an increase of 9.2%.

In the quarter, we experienced a realize loss on our investment portfolio of $654,000, or $0.02 per share, net of tax compared to a $640,000 gain in the third quarter of 2012. In total, revenue for the third quarter of 2013 was $88 million, up 9.5% in the year ago periods driven by the growth in premium earned.

As Janelle mentioned, our current accident year loss ratio for the quarter remains 73.2% compared to 76.5% a year ago. Our incurred loss and loss-adjusted expenses totaled $57 million for the quarter which included $2.7 million of favorable prior-year development. This compares to loss and loss adjustment expenses of $53.8 million in last year's third quarter, which included $1.6 million of favorable prior-year development. In total, our net calendar year loss ratio for the third quarter of 2013 was 69.9% compared to 74.4% for the third quarter of 2012.

Turning to operating expenses, the expense ratio declined to 22.6% from 22.8% the same quarter year ago driven by a higher growth rates in premium earned. Total underwriting and other expenses increased 12% to $18.5 million. The 2013 third-quarter operating expense components include $5.7 million of salaries and benefits; $6.2 million of commissions; and $6.6 million of underwriting and other costs.

In sum, our combined ratio was 92.5% for the third quarter of 2013 versus 98.5% for the same period in 2012.

With the improvement in the combined ratio, our underwriting results were a higher mix of the total pre-tax income. Consequently we experience an increase in our tax rate to 22.1%, up from the 20.9% a year ago. For the nine months, our tax rate was 23.4% compared to 17.7% for the nine months ended in 2012, again due to underwriting results being a higher mix of total pre-tax income.

Turning to the balance sheet, during the third quarter we executed a reinsurance commutation on our for [excess] of one layer for the underwriting periods 2008 through 2010. There was no gain or loss on the commutation, simply a balance sheet transaction. As a result, the commutation reduce our reinsurance recoverable by $28.4 million for the quarter.

Shareholders equity grew to $400.7 million, or $21.67 per share, at September 30, 2013, growing both sequentially and year over year. Operating return on average equity for the third quarter of 2013 declined to 7.2% compared to 7.1% for the third quarter of 2012.

On the capital management front, we paid our third consecutive quarterly dividend of $0.08 per share on September 27, 2013. And the Board of Directors, on October 28, declared a $0.08 per share dividend to be paid on December 27, 2013, to shareholders of record as of December 13. Also on October 28, the Board voted to extend our share repurchase authorization to December 31, 2014, and to increase the share authorization to $25 million from $24.4 million.

Finally, a few other numbers that may hold relevance to your models. Cash flow from operations remains strong at $99.8 million, up from $59.1 million in the nine months ended September 30, 2012. The increase primarily reflects the impact of the reinsurance commutation. We continue to maintain excellent liquidity at the holding company level with approximately $43.8 million of cash and cash equivalents. The $43.8 million includes the impact of a $15 million dividend to the holding company from AIIC on September 16. With the dividend, statutory surplus dropped modestly to $338.8 million from the $343.3 million in the second quarter.

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

Thanks, Mike. With those comments, let's open the call for questions.

(Operator Instructions) Matt Carletti, JMP Securities.

Just a few questions. First is on top line. I know we've talked in the past I think on the last call on going through a process of looking at your book and for lack of a better analogy, buckets of green light, yellow light, red light where red light needs the rate, keeps pushing it; green light you know there is a ton of margin and now that you started to get a little bit of elasticity and demand because pricing is so high, maybe you could open the fire hose there a little bit. So, can you walk me through how that's going? Should we expect to see growth accelerate at some point? And am I thinking about it right in that if that growth is coming from that green-light bucket, that that is the better-priced bucket and potentially it is better margins than the average of the overall existing bucket.

Matt, this is Allen. The Company, of course, prioritizes growth in those areas where you are making more money and less growth where you are losing money. That is pretty basic. And of course, what we have seen as we have commented on prior calls that we are pushing first for margin expansion and then worried about growth.

In the last couple of years, we have been able to grow our business at the same time that we have been raising the pricing. We're probably going to get to a point where the pricing doesn't rise as much, but we would expect the volume may increase some. But our focus continues to be on those areas where we are growing our business in areas we have made more money that we have better results. And we will continue to discourage that business, which has been less profitable.

So, we don't give forward-looking guidance. I'm not going to tell you that growth is going to accelerate dramatically, but I think you can tell from my comments we think that this is an opportunity to expand profitably, and profitably being the key part of that.

Great. That is helpful. And then a tie-through to that, can you talk a little bit about how you balance that with the capital? Because you've talked in the past about premium surplus leverage ratios that you feel comfortable operating at. We're still quite a bit a ways from that. And you are making good money, so the capital is growing. Do you think about special dividend, things like that? If you could talk us through the thought process of where the stock is today.

Matt, good morning. It is Mike Grasher calling. And I think the answer to that question is that everything is on the table. That the Board takes into consideration our capital position and what lies ahead from the standpoint of the opportunities we see in the marketplace. And again, I think as we suggested last quarter, while everything is on the table, we're pretty much good to take a prudent approach on this until we really have some more foresight into what the true opportunities are out there ahead of us over the next 12 to 18 months.

Okay. And one last numbers question, I couldn't find it in the filings. I know it's there. I just couldn't find it, the redomestication of the insurance subsidiary. Can you remind us? There is an expense savings to that, right? And have you estimated it? And is that primarily a 2014 event?

Primarily eight 2014 event. And as when we announced that, we pointed out that in 2012 we paid $3.8 million of retaliatory taxes. If that were 2014, that bill on that same amount of money would be $0.

Very helpful. Thanks.

There's going to be some growth in that, Matt. And as you expand premium if you spend the greatly in those states that have retaliatory tax, the impact will go up disproportionately. I don't have that chart in front of me to tell you where we are growing, but it is primarily a 2014 account impact. There might be some in 2013, but we're not sure when that event will occur.

Okay, great. Thanks say much for the answers, and congrats on a nice quarter.

Mark Hughes, SunTrust.

Allen, you had suggested you thought there would be pricing discipline for the next two years, and I was intrigued by the specificity of the two years. As you think about how the cycle matches up with prior cycles, what is giving you confidence that the pricing will hold in that?

Well, I think there's a time period. And one of the things I think is interesting about that, Mark, is that we all tend to watch this metric sequentially in the quarters. And as you know, the policies are 12 months in length. So, you really shouldn't look at pricing in the preceding quarter you should look to see what that pricing was in the preceding year, the same quarter.

And as you look back at that, you will see over the last 36 months that according to the CIAB studies that premiums have increased about 20% as reported by those folks surveyed when you accumulate the pricing.

If you also look at their history, and they have a long history of studying this, once the pricing goes up the increases may continue on for a while but at a lower rate. It doesn't necessarily go back. You will read the headlines I'm sure in the next few weeks that say, the CIAB study I think came out on Monday. And it showed workers comp going up 5.8%. Well, that is less than the -- I think it was 8.3% in the second quarter of 2013 days, so everybody will say that was a decrease.

It is not. That 5.8% is an increase over the 8.1% increase last year and which was over the 4.1% increase in the previous year. So I think we're still going -- if you look at the progression of pricing in those historical studies by the CIAB, I believe we're going to continue to have the support for increased pricing. Or it may plateau or it may even trend down. But I think it is going to remain at better levels.

Another big driver in that as you well know, is low investment yields. And I don't see that changing rapidly for the industry. And that's a big driver now, causing companies I think to focus on profitability. And when they focus on profitability, they will look at the pricing pretty rigidly.

Thank you for that. How about the larger claims? You had a flurry of those in the second quarter. Can you talk about what you saw in Q3? And is there any trend through the quarter or through October in those larger claims?

This is Janelle. And I think at the end of the second quarter we had reported that we had six claims over $1 million. At the end of the third quarter, we were up to nine. But the claims that we did have in the third quarter were over $1 million but not at the $2 million and plus mark that we reported in the second quarter. So, they were smaller million-dollar claims, if that makes sense.

Right. And then is there another layer underneath that of more sizable claims? And I'm trying to think of -- it sounds like frequency is very much under control. Certainly pricing is going up. Your current accident year loss, that number you kept the same here through three quarters. What is keeping that from going down?

Severity is still a concern for us. Like I said, we had the claims that were over $1 million that we reported second quarter and third quarter. We like the frequency trends especially when we have more earned premium coming to the door. As you know, we like to take a prudent approach to our reserves.

Third quarter is the quarter that we have the most workers out there working, so our reported numbers tend to pick up in the third quarter. And if you remember -- we've mentioned this quite often -- when we get closer to the end of the year, by the end of the fourth quarter we really do know pretty much the universal claims that we have in a given accident year, so that's our best shot at knowing how we think that accident year is going to develop as far as the number of claims that we have. So we are just being cautious about that until we know how the fourth quarter turns out.

Mark, let me add this comment on that. With respect to our pricing, we know the pricing is going up. We still have that memory of 2010, which developed adversely on us. And so when you look at the $2.7 million of favorable development, none of that came out of any years after -- including 2010 -- 2010, 2011, 2012 we've left alone. 2013 is the year we know the least about as we sit here today. And we're just trying to make sure that our decisions are appropriate and that the best estimates we have now, not relying to some pricing to make that selection but really looking at the losses and seeing some of those development trends.

And we see some good trends there. But quite frankly we want to be very cautious about that and the fourth quarter is a much better time to take a look. I am not predicting there will be a favorable development there on the 2013 accident year, but I do think that's a better time to look at it than in the third quarter.

Mark, I would just add -- this is Mike -- if you think about the nature of our business and the potential for the high-severity claims to come through, we just don't know until we know. And to Janelle's point, the fourth quarter is certainly a better period, the end of the fourth quarter where we actually know what the claim frequency looks like -- those claims that are coming in the door, we have a better picture of it at that point and time.

And then a final question, and Allen, if you touched on this I'm sorry but the flow of new applications, how is that looking? Any commentary about any of the other major players, how they are -- you perceive their behavior in the market?

The flow of applications for new business in the quarter was up about 6.8%, 6.9%. It had already been at a high level last year, and this year is that a high level. We have been quoting quite a few more in the late third quarter as the efforts of the sales and marketing department focused submissions that's come in to be in those profitable areas that I would mention to Matt. So, we're seeing some of that.

With respect to change in the marketplace, my comments about the marketplace being in somewhat of a little disarray right now, we are seeing some business submitted to us from some other carriers. Quite frankly, some a bit surprised -- surprising as those are coming from construction, particularly heavy construction, and from some trucking accounts recently. Oil and gas is another area that we're seeing submissions, not surprisingly. And we're also seeing some of the economic factors indicate that the construction and the oil and gas industries are actually reporting on a monthly basis higher payrolls than what they had anticipated at the inception of the policies. So, we're seeing some improvement in the audit premium with respect to those accounts.

Thank you.

(Operator Instructions) Randy Binner, FBR Capital Markets.

Let me just ask a few follow-ups. On the last commentary, Allen, I would take it then the oil and gas, and construction, trucking, is that going to be in energy states more that you are seeing that, like Louisiana, Oklahoma, Pennsylvania? Or is it more broadly distributed across your geographies?

The construction is not related to the industry states. The oil and gas, of course, is. And in the Gulf, oil and gas can also mean maritime. It can mean manufacturing as you should get into the fabrication business. So you can see some of that stuff. But it's not just the oil and gas space. The trucking -- really my comments were about what on the trucking side what we've seen that has come to us midterm from some other carriers as brokers seek to place that business. And that is where the trucking has come from.

As a whole, trucking has been pretty well flat, as a whole. But in the recent weeks and months, we've seen an uptick in the trucking moving business, Randy, that you understand this rating sensitive. It needs to move. That sort of stuff.

That is helpful there. And then a quick clean-up question on all the discussion around pricing, did I miss if you actually said which are overall price number was for the quarter, either --?

The quarter was 179 for third quarter of 2013; 166 for the third quarter of 2012.

Yes that is ELCM but on a percentage basis or do you not quote that?

We do not.

Okay. But we can take it from the ELCM that you would be above industry run rate on that. Is that fair?

It would appear.

I would say that that might be a reasonable assumption, yes.

One of the problems you know, Randy, that I have with that net rate change report, it all depends where you start.

I know that. This is what people want.

If your pricing was low, then you report a higher net rate change even though when you get to the absolute number you may not be as high as the other party. So we choose to report it on an effective LCM basis as a better metric of where our pricing is.

Understood. And then to just follow up on Matt's question about capital deployment, special dividends and everything being on the table. But your commentary around the think you said that books are in play. And so to me that means it's not just picking up more business in the market or maybe some of these items that are part in the stake for the residual markets. Can we think about the potential for renewal rights books being available on workers comp? Your leverage is obviously low; operating leverage is one point X; you have no debt. So you get quite a bit a premium to this platform. I think you have the technology to scale it.

Is there any color you can give us? If you could see a bigger opportunity to add business rather than just onesies, twosies.

The books that are in play that have been sent to us largely are requesting, quite frankly, rollovers to take an entire book and agree to write the entire book. And, Randy, we don't do that. But there is certainly the possibility of renewal rights transactions in those as the balance sheet are stretched and stressed. And folks have to get rid of certain books the business. So it's got to be. We're going to maintain our pricing discipline. We're going to maintain our risk selection. We're still going to look at them before write them. We're not going to agree to roll an entire book -- just not our approach to the business.

But yes, are we interested in renewal rights? Certainly.

One last one and maybe it's a tough one to answer, but you say the market is getting more disciplined, but is it still undisciplined enough that other people will just go ahead and roll those books? Or is there enough fear and workers comp now that nobody is touching those?

What we're saying is those are blowing apart. In other words, the programs don't find a home. And that is the reason for the parked long -- the parked accounts in the residual markets that underwriters are not rolling those in and just taking them and that the pricing is moving up in the process.

And Randy, I would just add that our experiences been that there's a lot of sticker shot for these insureds once they see what the real world is calling into action here in terms of the pricing. So from that standpoint I think our experience would tell us that while renewal right opportunity is out there, one may not receive the benefit of that renewal right in as much as just walking away and having the opportunity to see that business later on down the road.

Right, understood. Okay, that's great. Thanks.

Thanks, Randy.

I'm not showing any further questions at this time. I'd like to turn the conference back over to our host for closing remarks.

Thanks, Kevin. I want to thank you for your participation today, but before closing I want to tell you a story that I believe is somewhat relevant.

In late 2003 after working for this Company for more than nine years, I was given the opportunity to serve as the CEO. At that time, the market had emerged from an extended soft market period where pricing was largely driven by favorably priced low-level reinsurance products. The long term results of this soft market were not favorable. Even as prices recovered and demand was healthy in the economy, I found that AMERISAFE was without access to available capital and was handicapped in taking advantage of the turn in the market.

At that time I sought additional capital for the Company. I remember a conversation with a potential investor, and I remember telling him and I quote, these are the good old days, trying to encourage him to allow us some capital in our operating entities. I guess my arguments weren't very persuasive because my efforts to raise that capital were unsuccessful, and therefore, our ability to expand our operational leverage was limited.

Many things have happened to this Company since 2003. The biggest change is that we are no longer capitally constrained as we have been discussing here just a few minutes ago. This current market is not like the 2003 market, but it is the same time in the cycle when opportunity exists to expand the business with profitable margins.

We are not guaranteed any term for this opportunity, and it is incumbent upon us to take advantage of the opportunity to profitably expand our business. In other words, I would tell you again, these are the good old days.

Thanks for joining us.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.