Amerisafe Inc (AMSF) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AMERISAFE Inc. fourth quarter earnings conference call. At this time all participants are in a listen-only mode.(Operator Instructions). As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Mike Grasher, Chief Financial Officer, you may begin.

Thank you, Ashley. Good morning. Welcome to the AMERISAFE fourth 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 the factors discussed in today's earnings release, in the comments made during this call, and in the Risk Factors section of our 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. Thank you for joining AMERISAFE's year end 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.

The favorable trends that we have discussed in our last few earnings calls continued in the fourth quarter. As a general rule, industry underwriters have remained disciplined in risk selection. This discipline may be the result of stressed balance sheets, adverse reserve development, historically low investment yields, or a combination of all of the above. Regardless of what the motivation was to return to underwriting sanity, the circumstances are welcomed by AMERISAFE. Books of business are in play, as insurers turn toward underwriting profitability, and continue to shed unprofitable segments of business.

There are a few signs that the rate of premium increases are slowing. This should not be surprising to anyone, as the marketplace has now lapped itself in premium rate increases at least two, and more often three, times. There are very few indications of pricing concessions, however. We believe that increases in rates will plateau in the next few months. We do not believe there would be significant downward pressure on rates, as very little if any new money has come into the worker's compensation market, particularly in the high-hazard segment. Rather, very low investment yields, combined with multiple yields of years of highly unprofitable calendar year results will provide pricing discipline. Like others in the industry have predicted, we believe that many carriers will report additional adverse loss development in the coming quarters.

As another sign of a firming market, the growth in residual market continues, albeit at a slower rate than in the previous four quarters. We believe this too will support a relatively rational market.

Partially offsetting these conditions, which we consider favorable, is an economy that is growing much slower than expected. One can see clear evidence of that slow growth in the lower audit adjustments this company has reported in the fourth quarter and for 2013 as a whole. Janelle will address that in more detail later. However, all things considered, we would still characterize these times as, and I quote, "The good old days."

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. The operating results for the fourth quarter were notable. Our combined ratio was 80%, down 12 percentage points from the fourth quarter last year. Our top line grew $10 million, or 12.3%, during the quarter. Policies written in the quarter accounted for $14 million of that growth. New business grew 27% in the quarter in terms of premium dollars. In addition, policy retention was 92.5%, compared to 91.2% in the fourth quarter of 2012. Premium retention was 88.4%, compared to 90.2% in the fourth quarter 2012. This decrease was driven by the loss of one multimillion dollar policy.

Audit premium and related adjustments remained positive this quarter at $3.2 million. However, this was a significant decrease of $4.8 million from the last year's fourth quarter. For the full year, audit premium and related adjustments were $13.6 million, compared to $20.9 million in 2012. We believe these decreases indicate economic growth continues, but at a lesser pace than last year.

On the pricing front, we continue to show aggregate increases. Our Effective Loss Cost Multiplier, or ELCM, for voluntary premium in the quarter was 1.85 compared to 1.68 in the fourth quarter of 2012. I would expect this trend to plateau in 2014 due to cumulative increases over the last few years.

Relative to losses, our current accident-year loss and LAE ratio remained at 73.2% this quarter. Frequency trends were favorable in 2013, and severity increased within our expectations. Our claims reported in the calendar year were down 1.8% to 5,620 from 5,721. I would like to point out that the claim count decrease of 1.8% is in contrast to the 13.5% increase in premiums earned.

The quarter was positively impacted by favorable developments from prior accident-years. Case development led to $4.4 million of favorable loss development in the quarter, compared to $2.7 million in the fourth quarter of 2012. This quarter's favorable development was primarily attributable to accident-years 2009 and 2010.

Finally, our expense ratio decreased to 11.7% in this quarter, compared to 18.9% in last year's fourth quarter. Mike will provide the details on those expenses. That concludes my prepared remarks. I will now turn the call over to Mike.

Thank you, Janelle. For the fourth quarter of 2013, AMERISAFE reported net income of $17.4 million, or $0.92 per share, compared to $9.2 million, or $0.50, per share in the fourth quarter of 2012. For the year, earnings were $43.6 million, or $2.32 per share, up 48.7% from the prior year.

With regard to revenues, net premiums earned increased 10.1% from the year ago quarter to $86.7 million, and rose 13.5% year-over-year due to the strength in our premium written over the past year. Our net investment income totaled $6.8 million in the fourth quarter of 2013, a slight increase from the $6.7 million recorded in the fourth quarter of 2012.

The tax equivalent yield on our investment portfolio was 3.9% for the fourth quarter of 2013, down from the 4.3% reported in the fourth quarter of 2012. With a portfolio just over $1 billion in assets at year end 2013, our portfolio held 53.6% in securities classified as held to maturity, which carried $24.6 million in net unrealized gains. This compares to the 64.7% and $44 million, respectively, in 2012 and reflects a change from held to maturity portfolio in into available for sale positions. In total, revenue for the fourth quarter of 2013 was $94.3 million, up 14.3% from the year-ago period while revenues for the year grew 10.9% to $356.3 million.

Turning to expenses, our current accident-year loss ratio for the quarter was 73.2%, compared to 76.5% a year ago. Our incurred loss and loss adjustment expenses totaled $59.1 million for the quarter, which included $4.4 million of favorable prior-year development. This compares to loss and loss adjustments expenses at $57.5 million in last year's fourth quarter, which included $2.7 million of favorable prior-year development.

In total, our net loss ratio for the fourth quarter of 2013 was 68.2%, compared to 73% for the fourth quarter of 2012. For the year, our net loss ratio was 69.4%, with favorable prior-year development of $12.6 million, comparing favorably for 75.6% and $2.5 million of 2012.

Total underwriting and other expenses decreased 32.2% to $10.1 million, compared to $14.9 million in the fourth quarter of 2012, as we benefited from $5.4 million in estimate adjustments during the fourth quarter. More specifically, we reduced the allowance for doubtful accounts by $1.7 million, reversed the accrual for retaliatory premium tax by $1.5 million due to the re-domestication to Nebraska, and reduced estimates on the guarantee fund accrual of $2.2 million, an amount consistent with the past several years.

The 2013 fourth quarter expense components include $5.9 million of salary and benefits, $6.7 million of commissions, and a negative $2.5 million of underwriting and other costs due to the reductions in estimates. The expense ratio decreased to 11.7% from 18.9% in the same quarter a year ago. For 2013 our expense ratio was 20.3% compared to 21.1% in 2012. In total, our combined ratio was 80% for the fourth quarter versus 92.6% a year ago, and 90% for 2013 compared to 97.5% in 2012.

Return on average equity for the fourth quarter of 2013 jumped to 17.1%, compared to 9.8% in the fourth quarter of 2012. For the year, return on average equity rose 290 basis points to 10.9% from 8% in 2012. Book value per share at December 31, 2013 was 22.41, an increase of 7.3% from 2012. Our statutory surplus was $354.3 million at year end. We had strong cash flow from operations of $128.9 million in 2013, compared to $81 million in 2012.

On the capital management front, our Board increased the regular quarterly dividend to $0.12 per share from $0.08 per share, and approved an extraordinary cash dividend of $0.50 per share, both of which are payable on March 28, 2014 to shareholders of record as of March 14, 2014.

That concludes my preparatory 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.

Thank you. (Operator Instructions). Our first question comes from Christine Worley of JMP Securities, your line is open.

Hi. Good morning.

Good morning, Christine.

Good morning, Christine.

I have just a couple of questions. Do you have any additional color on what was driving the development in the quarter?

Hi Christine, this is Janelle. The development in the quarter was really driven by case development, cases that we favored, were able to settle or close favorably, not really any through IBNR decreases.

Okay. And then, as we look at the loss ratio in the year ahead, what would you sort of expect to see it in that number? Would you expect it to come down a bit from the current year given the trends that you are seeing and the price increases that you have gotten over the past year?

I agree, we have gotten price increases over the past year. I would expect those to decline, or decline or flatten in 2014 as far as the price decreases are concerned. So, I mean how much that affects the loss ratio as I reported in my prepared remarks, our effective ELCM was up to 1.85 and we do expect that to plateau. So, the effect of the loss ratio should decrease -- to the degree, I don't know.

Okay. And then, just one final question, how should we think about capital management and M&A in the year ahead, especially on the heels of the special dividend in the quarter?

Well, the special dividend and the increase in the regular dividend do not significantly impact our capital position such that it would inhibit us or prohibit us from being able to make an acquisition. We also, as you know, have no debt. So, I think the move by the Board, as I'll comment later, is really designed to return, to increase the total shareholder return to our shareholders, and it wasn't designed to be a marked reduction in capital.

Great, thank you very much and congrats on a great quarter.

Thank you.

Thanks Christine.

Thank you. Our next question comes from Doug Mewhirter of SunTrust. Your line is open.

Hi. Good morning, I just wanted to follow up maybe on the expense ratio, Mike or Janelle. Obviously, it moved quite bit during the year if you look at the individual quarters. Are you running right around where it averaged out for 2013? We have about 21%, is what we have for the full years expense ratio. Is that where you are running at, or do you see any improvement in that in 2014 as you grow your premiums? And how we should be thinking about that?

Well, there were obviously a couple of items here in the quarter which will help over the long term, including the re-domestication to Nebraska. Where we are today relative to where we will be, it would be surprising to see it improve out of where we are today, I mean this is 20% some change that's a pretty low loss, our expense ratio here. From that standpoint I think it will be difficult to repeat.

Doug, this is Allen, one thing you might think about in that the retaliatory taxes were accrued through the first three quarters and then of course not accrued in the fourth quarter as we re-domesticated. In 2014, you won't see the retaliatory taxes accrued during the quarter. So they may run a little quieter, but there is a certain lumpiness about our business. And because of the guaranty fund reassessment at the end of each year, there is a little bit of lumpiness there. But as Mike said, that reduction is consistent with the past several years.

Yes, if you take a look back, I think, from the allowance or bad debt perspective -- that particular movement, again, was something that had been accrued. As we go forward there will be some benefit from that as we move forward, it is hard to gauge how much. Then when you look at the retaliatory tax we are talking about a little over, right around 1.2% of our gross premium written. And then, from the guarantee fund perspective, this is something that occurs, it seems to occur annually and the $2.2 million we had this quarter was pretty much in line with prior years.

Okay. Thanks for that. Just one more question I guess for Allen. How is the market shaping up in terms of geographical? Is there any particular states or regions where it's unusually good? And setting aside, California which I know you don't really play in, are there any states which are maybe underperforming your expectations in terms of pricing or in terms of policy behavior in which the frequencies vary?

There is certainly some pieces moving around the table Doug, just some thoughts, not in any particular order. There has been a Supreme Court decision in Florida which has created a disruption in the construction industry there and the question of how long disability payments have to continue. The Oklahoma Legislature approved an opt-out program in Oklahoma, much like -- well something like Texas. It's yet to be determined as to whether or not that would have a negative impact on the worker's comp volume. It certainly won't help it in the state of Oklahoma.

There are other states that have particular rules that have come through or rate changes and policy sort of things, but not anything really generally. With respect to California, don't look for us to be making a move out into California. We are somewhat skeptical of the stability of that market. That's probably the best way I can put it. So, no states are really just horrible that I can think of. Illinois construction continues to be a struggle for us. So, we are looking to write more where we are making money, and we have defined that down by state, by industry. And we are looking to write less where we are losing money. I know that's a real sophisticated strategy, isn't it, Doug, but that's kind of what we have identified and that's where we are going.

Great, thanks. That's all my questions.

Thank you. Our next question comes from Bob Farnam of KBW, your line is open.

Hi there and good morning.

Good morning.

Bob.

For the reserve developments -- it sounds pretty simple, it's just there's some case developments. I am just curious it there was any other movements in other accident-years besides 2009 and 2010 that had up or down?

Sure. I can give it to you by accident-year. I can go -- 2006 and prior was minimal, 2007 was pretty much flat, 2008 was about 700,000 favorable, 2009 was about 1.5 million, 2010 was 2 million and then 2011 and 2012 we held steady.

Okay good, thanks for that. The investment yields, new money rates versus their expiring rates kind of what you are looking at in the delta there, and what do we expect in terms of investment performance going forward?

I think more of the same. I think, frankly, when you look at the market overall, the new money is being invested at considerably lower rates than what that is rolling off. I think that is going to remain consistent over the next year and wouldn't anticipate any movement there.

And last one for me. Has this winter's kind of weather had an impact on your insureds' operations? In other words has it been a slowdown, maybe improvement in claims frequency because of that?

The claims frequency, I don't think, is weather-related because it continued all year, Bob. It's been part of a long term trend, a pull trend for the year. The weather -- we insure a lot of people to work outside. When the weather is bad they may not work as much. But I think you are going to see that the December premium, when that really started, November and December premium wasn't reported until January, and that's not in these numbers. We certainly would expect that February would be down some when those premiums are reported in March because people are unable to work. Typically for us, however that gets made up. It's not lost, especially in the construction business, they will just pick it up later, but things are little bit different.

Okay, it would correct itself more in maybe second quarter.

And the thing I would be more concerned about, and we are watching, is just the overall economy. You can see that in those audit premiums, there is a decrease there. If you look at the policies written during this quarter, Bob, the top line grew 20%, but yet we reported 13.2% and the difference was that $4.8 million shrinkage in the audited premiums from last year's quarter to this year's quarter.

Okay, thanks.

Okay, no problem.

Thank you. (Operator Instructions) Our next question comes from Randy Binner of FBR, your line is open.

Good morning, thank you.

Good morning.

I wanted to just develop a couple of previous questions, I guess. This is probably for Allen -- the capital position is still quite in excess phase as you pointed out. The dividend doesn't make a big difference. And so, from our view being able to deploy that excess capital to raise ROE is kind of a central point. And so, one policy at a time, as you just said, might be tough given the economy. So books of business seem to be in play, you said that, but you haven't captured one. So I'm just wondering how competitive it is for those books? Because we're seeing people take them down. I just like to hear how competitive people are for the books that are in play and getting a feel for that environment?

Okay, first of all, I wouldn't say we haven't captured some, we've gone from $228 million in written premium $372 million. Now we haven't captured in the sense that there was an acquisition. There was a transaction that involved acquiring business, that's true. But we have acquired business, and quite frankly we've acquired business in a safer way then going out and buying a book of business.

Second point, the books that are in play are in play because they are unprofitable. It is not because they are profitable books of business out to be sold. And we are not really that interested in unprofitable business. So we would like to pick the business that we are interested in acquiring.

So we know our capital is good. We don't want to invest in something that won't continue to return value to our shareholders. With respect, we didn't shrink capital through the extraordinary dividend and increasing the regular dividend materially. It left us with a lot of flexibility about what we want to do, but we are balancing our AM Best rating, together with what our shareholders, we believe, have expected to continue, have expected us to continue -- and that's growth in book value, and returning shareholder value to them. So, we are not going to be driven -- it is not just what you have on the top line, is what you get to keep that counts.

Sure, it seems like, I guess the color I am looking for though is, despite kind of exit from the space, it seems like there are still people around looking for opportunities to pick up kind of what people are leaving behind. It's not just AMERISAFE there, there is people who are willing to come in, is that right?

I haven't seen anybody pay any material premium for anything.

And we haven't seen any new capital.

I mean, if you are talking about the AFG acquisition of the Liberty, Bridgefield Summit Group that certainly won't be much of a premium if anything. I don't remember what it was, I think it may have been book value. But, I haven't seen a whole lot of money coming in, I haven't seen hardly any except one small $50 million investment, I really haven't seen money coming in. And when you see growth of the runoff companies, that indicates that companies with continuing operations don't see those as viable investments. So we've, so far have been confident and comfortable with growing our book of business organically rather than try to do a transaction.

That's helpful, just one other if I can. You had mentioned in your opening comments that you thought there could be continued adverse prior-year development from competitors. And I guess my question is what accident-years do you think that will be from? You just had a material redundancy from 2009 and 2010 accident-years, which I think was the worst for workers' comp in this cycle. Would you see competitors taking charges in those years, or would it be kind of more recently written business where you are expecting them to feel the pain there?

That's a very good question. I would tell you just, and this is strictly my opinion, and Mike and Janelle may not agree with me. But if you look at the years where the cycle was softest, and you are talking about beginning in 2007 -- some would say beginning is the fourth quarter of 2004, but really the trough in the pricing was 2009 and 2010 and even some into 2011. So, the adverse development, that's the policy years, 2008, 2009, and 2010 are the low-pricing years, and that's where you are going to see the development come from.

I will say that the second step of that, the adverse development that they are seeing because they just didn't get their reserves right, correct? Well, they priced the next couple of years off their assumptions of how good their reserves were. So if the reserves were inadequate, their pricing for the next year would be inadequate. So, I would expect to see it bleed on through into 2011 and 2012. I think by 2013, the industry, at least the larger writers, had probably corrected for that. But when you see adverse developments say for the 2010 -- and by the way, Randy, I would agree with you, I think 2010 was sort of a trough. But when you see bad development there, you can assume that they were still using the results of 2010 in 2011 and in 2012 in pricing their product. Do you understand? So it will continue to probably be underpriced.

That's helpful. Thanks a lot.

Okay.

Thank you. Our next question comes from Matthew Dodson of JWest LLC, your line is open.

Can you just talk a little bit about maybe from the standpoint, you guys have a lot of Gulf Coast exposure. Have you started to see I guess that at all from what's going on down there relative to the big LNG, the big construction, the E&C guys or is it still too early?

It's still little early Matt, this is Allen. We had snow into Ritter, Louisiana three times this year. That's just not something we are used to. And it's been wet and those sorts of things plus there is a long runway in some of those large constructions programs. There clearly is economic activity building there, but I wouldn't say it's anything near full-swing or even really well, well underway.

This is Janelle --

Yes. I am sorry. But just as that build-out starts to happen over the next couple of years, I mean you guys should be a big beneficiary because you have got a lot of market share down there, right?

We don't have a lot of market share, we have market share here. I would tell you that we certainly intend to try to take advantage of that, but I will also tell you a lot of these projects are things that might be subject to wrap-ups to large contractors by either contractor-controlled products or owner-controlled work sites. So that remains to be seen as to how much that will help us. But I will tell you, a rising tide lifts all boats -- whether or not we get disproportionate share remains to be seen.

Okay. Thank you.

Yes sir.

Thank you. I'm not showing any further questions in queue, I would like to turn the call back over to management for any further remarks.

Okay, thank you Ashley. I want to thank all of you for participating in today's call. Since we went public in 2005, AMERISAFE has strived to enhance their shareholders' value. We have been fortunate in meeting with some success in that effort. At this time last year AMERISAFE initiated a common shareholder dividend of $0.08 per share per quarter. Our Board of Directors this week of course increased that quarterly dividend to $0.12 per share. Additionally, they approved an extraordinary dividend of $0.50. We believe, and I believe, that those actions are consistent with our commitment to our shareholders. As I said earlier in the call, we were certain to retain more than sufficient capital to support our growth, whether it's organic or otherwise.

With that, have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone have a great day.