Amerisafe Inc (AMSF) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AMERISAFE, Inc. second-quarter earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I will now introduce your host for today's conference, Michael Grasher, Chief Financial Officer. You may begin.

Thank you, Ashley. Good morning, everyone. Welcome to the AMERISAFE second-quarter 2014 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. Allen?

Thanks, Mike. Good morning, ladies and gentlemen. Thank you for joining AMERISAFE's second-quarter 2014 earnings call. As usual, I will make a few remarks and then turn the call over to Janelle Frost, our Chief Financial Officer -- Chief Operating Officer and President; and Michael Grasher, our Chief Financial Officer, for more details on both the operational and financial aspects of the Company.

On May 8, the NCCI provided their analysis of the 2013 results of the workers' compensation line nationally. This report is the most detailed analysis of the workers' compensation line published during the year. Highlights of that report indicated several national trends.

First, direct premiums written grew 730 basis points, with payroll exposures contributing about 470 basis points of that increase. Private carriers, which, under their terminology, excludes state funds, are projected to produce an aggregate net combined ratio of 101% for 2013. Due to realized gains, the ratio of investment revenue over earned premium on a net basis was the highest since 2000.

On the claim side, frequency, severity, and medical cost inflation all remained benign. Manufacturing and construction employment trails prerecession levels, but are slowly improving. Private carriers' net reserve deficiencies improved for the first time since 2007. And the growth of the residual market slowed significantly from 2013.

These results led the Chief Executive Officer of the NCCI, Steven Klingel, to characterize the marketplace as, and I quote, balanced. I believe that this is an accurate description of where the market is at this point in time. Competition, as always, is still present in the marketplace, but the pricing is not overly aggressive.

As I noted in my comments in the earnings release, the principal challenge to AMERISAFE and to others in the industry is the lack of exposure expansion -- meaning payroll expansion -- due to a slow recovery in construction, manufacturing, and other basic industries. We remain hopeful that employment in those basic industries will accelerate in the remainder of this year and into 2015.

There is, of course, the risk that excess capacity within the industry could occasion an increase in pricing competition. To be certain, the industry has generated significant capacity and insurance operational leverage is now at a historic low. However, very low investment yields should hamper rational underwriters from becoming overly aggressive in pricing. But as all of us know, the industry has not always acted rationally.

Now, with that, let me turn the call over to Janelle to discuss to discuss the operational metrics of the Company.

Thank you, Allen, and good morning, everyone. We are pleased with operating results in the second quarter. Our topline grew $8 million or 8.4%. Policies written in the quarter accounted for $7.4 million of the $8 million growth.

New business grew 19.6% in the quarter. In addition, audit premium and related adjustments contributed $0.6 million to the growth in the quarter. This was the first quarter in the last year whereby audit premium and related adjustments were additive to the topline.

Our favorable pricing trend continued this quarter. Our effective loss cost multiplier, or ELCM, for voluntary premium in the quarter was 1.86 compared to 1.77 in the second quarter of 2013. As anticipated, we believe we have reached a peak in pricing for those renewal policies we know best.

Our renewal premium retention slipped this quarter to 90.6% from 92.1% in the same year-ago quarter. All of the retention drop was attributed to policies greater than $100,000, which is not what we consider our sweet spot.

Remember, our average policy size is approximately $44,000. Relative to losses, we remained at a 71.5% loss in LAE ratio for the current accident year, as frequency trends were still down.

Our claims reported in the calendar year 2014 were up only 3.1% to 2719 claims. Another positive indication was our total open claim count, which was up only 1.8% from the year-ago quarter.

As for prior accident years, the quarter was impacted by favorable development. The encouraging trend I just mention and case development led to $4.4 million of favorable loss development in the quarter compared to $3.2 million in the (technical difficulty) quarter of 2013.

Accident years 2009 and 2010 were primary drivers for the favorable development. Overall, our operating trends were positive and led to a 89.4% combined ratio in the quarter, down 4.4 percentage points from the second quarter last year.

That concludes my prepared remarks, so I will now turn the call over to Mike.

Thank you, Janelle. Taking a look at the financials, for the second quarter of 2014, AMERISAFE reported net income of $12.8 million, or $0.68 per diluted share, compared to $7.6 million, or $0.41 per diluted share, in the second quarter of 2013. Operating net income reached $12.6 million or $0.67 per share in the second quarter of 2014, a 48.9% increase from the year-ago period.

Revenues in the second quarter grew 15% to $10.6 million as compared to the second quarter of 2013. Net premiums earned increased 14.1% from the year-ago quarter, benefiting from favorable growth trends in our 2014 reinsurance treaty.

As Janelle mentioned, gross premiums written rose 8.4% from the year-ago quarter, while net premiums written climbed 10%. The difference in the increase between gross and net reflects the impact of our 2014 reinsurance treaty, as we retained an additional $1 million on the first layer and thus cede less premium to the reinsurers.

Our net investment income totaled $6.8 million in the second quarter of 2014, an increase of 2.9% from last year's second quarter. The tax equivalent yield on our investment portfolio was 3.7% in the first quarter -- excuse me, second quarter of 2014, down 50 basis points from a year-ago period.

Our portfolio continues to carry a AA- rating, with an average duration of approximately 3.4 years and remains quite liquid. At the same time, nearly 55% of our investment portfolio, including cash and short-term investments, is comprised of held-to-maturity securities, which hold unrealized gain positions of approximately $28.4 million.

Turning to the expenses, our current accident year loss ratio for the quarter was 71.5% compared to 73.2% a year ago. Our incurred loss and loss adjustment expenses totaled $62.5 million for the quarter, which included $4.4 million of favorable prior-year development, primarily attributable to accident years 2010 and prior.

This compares to loss and loss adjustment expenses of $56.8 million in last year's second quarter, which included $3.2 million of favorable prior-year development. In total, our net calendar year loss ratio for the second quarter of 2014 was 66.8% compared to 69.3% one year ago.

With regard to operating expenses, total underwriting and other expenses increased 6.9% to $21 million compared to $19.7 million in the second quarter of 2013. Even though we experienced an increase in terms of dollars, the expense ratio itself actually declined 150 basis points to 22.5%.

The decline resulted due to our [domains] on uncontrollable operating expenses and despite lower accruals for ceding commission and contingent profit commissions.

Controllable expenses declined by $200,000, while our ceding commission and contingent profit commission accruals dropped by approximately $1.3 million, both relative to second-quarter 2013 results.

By category, the 2014 second-quarter expense components include $6.7 million of salaries and benefits; $6.9 million of commissions; and $8 million of underwriting and other cause. In total, our combined ratio was 89.4% for the second quarter versus 93.8% for the same period in 2013.

Finally, a few other noteworthy items. Return on average equity for the second quarter of 2014 was 11.9% compared to 7.8% for the second quarter of 2013. Book value per share at June 30, 2014, was $23.26, an increase of 9.3% from June 30, 2013.

During the second quarter, the Company paid its regular quarterly cash dividend of $0.12 per share. And on July 29, the Board of Directors declared a quarterly cash dividend of $0.12 per share, payable on September 26, to shareholders of record as of September 12, 2014.

Cash flows from operations remain strong, up $11.2 million to $70.6 million for the six-month period ended June 30, 2014. And lastly, our statutory surplus was $376.5 million at quarter end.

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

Thanks, Mike. And as you can see, it was clearly a very good quarter. Why don't we open the call for questions?

(Operator Instructions). Matt Carletti, JMP Securities.

Good morning. Allen, my first question centers around capital management. Just as growth has steadied out in the high-single digits, ROEs are above that level and probably improving as we go forward.

You mentioned in your own opening comments that operational leverage is at or nearing kind of all-time lows -- not just for yourself, but for the sector. Can you update us on your thoughts on capital management? Just seems that the way you're earning and just the regular dividend you are growing the capital, what are your thoughts on a special share repurchases, so forth?

Well, obviously, the -- it is incumbent upon us to operate at an efficient capital base. We want to temper that with caution and with prudent behavior. I think the Board of directors has indicated clearly by making an extraordinary dividend in the end of last -- announcement in the fourth quarter that it is aware of that and that was, I think, precisely their intention. They also, of course, as you know, Matt, increased the regular dividend by 50%.

We discuss capital management at every Board meeting. It is a topic of which we have an eye on. It is not my position to say what the Board will do in the future, except to say that that matter will be addressed and that it is very clear to us that unless we can expand writings to a low -- to increase the operational leverage, we will have to address capital management.

Now, we can do that several ways. Obviously, we grow organically, which was what we are trying to do now. We can make an acquisition. We can write poorly, which is one we are not going to do. Or we can give that back in the form of some extraordinary dividends or increasing a regular dividend.

Obviously, buybacks are a part of that capital management and I will remind the listeners that we have $25 million authorization to do that. We just have not been in a position where we wanted to do that at such high price to book multiples.

So it is a good question. It's certainly one we had anticipated and it is something that this Company will address. I wouldn't look for it to be addressed on a quarterly basis, though, Matt.

Okay. That is very helpful. Then part of that answer was organic opportunities. I know there's a lot of particularly energy and construction -- construction activity related to the energy industry right in your backyard.

Can you maybe give us an update on one, how you feel about the topline? It seems that it's stabled out from last quarter, actually improved a tiny bit. What do you see ahead from here as you see the lay of the land today?

Well, the interesting thing about what is going on in our business -- in our AMERISAFE zone book of business -- is our new business growth is remarkable. And much higher than it has been in recent years. I don't remember the percentage of the first quarter. Wasn't it 21% plus new business growth in the first quarter and --

19.6% in the second quarter.

The second quarter was 19.6%. So the new business growth has been remarkable. The renewal business has dropped off a little bit, as we push that pricing pretty hard, as Janelle has outlined.

One thing we are a little bit disappointed in is that we have not seen the payroll expansion in our renewal accounts that we anticipated. And I actually went back and looked at some detail and took a number of years, the first and second quarter, divided out in terms of our business and how premium payments have come in as opposed to what we expected the accounts to report. So just an over and under.

And typically, as you might be -- expect with our type of insurers, bad weather tends to affect them in terms of payroll. And that was certainly true this year in the first quarter.

It recovered in the second quarter, but not the full extent, which is a little bit unusual. So there was a little bit of a weather factor there. But I think we would really benefit from a further expansion in the payrolls.

Now with respect to the energy business and southwest Louisiana, which is looking forward to a period of a number of years of increased business, those projects are moving along. They are still in very early stages, although we do see some efforts by the governmental entities to create the infrastructure necessary to support roads, bridges and those sorts of things.

So we are very optimistic about that and the opportunity to write business here, in energy-related businesses, particularly, in Louisiana.

Great. And then just one last quick numbers question. I apologize if I missed it. What was the LCM in the quarter?

1.86.

1.86.

Same thing we reported in the first quarter, Matt. [Same thing].

Yes. Well, thanks for all of the answers and congrats on a nice quarter.

Mark Hughes, SunTrust.

Thank you, good morning. The audit premiums you pointed out improved, but you were still somewhat muted on exposures. Am I right in thinking that is kind of inconsistent?

Let's put it this way -- we were surprised that the audit premiums improved -- well, [I won't say] we weren't surprised. Watching the cash flow, we anticipated there would be an improvement. It moved further than we expected in the second quarter. But, -- go ahead, Janelle, you wanted to --

Keep in mind, the audit premium that we are recognizing this quarter is for policies that we wrote 15, 18 months ago. The increases were coming in in things like construction, still at that point oil and gas, and trucking. So when Allen was talking about exposures, he was talking about more of the policies that are actually in effect right now.

And the way we monitor that, Mark, is to look at the cash coming in and what are reports and how many -- what percentages are over or under anticipated amounts.

Right, yes.

So the seasonal adjustments you have to look at, as the first quarter is going to be lower than the average, the second quarter as the weather improves becomes more robust. Little bit disappointed that it didn't entirely overtake the first quarter.

Is there's -- something about the audit premiums in the third quarter of last year were quite low. Is there any seasonality impact on that? Or is there some reason why Q3 would just be tougher or should we look at this as you got an easy comparison and there isn't any reason there should be a downtick, relative to what you just saw in 2Q?

I would expect it to improve. Last year, what drove that were, again --

The approved offers of [$4.4 million]?

It is not necessarily sequential, but because it is going to be based upon policies expiring that were written 15 to 18 months prior, see.

Right.

But as you compare the third quarter of 2014 to the third quarter of 2013, if the payrolls are expanding, we would expect to see better audits there.

Yes, because the third quarter last year, Mark, was only [$660,000] positive.

That's right. How about the -- you touched on this, Allen, but the new business growth, it's held pretty steady at 20%. What is your feeling about the Q3 is that so far so good, still in that range?

Yes, we are still seeing new business growth. We have increased our quote ratio internally, so we are putting more quotes out there. I will say that raw materials, applications, submissions, however you want to call it, is down -- is down from the prior year. So -- but we are making more of what we're receiving.

Right.

I think a lot of that decrease is probably attributable to our sharpening our focus about what we want more of. And so we are seeing a lot more of the business we want more of. And it has given us an opportunity to quote at higher levels of quotation and that is translating into greater writings and new business.

That down 1%, was that a Q2 number, Janelle?

I'm sorry, what was down 1%?

I'm sorry, I thought you had suggested that raw materials, the number of quotes -- ?

Oh, it is down from 2Q of last year, correct.

Right, and it was down 1%?

No, it wasn't -- I didn't say 1%, I just said down.

Okay. So, the raw material was down, but the new business growth was still up 20%?

Yes. Correct. Correct.

Right. And so that trend, perhaps, is persisting -- raw material down, but new business growth sounds like you think --

Yes.

-- will continue to be healthy.

Yes. I would agree with that.

Then Allen, anything on this -- the hedge fund, the reinsurance, any of that you are seeing anything material happening?

Not seeing a lot of the comp players in it yet. That is an interesting topic, as reinsurance is the wholesale part of our business. And hedge funds entering the reinsurance area now moving away from property coverages into more of the casualty lines is a potential to create excess capacity or to provide capacity, quite frankly, to folks whose capacity has shrunk as a result of adverse development and those sort of things.

We haven't seen a lot of those products driving pricing, as pricing still remains very, very healthy, both for new and renewal business. As is demonstrated by the effective LCM. I do think it is a fact, a development that needs to be watched very closely, and we are paying close attention to what is going on, with respect to these hedge fund reinsurers.

Thank you.

(Operator Instructions) Randy Binner, FBR.

Good morning. I kind of mostly have an answer, but I guess on LCM -- so it is obviously an all-time high and I guess per the comments at the end there, is it -- I think you have been talking about that kind of plateauing out here, but is that -- I thought it was going to plateau out maybe in the 1.70s.

So where is it -- is it possible that that can continue to go up?

No.

I don't foresee that, Randy. Like I said, we are very protective of our renewal book. And as I said in my prepared comments, that is where we are watching it. Where I think we have reached a peak.

Okay. And then going back to the capital deployment question that Matt Carletti was asking in just a different way. I mean, I thought -- I think part of the opportunities set kind of as we all -- if you go back 18 months, usually at this part of the cycle, you get a look at books of business and folks getting out.

Yet there is all this capital, right, as evidenced, maybe, by some of these hedge fund reinsurers. So is it -- I mean, are we just not going to get the books this cycle? Have we missed that window and we have to rely upon -- there's obviously some slack in the labor market.

You are seeing that in a lot of this conversation. So any update on what the books out there? Is there flow of opportunities to attach yourselves to in a material way or is that just getting eaten up by all of the alternative capital out there?

We are seeing opportunities with respect to books of business and most of them -- but not all -- most but not all are out there because there's a problem in those books.

Right.

They have been released by underwriters that can no longer absorb that book. There have been a lot of folks that want you to take books, but then they want what is called a roll. They want to roll the book to you. Which means take them all.

Right.

And that's something that is not very exciting. So we haven't seen a lot of quality books. We have seen some and I would characterize them as I have in the past, that things that were affordable weren't worth having and things that were worth having weren't affordable.

Right. Which is probably all a function of just an excess capital level in the environment overall. At least in part, right?

Yes, I think you are probably right about that. But it is interesting, Randy -- even though those are out there, our new book -- new business growth rate is remarkable.

Oh, it is good. I mean, don't get me wrong, it is really good. It is just not -- you just have a significant amount of excess capital. Your leverage -- operating leverage is way below where it could be and so the -- that per the earlier conversation there's no question, right?

Absolutely. There is no question but that our operating leverage has -- while we have increased premium from 2010 about $144 million, the -- we have also earned a lot of money in the meantime. So we had a lot of growth of the equity.

Right.

So that is the challenge and we are well aware of it and I think the Board is going to respond to that and act in an appropriate and prudent fashion.

Right. Understood. And so I guess can we infer from that -- this is going to be my last question -- that you are going to stick to your [knittings] so no -- you are not looking west to big states that still have pricing --

Oh, let's see -- what's out west? (laughter)

Texas.

That particular state you are referring to is probably not on the top of our shopping list. Adding additional class codes within our current area of operation and prudent geographical expansion is an alternative.

High hazard.

High hazard. High hazard.

Yes, sure, high hazard, but any jurisdictions that are good, maybe, particularly right now or potentially?

Well, I don't want to give too much competitive -- Janelle is looking at me and I don't think she is happy. So I'm not going to give any competitive information out. But, yes, there are some places that -- and there are some industries within current states, some particular job classifications, that we avoid and have avoided in the past that currently we are looking at maybe deploying some capital in those areas. Some of them may be energy-related, who knows.

Got you. All right. Thanks a lot.

Bob Farnam, KBW.

Good morning. I think my question is rolling on with Randy's question. I wanted to know are there any particular classes that you are getting success in with your new business? So I am not sure if that is answerable or not, but I am just curious what new business you are writing and where is it?

Our new business growth in the quarter -- not surprising -- came from construction and a large portion roofing and manufacturing.

Okay, good. And the larger accounts that have you have lost -- it sounds like you have lost a couple of larger accounts. What types of classes were those in?

Trucking and some construction, but mostly trucking.

Mostly trucking. Okay. That is it for me. Thanks.

Thank you. I am not showing any further questions in queue. I would like to turn the call back over to Allen Bradley for any further remarks.

Thank you. Well, the second quarter was a very good quarter for AMERISAFE, where we experienced a number of positives. Growth in gross written premium of 8.4% while maintaining pricing at historically high levels. We had significant prior percent favorable development that resulted in a 66.8% loss -- net loss in LAE ratio.

A respectable 22.5% expense ratio, an increase of 2.9% in our next investment income, which increased our net income to 61 point -- 67.1% over last year, increased our ROE to 11.9%. And even after the payment of an extraordinary dividend and two regular dividends, allowed the Company to increase its book value per share this year 3.6% to $23.26.

AMERISAFE remains very well positioned to provide continued superior returns to our shareholders while maintaining our underwriting margins and profitability during a period of rational premium growth.

Thanks for joining us today.

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