Amerisafe Inc (AMSF) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AMERISAFE Incorporated Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Mike Grasher, Chief Financial Officer. Sir, you may begin.

Thank you. Good morning, everyone, and welcome to the AMERISAFE third 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 factor section of our Form10-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 quarterly earnings call. As usual, I'll make a few remarks and then turn the call over to Janelle Frost and Mike Grasher for details on the company's performance.

Despite an increase in competition, the workers' compensation market remains attractive in

terms of pricing. We expect industry pricing to plateau or perhaps drift downwards slightly over the next few quarters. We expect to see modest increases in exposures, but certainly nothing dramatic, all things considered. It's a good time to be in the workers' compensation business.

There are, however, a number of factors, both positive and negative, which could materially affect the direction of the market in the coming years, in the coming quarters.

Positive impacts from the positive factors include the continued improvement in loss frequency coupled with a general muted growth in severity of claims. The modest improving national economy is positively impacting premium growth.

Additionally, a number of weaker and/or impaired carriers have exited the workers' compensation market, resulting in a more prudent underwriting environment among the remaining stronger carriers. The results of this improved environment should be revealed in financial results over the next year or two.

Negative factors that could change the market in an adverse faction include but are not limited to filing loss costs and rates which could work to offset the growth and exposures by an improved economy. New sources of reinsurance may provide capacity to carriers that lack either the expertise to write workers' compensation profitably, or the capital to otherwise compete.

A change in demand for the product arising from the shifting composition of the US workforce in favor of more service-related employment. That sort of employment generates less premium per unit of exposure and would therefore put downward pressure on market expansion.

The potential proliferation of opt out systems replacing traditional workers' compensation systems is a threat to the market as a whole, as is the elimination or restriction of exclusive remedy status of workers' compensation as we've seen in some recent court decisions.

And finally, the impact of the ACA on the general marketplace for healthcare could be disruptive to both the cost and availability of healthcare to injured workers. The ultimate outcome of these and other factors is unknown at this time. As the management of AMERISAFE, it is our responsibility to manage these risks and other risks similar to it to produce superior returns for our shareholders.

Speaking of shareholders, our Board of Directors has demonstrated again its continued focus on shareholder returns and the effective management of the company's capital.

As you no doubt noted in our earnings release, our Board declared an extraordinary dividend of $1 per share payable in December. This extraordinary dividend comes as our Board has reassessed the previous extraordinary dividend that was declared earlier this year. While our Board reviews capital management quarterly, any necessary adjustments to that capital will probably occur on an annual basis in the future. Finally, the Board also declared our regular quarterly dividend of $0.12 per share also payable in December.

With that, I'll turn the call over to Janelle Frost, our President and Chief Operating Officer.

Thank you, Allen; and good morning, everyone. We were pleased with the operating results this third quarter. Our combined ratio was 86.4%, down 6.1 percentage points from the third quarter of last year. Our top line grew $7.8 million or 9.1% during the quarter. Policies written in the quarter accounted for $3.6 million of the growth; of which new business grew 1.8%. Renewal business was driven by policy retention of 91.3% compared to 91.1% in the third quarter of 2013. Premium retention was 84.4% compared to 82.9% in the third quarter of last year.

As anticipated our retention slipped in policies with over $100,000 in premium. Retention is one measure we key on regarding pricing considerations. And as we've stated over the last few quarters, we felt we had reached a peak in pricing, particularly on tenured renewal accounts. Therefore, it is no surprise that our average effective loss cost multiplier or ELCM for voluntary premium in the quarter was 1.80 compared to 1.82 in the third quarter last year. This was a slight and an intentional decrease designed to retain the business we know best.

In addition, audit premium and related adjustments remain positive this quarter at $4.6 million, an increase of $4 million from the third quarter of last year. This was a reflection of actual payrolls on expiring policies being higher than anticipated.

Relative to losses, our current accident year loss in LAE ratio remained at 71.5% this quarter. We continue to see favorable frequency trends. Our claims reported in the calendar year 2014 were up 0.4% from 4,228 claims to 4,387 claims. The quarter was positively impacted by favorable development from prior accident years. Encouraging trends and case developments led to $6.8 million of favorable loss development in the quarter compared to $2.7 million of favorable development in the third quarter of 2013. This quarter's development was primarily attributable to case development in accident years 2005, 2010 and 2012.

Finally, our expense ratio also decreased to 21.9% this quarter compared to 22.6% in last year's third quarter. Mike will provide the details on expenses. However, this quarter's decrease in the ratio was driven by growth in earned premiums exceeding the growth in fixed operating costs.

That concludes my prepared remarks. I'll now turn to Mike for discussion on the financials.

Thank you, Janelle. For the third quarter of 2014, AMERISAFE reported net income of $13.5 million or $0.71 per diluted share compared to $9.7 million or $0.52 per diluted share in the third quarter of 2013.

Operating net income reached $13.6 million or $0.72 per share in the third quarter of 2014, a 33.3% increase from the year ago period. Revenues in the third quarter grew 16.3% to $102.3 million as compared to the third quarter of 2013. Net premiums earned increased 17.6% from the year ago quarter benefiting from favorable growth trends and our 2014 reinsurance treaty.

As Janelle mentioned, gross premiums written rose 9.1% from the year ago quarter while net premiums written climbed 10.4%. Difference in the increase between gross and net reflects the impact of our 2014 reinsurance treaty as we retain an additional $1 million on the first layer and thus cede less premium to the reinsurers.

Net investment income totaled $6.5 million in the third quarter of 2014, falling 6.5% from last year's third quarter. The tax equivalent yield on our investment portfolio dropped 40 basis points to 3.5% in the third quarter of 2014 from the third quarter of 2013. The portfolio continues to carry a AA minus rating with an average duration of approximately 3.1 years and remains quite liquid with approximately 30% of the portfolio running off over the next 15 months.

At the same time, nearly 55% of our investment portfolio, including cash and short-term investments, is comprised of held-to maturity securities, which now hold unrealized gain positions of approximately $26.7 million.

Turning to expenses, our current accident year loss ratio for the quarter remained 71.5% compared to 73.2% a year-ago. Our incurred loss and loss adjustment expenses totaled $61.8 million for the quarter which included $6.8 million of favorable prior year development, which as Janelle mentioned was attributable to accident years 2012, 2010 and 2005. This compares to loss and loss adjustment expenses of $57 million in last year's third quarter, which included $2.7 million of favorable prior year development.

In total our net calendar year loss ratio for the third quarter of 2014 was 64.4%, compared to 69.9% one year ago.

With regard to operating expenses, total underwriting and other expenses increased 13.8% to $21 million compared to $18.5 million in the third quarter of 2013. Even though we experienced an increase in terms of dollars, the expense ratio itself actually declined 70 basis points to 21.9%. The decline in the expense ratio reflects the impact of continued growth on our top line as well as our diligence on controllable operating expenses. All this despite lower accruals for ceding commission and contingent profit commissions.

Controllable expenses rose by approximately $900,000 driven by long-term compensation, while our ceding commission and contingent profit -- contingent accruals dropped by approximately $1.3 million, both relative to third quarter 2013 results.

By category, the 2014 third quarter expense components include $6.2 million of salaries and benefits, $7 million of commissions and $7.8 million of underwriting and other costs. In total, our combined ratio was 86.4% for the third quarter versus 92.5% for the same period in 2013.

On the capital management front, during the third quarter, the company paid its regular quarterly cash dividend of $0.12 per share. And on October 28th, the Board of Directors declared a quarterly cash dividend of $0.12 per share payable on December 26th to shareholders of record as of December 12, 2014.

In addition to the quarterly cash dividend, the Board also declared an extraordinary dividend of $1 per share reflecting the Board and management's proactive approach to returning excess capital to stakeholders, as well as the favorable outlook for AMERISAFE. Combined, these dividend payments will total $21.1 million. And for the year, it will sum to $37.1 million of capital being returned to shareholders.

Finally, a few other items. Return on average equity for the third quarter of 2014 was 12.2% compared to 9.8% for the third quarter of 2013. Year-to-date, our return on average equity is now 11.3%.

Book value per share at September 30, 2014 was $23.85, an increase of 10% from September 30, 2013, and is up 6.4% year-to-date. Cash flows from operations remain strong, up $4.2 million to $104 million for the nine-month period ended September 30, 2014. And lastly, our statutory surplus was $389.4 million at quarter end.

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

Thanks, Mike. Well, I think Janelle and Mike explained the quarter very well, so why don't we open it up for questions.

(Operator Instructions) Matt Carletti, JMP Securities.

Hey, good morning.

Good morning, Matt.

Good morning.

Few questions. First one is, Allen, we've just gone through nine months and the top line growth level has been pretty stable in the 8% plus or minus range. Could you update us on this kind of, I know you've talked in the past quarters about a few, maybe, upcoming initiatives, a lot of it in the energy space and just kind of your outlook for where you see those growth opportunities and if this sort of level we've seen is not like for projections of any sort, let's just say kind of a comfortable level?

Yeah. Well, it is kind of hard to predict what things, how it will work out in the future, but let me give you maybe some insight into things that largely Janelle has done with regard to our business.

As she pointed out at her comments, we reviewed our pricing on our renewal business to make sure we were able to keep that business which we knew the best.

And we compromised some on pricing there. Certainly it plateaued and we saw benefits that came to us from doing that. So feel better about that. We also have initiatives that are targeted in the -- and we've seen growth in the construction and the trucking side of our business, the oil and gas business and the some of the new construction that is targeting the shale gas is another focus where we're spending some time and effort.

We see competition and from time-to-time it can be pretty sharp, but generally speaking it is not. And generally speaking, we see the underwriters acting very responsibly. So, we want to focus on those, we've identified targets in industries and actual industry groups in every one of the states in which we sell policies. And we are putting incentives in place for submissions that result in policies being submitted to us in those areas which we want to grow the most.

Okay. That's very helpful. And then shifting to capital management, I think everybody is quite happy to see the special dividend, you bring it to $1.50 this year. Tying together kind of your starting capital position which is less than where you'd like to be in terms of operating leverage and kind of your comments around growth, is it without having you predict the Board's actions but just am I thinking about it right, that as we move forward and think about -- if the Sstreet is anywhere close to or even take this current year's run rate in terms of an earnings level, at least for the foreseeable future and if the stock kind of stays in the valuation range that it is, that we could see some growth in that special dividend in the sense that you're still growing capital at this point, $1.50 is a great start but you're going to earn something well in excess to that and arguably you ditto next year and the year after. Is it your view that there is upside to that number, granted it will probably be an annual exercise?

Well, I'll first of all make it clear that we've done two this year. One was the initial extraordinary that this company is -- first one we've ever done.

Yep.

And so naturally the approach of the Board of Directors was to be cautious on that. And then they reassess that position later in the year. So I think we want to get clear in everyone's mind not to think about this as a twice a year function but more of a once a year function.

Right.

But if you move it to the third quarter, it's going to have more positive impact in terms of return on equity as you look out to the next years. I would tell you this, without speaking for the Board or getting above my raisin on this, they look at capital very closely every quarter and our Board is very familiar with operational leverage and the impact it has on ROE, and also a lot of other things that we don't talk about on these calls with respect to where our reserves sit and what opportunities we see for growth or what opportunities we see for potential acquisitions. So I think all of that mixes together.

I think that the key take away from the addition to the extraordinary dividend that we paid earlier this year is that the Board is very well aware of it and they're going to take steps that make it prudent in appropriate returns of capital with a view to maintaining that A rating, maximizing in a prudent way our operating leverage and making sure that this company is extremely solvent and well positioned to take advantage of growth.

Great.

One thing I could add to Allen is, Matt, don't forget the business we're in. It's a very volatile business from the standpoint of losses. One never knows when they discover the slip and falls out there that maybe are occurring. Gravity is always present.

Very true. And then one housekeeping item and I'll get out of the way. I appreciate your comments on kind of pricing plateauing, but just in terms -- I'm sorry if I missed it, just the LCM in the quarter, just for modeling purposes, do you have that?

Yeah. The quarter was 1.80 for the third quarter this year versus 1.82 third quarter last year.

Great. Thanks very much, and congrats on the quarter.

Okay. And by the way, Matt, just for your -- year-to-date, the LCM is 1.84.

Wonderful. Thank you.

All right. Thank you.

Thank you. Randy Binner, FBR.

Hi. This is actually Jason Oetting for Randy today. How are you?

Good morning, Jason.

We're doing well. Good morning.

Well, thanks, Jason.

Good. My first question is actually on the tax rate. So it's a little bit elevated this quarter. Aside from better underwriting results, I was just wondering if there's anything special or something we should know that's going on in that number?

No, you captured it, just the better underwriting results are driving that -- the favorable development that occurred in the quarter, as well as throughout the year.

Okay. Fair enough. And then on net investment income, it was a touch lighter than I think we would have expected. I was just wondering is there, maybe, a slight allocation shift in the portfolio or maybe is it just lower yields?

It's primarily lower yield. We have maintained sort of that AA minus rating. So there's been really no shift in terms of quality. When you look at security types, I mean, the most recent quarter, I'd tell you that we're probably more -- a few more corporates purchase duration remain the same. Basically right at the three-year mark, the rate, reinvestment rate is about 1.6%. So given where the portfolio is running off versus what we're reinvesting at, that should be, I guess, sort of your run rate as you think about it going forward.

Okay. And I think if I look back, historically, munis have kind of come down, are you still shifting more to corporates and/or --

That's been the most recent trend. Again it's sort of taking a picture of what's going on in the market on a day-to-day basis and finding those opportunities whether it be munis or corporates.

Okay. And a last one, if I may. Earlier you talked about growth in oil and gas and a few of the other areas, when you think about your overall premium distribution, do you -- how do you visualize your ideal pie, if you will? Do you want to increase certain areas more than others or maybe kind of pullback in certain industries?

Well, first of all, let me give you my smart alec answer, we want to grow where we're making more money.

Always.

But what that -- and while that is a little bit of smart alec answer, it is also the basis of our targeted growth. We take multiple years of data, segregate them on a state-by-state basis by the SIC codes and determine what factors make us , more attractive for us to grow and others -- as opposed to others. We -- oil and gas growth actually, Jason, affects several SIC codes. Construction, transportation, manufacturing, all of those can grow out of an energy expansion. And we're seeing a lot of that being actually dictated by what's going on in the economy now with the shale gas and a lot of those things are driving parts of that. I would think of us or I think of us as probably a 40% to 45% construction business somewhere in the low-20s% in the trucking. Perhaps a bit more in the oil and gas now. A few years ago agriculture had grown to be a larger part, that has backed off a little bit and oil and gas has come up. But really what we're looking for are those things in those locations that have historically provided us over the last 6 to 10 years a superior return. And so that's where we'd like to see at growth. But a general mix, 40% to 45% on construction, 20% to 23%, 24% on transportation, and then the other are shifting around where the opportunity exists.

Okay. Those responses are helpful. Thank you.

Thank you.

Thank you. (Operator Instructions) Mark Hughes, SunTrust.

Mark?

The LCM in the quarter, the 1.8 down sequentially in a what had been increasing and stable climate. Could you talk about your strategy there? I know you had mentioned that you wanted to make sure that you're getting certain accounts renewed, was that kind of a one quarter phenomenon as you got past some of these renewals or is this something we should expect to persist?Iis this the new normal in terms of LCM?

Good question, Mark. The drop in our LCM for the quarter was in the renewal business alone, the new business did not drop and I don't -- at this point we don't see that and we don't anticipate that dropping. Is that a continual drop? It depends on what's going on in the market. I think Allen alluded to in his remarks that we have seen some rate decreases from the state. I think we're at 3 to 1 decreases versus increases at this point for the year. And so, we are very cognizant of that fact. But at the same time on those tenured renewal accounts, the accounts we know best, the accounts that we know are profitable, we are very attentive to the cumulative net rate changes they've experienced over their tenure with AMERISAFE. So that's what's changing in the mix for us.

That phenomenon will still flow through subsequent quarters, I assume --

Yes, I think so. I believe so. But keeping in mind, we are keeping our eye on the underlying rates by the states.

Yes, and let me just amplify that a little bit, if I might. The loss cost, as I commented, the loss cost, as Janelle commented, the loss cost of the rates, let's exclude rates because that's all in, but the loss costs in most states are falling. There's about three loss cost reductions for every one loss cost increase across the country.

Even if the LCM were to stay the same, since it's an index multiplied against the loss cost the premium itself would trend down. So we are trying to make sure, but that clients look at it in terms of what they pay, a net rate. So we're trying to adjust that as we go along and not just be cemented into a number on the loss cost itself.

And when you see these rate reductions in states versus rate increases, that's the aggregate across 600 or 700 class codes. How an individual class code is impacted Is maybe dramatically different from the overall aggregate. So it's very tailored to the account and designed on our renewal business to keep those accounts that have performed well for a long period of time that we know best. And for new business, we're not nearly as aggressive with respect to that.

And what did you say regarding frequency in severity that you've seen lately?

Well, my initial comments where about the industry as a whole. But the industry as a whole and AMERISAFE are both experiencing a decline in frequency, which continues on and whether it's measured on a payroll basis or a premium basis, both have indicated continuous declines across the country for the industry and certainly for us.

In addition to that, we've seen, gosh I hate to get too excited about this, because every time you just say some positive then something negative happens. But you've seen -- we've seen sort of a muted growth in the severity of claims. One of the things that the NCCI has noted has been a noticeable drop off in the use of Schedule II opioids. And the Schedule II narcotics are a big driver of cost and not just the drug cost itself, but the impact it has on the return of the injured worker back to the workforce. So we're taking that as a positive.

Back to my other comments, our concern about the ACA is that since workers' comp is the last bastion of fee-for-service business in the healthcare industry and a lot of other folks, group health and otherwise have more leverage with the providers, we may find ourselves with delays in receiving treatment, which could be very adverse to us.

So the muted growth in severity, is that an ongoing deceleration? Was it more muted in your recent experience, Q3 compared to what it was earlier?

I'm looking back over the last two years for the industry and the claims get bigger every year, okay. So I'm just saying it didn't grow as great a rate.

Right.

Than it had been in the past.

Right. Okay. And then your -- your point about competition was that the underwriters were being more prudent? Do you see moves amongst any of the bigger players that are notable? You've from time-to-time in the past have been open to naming names, I'm curious whether if you've got anything to say this time around?

Yeah. Well, I will tell you this. I guess, I should be consistent to name names when they do good and they do bad. Right now, a large writers that we see across the country of workers' comp. Names that you recognize as someone that follows public companies. I wouldn't say anyone was acting irrationally. Now that doesn't mean one of our salespeople or one underwriter might talk about a particular account, it was one way or another. But consistently there's been a lot of responsibility that we've seen in the marketplace. Now, smaller players, individual players in states, some people that have extremelyrapid growth characteristics are certainly more aggressive in their pricing, although most of those are not spending most of their time in our part of the business.Iin the high hazard business, that's not a place to get real aggressive very quickly, unless you kind of want you express lane to liquidation or being placed into run off or whatever.

Right. And then what did you say -- I see that the audits are up and you had an easier year-over-year comparison, and what was your commentary regarding payroll, trends that you saw in the quarter?

Yeah, we continue to see positive audit trends and we internally, Janelle called it wrong six quarters ago, so I'll continue to be wrong. And it's in our primary industries; construction, trucking, oil and gas, we've seen positive payroll growth. So we're interpreting into that, that our insurers are working more than they anticipated. We think it's longer workweeks, which we like, rather than new workers, but we've seen it across the board, the only declines I've really seen of note would probably be in manufacturing and it's a very small part of our business. We have seen it there and in the services industry. The audit premium growth has been pretty much across the board.

Thank you very much.

By the way, Mark, we've decided before the call that Janelle had to answer that question.

So let me saying, I was wrong again and again and again.

Right.

Thank you. I'd now like to turn the call back over to Allen Bradley for closing remarks.

Thank you. And thank you, ladies and gentlemen, for joining us today. The third quarter was a very solid quarter for AMERISAFE and the company remains well positioned to provide continued underwriting margins, profitability and superior returns to our shareholders. Thank you very much.

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