Amerisafe Inc (AMSF) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your AMERISAFE Incorporated First Quarter Earnings Call. (Operator Instructions). Please note, today's call is being recorded. I'd like now to introduce your host for today's program, Mr. Michael Grasher, Chief Financial Officer. Sir, please begin.

Thank you, Roland. Good morning, everyone. Welcome to the AMERISAFE first quarter 2015 investor call. If you've 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.

Thanks, Mike. Good morning, ladies and gentlemen. Thank you for joining us for our first quarter 2015 earnings call. I'll make a few remarks about the marketplace and then turn the call over to our CEO, Janelle Frost and our CFO, Mike Grasher for details on the Company's performance during the quarter.

Industry pricing surveys by both the council of independent agents and brokers and market scale during the quarter indicated slight decreases in the pricing of workers' compensation insurance. As is usually the case, the pricing reductions favored large accounts, those over $100,000 while reductions in smaller accounts were very slight. We continue to believe that there will be a drift downwards in pricing over the next few quarters. Considering that prices on an effective LCM basis have been at historical highs, we consider this decline in pricing to be normal and it does not negatively impact our view of the market, which we view as attractive. The improvement in employment levels should increase the total written workers' compensation premium. However, the most recent GDP data does create some concern relative to the strength of the economy.

On the favorable side, currently, claims frequency and severity are trending in the right direction. However, as lower pricing earns out over policy periods, claim frequency may flatten and could increase on an earned premium basis. The potential for an increase in frequency, doubts about the strength of the nation's economy and the continued lower investment returns should cause prudent underwriters to limit pricing concessions to employers. All things considered, the market should remain relatively stable for the near-term. With those comments, I am going to turn the call over to our new CEO, Janelle Frost.

Thank you, Allen and good morning, everyone. We were extremely pleased to start 2015 with an 85% combined ratio. Our continued focus on our core disciplines of underwriting, safety, claims handling and expense management resulted in a successful quarter. As we discussed on our last call, it is our intention to grow in terms of premium. [Our] reported decline in our new business in the fourth quarter and that decline continued in 2015. As a result, topline decreased 4.6% in the quarter. Partially offsetting the new business decline was our renewal premium.

Renewal premium grew 7.9% in the quarter. Policy retention was 91.7% for the first quarter of 2015 compared to 90.9% in the same quarter last year. Pricing on policies written in the quarter was [$1.83] on an effective LCM basis. This compares to [$1.86] in the first quarter of 2014. And finally, audit premium and related adjustments remained positive this quarter at $4.4 million, an increase of $1.1 million from last year's first quarter. This increase reflects growth in payrolls for our insurance.

I continue to feel we're making appropriate price adjustments while maintaining our underwriting integrity. In addition in mid-April, David Morton joined our company as Head of Sales and Marketing following the 2014 retirement of long-time employee Craig Leach.

I make these points to reiterate that our intention to profitably grow has not wavered. Relative to losses, we continue to experience a decrease in claims frequency on an earned premium basis. Our claims reported in calendar year 2015 were down 5.2% to 1,251 claims from 1,320. The encouraging frequency trend coupled with the same pricing led to our loss and loss adjustment expense ratio for the current accident year of 69.8%, down 1.7 percentage points from accident year 2014.

While frequency is currently downward, our loss selection does assume frequency will flatten in the near future. Another positive impact in the quarter was favorable development from prior accident years. Case development once again led to $6.1 million of favorable loss development in the quarter compared to $2.5 million in the first quarter of 2014. This year's favorable development was primarily attributable to accident years 2009, 2011 and 2012. Our loss experience coupled with strong pricing and expenses delivered an end result of 43.4% growth in net income for the quarter. Our commitment is to remain focused on producing and servicing profitable business.

That concludes my prepared remarks. So, now I'll turn the call over to Mike.

Thank you Janelle. For the first quarter of 2015, fully diluted earnings rose 43.4% as AMERISAFE reported net income of $15.1 million or $0.79 per diluted share compared to $10.5 million or $0.56 per diluted share in the first quarter of 2014. Operating earnings, a non-GAAP measure, were also $15.1 million and $0.79 per share in the first quarter, each rising over 40%.

Revenues for the first quarter of 2015 grew to $101.8 million, up 5.8% from $96.2 million one year ago. Net premiums earned increased 6.2% from the year ago quarter to $94.8 million, reflecting net premium written growth over the past year. Our net investment income totaled $6.8 million in the first quarter of 2015, a 1.9% increase from last year's first quarter. The tax equivalent yield on our investment portfolio was 3.5% in the first quarter of 2015, down 30 basis points from the first quarter of 2014.

Including cash and cash equivalents, the Company's portfolio is now valued at roughly $1.2 billion with 59.5% in securities classified as held to maturity, carrying an unrealized gain of $24.6 million. As of March 31, 2015, municipal bonds comprised 51.3% of the investment portfolio. Overall, the investment portfolio continues to carry a AA- rating with an average duration of approximately 2.9 years.

Turning to expenses, our current accident year loss ratio for the quarter was 69.8%, 170 basis points lower than 2014's loss pick of 71.5%. The incurred loss and loss adjustment expenses totaled $60 million for the quarter which included $6.1 million of favorable prior year development. This compares to loss and loss adjustment expenses of $61.3 million in last year's first quarter which included $2.5 million of favorable prior year development.

In total, our net calendar year loss ratio for the first quarter of 2015 was 63.3% compared to 68.7% one year ago.

With regard to operating expenses, total underwriting and other expenses declined 4.6% to $20.4 million from $21.4 million in the first quarter of 2014. The decline in expenses reflects a few specific items for the quarter. In particular, lower premium based assessments out of the State of Pennsylvania which resulted in a $632,000 reduction, a $453,000 adjustment for premium taxes due to lower than anticipated premium tax rates. And finally, the over accrual of 2014 bonus compensation in the amount of $398,000.

Recall that the first quarter of 2014 included a $400,000 under accrual for bonus compensation. So, net-net, compensation expense was favorably impacted by roughly $800,000 in the year-over-year comparison. These benefits were offset in part by no contingent profit commission being recorded in the quarter compared to $900,000 in the first quarter of 2014. This was due to the Company experiencing a large claim in the quarter. By category, the 2015 first quarter expense components include $5.9 million of salaries and benefits, $7 million of commissions and $7.5 million on underwriting and other costs.

Overall, the expense ratio declined 240 basis points to 21.5% from 23.9% in the same quarter a year ago. If you exclude the impact of the one-time items previously discussed, the expense ratio would have been 23.2% in the quarter. In total, our combined ratio was 85% for the first quarter versus 92.7% for the same period in 2014.

You may have noted our tax rate climbed to 28.6% in the quarter from 21.3% a year ago. The increase largely reflects the increase in taxable income relative to tax exempt interest income as that ratio rose in the quarter due to the $6.1 million of favorable development. Cash flows from operations remained strong during the first quarter of 2015 at $32.3 million. Return on average equity for the first quarter of 2015 was 13.3% compared to 10.1% for the first quarter of 2014.

On the capital management front, the Company paid a regular quarterly cash dividend of $0.15 per share on March 28, 2015, a 25% increase from the regular cash dividend of $0.12 per share paid in prior quarters. On April 28, 2015, the Board of Directors declared a quarterly cash dividend of $0.15 per share payable on June 26, 2015 to shareholders of record as of June 12, 2015. Book value per share at March 31, 2015 was $24.32, an increase of 7.9% from March 31, 2014's reported book value of $22.54. And finally, our statutory surplus was $391.7 million at quarter end.

That concludes my prepared remarks on the financials, and I will now turn the discussion back to Janelle for closing comments. Janelle?

Thank you, Mike. This was a remarkable quarter. We will continue our diligence and are looking forward to the remainder of 2015. We'll now open the call to questions.

Thank you. Matt Carletti, JMP Securities.

I have two questions. First one relates to just topline and Janelle, I appreciate the comments. Thank you for the color. Really what it is -- I know that -- as we discussed last quarter, in Q4 and Q1, even prior to David arriving, you guys have taken some efforts to kind of push price a little less where warranted and some other things. How long did those take to become implemented? Are those complete now and therefore maybe, going forward, start to get a little traction before even David really gets a chance to get his hands into things or are those still being formulated and implemented and maybe it takes a little longer?

Great question, Matt. Yes, I wish it was easy as making a decision today and I saw it tomorrow. But it doesn't happen that way. We are currently -- we're constantly making adjustments. I will say it does take time, and without being too forward looking, but we are seeing improvements. If you remember, in the fourth quarter call, I talked about October actually was looking pretty good and then things started slipping mid-November, December. So, we started making -- really digging in, making those changes and we are seeing some improvement. So, yes, as I said on my prepared comments, it is our intention to grow.

Great. And then, my second question relates to just capital management and if we just for argument sake assume that topline is flat this year, makes it kind of easy math in that -- could you give us maybe some insight into how the -- I know it's tough to speak for the Board, but how you guys and potentially the Board are thinking about capital management in regards of, if there is not imminent growth opportunity of any size, should we expect to see that the capital management, which at this point has been [regular, irregular] and some special dividends. Approximate earnings or is there a reason for the Company to build capital at this point in that it might be somewhat lessen and you want to have more capital going forward?

I think the best way for me to answer that remain in the good graces of the Board.

Sorry to put you on the spot.

You've now put us on the spot. The Board has demonstrated an interest in maintaining adequate capital but managing that capital to serve the needs of the Company. We watch our operational leverage closely and quarter like the first quarter exacerbates the lack of leverage in the operations. And so, if you can't grow to manage that or grow more than you're growing premium, then you will have to make adjustments in capital. I think as we've indicated at the last year, we did two extraordinary dividends last year, one in March and then another one announced on the third quarter earnings call. And as I've tried to indicate then, that's more of the later part of the year, third [or] fourth quarter sort of adjustment but I would anticipate that we look at capital every quarter and certainly later in the year, the Board would have a much better look at how much capital we need, what we need. You know we have no debts. So, there's certainly that if we wanted to, but I do believe the Board is very focused on that. They're focused on the regular dividend as well as managing capital via extraordinary dividends.

Great. Thank you very much for the answers and congrats on a very nice start to the year.

Thank you, Matt.

Thanks, Matt.

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

Continuing again on sales and pricing trends, your effective LCM has been up sequentially in the last couple of quarters. It's a little bit below the peak but you're still at very healthy levels in historical terms, but you've been pushing it even higher in a market that's gotten a bit more competitive. Can you talk about your thinking in doing that? I hear what you're saying, it sounds like you say you're seeing improvements in sales trends in the first quarter. How are you going to be striking that balance through the remainder of 2015?

A great question. I think it's safe for me to say you will not find us being aggressive on pricing, Mark. It's just not what we do. We are, as I mentioned on the previous calls, from a renewal perspective, we are really focusing on those tenured accounts that we know the best. From a new perspective, as I think all companies do, we go back through our history and figure out what are the things we've done well on and those are the ones that we are willing to maybe provide more price concession to and then from that same side of the equation, those are also the accounts that we are trying to pursue in terms of submissions for new business. What are those types of businesses, classes of business in states that we know that we do well in and that we can offer pricing concessions. But, I will not say that we're going to be aggressive on price. It's just not who we are.

Maybe aggressive in getting price increases or good pricing that you're LCM has been moving up. Seems pretty striking that your --

Yes. Keep in mind, the underlying loss costs for states are declining. We look at that continually. Allen talked about the CID study that shows how rates are declining. With the January one rate renewals, 29 states rates or loss costs were down and only six were up and one was flat. So, yes, while that ELCM may not be moving down into the high 170s, keep in mind, the underlying loss costs have declined.

Right. Would it be fair to think that Q1 gross written premium could be steady or up?

Q2, you mean?

Yes, I am sorry, Q2.

Well, I only know April. So, I can tell you that we've seen progress in the changes that we've made.

Okay, that's helpful. And then, on the tax rate, assuming you continue to have a comparable or better level of profitability, the tax rate 28%, 29%, should that be sustained through the balance of the year?

I think that's a fair assumption on your part. Our business is lumpy to the extent that we continue to see favorable development. That ratio of the taxable versus tax exempt is going to [have inflow] with that.

Right. And then the expense ratio, I think you said 23% excluding one timers. Did that also in that included no contingent commission. Is that correct?

That's correct.

The normal run rate of contingent commission over time, what has it been as a percentage of the premium?

Yes. So, we had -- last year, we had it, on a quarterly run rate, of about $900,000 and remember that we changed our reinsurance structure, our reinsurance program in 2014. So, I think that's the run rate that you're looking for.

Right. So, assuming no large claims, [900k] might be a useful number?

Correct.

Okay. And then, Janelle, you had said your loss selection assumes that frequency will flatten. Are you talking about earned premium basis?

Yes, I am. I think it's important, since I, at one point in my comments said, frequency is down, which is absolutely true but I didn't want people to think that our loss selection for 2015 was all roses and flowers. We do expect frequency to flatten.

As you know, the industry reports that metric on a pay roll basis as well as a premium basis. And so, I know people can get confused about that. There is a 70-year trend declining on a payroll basis. On the other hand, on a premium basis, the market is somewhat cyclical. So, we measure it on a premium basis and that's how we always reported, because, quite frankly, we don't pay claims with payroll. We pay it with premium and we want to know what the frequency is per million dollars of earned premium and the average severity and that helps us with our projections and selections. So, I think, what Janelle is saying is that in terms of how we're looking forward, we're assuming some flattening in that slope. If that doesn't occur, then that will be better news in terms of results.

You have been willing to sort of name names and talk about the behavior of competitors and maybe not to do it on a name basis, but any comments on what you're seeing in the competitive environment, kind of who is in, who is out, just some observations there?

I usually take the market. So, let me give a shot at that. Looking both at our data as well as national data, the Top 20 writers of workers' compensation insurance in terms of premium volume write 70% of the market, okay. And I would say, with almost no exception, those people are not being very aggressive. Most of the competition comes in the remainder portion, which are smaller companies like ours and smaller and what we see is, on that regard, what reported in the industry largely is smaller companies in regional carriers or single state writers, self-insurance funds and some of those types of carriers that are being more aggressive. Now, that doesn't mean a carrier maybe not on a particular account may not be real aggressive, but as a general rule, it's not the major carriers, and we're not seeing the widespread irrationality that we saw 48 months ago. Now, can that change? Absolutely. One of the things that I found interesting is on the self-insurance funds, which is not a big part of the market but can be troublesome since we write smaller accounts. They are now able to buy reinsurance. In the past, they bought an excess of loss kind of just excess policy, but now they buy reinsurance and some of the new alternative reinsurance markets are pursuing those and that can provide fuel for folks that don't have the capital or otherwise to write the business. So, but I don't see behavior being widespread, overly aggressive.

Thank you. Randy Binner, FBR Capital Market.

This is actually Jason Oetting, on for Randy this morning. My first question kind of goes back to the idea of operating leverage in the form of net premiums [written to] surplus. Obviously, we each have to make our own assumptions on premium growth and potential capital deployment in the form of a special later in the year if that ends up happening but the ratio has been hovering around a one times to just under one lately. Is there a kind of target range that you have or maybe how do you broadly think about operating leverage?

I think, by and large, we love to move that needle on the operating leverage front and we've spoken about that in the past, but I think the, maybe the metric to keep in mind is ROE and to the extent that we can continue to generate the source of ROEs, I think that's the key ingredient for us in terms of whether or not we're losing ground in terms of our capital management. But, by and large, on the operating leverage front, that's, as you said, an assumption that you all need to make in terms of the growth in premium throughout the year.

Okay, fair enough. And then, we appreciate the comments obviously on premium growth and there's some improvements being made there, but if it takes a while to restore growth, does at some point M&A start looking more attractive or maybe even spreading organically into other geographies? I know, in the past, we've asked about California and I assume your stance is the same there but maybe just other areas like perhaps Northeast US exposure? How do you think about growth outside of just the typical realm?

First of all, yes, you're correct about California and our stance has not changed. We are not going into California. We focus on operating leverage, as Mike was just talking about. We would like to expand organically. We continually look at M&A as you mentioned, but there is just nothing out there that we've been able to find a fit for but, yes, we would like to grow organically. If that were to mean expanding geographies, we're not opposed to that but we know and we believe that we can expand in our markets that we're in now that we don't have -- we haven't reached the market shares that we would like to be, particularly in certain classes of business in particular states.

Okay. And my last one is just on the $6.1 million of favorable PYD in the quarter. Can you just give the split between the 2009, 2011, 2012 accident years?

Yes, sure. 2009 was $350,000 rounded. 2011 was $1.1 million and 2012 was $4.7 million.

Okay. So, [it is mostly] 2012 then.

Yes.

So, how do you guys think about 2012 and more recent years shaping up versus kind of initial expectations? Is it reasonable to think there might be more coming out of there?

We have been very fortunate, as I said in my earlier comments, that these changes were led by case development where we had on account, on individual case basis, had I guess you would say over-reserved and we've had some things go our direction and go favorably. We have those things go in the opposite direction as well, but at the same time, I'd be foolish to say, I think we AMERISAFE and the industry learned quite a bit of -- few lessons from accident year 2010. And I know it was very uncomfortable here to have to have that year develop adversely for us. And So, I think that trickle down even to the case level where maybe field case managers and senior field case managers are maybe a little more prudent about their reserves in thinking forward and things that could go wrong. So, we benefited from case development, particularly in accident year 2012.

Let me add industry color on that. The industry itself is seeing some improvement in the claims metrics. The NCCI will report its workers' compensation results two Thursdays from now, on the 14th. And I think what you're going to see is you're going to see a March drop. There has been reports (inaudible) 11% drop in the use of opioids, Schedule II narcotics for claimants. I think you will start to see some shortening of claim durations and the ability to return people to work, which was something that was very lacking during the great recession. I think the reserves of the 2011 and 2012 and 2013 years as Janelle has pointed out were made and estimates were made with a view back towards the great recession. And so, as employment changes and opportunity expands, the ability to get these matters closed improves and they improve not only in being able to get them close but get them closed and returning people to work and taking down those excess reserves.

Thank you. I'm showing no further questions in the queue at this time. I'd like to hand the call over to Ms. Janelle Frost, Chief Executive Officer, for any additional remarks.

Thank you for your questions today. Tomorrow, we will celebrate our 29th anniversary of writing our first policy. I would like to use this public forum to acknowledge our greatest asset. Thank you, AMERISAFE employees. Your hard work and dedication are the foundation of our success. Thank you all for joining us today.

Ladies and gentlemen, thank you very much for your participation. This does conclude the program. You may now disconnect.