Amerisafe Inc (AMSF) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AMERISAFE Incorporated Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded. I would now like to turn the conference over to our host of today's call, Mr. Vincent Gagliano. You may begin.

Good morning. Welcome to the AMERISAFE third quarter 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 Executive Chairman.

Thank you, Vincent. Good morning, ladies and gentlemen and thank you for joining AMERISAFE's quarterly earnings call. I'm going to make a few remarks about the workers' compensation market and then turn the call over to our President and Chief Executive Officer, Janelle Frost and our Chief Financial Officer, Neal Fuller for the particulars on the Company's performance during the quarter.

The workers' compensation market is gradually transitioning to a more competitive state. This transition is resulting in flat to slightly downward pricing. Most carriers are not materially utilizing discretionary discounting in order to compete with others. Declining loss costs are reducing net rates. However, the improving national economy has increased total exposures noticeably.

Further, unlike the last few years, employers seem to be comfortable with projecting future growth in payrolls. The significant drop in oil and gas exploration exposures has been offset by growth in other economic sectors.

In the past, I've expressed some concerns relative to new capacity in the reinsurance sector that had the potential of fueling aggressive competition. Current reports from that sector indicate that those programs by non-traditional re-insurers have been significantly limited or withdrawn as respects long-tail casualty lines of business. All things considered, it's a good time to be in the workers' comp business.

With that, I'll turn it over to our President and Chief Executive Officer, Janelle Frost.

Thank you, Allen, and good morning everyone. We grew premium for policies written in the quarter by 2.4%. Exposure growth led to renewal premium increasing 8.5% in the quarter. Our retention was up on both the policy count and premium basis. Policy retention was 92.5%, up from 91.4% and premium retention was 85.4%, up from 75.8%.

Audit and related premium adjustments had no impact on gross premiums written in the quarter. This dented the quarter-over-quarter comparisons, because these adjustments added $4.6 million to top line in the third quarter of 2014. Therefore, gross premiums written for the quarter were down 3.1% or $2.9 million. However, pricing remained strong. Our Effective Loss Cost Multiplier or ELCM for voluntary premium in the quarter was 1.77 compared to 1.80 in the third quarter of 2014.

As I stated last quarter, this decline in pricing was deliberate, appropriate and reflective of the market. Relative to losses, we remained at a 69.8% loss in LAE ratio for the current accident year. We are only nine months into the accident year and we've seen no trends that differ from our long-term expectations. The real story for our quarter resides with our prior accident year losses. We experienced significant favorable case development in the quarter, which led to a reduction in losses incurred of $14.2 million. The favorable development primarily stemmed from accident years 2009, 2010, 2012 and 2013.

We attribute the favorable case development to our incentive claims management focused on closing claims and returning the injured to work at maximum medical improvement. Our open claim count at the end of September 2015 was 2.3% lower than it was at the end of third quarter 2014. With the favorable development, our loss in LAE ratio for the quarter was 54.1% compared to 64.4% last third quarter.

The best summary of these operating metrics is a combined ratio of 79.1% and a pre-tax underwriting profit of $18.9 million. We are pleased that our commitment to underwriting discipline has proven beneficial to our stakeholders.

I'll now turn the call over to Neal to discuss the financial results.

Thank you, Janelle, and good morning everyone. For the third quarter of 2015, AMERISAFE reported net income of $17.9 million or $0.94 per diluted share compared with $13.5 million or $0.71 per diluted share in last year's third quarter, an increase of 33.1%. Operating net income in the quarter was also $17.9 million and $0.94 per share, a 30.6% increase from the third quarter of 2014.

Revenues in the quarter declined 4.8% to $97.5 million compared with the third quarter of 2014. Net premiums earned decreased 5.7% to [$90.5 million] as well. Both of these figures, revenues and net premiums earned were impacted by two items. First, we had additional ceded premiums of $1.8 million above our expectations in the quarter due to increased ceded losses on our 2014 reinsurance treaty. Second, we experienced lower premium audit and other adjustments compared with the year ago period by $4.6 million, as Janelle mentioned in her remarks.

Net investment income was $6.9 million in the third quarter of 2015 increasing 6.6% from last year. This increase was driven by higher average investible assets and cash equivalents, which were up 5.5% compared to last year. The tax equivalent yields on our investment portfolio held steady at 3.5% in the third quarter of 2015 compared with the third quarter of 2014. There were no impairments or significant realized gains or losses during the quarter.

The investment portfolio was high-quality carrying an average AA- rating with an average duration of 3.2 years and with 52% in municipal securities, 31% in corporate bonds and the remainder in cash and other investments. Approximately 57% of our investment portfolio was comprised of held-to-maturity securities, which are in an overall unrealized gain position of $19.6 million. These gains are not reflected in our book value as the bonds are carried at amortized costs.

With regard to operating expenses, our total underwriting and other expenses increased 5.9% to $22.3 million in the quarter compared with $21.0 million in the third quarter of 2014. The increase was primarily due to $1.1 million in lower contingent profit commission, which acts as an offset to expenses and an increase in insurance-related assessments compared with last year. By category, the 2015 third quarter expenses included $6.3 million of salaries and benefits, $6.7 million of commissions, and $9.3 million of underwriting and other costs.

Our expense ratio for the quarter was 24.6% compared with 21.9% in the same period in 2014. Besides the lower profit sharing commission mentioned previously, the expense ratio was also impacted by the decrease in earned premium from the additional ceded premium on our reinsurance treaty and the lower audit premium during the quarter, which combined, had an impact of 1.6 points on the expense ratio.

Our tax rate increased to 30.7% in the quarter, up from 30.3% a year ago. The increase reflects the larger amount of taxable income compared with tax exempts during the quarter as a result of the increase in the favorable prior year development. Return on equity for the third quarter of 2015 was 14.9% compared to 12.2% for the third quarter of 2014. Operating ROE for the quarter was 15%.

And now to capital management, during the third quarter, the Company paid its regular quarterly cash dividend of $0.15 per share. And on October 27, the Board of Directors declared a quarterly cash dividend of $0.15 per share payable on December 28 to shareholders of record as of December 14, 2015. In addition to the quarterly cash dividend, the Board declared an extraordinary dividend of $3 per share, reflecting the Board and management's continued goal of returning excess capital to shareholders of AMERISAFE.

Just a couple of other noteworthy items, book value per share at September 30, 2015 was $25.69, an increase of 7.7% from September 30, 2014 and it is up 8.6% year-to-date. At the end of the quarter, our statutory surplus was $375.5 million. And because, not often does the combined ratio start with the number 7 in this industry of triple digit combined ratios, let me say again, our combined ratio for the quarter was 79.1% compared with 86.4% last year.

That concludes my remarks and now I'll turn it back over to Janelle.

Thank you, Neal. We are approaching our 10th anniversary as a publicly traded Company on November 17, 2015. AMERISAFE went public at $9 a share with a pro forma book value of $7.24. By the end of the third quarter of 2015, our reported book value grew to $25.69. This after redeeming preferred shares, retiring debt, repurchasing shares and paying out dividend of $2.75 to-date.

We have told the AMERISAFE story many times and is with great pride that we've been able to prosper while sticking to our knitting. I believe our policyholders are provided a valued niche product with quality service. At the same time, we've been good stewards for our shareholders. We believe our capital is adequate and the Company is well positioned for the upcoming market. Therefore, returning capital to the shareholders reaffirms that belief.

We'll now open the call up for questions.

(Operator Instructions) Matt Carletti, JMP Securities.

Just had a few questions, I think the first one just relating to the favorable development in the quarter, I saw -- Janelle you mentioned them and they're in the press release kind of what years it came from. Was any of those years particularly more weighted than others? Was it the older years or are we getting more onto the more recent years?

Thanks Matt. Good question, I can give you the numbers by accident year. Prior to 2010 was $2.2 million. Accident year 2010 was $2.6 million; 2012 was $6.1 million; and 2013 was $3.3 million.

That's very helpful. Thank you. And then I had a couple of questions, more growth related. One was just on the audit premiums, you guys have been predicting for a long time that they would go away and churn off, they did this quarter. Do you see any risk of them going negative or do you think that's just unlikely and that we're more likely going to have potentially some non-existent audit premiums for a few quarters and within a few quarters time, it's kind of -- not a headwind anymore or kind of apples-to-apples?

Sure. Thanks for not naming me, specifically saying I called it two years ago, I appreciate that. I believe audit premium will remain positive. What we [felt] this quarter and what I think we will see continuing into 2016 is that the quarter-over-quarter change probably will be a drag for the Company, while the payrolls will be positive. We had extremely positive payrolls in later 2014 and early 2015 and I think that's going to reflect in 2016. I think our insureds and maybe the Company is doing a better job or being more realistic about what their estimated payrolls are. It's not necessarily less work activity. We're just doing a better job at estimating it on the front end.

Okay, great. And then last question, just wondering if you could provide us an update, obviously new Head of Sales has been onboard with you guys for not a long time now, but a few quarter and if you could update us on kind of some of the initiatives on the sales side and how those are going?

Sure, I'll do my best without giving out competitive information. We're very excited about David Morton joining the Company. Our sales department is energized by that. We are working on developing the relationships that we have and making them more productive. I don't think you're going to see a different approach as far as who we are, what we do. I think we're just going to do a better job of selling that and not just marketing that. I think the AMERISAFE name is known well out there, but maybe changing those relationships where expectations are on both sides of the fence.

Got you, great. Thank you for the answers and congrats on a really nice quarter.

Mark Hughes, SunTrust.

Yes, thank you very much and welcome Neal. Neal, what was that combined ratio again?

Go ahead, Neal, say it.

79.1%.

Okay, alright. The new growth strategies, I heard what you were saying about making those relationships more productive. When do you think that bears a little more fruit?

I don't think that we're going to see that, I would love to say, oh, I'm going to see that at the end of 2015. I don't think that's a realistic expectation. It's going to take some time. We have some internal things. We've got to change the way we do some things internally and how that's portrayed in the market and brings results back to the Company will take time. So it will progress over 2016.

Okay. And then, when we look at the ELCM, what would be your anticipation about how that should trend based on what you are seeing in the market. Will that continue to come down, will it stabilize here a little bit, what do you think?

I think it's going to float a little bit. I mean it may go down -- it could obviously go down a little bit further. I don't see a dramatic drop. It's just a matter of what competition does in the market and we're very -- as you know, we've talked about this many times, we protect the margin. So at what point can we drop that pricing and still remain at our profitable levels that we accept.

Right. The audit premium, was there any energy impact there that -- I know that's a little bit of a headwind for you, could you catch us up the latest in terms of exposure to energy within your mix and then did that influence the audit premium results?

We haven't really seen a dramatic increase or a decrease in the audit premiums related to energy. We saw a decrease in almost all of our classes. We're not doing the quarter-over-quarter comparison. We did have positive audit premiums in our construction field this quarter as well as manufacturing. But even trucking was a negative for the quarter.

Right. And your best guess on that is that it's because the employers have got more realistic and factored in growth --?

I do, I mean I do believe that because we are able to grow -- I mean think about -- I've mentioned that we were able to grow our renewal book and I really do think that's exposure growth because we all know rates have declined. And our policy count has gone up, but it's definitely exposure growth. So I don't think it's less work activity.

Right. And what did you say the exposure growth was on the existing book?

I did not.

Okay. If you were going to say it? So the premium renewal was 85%, does that take into account the exposure changes?

It did, 8.5% growth in the quarter did and take into account exposure growth.

I'm sorry, I was referring to your premium retention of 85.4%, what was--?

I am sorry, yes it did.

Okay. And then you used an 8.5% number, is that?

I did, for renewal premium.

Okay, alright. And then the operating expenses, I take it, the bigger impact in the quarter was the lower ceding commissions from 2014 losses on the reinsurance treaty. Do I have that correct? And if so, what does it mean in terms of go forward. Does that mark to market every quarter and so, 4Q is a fresh bite at the apple and so normally you'd sort of be back to your usual operating expense ratio or is this something that will have a carryover effect?

Yes. We would expect to be back to our regular operating expense ratio. I think the change in the reinsurance contract has been that there has been less profit sharing commission this year as we've rolled quarter through quarter. That difference will change when we get to 2016 and we're comparing against 2015 numbers.

Right and so that will lead to a stable operating ratio or once you comp this effect, then you drop that down a little bit lower?

Yes, we would expect that our operating expense ratio would stabilize as we go throughout 2016. Obviously, I think you know from historical patterns it can be volatile in the fourth quarter.

Right. So more in line with history in 2016 is what you are saying?

Yes.

Okay. And then Janelle, you had expressed confidence that the audit premium would stay positive, is that based on what you're seeing here early 4Q or you feel like it's not going to turn negative, it's going to continue to be positive, just maybe not as positive, but positive?

I do, and that's based on some early indications we get. We look at cash receipts coming in the door versus what we expect and that's kind of a measure for us as how we think audit premium is going to come out in future quarters.

Okay, thank you very much.

(Operator Instructions) Randy Binner, FBR & Co.

Hi, guys. Good morning, this is actually Alex Combs on for Randy. Most of my questions have been asked. I just have one going back to top line, can you add some color on your outlook for growth like outside the normal course of business. I know in the past you have talked about expanding into other geographies or potential M&A, but can you update us on your views here?

Certainly. I have said over the last two quarters that we intend to grow in 2015 and we are going off of that intention that we plan to grow for policies that we wrote in the quarter. Our decrease this quarter was driven by audit premium, which is not something I control as far as what happens in the quarter. So, our intention is still to grow.

Okay, great. And then just in terms of M&A, is that still a possibility or have you kind of ruled that out at this point?

No, we have not ruled it out. We constantly consider things that are happening in the marketplace and we have an appetite; unfortunately it just hasn't played out for us.

Okay, great. That's all I have. Thanks.

And I am showing no further questions at this time. I would now like to turn the conference back to Janelle Frost for closing remarks.

Thank you for joining us today and to everyone who added to the AMERISAFE story for the past 10 years thank you and happy anniversary.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.