Amerisafe Inc (AMSF) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Amerisafe, Inc. fourth quarter earnings conference call.

(Operator instruction)

And now I'd turn the conference over to Vince Gagliano, Chief Risk Officer. Please go ahead, sir.

Good morning. Welcome to the Amerisafe 2015 fourth quarter and year-end 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 statements.

I will now turn the call over to Allen Bradley, Amerisafe's Executive Chairman.

Thanks, Vince. Good morning, ladies and gentlemen. Thank you for joining Amerisafe's fourth quarter 2015 earnings call. I'll 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 National Council on Compensation Insurance has published their 2015 preliminary projections for the financial performance of the workers' compensation market. With respect to net premium written, the NCCI projects a 5.7% increase in 2015 over 2014. If realized, this projected premium will represent a new record level of workers' compensation net premiums written. The NCCI's estimate, by the way, is based upon private carriers' reports, which means the voluntary market excluding certain state funds and the residual market [builds]. With respect to the underwriting results, the NCCI's preliminary estimate of 96% combined ratio marks the first two consecutive years of an underwriting gain in more than 50 years for this line of business. The workers' compensation line has only reported two other sub-100% combined ratios since 1990. Neither of those years has been back to back.

I believe the workers' compensation market continues to gradually transition from a [firmer] market to a much more competitive market. This transition is flat and is resulting in flat to slightly downward pricing. According to the most recent CIAB survey, more than 78% of agents and brokers nationally that were surveyed indicated that pricing on renewal accounts was without change or down less than 10% with most rate reductions being in the small single-digit range. It is apparent that carriers are cautiously using their discounting, their discretionary discounting tools in order to complete. All things considered, it's a pretty good time to be in the workers' compensation business.

With that, I'll turn it over to our CEO, Janelle Frost.

Thank you, Allen, and good morning, everyone. We are quite pleased with our financial results for the year. Both our combined ratio of 79.8% and return on average equity of 15.6% are the result of our focus on a niche market, combined with our expertise, experience and dedication of our employees. So let's talk about the operations which produced these results.

I've stated throughout the year that it was our intention to grow in 2016. However, the quarter and the year topline was down 1.9% from the respective prior-year periods. Premiums on voluntary policies written during the quarter decreased $0.5 million. New business was relatively flat and renewal business was down slightly, $0.4 million. These flat results were a reflection of our pricing and the softening market.

Our ELCM for the quarter was 1.76, down from 1.81 last fourth quarter. We did, however, grow new business policy count in the quarter. Our renewal business -- for our renewal business, our policy count retention for the quarter was down to 91.9% from 92.6% in the fourth quarter of 2014 and premium retention was 88.9%.

Primarily, the decrease in topline was driven by reduced audit premium and related adjustments. In total, payroll audits and related premium adjustments were $3.3 million in the quarter, a decrease of $1.2 million from the prior year. Payroll audits have remained positive, but as we've expected, are less robust than prior period. We expect this trend to continue in 2016 barring changes in the economy.

Relative to losses, we maintained our current accident year loss ratio at 69.8% this quarter. Frequency trends were favorable for 2015 and sincerity was within our expectation. The quarter was positively impacted by favorable development from prior accident years. As has been the pattern in 2015, case development led to $18 million of favorable loss development in the quarter, compared to $10 million of favorable development in the fourth quarter of 2014.

We write a high hazard insurance, which is low-frequency high-severity book of business. Based on our nearly 30 years of experience, we know how lumpy claims can be and that we historically have consistent loss patterns at 30 to 36 months after the inception of an accident year. The favorable development this quarter was largely attributable to accident years 2013, 2012, and 2008 and prior.

That concludes my prepared remarks. I'll now turn the discussion over to Neal.

Thank you, Janelle. For the fourth quarter of 2015, Amerisafe reported net income of $23.1 million or $1.21 per diluted share, compared with $16.9 million or $0.89 per diluted share in last year's fourth quarter, an increase of 36.8%. Operating net income in the quarter was $23.1 million or $1.20 per share, a 39.5% increase from the fourth quarter of 2014. For the full year 2015, net income was $70.5 million or $3.69 per share, an increase of 31.3% over 2014. Operating net income for the full year 2015 was $72.1 million, an increase of 35.5%.

Revenues in the quarter declined 3% to $101.8 million compared with the fourth quarter of 2014. Net premiums earned decreased 2.1% to $95 million when compared to last year's fourth quarter. For the full year, net premiums earned were unchanged at just over $375 million in 2015 and almost identical to the amount in 2014. Net investment income was $7.3 million in the fourth quarter of 2015, increasing 1.3% from last year. Net investment income for the full year totaled $27.9 million, an increase of 2.5%.

The tax equivalent yield on our investment portfolio held steady at 3.5% in the fourth quarter. There were no impairments or significant realized gains or losses during the quarter. The investment portfolio is high quality, carrying an average AA- rating with duration of 2.9 and with 52% in municipal securities, 33% in corporate bonds and the remainder in cash and other investments. Approximately 58% of our investment portfolio is comprised of held-to-maturity securities, which are in an overall unrealized gain position of $17.1 million at December 31, 2015. These gains are not reflected on our book value as the bonds are carried at amortized cost.

With regard to operating expenses, our total underwriting and other expenses decreased 10% to $19.4 million in the quarter, compared with $21.6 million in the fourth quarter of 2014. The decrease was primarily due to an adjustment of $2.8 million in last year's fourth quarter to the Company's contingent profit commission on reinsurance, which acts as an offset to expenses. Otherwise, expenses for the fourth quarter were in line with last year's fourth quarter. By category, the 2015 fourth quarter expenses included $6.4 million of salaries and benefits, $6.9 million of commissions, and $6.1 million of underwriting and other costs. Our expense ratio for the quarter was 20.4%, compared with 22.2% in 2014.

For the full year 2015, operating expenses decreased $850,000 or 1%, and the underwriting expense ratio was 22.4% compared with 22.6% in 2014.

Our tax rate in the quarter increased to 31.7%, up from 29.5% a year ago. The increase reflects the larger amount of taxable income compared with tax exempt income during the quarter as a result of the increased favorable prior year development. For the full year, the effective tax rate was 30.2%, 3 points higher than the 27.2% in 2014, largely due to greater taxable income from the favorable reserve development the Company experienced during the year.

Return on equity for the fourth quarter of 2015 was 19.5%, compared to 15.1% for the fourth quarter of 2014. Operating ROE for the quarter was 19.7%. For the full year, ROE was 15.6% compared with 12.4% last year. And our operating ROE for the full year was 16.1%, up 3.8 points from 2014.

And now to capital management; during the fourth quarter, the Company paid its regular quarterly cash dividend of $0.15 per share, as well as an extraordinary dividend of $3 per share. In yesterday's earnings release, we announced that the Board had declared a quarterly cash dividend of $0.18 per share, payable on March 28, 2016 to shareholders of record as of March 14, 2016. This dividend represents a 20% increase in the regular quarterly dividend.

Just a couple of other noteworthy items. Book value per share at December 31, 2015 was $23.73, flat with last year's $23.65 per share despite paying out $3.60 per share in dividends to shareholders during the year. Our statutory surplus was $371.4 million at year-end, compared with $377.7 million last year at this time.

We expect to file our Form 10-K with the SEC, including our loss reserve triangles, this Friday after the market close.

That concludes my prepared remarks, and I'll now turn the discussion back to Janelle.

Thank you, Neal. Before we open the call for questions, I would like to reiterate our commitment to underwriting discipline. Insurance is a cyclical business, and managing our Company through those cycles remains priority-one for the management team.

We'll now open the call for questions.

(Operator instructions) Matt Carletti, JMP Securities.

Just had a couple of questions. I guess, first one probably for Allen on his opening comments. I'm just curious, Allen, your thoughts on -- clearly, it's a rare event, the amount of profitability in the industry back to back, and just curious your thoughts on what makes this cycle different than the past. I know, you've mentioned interest rates in the past and that underwriting is really the only way to make money. And if that is the biggest driver, how do you feel today with what interest rates have done over the past several months -- we're headed back toward pretty low lows -- and what that spells for sustainability of profitability going forward over the next [two] years? Does this cycle look a bit different than prior cycles?

I do think this cycle is different from prior cycles because at no time in the last 30 years have we had this -- when we've come out of a former cycle, have we had the returns, the investment yields being so very low. I think that's -- compare the pricing cycle surveys over the (inaudible) cycles, it is clear that -- for example, let's just take (inaudible) effective LCM. I think the effective LCM for the year was 179, which is only marginally lower than it was last year. In normal circumstances, you would see the pricing erode much more quickly. And I think the lack of investment returns has gotten underwriters' attention. And it is particularly interesting because the discussion, nationally or worldwide, about negative interest rates have made the sort of returns that you can get from the investment side, people to be very apprehensive about the direction of that. So that being the case, you will see, I think, a slower -- even though there's excess capital available in the market, people are going to be much more hesitant about putting that at risk by trying to write more business.

I think that also creates another phenomenon -- and I've seen a lot of commentary about this over the last six months -- and that is, with respect to insurers, what business do you try to get? Well, usually, you start off with the stuff that you know the best, that's your incumbent business, your renewal business. So I think you may look to see more -- a bit more aggressive pricing on that renewal business than you will on the new business. That remains to be same. There's always somebody in this business that think they have a better mousetrap.

And it's always unique to me, Matt, that what got the industry to where it is today was abiding by better underwriting discipline in 2012, 2013 and 2014. And how quickly we forget, it's the discipline that gets these results. Our line of business -- when you write a piece of business, you don't know what it cost, and it's really a year or two later before you understand the true cost of it. And so, sometimes, people forget that and start pricing basically. But without great opportunities to invest out there, I don't think you're going to see a major deterioration in pricing. So I think that [pertains] good things from an underwriting perspective, but not necessarily good trends in terms of net investment income.

And then my second question would be, maybe this is more for Janelle, but provide a little more color on, update on some of the topline efforts. And I know, you've been going through, for lack of a better terminology, maybe a more surgical pricing exercise and parsing the book out and kind of strategically driving some incremental topline. Where does that stand? I know, a lot about that's a process that you are going through, and if you could update us, that will be great.

It has been. We have been talking about the decline in ELCM for a couple of quarters and the fact that it has been very deliberate on our part. At the same time, as Allen talked about, if you look at the slope, it hasn't been very steep. So that has definitely been a concerted effort on our part. And to Allen, it's quite about protecting renewal book. We certainly have been doing that in our pricing effort. At the same time -- I don't know if you caught, in my prepared remarks, I said that we grew policy count on the new business side. That is a little bit of a turn in the trend for us compared to where we were at the first part of 2015. So I look at that as a side going into 2016.

Mark Hughes, SunTrust.

The frequency, you said, trends have been favorable. Can you be a little more precise on that?

I can. For Amerisafe, our frequency was down in 2015, and that was not something that I personally was expecting. I thought it was going to be flattening, and I still believe that going into 2016, but frequency was down.

Down low-single digits?

(multiple speakers) slightly. Let's be clear.

Okay. It seems like you've taken fewer lumps lately. You talked about how lumpy business.

It is.

It seems like you haven't had one of those bad quarters in a while. Do you feel like (multiple speakers).

Why did you say that Mark?

I'm sorry. But maybe you answer my question there which is, is this part of a longer-term trend that those unusual items are dampening out perhaps in your business model? Or is it just you've had good experience lately?

Yes. Neal talked about in his prepared remark that we will be releasing the K later this week. You'll see in the K -- when we talk about severe claims in the K, we talk about claims in excess of $1 million. For accident year 2010, we had 10 of those claims. Compared to 2014, we had 13 of those claim. I would like to say it's something we're doing, but this is just a lumpy business, and if you call that lucky, then I'll call it lucky.

Yes. Would you say the increased competition is that just existing players with more appetite? Are you seeing carriers stretch into the high hazard segment?

No, I would say existing players with more appetite.

Okay. The expense ratio was nice this quarter. When we think about it going forward, should we use the full-year run rate as our guide, or Q4?

Mark, this is Neal Fuller. We think that the expense ratio had some favorable tailwinds this year and also in 2014. So we would actually expect the expense ratio to bump up potentially as high as a couple of points this year.

Mid-20s, like 24% or something like that, 25%?

Yes, a couple of points from the full year.

And why is that?

Well, we are investing in the business in terms of what we're doing in our sales and marketing organization. We don't expect the premiums are going to be going up by leaps and bounds. So we're trying to grow obviously like we were this last year, but we are not expecting the premiums given the competition. And what we're doing that -- they'll be rebounding robustly. So from that standpoint, we do expect the expense ratio to drift up.

Are you taking a different approach to this cycle in terms of pricing? As you pointed out, really holding the line on the ELCM and it's continuing to be at a very high level. You seem to be happy trading off that for more of a stable topline, let's say. Is that a different approach, or how are you reading this environment?

I would say this, I wouldn't use the term happy. I'm disappointed. I wouldn't apologize for the policies that we wrote, the underwriting that we did. I just like more of it.

Right. You seem to be choosing a price discipline over topline growth even at the pricing levels that in historical terms, would be considered very attractive even if they were lower than where they are now.

Well, I would say this, I think historically, Amerisafe has proven that we are not a topline company. Our emphasis on the margin.

We would like more volume, if I might -- like more volume. But I think we still adhere to the adage that volume is vanity and profit is sanity. So we would like to maintain our margins.

(Operator Instructions) Randy Binner, FBR Capital Markets.

Speaking of margins, I guess, the question I'd like to ask has to do with your accident year loss pick or accident year loss ratio, and it was better in 2015. It was very consistent. And it seems that notwithstanding maybe a little bit slower topline, that outlook continues to improve, right? Medical loss severity and other severities, it seems like it's in line. Frequency is marginally favorable. The industry is pretty rational. So can you help us think about where that accident year loss pick might come in for 2016?

We don't give forward-looking guidance, but I will talk about the factors that you just mentioned. As I alluded to earlier, I believe that frequency will flatten or slightly go up in 2016. Obviously, severity increases every year with medical cost inflation. The percentages of that -- there's lots of data out there. There's actually a great slide in NCCI's Annual Issues Symposium, State of the Line, that shows the medical inflation over, I guess, a 10-year maybe even longer period that averages somewhere around 6%. That's our assumption going into 2016. I don't expect our underwriting discipline to change. I don't really see a change in our mix of business. Sometimes that would cause variations in the loss ratio, and I just don't see that happening for us in 2016.

And then going back to the topline and maybe asking this in a different way, are you seeing any slowdown in the real economy in your construction and trucking markets that could impact topline? And as far as new sales initiatives, is there any update or detail you can provide on how that might be different than what Amerisafe did in the past?

Sure. I'll start with the last question, which is the sales initiatives. I don't like giving away competitive information, but I will say this, and I think I've said this on past calls, we are changing our focus to the relationship that we have with the agents. I think you will see when you see the 10-K at the end of the week that we have fewer independent agents. We would like to do more with less. And I think that -- with our new initiatives, I think that's possible. So I hope that answers your question about the sales initiatives.

As far as the economy, the economy has been rather stagnant, and that's why in my prepared remarks I said barring changes in the economy. We insure payroll. Anything that affects that as the economy would affect what we do -- we've certainly seen a decline in the oil and gas sectors as has everybody. And keep in mind, when you look at our industry scatters on 10-K or even our investment presentation, oil and gas is not just that one line. We have some oil and gas exposures in construction, services and trucking. So it's impactful. But in 2015, other areas or other industries were able to override that. I guess that answers your question.

Yes, that's helpful. And then, just on operating leverage and how that goes into -- actually -- sorry, back on the accident loss ratio, your 2012 and 2013, those have been real good accident years, I think it's safe to say. I think that as of the end of last year, so year-end 2014, they were seeing around 67%, 68% kind of the developed loss ratio. Do you have an idea of where those are, the 2012 and 2013 accident years, now?

I don't have that number in front of me, but as we said, the 10-K will be filed on Friday, you will be able to see that, as well as shortly by March 1, the schedule piece will be out which you will be able to see, [fall into] accident years at that point.

I was looking for a schedule piece in your previous sets (multiple speakers). We think there's a lot more coming out of 2012 and 2013.

Then on operating leverage, and that is my final one, so you ended the year perfectly at 1 times net premiums written to surplus, which is the kind of crude way we all measure operating leverage. Is that the right way to think of the right operating leverage for Amerisafe to manage to in this environment when we think about potential return of capital?

Obviously, we'd like it to be higher. I think when we and the Board announced the $3 dividend, that was something that we all talked about we were working toward making that better. It wasn't going to be done in one sale swoop, but obviously, we'd like that number to be higher, especially when combined ratio is 79.8%.

Randy, this is Allen. I think the Board has clearly indicated its awareness, the need to be able to put the margins that we create, the earnings that we create, capital we create to work. And to the extent that we cannot improve that operating margin via growth in premium, I expect that the Board would be good stewards of the shareholders' money and be prepared to make adjustments to our required capital. So in other words, I think you can look for them to review the need for further capital management late in the year of 2016.

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back over to Janelle Frost for closing remarks.

Thank you for joining us today. I'd like to end the call as I began the call, saying that we are quite pleased with the results this year. Thank you to our shareholders for supporting us and to our employees for their dedication.

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