Amerisafe Inc (AMSF) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the AMERISAFE first quarter 2016 earnings release conference 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 is being recorded.

I would now like to introduce your first speaker for today, Chief Risk Officer, Mr. Vincent Gagliano. You may begin sir.

Good morning. Welcome to the AMERISAFE 2016 first 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 the 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 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 Janelle Frost, AMERISAFE's President and CEO.

Thank you, Vincent and good morning, everyone. Thank you for joining us on the call today to discuss our first quarter results. But let me start by discussing the market.

The workers' compensation market is in an interesting state. An industry that has historically not looked attractive due to underwriting results has been profitable over the last two years. This was spurred by companies coming to the pressure of underwriting discipline forced by low interest rates. At the same time, workers' compensation pricing has continued to decline. MarketScout reported a 2% decline in workers' compensation composite rates in the first quarter. All of these events has led to a softening market, but not as soft as prior cycles when investment income was more prevalent.

AMERISAFE has maintained its demonstrated discipline. We started the year off with a 70.8% combined ratio, a return on average equity of 20.8% and 60.3% increase in net income. These results were led by favorable loss development from extensive claims management and underwriting discipline in prior periods. While continued underwriting discipline has slowed our top line growth, we believe this discipline is prudent for the long-term benefit of our stakeholders.

In the first quarter, gross premiums written decreased 0.4% from the prior year's quarter. Our average ELCM decreased from 1.84 in the first quarter of last year to 1.76 this quarter. With the overall pricing decline, we grew new business 13.8% in the quarter and new business policy count grew 14.4%. Renewal premium was down 7.8%, but policy retention was relatively flat at 91.5%. Overall, premium for policies written in the period were down $2.8 million from the prior year. However, audit premium and related adjustments increased $2.2 million in the quarter. This tailwind was driven by additional audit processed in the quarter and stronger than expected payrolls on those policies. While I do expect audits to remain positive, I do not believe this tailwind to be a trend for the year. Relative to losses, the quarter's loss ratio was 48.7%, again driven by prior accident years.

The favorable development was largely a result of case development, primarily in accident years 2012, 2013 and 2014. It has been our historical pattern not to adjust to prior accident year until 30 months to 36 months. However, due to favorable case development in accident year 2014, that accident year was adjusted this quarter. The current accident year selection is 67.9%, a 1.9 percentage point improvement from accident year [2015]. I believe this to be reflective of our strong pricing and an assumption of only modest changes in frequency and severity.

I'll now turn the call over to Neal Fuller, our CFO, to discuss the financials.

Thank you, Janelle and good morning, everyone.

For the first quarter of 2016, AMERISAFE reported net income of $24.3 million or $1.27 per diluted share compared with $15.1 million or $0.79 per diluted share in last year's first quarter, an increase of 60.3%. Operating net income in the quarter was $24.1 million or $1.26 per share, a 59.7% increase from the first quarter of 2015.

Revenues in the quarter increased one-half of 1% to $102.3 million compared with last year's first quarter. Net premiums earned increased 1.2% to $96 million when compared to the first quarter of 2015. Net investment income was $6 million in the first quarter of 2016, a decline of 11.5% when compared with last year's first quarter. The significant driver of this decrease was the decline in value of a hedge fund investment, which is mark-to-market through net investment income each quarter. Without the hedge fund decline, net investment income was flat compared to the first quarter of 2015.

The tax equivalent yield on our investment portfolio was 3.4% in the quarter, down slightly from 3.5% in the first quarter of 2015. There were no impairments or significant realized gains or losses during the quarter.

The investment portfolio continues to be high quality carrying an average AA- rating with an average duration of 3.02 and with 51% in municipal securities, 33% in corporate bonds and the remainder in cash and other investments. Approximately 55% of our investment portfolio is classified as held -to-maturity, which is in a net unrealized gain position of $19.5 million. These gains are not reflected in our book value as these bonds are carried at amortized cost.

With regard to operating expenses, our total underwriting and other expenses decreased 1.2% in the quarter to $20.1 million compared with $20.4 million in the same quarter last year. We saw slight declines in compensation costs and premium taxes offset by slight increases in insurance related assessments and bad debt expense during the quarter compared to last year's first quarter.

By category, the first quarter of 2016 expenses included $5.8 million of salaries and benefits, $6.9 million of commissions and $7.5 million of underwriting and other costs. Our expense ratio for the first quarter was 21.0% compared with 21.5% in the first quarter last year. Our tax rate increased to 29.5% in the quarter, up from 28.6% in the first quarter of last year. The increase reflects the larger amount of taxable income compared with tax exempt during the quarter as a result of the increased favorable prior year development.

Return on equity for the first quarter of 2016 was 20.8% compared to 13.3% for the first quarter of 2015. Operating ROE for the quarter was also 20.8%.

On April 26, 2016, the Company's Board of Directors declared a regular quarterly cash dividend of $0.18 per share, payable on June 24, 2016 to shareholders of record as of June 10, 2016.

And finally, a few other items of note. Book value per share at March 31 was $24.96, up 5.2% from year end and up 2.6% from last year at this time. Our statutory surplus rose to $397.2 million at March 31, 2016, up $25.8 million from year end. AMERISAFE expects to file both our Form 10-Q for the first quarter and our annual proxy statement with the SEC this Friday, April 29.

That concludes my remarks and we would now like to open up the call to investors for a question-and-answer session. Operator?

(Operator Instructions) Matt Carletti, JMP Securities.

Good morning and congrats on a very nice start to the year. Few questions. I guess I'll start high level and move down. In past quarters, I think last year really kind of started the initiative of sort of -- kind of lack of better phrase, maybe a little more granularity in pricing in terms of dissecting accounts and looking at which accounts you really needed to hold the line on rate and which others maybe you were -- you could give up a little and there's still a lot of profit there. Can you update us on kind of how that's progressed and if it's gotten traction or if the market is not allowing it, just kind of where that stands?

Sure, great question. I believe we are getting some traction on that front, as we've talked about on prior calls, we kind of did an analysis of taking an eight-year loss history of AMERISAFE and finding out by class, by industry, by state, where we felt like we were able to be most profitable and where we had the best market penetration and real complicated structure, green, yellow, red and I do think we're making strides toward that, particularly in the first quarter this year with some of our sales initiatives.

Okay, great. And then kind of just macro topic obviously, energy has been in the news a lot. I know it's not a huge part you guys' book, but I'm just curious on where you do kind of have energy exposure, has that been a headwind that maybe there is some growth elsewhere that's been offset or are you really not seen the impact yet?

No, we've definitely seen an impact, but we've been able to offset it with other industries.

Okay, great. And then last question, just a number you probably gave it, I apologize, I missed it, but just the -- did you give the ELCM in Q1?

1.76.

(Operator instructions) Alex Combs, FBR Capital Markets.

So, last quarter you mentioned some investments in the business within the sales and marketing piece, so we're a bit surprised to see the expense ratio so low and actually an improvement from 2015. I think, Neal alluded this could potentially move up a few points. So can you provide any color on expenses for 2016, should we expect these to be back-loaded then?

Yes, this is Neal. We still expense that -- the expense ratio in the fourth quarter and actually a little bit in the first quarter had some favorable tailwinds. So, we detailed that out in the press release, but we still do expect the expense ratio to bump up potentially as high as a couple of points higher for the full year compared to the full year last year.

Okay, great. And then on the call last quarter, you mentioned that you were shrinking your independent agent count and focusing on some key relationships, can you give an update on how this initiative is working out, and are you seeing increased production from these focused relationships?

Yes. I think we are. I don't know if you were able to hear my opening comments, I talked about the growth that we had in new business, 13.8% in terms of premium and 14.4% in terms of policy count and I certainly attribute that to our sales initiative.

Okay, great. And then one last one if I could, can you give a breakout of the favorable reserve development by accident year, so that 18.4 across the 2011, 2013?

Yes, this is Neal Fuller. I've got that break out for you. I'll just walk it backwards from 2014. 2014 was $3.9 million, 2013 was $5.2 million, 2012 was $5.7 million, 2011 was $1.3 million, 2010, $1 million and 2009 and prior was $1.3 million.

Mark Hughes, SunTrust.

I regret, I just jumped on the call, did you provide the ELCM for the quarter?

That's fine. You missed all my brilliant comments, I'll be happy to do that for you later.

You have a lot of good jokes like --.

No hunting stories, so fishing stories unfortunately. 1.76 for the quarter.

1.76. And then just your subjective comments on competition, kind of how you felt about it this quarter versus last quarter, the written premium seem to be kind of steady in line with what has been the pattern, but how do you see competition?

From the competitive environment, we really haven't seen any changes from when we spoke at year-end. There is nothing, no one out there that I could tell you is being extremely aggressive. We think it's a softening market, the companies are maintaining their discipline, I do think our sales initiatives internally are helping us kind of ride the tide right now. So that's a good thing for us, but no real change in the competitive environment.

Did you address kind of the philosophy on the reserve releases, I think, maybe historically there has been some preference for seeing how things develop during the year, this seems to be a strong result this quarter, any change in philosophy or --?

No, it's not a change in philosophy. We just had a large amount of favorable case development this quarter. As you know, compared to the industry, we don't carry a large amount of IBNR. And so when we have favorable development like that, it's really driven by case development.

Are there any underlying patterns there that maybe patterns you can say that the patterns yet, but could be something emerging?

No, we're in a lumpy business obviously, I can't develop a pattern of three months' worth of data for accident year 2016. I will say in the first quarter, we didn't have any claims in excess of $1 million, but subsequent to quarter end for accident year 2016 we did pick up two, one is rather large $5 million. So, that just attributes to the fact that we are in a lumpy business and we'll see what happens for the remainder of the year.

And at this time, I'm showing no further questions. So with that said, I'd like to turn the conference back over to President and CEO, Ms. Janelle Frost for closing remarks.

Thank you. I wanted to say at the beginning of this call that we are missing a very important person. My fear was I wouldn't be able to make it to the end of the call if I did. As you know, Allen Bradley retired last Friday. I want to use this public forum to thank him on behalf of the AMERISAFE family for his service, his passion and his inspiring leadership. He gave us all something to aspire to. Allen, we know you're listening and you will be missed. Thank you for joining us today.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may now disconnect. Everyone have a wonderful day.