Amerisafe Inc (AMSF) 2016 Q2 法說會逐字稿

Good morning. Welcome to the AMERISAFE second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Vince Gagliano, Chief Risk Officer. Sir, you may begin.

Good morning. Welcome to the AMERISAFE 2016 second-quarter investor call. If you have not received the earnings release, it is available on her 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 Form 10-K, Form 10-Q's 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 the call today as we discuss our second-quarter results.

Before discussing AMERISAFE's operations let's talk about the operation as a whole. Companies are fighting to retain renewal accounts. In many cases, the underlying rates for those risks have declined resulting in a decline in premium.

To maintain or grow top line, companies are becoming increasingly competitive, a sign of a softening market. What's preventing a soft market? I believe we have not returned to the soft market of previous cycles because of low investment yields. Underwriting profit is necessary for companies to meet ROE goals.

As I stated in orr earnings release, AMERISAFE remains unwavering both in our disciplined underwriting focus, on our market niche and in producing consistent and superior results. This quarter we reported a combined ratio of 80.4% an ROE of 13.7% and earnings per share of $0.87.

How does that discipline work this quarter? Gross premiums written declined 2.6%. This decline was a result of audit and related premium adjustments. More importantly for policies we wrote in the quarter, premium grew 1.1% and policy count grew 3.4%.

Our policy count retention for the quarter was 93.5% compared to 92.9% in the second quarter of 2015. The effective LCM for the quarter was 1.73, down from 1.81 in the second quarter of 2015.

Our pricing concessions have been in response to the competitive market, but without losing sight of protecting the underwriting margin. Also keep in mind, our pricing declines have been moderate and deliberate coming off from all-time high of 1.86 second quarter of 2014.

As for the audit premium and related adjustments, I mentioned, this was a drag to top line and it was expected. Audit premium continued to remain positive but not at the same levels as the previous year. This is driven by economic activity in the industries that we insure, and unless there's a significant change in the economy, I would expect this trend will continue in 2016.

Relative to losses, the current accident year selection is 67.9%, a 1.9 percentage point improvement from accident year 2015. Coupled with favorable development from prior accident years, the quarter's loss ratio was 54.2%. The favorable development was largely a result of case development experienced in the quarter, primarily in accident years 2014, 2013 and 2009 and prior. Once again, I believe these favorable results are driven by our unique claims management process focused on maximum medical improvement, returned to work and expedient resolution. Yet another example of our focus on discipline.

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

Thank you, Janelle, and good morning, everyone. For the second quarter of 2016, AMERISAFE reported net income of $16.6 million, or $0.87 per diluted share, compared with $14.3 million, or $0.75 per diluted share, in the same quarter of last year, an increase of 16.2%. Operating net income in the quarter was $16.3 million, or $0.85 per share, a 1.7% increase from the second quarter of 2015.

Revenues in the quarter decreased by 2.4% to $97.6 million compared with the second quarter of last year. Net premiums earned decreased 5.1% to $90.7 million when compared to the second quarter of 2015. This decrease was largely due to $3 million in lower payroll audits that Janelle mentioned previously, as well as an additional $0.9 million in lower assumed premium from mandatory state pooling arrangements.

Net investment income was $6.2 million in the second quarter of 2016, a decline of 10% when compared with last year's second quarter. The decrease was largely due to the decline in value of a hedge fund investment, which is mark-to-market through net income each quarter. Without the hedge fund, net investment income was down 2.6% compared to the second quarter of 2015.

The tax equivalent yield on our investment portfolio was 3.3% in the quarter compared with 3.6% in the same quarter of last year. 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 minus rating with an average duration of 3.04 with 52% in municipal securities, 32% in corporate bonds and the remainder in cash and other investments. 53% of our investment portfolio is classified as held to maturity, which is a net unrealized gain position of $23.2 million at June 30, 2016. These gains are not reflected in our book value per share as these bonds are carried at amortized cost.

With regard to operating expenses, our total underwriting and over expenses increased 2.2% in the quarter to $22.6 million compared to $22.1 million in the second quarter of 2015. We saw an increase in bad debt expense largely as a result of a change in estimate, or reduction, we made last year in the second quarter and a slight increase in compensation costs.

By category, second-quarter 2016 expenses included $6.3 million of salaries and benefits, $6.5 million of commissions and $9.8 million of underwriting and other costs. Our expense ratio for the second quarter was 24.9 compared with 23.1 in the second quarter of last year. The majority of the change in expense ratio was due to the decline in net earned premium mentioned earlier and with the remainder due to the increase in expenses mentioned above.

Our tax rate increased to 32.4% in the quarter up from 28.8% in the second 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 amount of favorable prior-year development.

Return on equity for the second quarter of 2016 was 13.7% compared to 12.3% for the second quarter of 2015. Operating ROE for the second quarter was 13.6%. On July 26, 2016, the Company's Board of Directors declared a regular, quarterly cash dividend of $0.18 per share payable on September 23, 2016 to shareholders of record as of September 9, 2016.

And just a couple of other items to discuss. Book value per share increased 8.8% from year end to $25.83 at June 30, 2016. Our statutory surplus rose to $409.4 million at June 30, 2016, up $38 million from year end. Finally, AMERISAFE will file our Form 10-Q for the second quarter this afternoon after the market close.

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

(Operator Instructions)

Mark Hughes with SunTrust.

Thank you very much. Janelle, your point about audit-premium trends, do you expect those to continue at roughly the current pace?

We do. We think audit premium will remain positive, but not nearly as robust as it was last year. So it will be a drag to top-line for, I assume, the rest of 2016.

You've got an easy comparison on the third-quarter?

I will.

The hedge fund investment, could you refresh me? What drives that and any early read on what the trend has been in 3Q?

Sure, yes, this is Neal. We have a hedge fund investment at the parent company and it has a large portion of it invested in life insurance stocks and so with the Brexit vote coming right at the end of the quarter, those stocks tanked pretty significantly and that drove down the value of the hedge fund investment which is mark-to-market. Since that time, we believe that those stocks have risen somewhat and recovered some of their value, but we think that overall, it's still down from where it was at the year end. So we continue to look at that investment and think about that, but that's what's causing that volatility in the net-investment income.

Then a bad debt issue you highlighted a change in the way you calculate bad debt in the second quarter of last year. Did I hear that properly? And if so, are you going to be lapping that? Will we see bad debt recede in the third quarter?

Yes, you are hearing that properly. We made an adjustment to our allowance based upon our historical experience, last year, second quarter and we took bad debt down by about $1.1 million. And so the significant increase you see here is just a year-over-year comparison and we don't expect to see that significant increase from a comparative standpoint in future quarters.

So it was a positive. You reduced your bad-debt expense in this quarter last year so you had a tough comp; is that right?

That is correct.

And then the policyholder dividends seem like they are a little higher this quarter. What should we expect there?

We would expect them to run at about the rate they've run so far this year, probably about 1% to 1.3%. We have seen an increase in the amount of policyholder dividends as a result of activities that we have in certain states, certain states where we compete on the basis of policyholder dividends. So we expect them to be around 1% to 1.3% going forward.

And then generally, the operating expense ratio, I think, last quarter you had suggested about 25%. Is that still a good number on a go-forward basis?

Yes, we think the run rate will be somewhere between 24% and 25%.

24% or 25%. And how about the tax rate? Tax rate was a little higher this quarter. What should we use for the rest of this year?

That's a good question. You know, the tax rate is largely driven by the amount of favorable development that we see each quarter. And so, I would look just to the historical record to try to estimate the tax rate.

Right, so maybe this quarter was a little higher than history and so we might look back at history and use that as our guide; is that what you're saying?

Yes.

I.e. a little bit lower perhaps? I know you don't want to say that. (laughter).

You know, it is going to fluctuate based upon the earnings of the Company and the amount of underwriting to profit. That's largely what drives it.

And then, I know you've had some initiatives to try and grow the top-line at the same time competition, I think as you described, has been increasing. How do I think about the competition? When I look at these broader pricing surveys, they have casualty pricing flat maybe to down slightly. Gallagher said as much on their call just a little bit ago. But do you describe pricing being under pressure. Your LCM is down a bit, down year over year; how do I square that situation?

Yes, that's a really good question and I guess the question everyone is looking at is where it is going to head in the next few quarters. There's definitely an increasingly competitive market. We are not seeing, and I think I said this on last quarter's call, we are not seeing the irrational behavior we've seen in prior soft markets, but we are starting to see some multi-line carriers that have typically, or in the last few years quarters, have pulled away from workers comp because it wasn't profitable, deciding that yes, we will quote some workers comp.

From an AMERISAFE standpoint, you mentioned our sales initiatives, we are starting to, I think, see traction there. I've talked in past about our green, yellow red. We are seeing more greens and so we are doing a better job of bringing in the things we want to see, but our submission count is down, so we would just like to see more of that.

Right, your voluntary premium was up this quarter slightly; it was the first time in the last three quarters. Do you think you just kind of hold in this range, hold your own rather than grow?

You know what, we will protect the underwriting margin. We are trying to be as responsive as we can to the market, but only at what we are willing to accept.

Right and as you see it now, are there any new initiatives you see are getting more traction, but submissions are still a little bit sluggish, you might say? When you put that all together, does the extra traction get you a little more forward progress or is that just helping you hold steady?

It really depends on what the competitive market is going to do. I think we're doing a good job of holding steady. I mentioned that we grew policy count and I talked about a couple quarters ago on the call that going into this softening market, or if we reach a soft market, policy count is where I was focused because if I can maintain those policies I know I want to keep in our renewal retention rate, which was up this quarter, I feel like we are positioning the Company correctly.

And then, any notable change in the large losses? I think they were actually lower than normal earlier in the year.

Yes. At the end, when we reported first quarter at the time that we ended the quarter, we didn't have any large losses. I think on the call, I alluded to, we had one come in subsequent to, reported for the quarter before the call. So right now, when we say large losses, that's excess of $1 million. We are at a count of 5 and, just to put that in some perspective, accident years 2014 and 2015 are at 12. So that's not unusual amount for us. There's nothing in those losses that would cause us to want to change our loss pick for the year.

Understood, thank you.

Thank you, Mark.

Matt Carletti with JMP Securities.

Good morning. Anyway, Mark covered most of my questions. The one I have left is on accident-year loss ratio. As we sit here in, the past several quarters it sure seems like prior-period development is obviously starting to come through pretty strongly from some semi-recent years. You know, it's always been in insurance when bad things happen in prior years, that has implications for current accident-year loss ratios. The question is the opposite of that. If the prior years keep coming through better than expected, is it right of us to think that there is probably ongoing positive applications for the current accident-year pick going forward?

I believe you know AMERISAFE and you know AMERISAFE well. We are in a lumpy business, but we are conservative about what we do. There's nothing in the underlying data six months in that would cause us to believe our loss ratio needs to change at this point. The frequency is about where we thought it was; severity is about where we thought it was. So your point about the favorable development, that's case-by-case. That's just how it happens for us. We've had good things happen, but bad things can happen as well.

Right, that's a very fair answer. So thanks very much and congrats on another nice quarter.

Thanks, Matt.

(Operator Instructions)

Randy Binner with FBR & Company.

Hi, this actually Alex Combs on for Randy Binner. I was wondering if you could touch on the breakout of accident years for the $12.4 million of favorable development.

Sure, accident-year 2014 was $3.8 million; 2013 was $4.2 million; 2012 was $1.7 million; 2011 was $0.1 million; and 2011 and prior was $2.6 million.

Okay. Great, it seems like big portion of that release comes from the 2012 and the 2013 accident years; and we had a mini hard market there and our analysis of -- what's that?

I'm going to write that one down, a mini hard market, I like it.

Yes, when we look at your schedule P kind of as-developed workers-comp loss ratios, we think this should get to the 2006, 2007 range which is down to about 50%. So I guess if it is consistent with the way that you're looking at 2012 and 2013 data, then this would imply a considerable amount of reserve redundancy going forward?

Right, we have been pretty vocal about the fact that the favorable development that we received of particularly those years that you're talking about, 2012 and 2013, have come from case development. And I've said all along, I think that those years, from case-reserving standpoint probably, were a shift in the paradigm if you will because that was coming off of accident-year 2010 where we got it wrong; the industry got wrong. I think we all took a look and said, are we being realistic about how we are setting these case reserves, in particular return to work? Coming out of the great recession, return to work is a large part of what we do and there weren't jobs (technical difficulties). So we factored that into our case reserving and now I think, the Company is reaping the benefits of that. So that would have been a change from 2012 and forward, which would include 2014, 2015 and 2016.

All right, great, thanks, that's all I have.

Thank you.

I'm showing no further questions at this time. I would now like to turn the call back over to Ms. Janelle Frost for any closing remarks.

Thank you. I began my comments calling this an increasingly competitive time in the market. There are numerous macro factors which influence the direction the market goes from here. Regardless, AMERISAFE is well-positioned for the upcoming twists and turns. Our focus on underwriting discipline, claims management and expense frugality will continue to support our commitment to our stakeholders. Thank you.

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