Amerisafe Inc (AMSF) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AMERISAFE 2016 third-quarter earnings conference call. (Operator Instructions) As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Mr. Vincent Gagliano, Chief Risk Officer.

Good morning. Welcome to the AMERISAFE 2016 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 statements.

I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.

Thank you, Vincent, and good morning, everyone. This quarter, AMERISAFE's favorable results were driven by our continued discipline -- discipline our risk selection and pricing, discipline in our claims handling, and discipline in managing costs. We firmly believe maintaining that discipline is appropriate as the worker's compensation market softens.

The industry has reported a profit in the last few years; however, both NCCI and A.M. Best consider industry-wide loss reserves to be deficient. At the same time, underlying loss costs continue to decline. This combination will tempt underwriters to chase premium and sacrifice underwriting profits.

Our focus has been and will continue to be to protect the underwriting margins. That focus enables us to return value to our shareholders.

This quarter our Board evaluated our capital position and that return in value included an extraordinary dividend of $3.25. The extraordinary nature of this dividend is reflective of our perception of the worker's compensation market conditions and the Company's continued ability to produce earnings for our shareholders.

Now on to operations. Premium written in the quarter was down 2.4%. Audit and related premium adjustments declined $1.2 million.

We are focused on policy count, given the softening rate environment as I have been saying all year. We did grow voluntary policy count by 3.6% in the quarter, which was a good result. However, with loss cost in most states falling, premium for voluntary policies written was down 0.9%.

New business was down 7.3%, but renewal business was up 0.5%. Our effective loss cost multiplier was 1.71, down from 1.77 a year ago and down slightly from 1.73 last quarter.

Relative to losses, we remained at a 67.9% loss in [LOE] ratio for the current accident year. Both frequency and severity for the current accident year were consistent with the prior accident year at the same point in time.

Our claims reported in calendar year 2016 were down 1.2% from 2015. As for prior accident years, we experienced favorable case development in the quarter, which led to a reduction in losses incurred of $10.5 million. Accident years 2008, 2013, and 2014 experienced the most favorable development as we focused on closing claims and returning injured workers to work.

Our open claim count at the end of September 2016 was 4.1% lower than at the end of third quarter 2015. After the favorable development, our loss ratio for the quarter was 56.2% compared to 54.1% last third quarter. The best summary of these operational results is a combined ratio of 80.3% and a pretax underwriting profit of $20.8 million.

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

Thank you, Janelle, and good morning, everyone. For the third quarter of 2016, AMERISAFE reported net income of $17.9 million, or $0.93 per diluted share, compared with $17.9 million, or $0.94 per diluted share, in the same quarter last year.

Operating net income in the quarter was $17.8 million, also $0.93 per share, a $0.01 per share decrease from the third quarter of 2015. Revenues in the quarter increased by 0.8% to $98.2 million compared with the third quarter of last year. Net premiums earned decreased 0.6% to $89.9 million when compared to the third quarter of 2015.

Net investment income was $8 million in the third quarter of 2016, an increase of 15.6% when compared with last year's third quarter. The increase was largely due to the increase in value of a hedge fund investment, which is marked to market through net income each quarter. On a year-to-date basis investment income is down 1.9% from last year.

The tax equivalent yield on our investment portfolio was 3.2% in the quarter compared with 3.3% in the same quarter 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- rating, with an average duration of 3.12, and with 52% in municipal securities, 30% in corporate bonds, and the remainder in cash and other investments. 51% 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 book value per share, as these bonds are carried in amortized cost.

With regard to operating expenses, our total underwriting and other expenses decreased 6.7% in the quarter to $20.8 million, compared with $22.3 million in the third quarter of 2015. We saw decreases primarily in assessments and commissions compared to the third quarter last year.

By category, third-quarter 2016 expenses included $6.3 million of salaries and benefits, $6.4 million of commissions, and $8.1 million of underwriting and other costs. Our expense ratio for the third quarter was 23.1% compared with 24.6% in the third quarter last year.

Our tax rate increased to 31.2% in the quarter, up from 30.7% in the third quarter last year. The increase reflects the larger amount of taxable income compared with tax exempt income during this year as a result of the increased amount of favorable prior-year development on a year-to-date basis.

Return on equity for the third quarter was 14.2% compared to 14.9% for the third quarter of 2015. Operating ROE for the third quarter was 14.4%.

On October 25, the Company's Board of Directors declared a regular quarterly cash dividend of $0.18 per share payable on December 29, 2016, to shareholders of record as of December 15, 2016. In addition, as part of our ongoing capital management efforts, the Company's Board declared a special dividend of $3.25 per share for shareholders with the same record and payable dates. This brings the total amounts of special dividends paid out in the last three years to $7.75 per share.

And just a few additional items to note. Book value per share increased 11.7% from year-end to $26.51 at September 30, 2016. Our statutory surplus rose to $395.2 million at September 30, 2016, up $23.8 million from year-end.

In addition, so far this year we have paid $37 million in dividends from the insurance companies up to the holding company, AMERISAFE, Inc. AMERISAFE will file our Form 10-Q for the third quarter tomorrow afternoon after market close.

That concludes my remarks and we would now like to open up the call to analysts and investors for questions. Operator?

(Operator Instructions) Matt Carletti, JMP Securities.

Thanks, good morning. A couple questions; I guess I will start with one on the market and what you are seeing. If we look at some of the published marketwide surveys or rate trackers for worker's comp -- and I know that that's -- they are catching a lot of -- your book is very targeted and that's very broad. We saw a slight correction in the downturn of rates the past couple months, down 3%s and 4%s, became down 2%s and down 1%s from July to August to September.

What are you seeing in your book? Would you say it's stable? Would you say it's kind of that sort of same trend? Is it something opposite of that?

No, Matt, we are still seeing increasing competition. The market is continuing to soften. The last graph that I saw from NCCI showing loss cost filings, there were 32 decreases approved and six increases.

I saw the same one.

So we still believe the underlying loss costs are declining, partially driven by experience. But as I mentioned earlier, in this market declining loss costs, when we believe there is deficiency still in the industry, is going to cause some turmoil in the marketplace.

That makes sense. Then one other, I guess just more along the talk about reserves and development you've seen; more so a read-through question. I know that years like, say, 2015 are too early for you guys to look at, at least from a release standpoint, but as you look at these older years, 2014 in particular being the most recent one and ones before that develop favorably, one, what are the implications for 2015 as we go into 2016 since you are lowering the bar at which those are set at?

And what are the early reads? Are you seeing actuals come in better than indicated in, say, 2015, but it's just too green and we need to wait and see, or is it coming in more as expected?

It's coming in as expected. I think, as you mentioned, 2015 is still a green year. We are in a lumpy business; it just takes a few claims for things to get a little escalated for us.

I think I've said this before on prior calls, I believe that we, as in most companies, probably honed in on our reserving practices on a case basis after the Great Recession and I think that's what you are seeing in our reserve -- our case reserve releases that we have seen from accident years 2012, 2013, and 2014. Going into 2015 I think maybe we were maybe more realistic about what we were facing in terms of return to work and duration of claims, but at the same time we are getting less premium per dollar for those exposures.

Got you, thanks. Thank you for the answers and congrats on a very nice quarter.

Randy Binner, FBR Capital Markets.

Good morning, thanks. If I missed it I apologize, I've been jumping from different calls; but did you mention what the statutory surplus was at the end of the quarter and what that number would be after the payment of the special?

Randy, this is a Neal. We did mention statutory surplus at the end of the quarter was $395.2 million and that was up $23.8 million from year-end. We had already paid $37 million up to the parent company, though, so you sort of have to take those two into account to get to statutory earnings.

We will also pay an additional amount up to the parent company to help fund the special dividend that we have declared and that will be paid out in December.

So maybe minus another 30 for their pro forma, is that about right?

Yes.

Okay, cool. So that sets up my question, which is very (technical difficulty) see the special. I think that's great for shareholders. But despite that large payment, your premiums and surplus, which is our crude measure of operating leverage from the outside, is still not even up to 1x.

And so I guess synthesizing the comments from Janelle on having to stay disciplined in the market, what is a reasonable operating leverage goal for AMERISAFE over the next year or so?

We have a long-term target. We think that our GAAP operating leverage right now is running -- bouncing around 0.8 or so. Long term we think that that GAAP operating leverage can get to 1.0. We won't disclose a target for where we could get in the next year.

But our Board continues to focus on the capital position of the Company and discuss it each quarter and then make a determination about what is the best method to return capital to shareholders and what is sort of the future as we look at the market as we go through different cycles. So long term that 1.0 is still a long-term target that we would like to strive towards.

So there's a point maybe a couple years ago where it seemed like distress in the market would yield some underwriting opportunities for AMERISAFE, potentially just taking business, maybe picking up a distressed company or a block. Is it safe to say that that -- if that opportunity existed, it's passed?

Just trying to think of a plausible way that -- or any color you can give on opportunities you see inorganically out in the market. Just trying to get a sense of how likely it might be that you can use this capital for something productive rather than the special.

We constantly look at M&A opportunities and as we move through the softening market, there is potential, but there may be books of business or pieces of business that other people are concerned about. We have done some small purchases of blocks of business in the past and we certainly would look at them again.

We are not necessarily interested in buying balance sheets, but it is something that we continually think about in terms of our capital position and use of capital. But it would have to be a great return for shareholders.

I will just do one more. Just on the 1.71 ELCM; I believe that implies a 59% loss ratio and you are running still accident year loss ratio at 68%. These are rough numbers because there's a little bit of GAAP versus stat, but pretty conservative.

And so I guess, should we expect that kind of conservative spread on where you run the accident loss versus the LCM to persist? It's not new, it's just seemingly building in a lot of redundancy into the book, which if fine. Just trying to get your perspective on how wide that might continue to run and how some of the macro factors in the workers comp space fit in that.

Good question. As far as the inference of the 1.71, I would keep in mind that would be assuming that the loss costs are correct. As you know, loss costs seem to have large swings in them, which doesn't -- and it takes a period of time for that to work itself into the book.

Secondly, as far as AMERISAFE's reserving practices, I think we've been very consistent over our history, particularly in our current accident year selection, of where we think our book may be. We look at frequency; we look at severity. And as I was mentioning to Matt earlier, we are in a lumpy business.

So our standard practice has been we set that loss pick where we think it should be at the beginning of the year, what we think ultimately the cost will be. If there's some things throughout the year that indicates to us, either in the trends of frequency and severity, paid to encourage, anything to that nature -- closure rate -- that we think makes that estimate incorrect we would adjust. But most of those investments, in my mind, would be upward. I'm not saying it wouldn't go downward unless those are something extremely compelling.

Otherwise, given the type of business that we write, we typically wait 30 to 36 months after the inception of a policy year to make those type of adjustments, unless there is something extremely compelling, which we did earlier in the year for accident year 2014. Typically we would not have adjusted that the second or third quarter, but we had enough case reserves that were favorable to us that we made the adjustment in the first quarter. So I that we are responsive to that, but as you know, our responses are very deliberate and very consistent.

All right, that's all I have. Thanks a lot.

(Operator Instructions) Mark Hughes, SunTrust Robinson Humphrey.

Thank you, good morning. The audit premium was negative for the first time in quite a while. Was that concentrated in any particular end-market or broad-based?

Audit premium along -- just audit premium, not counting endorsements, cancellations, that effect, were still positive in the quarter. So we are seeing negative audit premium come through, obviously in the oil and gas industry and actually in this quarter it was in our roofing business we saw some negative audit premium.

But as a total, audit premium was positive this quarter, just less positive than it was in previous quarters. The declines were pretty much across the board with the exception of trucking, which we've talked about with you and others on the call how we felt like trucking was going to hold strong throughout this softening cycle. And that proved to be true with the audit premiums.

Right. So the audit premium was just down $1.2 million from last year. Last year's third quarter, if I've got my number right here, it was flat in terms of the audit premium.

All-in, including endorsements, cancellations, that's correct.

Right. Does this year --?

Our cancellation number was higher this year than it was last year.

Right, okay.

And our audit number was positive, but it was lower than last year. So all-in that's where we got to the minus $1.2 million.

Right, and the number that you give is sort of an all-in number.

That's correct.

Last year's all-in was flat. This year's all-in was negative $1.2 million, but you are saying that the audit premium was actually positive. It includes the --.

The audit premium number was positive. It was still a negative change from the prior year, but it was less than $[100,000].

Right. And what was the cancellations, what was the -- what accounted for the remainder of that $1.2 million?

The remainder of that was basically driven by cancellations, so we had more cancellations in the quarter than we did in the prior year's quarter.

Right. What causes that?

It could be a couple things. One is canceled flat. If an insurance books and binds a policy with us and within a certain period of time moves that policy to someone else, we will cancel it flat. And so basically the entire premium gets undone, but it shows up as a cancellation premium.

Or if we were to cancel an insured for some reason, due to an audit that we have done or -- well, it wouldn't be nonrenewal. It would just be cancellation.

Okay. The underwriting expense was better this quarter. I think you had referred to assessments and commissions. Is there some reason why the commission rate is lower? I know written premium was flat to down a little bit. Was the commission rate lower this quarter?

The overall effective rate for commissions was lower this quarter. I think part of that in some of the sales initiatives we have ongoing. We had a number of agents that lost their preferred status in the quarter; some of which regained it going into the fourth quarter.

But for the third quarter -- we do valuation dates on a six-month period, so there were agents who lost their preferred status, which meant a lower commission rate. But as we get our sales initiatives going and as we get our agents on board with what we're trying to achieve, I would expect that to go back to a normal rate.

Right. And was 2Q more like the normal run rate?

No, I would say 2Q was lower. I would think it would be more in line with Q1.

On commission.

Okay. I guess when I'm thinking about the expense ratio overall, if I do expenses and policyowner dividends, you were about 26% in the second quarter. This quarter you were about 24%. Again, that's combining the two categories.

Is the 26% closer to what we ought to think about on a go-forward basis?

That's a good question. I think you have seen that our dividend ratio has increased this year as we are competing with dividends more in several states where that's the only way you can compete. So I think the dividend ratio is probably -- the year-to-date basis is a good to go-forward rate.

And then the expense ratio we are continuing to try to manage our expenses in a disciplined fashion as Janelle has mentioned and so that 24% range I think is typically what we have stated for the year. We've been slightly below that, but we always like to try to manage that in line with our plan and do everything we can to manage that expense ratio.

Okay. Janelle, did you give the specific number for change in frequency -- or Neal? Down 1.2%? What was that the number?

That was the change in our claims reported for the calendar year.

Right. Right, okay. So kind of a proxy for frequency?

If you wanted to infer that perhaps.

Then how about large losses? What did you see in 3Q and how has that trended year-to-date?

So on a year-to-date basis -- and when we talk about large losses, we typically talk about something in excess of $1 million, even though our retention starts at $2 million. On a year-to-date basis, we're at 10 claims in excess of $1 million. I think we ended the year last year with 14, so I think we're on -- if you want to call that on pace.

Again, we never know when they are going to happen, so it's kind of it happens when it happens for us. But there's nothing in the large loss number that would cause us any angst as far as our accident year selections for calendar year 2016.

Then the net investment income got a little bit of a bump from a hedge fund gain. Is that -- what normally triggers that? Is that kind of broader stock market or just something else entirely?

I would say the broader stock market. I think you've seen volatility this year as it relates to what's going to happen with interest rates and the Fed, and so there's been a lot of volatility in the first quarter and also in the second quarter.

This third quarter there's been a pretty significant gain. I think on a year-to-date basis that's about what we would expect, but obviously the net investment income was lumpy in the first three quarters of the year.

Yes. And if that goes against you in the subsequent quarters, is that worth the volatility?

You know, it's something that we continue to look at and focus on as we think about our investment strategy and it is something that we are assessing.

Okay, thank you very much.

Thank you, that concludes our Q&A session for today. I would like to turn the call back over to CEO Janelle Frost for any further remarks.

Thank you. We believe AMERISAFE is well-positioned, both from a capital perspective and from an operational perspective. Our mission is to provide quality insurance services to our customers through diligent risk assessment.

We deliver an exceptional product with integrity through professional, knowledgeable, and dedicated employees. That level of commitment is what allows us to maintain our consistency, focus, and frugality, and in return provide value to our shareholders. Thank you for joining us today.

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