Amerisafe Inc (AMSF) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to AMERISAFE's 2017 Fourth Quarter and Full Year Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, Mr. Vincent Gagliano, Chief Risk Officer. Please go ahead, sir.

Good morning. Welcome to the AMERISAFE 2017 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 may differ materially from the results expressed or implied in these statements if the underlying assumptions prove to be incorrect or as the results of risks, uncertainties and other factors, including 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. For some time now, we have discussed the challenge for AMERISAFE of declining loss cost in an increasingly competitive marketplace. Early in the soft cycle, we outlined our strategy to maintain discipline, sustain underwriting profitability, provide superior returns to our shareholders and deliver value-adding services to our policyholders.

Allow me to quickly highlight some financial results for the year to emphasize my point before moving on to the quarterly metrics. Our ROE for 2017 was at 10.5% and 13.3% on an operating basis, taking out the impact of tax reform. Our combined ratio was 84.7%, and we paid out $4.30 in dividends to our shareholders. I believe these results, along with our strong balance sheet, reflect our stability and our commitment to our shareholders and policyholders, as outlined in our strategy.

Now onto the quarterly metrics. Gross premiums written in the quarter were up slightly from fourth quarter of 2016. The increase was spurred by audit and related premium adjustments, which added $2.1 million to gross premiums written in the quarter compared to $1.2 million in the fourth quarter of 2016. While debt premium was down less than $0.5 million for the quarter, we grew voluntary policy count 1.3% at an average ELCM of 1.65. The ELCM was down only slightly from 1.67 in the fourth quarter of 2016. We also had strong 93.3% policy retention rate in the fourth quarter for those policies for which we offered renewal.

I believe our retention rate reflects our responsiveness to the competitive environment while maintaining our discipline. It's that same discipline, which ultimately earns the appropriate level of premium for the risk we underwrite, as reflected in our loss ratio.

Our net loss and LAE ratio was 66.7% for the quarter and 60.5% for the full year. Our estimate for the current accident year loss ratio changed in the quarter from 69% to 70.5%. Both frequency, as a function of premium and severity trends, were up for accident year 2017 compared to '16.

If you recall, we assumed such increases when we set our initial estimate for 2017 back in the first quarter.

Throughout the year, claims reported were down compared to that year -- to the prior year. For the full year, our claims reported were down 3.4%, while net earned premium was down 6.1%.

During last quarter's call, we noted some concerns about severity in the current accident year. As the fourth quarter progressed, we saw a further increase in severity trends, which caused us to change our estimate for the accident year 2017. The impact of this change, in estimate, added 4.5 percentage points to the quarterly loss ratio.

As for prior accident years, we experienced $7.2 million of favorable development in the quarter, primarily from case development in accident years '10, '11, '14 and '15. Our open inventory of claims at the end of 2017 was down 4.1% from 2016, as we continue to manage our claims for maximum medical improvement, return to work in closing the claim.

Workers' compensation contends to be a very -- continues to be a very profitable line for us and for the industry. This fad drives competition. History has a way of repeating itself, and I believe underwriters who maintain discipline when loss cost trends begin to increase will avoid building loss deficiencies as the cycle turns and ultimately, provide greater returns to shareholders and stability for policyholders.

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

Thank you, Janelle, and good morning, everyone. For the fourth quarter of 2017, AMERISAFE reported net income of $649,000 or $0.03 per diluted share compared with $19.1 million or $0.99 per diluted share in last year's fourth quarter.

Overall, net income was impacted by tax reform due to a revaluation of our net deferred tax assets at the new lower corporate rate of 21%. This created a noncash charge of $12.6 million in the fourth quarter, which lowered net income by $0.66 per share. Obviously, AMERISAFE will benefit significantly on a go-forward basis with the new lower corporate tax rate of 21%.

Operating net income, which excludes the tax impact as well as realized gains and losses on our investment portfolio, was $13.2 million for the quarter or $0.69 per share, a decrease from $1.04 in the fourth quarter of 2016.

For the full year 2017, AMERISAFE produced net income of $46.2 million or $2.40 per share, a decrease from the record net income we reported in 2016.

Operating net income for the full year 2017 was $59.3 million or $3.08 per share. This level of operating income is our third-best year but was a decrease of 24% when compared to the record operating earnings in 2016.

Revenues in the quarter declined 3.7% to $94.9 million compared with the fourth quarter of 2016.

Net premiums earned decreased 5.1% to $87.4 million when compared to last year's fourth quarter. For the full year, net premiums earned were down 6.1% coming in at $346.2 million.

Turning to net investment income. We saw a decrease of 6.9% in the fourth quarter to $7.3 million compared with $7.9 million in the fourth quarter of 2016. The decrease was largely due to the increase in value of a hedge fund investment in last year's fourth quarter. Net investment income for the full year was up 4.2% to $29.3 million compared with $28.1 million in 2016.

The tax-equivalent yield on our investment portfolio was 2.9% at year-end. This yield reflects the new tax rate of 21% on taxable investment income. The pretax yield on the portfolio at year-end was 2.54%, up slightly from 2.46% 1 year ago. There were no impairments on any of the securities held in the portfolio during the quarter or for the full year of 2017. And there were no significant realized gains or losses during the quarter.

The investment portfolio is high quality, carrying an average AA rating with current duration of 4.03, and we have 60% in municipal bonds, 19% in corporate bonds, 13% in U.S. trades, treasuries and agencies and the remainder in cash and other investments.

Approximately 57% of our bond portfolio is comprised of held-to-maturity securities, which were in an overall unrealized gain position of $9.6 million at year-end. These gains are not reflected in our year-end book value, as these bonds are carried in amortized cost.

Moving now to operating expenses. Our total underwriting and other expenses were $18.1 million in the quarter compared with $17.1 million in the fourth quarter of 2016. The increase was primarily due to higher insurance-based assessments compared to the same quarter last year. By category, the 2017 fourth quarter expenses included $6.7 million of salaries and benefits, $6.4 million of commissions and $5 million of underwriting and other costs.

Our expense ratio for the quarter was 20.7% compared with 18.6% for the fourth quarter of 2016.

For the full year 2017, operating expenses decreased $1.8 million or 2.3%. Even with lower operating expenses, our expense ratio was slightly higher for the year at 22.8% compared with 21.9% in 2016 due to lower earned premium in 2017.

Our tax rate was significant during the fourth quarter and for all of 2017, as a result of the tax reform bill and the $12.6 million impact on our net deferred tax assets. Excluding the impact, our tax rate decreased to 25.5% in the quarter, down from 31.4% a year ago. The decrease reflects a larger amount of tax-exempt income relative to taxable income compared with a year ago.

For the full year 2017, excluding tax reform, the effective tax rate was 28.4% compared with 31.0% in 2016. As we look to 2018, we expect to see substantial benefit for the new lower tax rate, as our underwriting profits will now be taxed at 21% instead of 35%.

Return on equity for the fourth quarter of 2017 was 0.6% compared to 15.8% for the fourth quarter of 2016, impacted, again, by tax reform. Operating ROE for the quarter was 11.4%. For the full year, ROE was 10.5% compared with 17.1% last year, while operating ROE for the full year was 13.3% compared with 17.2% in 2016.

And now to capital management. During the fourth quarter, the company paid its regular quarterly cash dividend of $0.20 per share as well as an extraordinary dividend of $3.50 per share. This quarter, the board has declared a quarterly cash dividend of $0.22 per share payable on March 23, 2018, to shareholders of record as of March 9, 2018. This represents a 10% increase in the regular quarterly dividend.

And finally, just a couple of other noteworthy items. Book value per share at December 31, 2017, was $22.10, down slightly compared with the last year's $23.72 per share. And we paid out $4.30 per share in dividends to shareholders during the year.

Our statutory surplus was $382 million at December 31, 2017, compared with $394 million last year at this time.

And finally, we will be filing our Form 10-K with the SEC tomorrow, February 28, after market close.

That concludes my remarks, and we'd now like to open it up for the question-and-answer session. Operator?

(Operator Instructions) Our first question comes from the line of Randy Binner from B. Riley.

I wanted to ask a question about the severity and specifically, because you have a book of business where large claims can have an impact. I wanted to understand if what we're seeing here is a function of, kind of, a few large claims, kind of, like what we've seen in the past? Or if it's something that's more systematic throughout the book?

Thank you, Randy and good question. So let me start with talk about the book as a whole. If you look at our industry mix, when you see the 10-K, that Neal alluded to, will be filed on the next day. There's not really a change in the mix of our business. So there's not a large shift between the industries. It's pretty steady state from what you've seen. So that's been a very consistent approach. Secondly, our reserving philosophy here at AMERISAFE has not changed in regards to how we reserved accident years '15, '16 or '17. There's no real change in the reserving philosophy there, because we've talked in the past about coming out of the Great Recession. I do think, from a case reserving philosophy, maybe we were -- we did increased things and living in this new world of return to work and what that meant for our claims. But to your question about the large losses, so when we talk about claims over $1 million, we ended accident year 2017 with 17 claims over $1 million, which, if you look back at 2016, same point in time, we had 17 claims. In '16, those 17 claims range from incurred of $1 million to, I think, the upper end was $4 million. In '17, it ranges from $1 million to the largest claim there is $10 million. So there is a -- obviously, an increase in severity and just in the dollar volume of those large claims. But looking through my book, I don't see anything in terms of -- to your point, is it systematic or not? 1 year does not make a trend, so I don't want to say that. But I can only tell you what we're seeing in the '17 data, which is something we alluded to in the third quarter call, that we had concerns there in terms of severity.

Right. So I mean, I guess, it sounds to me like we should plan on a little bit higher loss pick, because it's not a situation where we can say there is these 3 or 4 claims that are really driving that, but the rest of the book. I mean, you're seeing -- you're just seeing an inflation of claim payouts. And what is it? Is it the -- I mean, the indemnity piece doesn't change, right? So it's got to be -- is it the health care piece? Is there more litigated claims? Is there -- what is it that is driving that inflation and severity?

I think it's the severity of the accident. So obviously, you're right. The medical piece drives more VAT than the indemnity piece does. When I look at -- even if I just look at this universe of large claims, it's our typical accidents. Motor vehicle accidents and falls. Those are the major injuries that we have, those are the major injuries we had in '17. They just seem to be a little bit more severe. But keep in mind, because we talked about this when we set the initial estimate for '17 in the first quarter, we assumed coming into the year that we thought frequency was going to be as in terms of premium. And that came to be -- it came to fruition, our actual claim counts are down. So to your point of, is it the mix of business? Our claim counts are down, and I grew policy count. It's just the severity of those claims is where our concern is for accident year '17.

All right. That is interesting. I'm going to ask one more. So is that something you see in NCCI data? Like, if -- I mean, I don't know. So auto accidents, if we look at the rest of the industry, we have seen more severe auto accidents, because vehicles are moving faster, for instance on (inaudible). So this one example. So can you validate what you're seeing in your relatively small book against NCCI data, or is it not -- is that not the case?

No, I can't speak for the industry as a whole. Because keep in mind, we are writing a niche, and we are writing high-hazard carrier -- high-hazard insured. So they tend to have more severe accidents. So that's a good question. Will that prove out in the industry-wide data? I don't have the answer to that.

(Operator Instructions) Our next question comes from the line of Mark Hughes from SunTrust.

You say that the accidents are more severe. Do you feel like, medically speaking, people are getting hurt more, or it's the payout, the settlements that are higher?

Rephrase the question. So you said, medically, are they getting hurt more? Again, the claim counts are down.

All right. I'm just -- I'm sure it's -- is in fact the physical damage that the actual versus the cost-side damage?

Yes. That's a good question. I do think, at least in the accident year 2017, we did see more severe accidents. We saw a lot of single-vehicle accidents, which -- we're trying to figure out, what does that mean in terms of the data? Is that something new that we're going to see? There's a lots of nationwide data out there about distracted driving and those sorts of things. I don't know if that answers your question or not.

So I think to my -- was that more damage rather than more cost per accident?

Yes. And if I'm thinking in terms of our large losses that I just named out to 17, yes. There were more severe injuries, a quad, for example, where in a motor vertical accident, where -- I don't think we get a lot of -- you wouldn't think in a motor vehicle accident, you would get a lot of quads. But in this case, we did.

In your experience, is that -- are there trends like that? Assuming your book is relatively steady, your underwriting is steady, when you start to see an uptick in actual damages like that. Is that -- is there a parallel to a time, historically? I guess, I can understand medical inflation or higher wages, but the actual severity of the accidents?

At this point, I can't say it's a trend. I hearken back if there's an over-under, I'm going to use the word lumpy. We are in a lumpy business. And particularly, with these high-hazard insureds, it's just a matter of how they fell. We know they're going to fall, but how they fell, and how they landed adds to the severity of the industry -- injury. And that is sort of -- I hate to say, luck of the draw, but that's what adds to the lumpiness of what we do.

Right. And then to Randy's point about the loss pick, when we think about 2018, should we assume higher than the 70.5%?

I can't -- I don't want to give too much forward-looking guidance. I will say this, I don't see anything on a macro basis that seems to be moving the needle in terms of what we've -- what we're experiencing in the industry. So we had declining underlying loss costs this -- in 2017. I think will probably still -- that will continue into '18, probably not to the degree that we saw in '17. There were plenty of CATS in 2017, but I don't think that was enough to move the needle in terms of the excess capacity in the marketplace. So I believe '18 will be as competitive. So if you translate that into how pricing will affect the loss ratio, is that -- I know, I'm getting a long way there, how pricing will affect the loss ratio, I don't see anything dramatically changing the trend we saw in '17.

And just so, if I'm reading you properly, the trend would -- the increased competition declining loss costs, that would tend towards a little upward pressure on the loss pick? Is that a fair...

Right. So I'm going to be -- it's really a function of the premium, I'm collecting, right? And I'm going to earn, at this point, it appears, earning less premium with those policies that I have written in '17.

I think I got you. When we look at the ELCM, it was pretty steady year-over-year, a little bit of a step down, sequentially, between Q3 and Q4. Was there some intentionality to that, more competitive marketplace, how do we think about that?

The marketplace is certainly competitive. It's a little bit hard to look at ELCM's consecutive quarters. Because if you're looking at it in terms of renewable books, it's really what ELCM did, we charged on that book of business last fourth quarter. So I was really comparing the 1.67 to the 1.65, which is a very slight decrease. But I do think, we were responsive to the market, simply because, as I said in my opening remarks, our retention rate for those policies we chose to offer renewal was at 93.3%, which is a very high percentage.

And then when we think about the expense ratio for 2018, any obvious, kind of, puts or takes as we think about the likely expenses, anything about 2017 that will not recur or will that will influence that?

No, Mark. This is Neal Fuller. No, we would expect to continue to try to manage the expense ratio as we expect to see a declining premium environment. So our guidance for the expense ratio would not change. I think, we would look at in the 24% to the 25% range, which we think has been our historical guidance.

And then the effective tax rate, given your mix of investments -- tax-exempt investments, any guidance on, likely tax rates?

No, it's hard for us to give guidance on likely tax rate, because it would imply some level of favorable development. And obviously, we don't forecast favorable development. So it's difficult for us, other than underwriting profits will now be taxed at 21%. The amount of taxable income would be taxed at 21%. And then the change on the -- the tax rate on the munis has not changed.

Right. So something less than 21% would be a good place to start?

Yes. Yes, we would expect that it would be lower than that.

Maybe high teens?

I'm -- I won't go there. But if you do the math, you'll come up with the tax rate.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Janelle Frost for any further remarks.

Thank you for your interest in AMERISAFE and for joining the call today. We are pleased with our results for 2017. And believe the company is well positioned to execute on our long-term strategy. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.