Amerisafe Inc (AMSF) 2023 Q1 法說會逐字稿

Good day, and welcome to the AMERISAFE 2023 First Quarter Earnings Call. Today's conference is being recorded.

At this time, I'd like to turn the presentation over to Ms. Kathryn Shirley. Please go ahead, ma'am.

Good morning. Welcome to the AMERISAFE 2023 First Quarter Investor Call. If you have not received the earnings release, it is available on our website at 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 result of risks, uncertainties and other factors, including factors discussed in today's earnings release and the comments made during this call and in the Risk Factors section of our Form 10-K, Form 10-Q 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 Gerry Frost, AMERISAFE's President and CEO.

Thank you, Kathryn, and good morning, everyone. AMERISAFE's long tenure in the high hazard workers' compensation market and disciplined approach to risk selection and pricing has allowed us to navigate competition and pricing pressure while maintaining solid results. We started the year with a strong first quarter performance, reporting a combined ratio of 82.2%, gross premiums written growth of 6% and an operating ROE of 19.1%. During the quarter, top line grew 6% as positive audit premiums more than offset rate declines.

Our overall pricing this quarter as measured by our ELCM was 148. We continue to see strong retention in policies we offer renewals with a 94% retention for the first quarter, largely in line with our recent experience despite steady competition. As we look forward, competitive pressures and rate declines are anticipated to remain a headwind. At the same time, we anticipate audit premiums to remain a tailwind. However, the quarter-over-quarter growth comparisons should become -- should begin to flatten. Moving to losses. The accident year loss ratio remained steady with the prior year at 71%. During the quarter, our claims handling practices drove better-than-expected outcomes, resulting in favorable prior year development of 10.1 million or 14.6% loss ratio points. These reserves were primarily released from accident years 2016 through 2020.

As it relates to loss trends, frequency and severity are both within our line of expectations. Frequency was trending slightly below and severity on par with the previous accident year. It bears repeating that claims trends can be lumpy when isolating quarters. As has been our historical practice, our case reserves include anticipated medical inflation, particularly given the long-tail nature of severe claims. Our balance sheet is conservatively positioned as we were minimally impacted by the economic volatility this quarter. Our financial position remains strong with roughly $1 billion in investments in cash, a solid reserve position and no outstanding debt. We expect our market dynamics to remain challenging. However, given our long tenure of experience in high hazard niche and strong balance sheet, we are well positioned to retain our policyholders and attract business while delivering robust returns to our shareholders.

With that, I'll turn the call over to Andy to discuss our financials.

Thank you, Janelle, and good morning to everyone. For the first quarter of 2023, AMERISAFE reported net income of $17.3 million or $0.90 per diluted share and operating net income of $16.1 million or $0.83 per diluted share. This is largely in line with Q1 2022 net income of $17.3 million or $0.89 per diluted share and operating net income of $15.9 million or $0.82 per diluted share. Gross written premiums were $82.5 million in the quarter versus $77.8 million in Q1 2022, growing 6% on a year-over-year basis.

During the quarter, voluntary premium decreased 1.1%, primarily due to continued rate pressure. Payroll audit and related premium adjustments benefited the quarter by $8.9 million. Rates continued to decrease with the average decline in approved loss costs of 6.8% on a year-over-year basis. Wage growth remained strong, resulting in some offset to our top line pressures. The accident year loss ratio was 71% in the quarter and in line with what was booked in the previous year. The net loss ratio for the quarter was 56.4%, which reflects $10.1 million in favorable loss development, primarily from accident years 2016 through 2020. Our total underwriting and other expenses were $17 million in the quarter, resulting in an expense ratio of 24.5% compared with 22.4% in the first quarter of 2022.

This quarter included a $3.3 million increase in profit sharing reinsurance commission, while the first quarter of 2022 included a $3.8 million return of assessments from the Minnesota Reinsurance Association. After netting out these 2 items, the balance of the increase is driven by commissions and professional fees. Turning to our investment portfolio. In the first quarter, net investment income increased 21.6% to $7.4 million from $6.1 million in the prior year quarter. The increase was driven by higher yields on cash as well as higher reinvestment rates on fixed maturity securities. Yields on new investments increased approximately 313 basis points, driving our tax equivalent book yield to 3.49% or 74 basis points higher than the previous year. The investment portfolio is high quality, carrying an average AA credit rating with a duration of 4 years.

The composition of the portfolio is 58% in the initial bonds, which includes 15% in taxable munis, we have 27% in corporate bonds, 3% in U.S. treasuries and agencies, 7% in equity securities and 5% in cash and other investments. Approximately 60% of our bond portfolio is comprised of held-to-maturity securities. Our capital position is strong with a high-quality balance sheet, solid loss reserve position and conservative investment portfolio. At quarter end, AMERISAFE carried roughly $1 billion in investments, cash and cash equivalents. Since year-end, book value grew 4.9% to $17.38 and operating return on average equity was 19.1%.

With that, I would like to open the call for the question-and-answer portion of the call. Operator?

(Operator Instructions) We'll now take our first question from Matthew Carletti with JMP.

Gerry, I was hoping you might be able to just kind of walk us through a little bit of the loss environment, just kind of your mental math on how you get to think about kind of accident your loss ratios, and specifically kind of just what you're seeing with frequency and severity and kind of your expectations there, and you talked a bit obviously about what loss costs are doing. But then also with an eye towards kind of the piece of the puzzle that is exposure growth and wage inflation and kind of how that might impact that calculus and how much of that might act like rate even though it isn't loss cost per sec?

Right. That's a good way to look at it, Matt. So I'll start with talking about the loss trends themselves. It sounds like a broken record when I say this, but we're still not seeing reported claim counts rebound to pre-pandemic levels. So which is good, right? That's good news. Say for employers, safer workplaces, all wonderful things. When I talk about frequency, I tend to talk about frequency in terms of premium dollars, not payrolls, but I'll get to the payroll in a second.

So even though we've collected less premium dollars to cover those losses, our frequency even our frequency measure has been slightly down even compared to first quarter of 2022. Now granted 1 quarter does not a trend make. But we just haven't seen the rebound in claims reported and which is definitely benefiting us from the frequency standpoint. From a severity standpoint, severity for the first quarter, again, not one quarter does not a trend make. From the first quarter, severity was pretty much on par with where severity was for the first quarter of 2022 accident year. As we've talked about numerous times on these calls, where our concerns come in severity is given the long-tail nature of our claims, how does medical inflation influence that over a long period of time.

I feel like we've always taken a very long-term view of medicalization. So I feel very comfortable about that from our ultimate loss ratio pick. And then even on the case reserving basis, I cannot give enough credit to my field case managers in terms of how they think about these claims, and they really do look out to say what could that replace that knee replacement cost us 5 years from now, 10 years from now and how many of those are going to be factored into the claim, and they put that in their initial case reserve. So credit to them for how they review and think about individual claims. To your question about payrolls sort of acting as Ray, you're absolutely right. In Andy's prepared remarks, he mentioned that premium audits added $8.9 million to the top line for the quarter.

We continue to see payroll growth. So if you think about Andy's number of 8.9%, that's reflecting policies that we wrote a year ago and how those estimated payrolls turned out regarded to how we originally estimated them to be the actual payrolls compared to what we originally estimated them to be. So if you think about that time period, we're talking policies that were in effect or the work activity that happened in 2022. Each quarter, we've been trying to give a little bit of a forward-looking picture of that saying, well, what are we seeing in wage growth or payroll growth in the previous quarter. And as you know, we've been reporting double-digit increases. Third quarter was 12.1%, fourth quarter, 11% first quarter 2023, 11%.

So we think that bodes well for us in terms of continuing to see pretty robust audit premium. Now obviously, the comparative year-over-year is going to get a little bit tougher because if you the audit premiums that we've seen increasing. It really started increasing in first quarter of 2022. And so as we get these quarter-over-quarter comparisons, that growth rate will tend to flatten or be less impactful to the top line. But still, to your point about the underlying loss cost and the rate, those payroll dollars are certainly adding to our premium. Can you when you think about did I answer all your questions?

Very helpful. And I guess, just one more kind of as we think about that payroll growth, are you -- do you have a feel for how much of that is increased exposure, so more hours worked or more employees working that sort of thing versus true wage growth, just same person, doing same exact exposure you're getting paid more for it.

Yes. I don't have transparency into hours worked. That would be ideal, right? If I knew that same workers extended hours. I don't know that. I know of the 11% that we saw reported to us in the first quarter, which would have been fourth quarter activity, 8% of the 11 was wage growth, absolute wage growth. So it could have been higher wages or same or higher more hours. The new employee count has been relatively benign, which we like to see. And that's really across Matt, really across our industry groups. When I look -- when we look at it, the payroll broken down by industry group, it's been pretty robust for most of them. Obviously, we saw a little bit of increase in more so in roofing, maybe in our construction book than other lines, but Maritime had really strong wage growth. So I can't even isolate it down to particular industries. I think it's just the economies for the small to midsized employers really.

That makes sense. And then you're actually going to hit on something there I was going to ask as my follow-up question, and that is do you have the number, the millions of dollars of the Q2 '22, what was the benefit from audit premiums in that quarter, just so we have a baseline as we think about...

It was a $5.5 million with second quarter of 2022 was $5.5 million.

Perfect. Wonderful. Great. That's all I got. And congrats on the nice start to the year.

Thank you, Matt.

(Operator Instructions) We'll now take our next question from Mark Hughes with Truist.

Janelle, I wanted to explore your mental map a little further.

Absolutely.

I did have a question on the construction, you hadn't said that it was any sort of headwind or any issue. What's your feeling about that? I think you've talked about the customers are always focused on the next job. What's the latest vibe on that?

Right. If I make it by vibe strictly on what's been reported as in payroll, I would say, wow, my construction book looks really great. You're absolutely right in terms of what does the next job look like. I am not naive to the headlines that we see about in terms of the tightening in the credit market, and that certainly could impact our small to midsized employers in terms of lines of credit being the -- their credit lines being available to them from small regional banks. But we haven't really seen it in work activity yet.

So I harken back to the COVID-related recession. That was one of our bigger concerns was, okay, you're working now, but is the next job going to be there. And for our employers, again, the small to midsized businesses, they had steady work throughout. So unless somehow credit tightens to the point where maybe that makes it a little bit more difficult to complete that next job or bid on that next project. I think we still have a few quarters of robust payrolls coming from those industry groups. I guess we all read the headlines about is there going to be recessions that are not going to be a recession. Our industry groups tend to bode well in what we call mild recession. So I feel pretty comfortable about that as well.

Yes. Maybe by the time the recession is over, they'll have continued to work on their existing backlog and then we can start on the new backlog.

That would be great. That would be great.

Yes. any large losses in the quarter and $1 million plus?

We had 2. We had 2 claims with cash reserves over $1 million in the quarter.

Okay. You give the NCCI loss costs in the release, and it looks like it's moderating a little bit. I think last quarter was 7 plus, and this is kind of high 6s. Is that a wishful or how are you seeing that?

It's funny. We've been saying for so long, we would appreciate a slowing of the decline. So in that regard, I guess we got what we asked for is a little bit slowing in terms of the rate of the decline. We'll see. NCCI will put out the industry-wide results in a couple of weeks in May. So we'll see how the industry fared in terms of the accident year loss ratio be harking back to that data the last few years, every year, it's been creeping up a little bit higher, a little bit higher. I anticipate that to be the case this year as well for the industry.

Will you say creeping up a little higher, it's a little less negative or more negative?

Approaching that 100 combined, if you think about it in terms of the combined the accident year, the accident year, I know companies are still reporting some redundancies. But if you look at the accident year combined ratio or even loss ratio for the industry as a whole, each year, it's been going up a point or 2 or 0.2 where the combined ratio was approaching 100 last year. So we'll see what they report for 2022.

Yes. I don't know if you...

Question will drive -- that's ultimately what's going to drive whether the rates continue to decline or let's be bold and say flatten.

Yes, Do you have any observations about the loss development trends maybe across the sector. I don't know if that's part of your process or whether you wait for CCI to come out. But I wonder if you have any thoughts on what's happening more broadly around loss development.

Yes. I think the industry as a whole has certainly seen the benefits of declining frequency. I don't think that's really changed all that much. It's happened for AMERISAFE, I think it's happening for the industry. Severity is the question mark as to what's going to happen with severity.

I think anyone you talk to you in the workers' comp space, obviously, is spending a lot of time thinking about medical inflation and just survivability alone, particularly on the types of severe claims that we deal with through medical technology and innovation, people survive injuries and have better health care, which is fantastic, but that adds to the ultimate severity of those claims and I think that just continues to be -- has to be continue to be factored into the rates themselves, that severity is not just about medical inflation. The fact that these injured workers tend to get the best in class in terms of care as they should. But that also means a higher price tags associated with those claims.

Yes. You mentioned steady competition. Any shading on that when you think about Q1 versus maybe the back half of 2022, a little still tougher a little easier...

No. We were able to get some new business growth in the quarter, but I'm totally going to attribute that to our employees just really hustling for that new business. Agents continue to have struggles, if that's the right word, in all the other lines of business. So everyone that's coming in for workers' comp coverage, particularly if they're pricing out all of their product lines, workers' comps a rate decrease, no matter which companies they're going to be dealing with unless they've had something obscure happen.

So the agents just don't have the luxury really, if you want to call it that, a shopping workers' comp right now. It's really about where am I going to find the auto coverage? Where am I going to find the liability coverage. So kudos to AMERISAFE were doing more with what we have. We would love to get a large influx of opportunities to see new business. But that requires, to your point, it requires the competitive environment to have a shift, and we really haven't seen that in quite some time.

Have you -- this may not be as relevant in workers' comp. And I'm sorry for in the call here. You're buying. Yes. I don't know if this is relevant for workers' comp, but any observations around agents being able to get appointments or have access to markets that, I guess, could end up being beneficial that maybe some of your bigger competitors, the travelers or Hartford isn't as interested in working with the same group of agents as they might have in the past because they're kind of narrowing that relationship list. Do you see anything like that?

I have not, Mark. I haven't seen anything like that.

Was an idea.

It is you're right.

We'll now take our next question from Rob Farnam with Janney.

One question in your reserves. So what medical inflation assumption are you using for your reserves?

Yes. We continue -- let me -- I think of this in 2 different ways. When we think about our overall reserves like the ultimate PICC for 2022 or 2023 or even 2022 when we were doing 2020, like I said, we take a long-term approach. So it tends to be mid- to high single digit in terms of medical inflation. But more importantly, on our case reserves, again, I'll give credit to my field case managers on a case reserve basis, they really do factor in the realities of each individual case and what that means on a long-term basis.

On a few calls ago, maybe the last call even I talked about home health or using that as an example. There's certainly a labor shortage in home health. It's a challenge for any company that's having to deal with long-term health component. My field case managers are factoring that into my case reserves now. The reality is that they're seeing currently. If something shifts in that regard, then that could be beneficial to us in the future. But we want to make sure that we get our most likely outcome in terms of our case reserving now.

Right. And so if the actual inflation is not as robust as the inflation assumptions that you're putting into the reserves, that portends well for future favorable reserve development as you find out that the inflation wasn't as strong.

Yes, I would agree with that statement.

Okay. And the second question I have is more about the industry, you're probably getting along with what Mark was asking. So if the industry's accident year combined ratio is approaching 100 and how I don't know if confidence is the right word, but how confident are you that the industry's industry doesn't overshoot the loss cost declines and that 100 turns into 105 or 110 over time. I know in many years past, the workers comp was not a great line in terms of profitability. But I don't know, any sights in the near term as to where profitability will be going?

Yes. So it's a great question. History would say that's exactly what happens, right? We're getting to a period where we have declining rates and ultimately, companies are using that to book their premium and put up their loss reserves. And the realization of claims start getting paid out. You haven't estimated that correctly and you have started paying out those claims and you didn't collect the right dollars. And so then rates take a swing. And ideally, for a company like AMERISAFE, that's when we tend to do better, right, in terms of we like those kinds of -- those kinds of environments because of our underwriting discipline.

We feel like we are very good about managing where we -- what the right price is for our individual risk. But as an industry as a whole, if you look back, that's typically what happens. You have this period of declining rates. All of a sudden, the industry has some adverse development and then it swings the other way and then you get those rate declines. Will it be as large of a swing, will the valleys be as low and the peak be as high as in prior years. I don't think so. The industry has better data. I think people are more underwriters are more disciplined than that. I don't really hear a lot about cash flow underwriting, which was something that was done in the past. So maybe I think the market is still the cycle is still alive and well. But maybe, like I said, maybe the valleys aren't as low and the peaks is high.

So I do think as the industry approaches getting into that unprofitable level, what we hope to see, we, AMERISAFE, hope to see is other multiline carriers contracting their appetite for workers' compensation, particularly severe workers' compensation and utilizing their capital to pursue lines where they are getting rate and where they have had more success. I don't know that they will completely walk away from worker's compensation, but just contracting their appetite for us would be a consideration of hardening market, which we just haven't seen a lot of fluctuation in competition for over a year now, maybe even 2 years, if I lose track of time with COVID. But let's say, 2 years, there really has been a lot of fluctuation in the competitive levels.

Yes, that was kind of what was driven my question. I was -- I didn't mean to imply that AMERISAFE's combined ratio is going to be going up that high. That was more of an industry just wondering when the competition might stop pulling back because it's not profitable anymore. You answered that to provide a good color.

And it appears there are no further telephone questions. I'd like to hand the conference back over to Ms. Frost for any additional or closing comments.

First quarter was a strong start for the year, and we're pleased with the quarter's results. Equally, we look forward to a continued success in 2023 as the AMERISAFE team strives to enhance our service to our agents, our policyholders and injured workers. Thank you for joining us today.

And that does conclude today's conference. We thank you all for your participation. You may now disconnect.