Amerisafe Inc (AMSF) 2021 Q4 法說會逐字稿

Good day, and welcome to the AMERISAFE 2021 Fourth Quarter and Full Year Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Kathryn Shirley, Chief Administrative Officer. Please go ahead.

Good morning, and welcome to the AMERISAFE 2021 Fourth 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 a 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 Janelle Frost, AMERISAFE's President and CEO.

Thank you, Kathryn, and good morning, everyone. I'm going to change the usual order of my comments and discuss losses incurred first.

For our longtime listeners, you will appreciate my words when I say, "This is a lumpy business." In the fourth quarter, we had a catastrophic claim involving severe injuries to insured workers as a result of a single accident. Due to the nature of the injuries and information available, we have increased our current accident year loss ratio to 80.7% for the full year. As currently reserved, this claim impacts our catastrophe reinsurance layer.

To recap our reinsurance, we are responsible for the first $2 million at each loss occurrence. We are then covered by reinsurers for the next $8 million up to $10 million in the working layer. Then, we have catastrophe coverage for the next $60 million, in excess of $10 million. The catastrophe coverage does have a $10 million maximum any one life provision. Meaning, within the layer, the most reinsurers will cover per injured worker is $10 million.

While the multi-claimant aspect of this claim is unusual for us, dealing with severe injuries is not. This is what we do and have expertly been doing for 36 years. Each quarter, we disclosed the number of severe claims in the context of those with case incurred losses in excess of $1 million.

In 2021, we had 19 severe claims compared to 18 at year-end 2020. We averaged 18 severe claims per year over the last 5 years. We provide severe claim count as additional insight into our high-hazard niche, and we do so without giving claim-specific information.

Out of respect for the injured workers and their families and to protect medical privacy, we will not share specifics regarding this accident nor the injury sustained in this catastrophic claim. However, the risk profile of this policy is in our core appetite.

The 80.7% loss ratio includes our best estimate for the catastrophic claims and no change in any other loss assumptions regarding the accident year. Frequency trends for accident year 2021 have not returned to pre-pandemic levels, although they are higher than accident year 2020. Severity was also within our expectations, sans the catastrophic claims.

As for prior accident years, we recognized $13.6 million of favorable prior year development stemming from accident years 2016 through 2019. The loss ratio for the full year was 58.3%, comprised of 80.7% for the accident year 2021 and a favorable prior year loss ratio of 22.4%.

Turning to premiums. Debt premium was down 9.4% for the quarter and 6.3% for the full year. Loss cost declines continued to be a headwind, averaging a 6.9% decrease in the quarter and a 7% average decrease for the full year.

Competition remains strong, and we continue to respond while maintaining underwriting discipline. As such, our renewal policy retention for the quarter was 93.5%. And we were able to grow policy count slightly in 2021 with the addition of new business. New business growth in 2022 is expected to be aided by a stronger economy with fewer COVID variant spikes and improving agent relations. Our aggregate pricing for the quarter, as reflected by our ELCM, was a 1 53.

To recap each quarter of the year, our ELCM was a 1 54 in the first quarter, a 1 52 in the second quarter and 1 53 in the third and fourth quarters. Audit premium and related premium adjustments increased gross premiums written $0.1 million in the quarter and decreased gross premiums written $1.2 million for the full year. Audit premium alone was positive in the quarter, rebounding from being slightly negative in the third quarter.

Looking ahead, payrolls reported in the fourth quarter reflected growth of roughly 4%. Approximately 70% of that was due to wage growth and 30% to employee count. In total, gross premiums written were down 11.4% in the fourth quarter and 8.2% for the full year.

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

Thank you, Janelle. Good morning, everyone. For the fourth quarter of 2021, AMERISAFE reported net income of $3.5 million or $0.18 per diluted share compared with $28.5 million or $1.47 per diluted share in last year's fourth quarter. This result was heavily influenced by the catastrophic claim the company experienced in the fourth quarter, as Janelle outlined, which impacted the quarter by $0.98 per share.

For the full year 2021, AMERISAFE produced net income of $65.8 million or $3.39 per share compared with $86.6 million or $4.47 per share in 2020. Operating net income for the full year 2021 was $54.7 million or $2.82 per share. Revenues in the quarter were down 11.2% to $78.4 million compared with the fourth quarter of 2020. Net premiums earned decreased by 9.3% to $67.7 million when compared to last year's quarter. For the full year, net premiums earned were also lower by 9.3%, totaling some $276 million. These premium trends were driven by the continued decline in workers' compensation loss costs in 2020 and 2021.

Turning to investments. We saw a continuation of the impact of lower short-term and long-term yields, with net investment income down 16% in the fourth quarter to $6.1 million compared with $7.2 million in the fourth quarter of 2020. Net investment income for the full year was down 13.4% to $25.4 million compared with $29.4 million in 2020 due to the lower interest rate environment. The tax equivalent yield on our investment portfolio was 2.67% at year-end. The pretax yield on the portfolio at year-end was 2.37.

There were no significant credit losses on any of the securities held in the portfolio during the quarter or for the full year of 2021. There were no significant realized gains or losses during the quarter or full year. And unrealized gains on our equity securities were $4.3 million in the quarter and $12.3 million for the full year 2021.

The investment portfolio is high quality, carrying an average AA- rating with the current duration of 3.71. And the portfolio is composed of 64% in municipal bonds, including 15% in taxable municipals, 19% in corporate bonds, 5% in U.S. treasuries and agencies, 6% in equity securities and 6% in cash and short-term investments.

Approximately 60% of our bond portfolio is comprised of held-to-maturity securities, which were in an overall net unrealized gain position of $26.6 million at year-end. These gains are not reflected in our year-end book value as these bonds are carried at amortized cost.

Moving now to operating expenses. Our total underwriting and other expenses were $16.7 million in the quarter compared with $15.6 million in the fourth quarter of 2020. The increase in operating expenses in the quarter was primarily due to increases in bad debt from NCCI pools and increases in loss-based assessments.

By category, the 2021 fourth quarter expenses included $6.3 million of salaries and benefits, $5.3 million of commissions and $5 million of underwriting and other costs. Our expense ratio for the quarter was 24.7% compared with 20.9% for the fourth quarter of 2020.

For the full year 2021, operating expenses increased by just $145,000 or 0.2%. Our expense ratio for the full year was 26.1% compared to 23.6% in 2020, primarily as a result of lower earned premiums. Our tax rate for the full year 2021 was 18.1% compared with 19% in 2020 as a result of the elimination of a tax valuation allowance on deferred state tax assets. Return on average equity for the full year was 15.7% for 2021 compared to 19.9% for 2020. Operating ROE for the full year was 13.6% for 2021 compared with 19.7% for 2020.

And now to capital management. During the fourth quarter, the company paid its regular quarterly cash dividend of $0.29 per share as well as a special dividend of $4 per share. This quarter, the Board of Directors has increased the regular quarterly dividend by 6.9%, declaring a cash dividend of $0.31 per share payable on March 25, 2022, to shareholders of record as of March 11, 2022.

And finally, just a few other items. Book value per share at December 31, 2021, was $20.62, down slightly compared with last year's $22.70 per share. And we paid out $5.16 per share in dividends to shareholders during the year. Cash and liquid investments at the holding company at year-end was $108 million, and the company expects the dividend up $78 million to the parent company during 2022. Our statutory surplus was $278 million at December 31, 2021. And finally, we will be filing our Form 10-K with the SEC on Friday after market close.

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

(Operator Instructions) We'll go ahead and take our first question from Matt Carletti with JMP.

Let's see, I might start with Janelle. You made the comment, I think about seeing payroll growth up about 4% in Q4, 70% to the wage growth, 30% employee count. In that 70%, if I got that right, is that exposure in the sense that the same employees are working more hours? Or is that more kind of true wage inflation in the sense that they're getting paid more for the same amount of hours being worked?

Yes. Great question. It really would be inclusive of both. It could be wage, it could be higher wages or more hours worked.

Is there any -- even a way to have that? Is there a way from the exact math of it? Is there any way to kind of what you're seeing across your book more broadly? Is there any way for you to get a sense of kind of where the market is heading?

Do you think there's just more -- I'm just trying to get a feel if there's more exposure going with that? Or if you're seeing true in wage inflation come through yet in your kind of specific areas of concentration?

No, I think if you look at economic data, I believe, everyone is experiencing wage increase, wage pressures, certainly. So I don't think that would be any different in our industries or the book of business that we underwrite.

Okay. Perfect. And then I apologize if you've answered this question. I could not hear a thing the first 3 minutes of the call. I dropped off and came back in.

I'm sorry.

So you might have -- you probably addressed this. I'm sure it was on my end. So if you already answered this, just say, "Matt, go read the transcript." But I was hoping to get more...

That's rude.

I was hoping to get just a little -- just digging a little deeper on kind of the nature of the one incident that was called out for the pumping of the accident here in the quarter. Just kind of how many parties involved? The nature of the incident? And just what kind of led to -- it seemed like knowing kind of the details of the cat treaty?

A pretty big assumption kind of per person potentially. I'm just wondering if that was -- these are very young people that you expect to live a very long time or more intense kind of medical assumption? Or just what kind of how -- just triangulate kind of how you get to that kind of number?

Yes. Great questions, Matt. Certainly, we're early on in this claim. And I have to be very respectful of people's medical privacy and what happened with the accident. Obviously, there's a lot of things going on.

There were several workers. You are correct in terms of thinking of the severity of the claim. The reason we've isolated it is because it is one claim, and we wouldn't want anyone to draw conclusions that we believe the severity of our book has changed. The severity sans the catastrophic claim for 2021 was within our expectations.

So one of the reasons we highlighted this particular claim, a, this -- we haven't had a claim like this in our 36-year history. So that is of note. And secondly, we do feel like it's the nature of what we underwrite. But at the same time, we handled severe claims every single year. I don't want to say day in and day out because that sounds ominous.

But we continually report and have reported over time the number of severe claims and $1 million excess as a way of giving perspective to the high-hazard nature of our book. As far as the handling of these claims, our reserving philosophy is most likely outcome based on the information we have at the time. And we will handle this claim and take care of these injured workers just like we do our severe claims. I feel like our claims staff is expertly equipped for this type of incident.

Just that it hasn't happened in our 36-year history is the best way I can say it happens. But we know we write hazardous business, and we know it's a low frequency, high severity business.

Yes. Understood. That's helpful. And I guess any color you can give around like was this -- I know motor vehicle accidents or a big driver of loss across your various exposures. Like was this multiple person motor vehicle accident? Or is this more like an industrial or construction site accident? Just trying to get a feel for...

The more severe injuries are burned, if that gives you an indication.

(Operator Instructions) And we'll go ahead and move on to our next question from Mark Hughes with Truist.

And just to clarify, so it sounds like multiple injured workers over that $10 million threshold. So the program is designed to get everybody up 10, but now you've got unusual circumstance that you've got multiple injured workers meaningfully in excess of $10 million per event or per worker. Is that the right way to think about it?

Again, I'm trying -- I want to be respectful of your question, but I am trying to be sure that we protect the medical information of these injured workers and their families. And at this point, I don't think we're prepared to share that level of information.

If the -- given the magnitude of the loss though, am I right in thinking it -- obviously, at least one person is over $10 million? And presumably, multiple people would be over the $10 million threshold? I'm just trying to understand the nature of your reinsurance agreement. Theoretically, I'm not interested in the specifics of any case, but I'm just trying to understand the case scenario that would lead to this magnitude of loss.

Yes. All these scenarios that you're laying out, I think you're thinking about it correctly mathematically. Within the catastrophe layer of our reinsurance, any one life, the reinsurer is responsible for $10 million. Anything above that $10 million would be net to AMERISAFE. So I think mathematically, you're thinking about that correctly.

Yes. And then is there anything about -- does this have you rethinking kind of your premiums, your coverage? Is there -- given that this is unique, is there something about the treatment profile, maybe even the survivability of these kind of injuries that has evolved to the expenses?

Yes.

I mean this is clearly pretty unusual.

Right. Yes. The unusual nature of it does obviously have us think about all those things. Let me sort of lay it out. As I was saying to Matt, first and foremost, severe claims is what we do. It's what we've been doing for 36 years. So from that aspect and looking at our book of business and our high-hazard focus, this was a long-term policyholder. Nothing about that causes me question to think, "Oh, is that an issue?"

Thinking about the reinsurance coverage, I think our -- when we purchase our reinsurance cover, we look at more as protecting us against frequency of severity, right? So I feel very -- I feel comfortable in that regard.

Again, it's easy for me to say right now with this unusual circumstance. As far as treatment and how we view reserving and how we think about life expectancies, I think we're way too early in this claim to start making those sort of judgments as to what that ultimately could be.

Certainly, we will learn from this claim. But at the same time, this is the first time this has happened in our 36-year history. So I think we're a little early in how this claim -- these severe claims develop over time. I think we're a little bit too early to be questioning how we would think about this on a long-term aspect of our particular book of business.

Mark, this is Neal Fuller. Also, if you go to the NCCI, they've done study on mega claims, which are claims over than $10 million for the industry. And there's typically just a handful of these each year. So this is a very rare occurrence from that standpoint.

Yes. And then -- how do you think about the -- your timing on reinsurance renewals, how do you think that will impact your -- the cost of your reinsurance program? Any early thoughts on that?

Yes. So if you recall, Mark, our catastrophe layers renew every year. So we were renewing at the end of the year. This claim was known by 12/31. So therefore, the reinsurers were aware of it as well. So that's already factored in. And keep in mind that our catastrophe layer is a small portion of our reinsurance premium.

Okay. So one would say immaterial to the P&L?

Overall?

Anything...

Yes, I think you could argue that. Any -- yes.

Yes. Okay. And then your -- the 19 severe claims, was this claim actually in 2022?

2021.

Or is this in the fourth quarter?

I'm sorry, if I wasn't clear about that. Yes, it was a fourth quarter 2021 event.

And then if it was 19 as of year-end, what was the total through 3 quarters?

9.

9. Okay. All right. The NCCI loss cost you've in the past kind of commented on, what you've been seeing as some of these state numbers come in, any observations about how that's shaping up for 2022?

Yes, mid-single-digit declines. Still declines.

Okay.

Sort of, I guess, really on par with what we saw in 2021.

Yes. And then -- and this is early days, but your appetite for -- you've obviously been paying special dividends. Does this influence your capital management? I mean, essentially, it's a dollar of earnings that you won't have. Kind of where do you sit from a capital adequacy standpoint? Would we think about the potential impact on a special dividend when that time rolls around again?

Yes. That's a good question, Mark. We have cash and liquid investments at the holding company. At year-end, it was $108 million. We expect the dividend up $78 million additional. That's almost $10 per share right there, if you add those 2 together.

So we're not expecting that this will have any significant impact at this point in time in our capital management strategy. Our statutory surplus and our balance sheet continues to be very strong. Our BCAR ratio continues to be very strong. Our actual stat surplus at year-end was $278 million. Obviously, that includes this claim in terms of the current estimates. So no changes to our capital management strategy at this point in time.

Very good. And then I might ask, Janelle, you sounded a little more -- or made some positive commentary about new business in '22. I think you expected to be aided by the economy or at least what would happen to COVID, we hope.

Yes. We're all -- everyone is hoping for that, right?

Yes. Yes. And then you also cited distribution relationships. Maybe I'll weave in competitive dynamic with those factors, plus your view of competition, which if you could maybe share your view of the competitive environment now? What's your feeling about the top line in 2022? And since you mentioned it, I'll ask the question.

Yes. I'll start with competitive environment. On the third quarter call, we sort of mentioned that post the quarter, we saw a competitor sort of pulled out of some of our hazard classes. And we were happy to see that. It's the first time we've seen that in a while.

Unfortunately, that didn't start a trend. So it hasn't really changed in a significant way. I still think it happens in very small pockets. So I don't see, at this point -- again, sitting here on February 23, I don't see a large swing in the level of competition in 2022 in terms of it getting more intense or even less intense, which would obviously be my preference.

So I think that gives a little bit of color around the competitive environment. Certainly, our goal is to grow policy count. We were able to do that slightly in 2021, not probably where we'd want to be. And that is our continued focus into 2022.

Obviously, a stronger economy helps that. Our insurers are out there working. As I talk about wage inflation, we love more new workers less so, but anything that increases payroll increases premium for us. So that's a positive something for us to look at the positive sign for 2022.

As far as the distribution network, yes, we're spending time. And I believe I mentioned this on the third quarter call as well. Really spending time with our agents, reiterating with the value proposition of working with AMERISAFE is from an agent's perspective and how they sell that to their clients. Our safety services, our claims services, how we take care of their injured workers, how we service their policies, and I mean, I think our retention rate really speaks to that. So I think those are all things that we can really drive home with our agents and trying to find the best solutions for their clients in 2022.

If you don't mind, I'll ask a couple more. The ceded premiums were up just a little bit. Is there any P&L impact from the large claim? Any reversals of profit sharing commissions there? I think you have some ceding commissions that flow through the P&L. Anything like that, either on written or earned or the expense ratio related to the claim?

Yes. No, nothing from that standpoint other than there was a small reinstatement premium on the cap trading. About $300,000 increase in ceded premiums, but not really material to the overall level of premiums in the quarter.

Yes. Okay. And then, Neal, anything on expenses in 2022 when we think about inflation, inflation within your own payroll?

Yes. We've done a good job of holding the line on expenses. The difficulty, obviously, is the decline in premium. So we do expect the expense ratio, similar to last year, to trend up a little bit from current levels based upon continued expected declines in net earned premium, at least basically looking at our renewal book of business and loss costs continuing to potentially go down mid-single digits. But we expect a little bit of pressure on the expense ratio.

And with that, that does conclude our question-and-answer session. I would now like to hand the call back over to Janelle Frost for any additional or closing remarks.

When I look back at 2021, I am pleased with our ability to turn risk into opportunity. We continue to operate with an underwriting profit in a competitive environment. We have a strong balance sheet, and we provided value to our shareholders. And importantly, through the performance and expertise of our employees, we served our policyholders and their workers with expert safety and claims services. Congratulations to the AMERISAFE employees on a job well done.

One final note, we also issued a press release announcing the appointment of Billy Greer to the AMERISAFE Board. Billy's expertise in investment management, business development and asset administration make him a great addition to our Board, and we're excited to have him join.

Again, thank you for joining us today.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.