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Amerisafe Inc (AMSF) Q1 2019 Earnings Call Transcript

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Amerisafe Inc  (NASDAQ: AMSF)
Q1 2019 Earnings Call
May. 02, 2019, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day ladies and gentlemen, and welcome to Amerisafe 2019 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) And as a reminder, this conference call is being recorded.

I would now like to turn the call over to Kathryn Shirley. You may begin.

Kathryn Shirley -- General Counsel

Good morning. Welcome to the Amerisafe 2019 first 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 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. 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 statement.

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

Janelle Frost -- President and Chief Executive Officer

Thank you, Kathryn and good morning everyone. Our year-end call was just two months ago. Since then we have not seen signs of change in the workers' compensation market. The soft cycle lives on. In the first quarter the market was highly competitive as approved lost costs continue to decline. For Amerisafe gross premiums written were down 4.4% with a measured decline in pricing represented by our 159 ELCM. This compares to a 163 ELCM in the first quarter of the previous year.

Pricing adjustments were made to retain profitable accounts as reflected in our policy retention rate of 92.4%. Overall voluntary policies written in the quarter were down 1.2% on a count basis and 5.7% on a premium basis. Premium declines due to lower rates were somewhat countered by stronger payrolls among our hazardous industries. Payroll audits remained positive for all of our major industry groups with marked increases in trucking, oil and gas, and wholesale retail.

In total audit premium and related adjustments increased top line by $1.2 million compared to last year's first quarter. Our loss in LE ratio for the quarter was 58.4% comprised of the current accident year loss ratio of 72.5% and a favorable prior accident year loss ratio of 14.1%. Our estimate for the current accident year was 1.0 percentage point higher than accident year 2018. We assumed frequency to be flat to slightly higher with more reported claims on a smaller earned premium base in a declining rate environment. For severity we assumed mid single digit inflation. Our favorable development this quarter totaled $12 million compared to $9.3 million in the first quarter of 2018. This favorable development was driven by favorable case reserve development particularly in accident years 2016, 2015, 2014 and 2012.

I will now turn the call over to Neal to discuss the financials.

Neal Andrew Fuller -- Cheif Financial Officer

Thank you, Janelle and good morning everyone. For the first quarter of 2019 Amerisafe reported net income of $19.4 million or $1 per diluted share compared with $16.2 million or $0.84 per diluted share in last year's first quarter. Operating net income for the first quarter was $17.6 million or $0.91 per share an increase of $0.05 from $0.86 per share in the first quarter of 2018. Revenues in the quarter increased 1.1% to $95.2 million compared with the first quarter of 2018. Net premiums earned decreased 2.7% to $84.9 million when compared to last year's first quarter.

Turning to our investment portfolio, net investment income increased 11.2% in the first quarter to $8 million compared with $7.2 million in the first quarter of 2018. The increase was driven by higher interest rates on fixed income securities. The tax equivalent yield on our investment portfolio was 3.14% at the end of the quarter. The pre-tax yield on the portfolio was 2.82% at the end of the period up from 2.59% one year ago. There were no impairments on any of the securities held in the portfolio during the first quarter and there were no significant realized gains or losses during the period.

The investment portfolio is high quality carrying an average AA rating with duration of 3.91 one with 55% in municipal bonds, 23% in corporate bonds, 15% in U.S. Treasuries and Agencies and the remainder in cash and other investments. Approximately 57% of our bond portfolio this comprised of held-to-maturity securities which were in a net unrealized gain position of $11.2 million at quarter end. These unrealized gains are not reflected in our book value as these bonds are carried at amortized costs. We have a small investment in equities and during the quarter these securities increased by $2.2 million in value.

With these changes in value running through the income statement this increased net income by $0.09 per share. Moving now to operating expenses, our total underwriting and other expenses were $20.7 million in the quarter compared with $20.3 million in the first quarter of 2018. The increase was largely due to higher estimates of future payouts of share based incentive compensation compared to last year's first quarter. By category the 2019 first quarter expenses included $6.7 million of salaries and benefits, $6.4 million in commissions and $7.6 million of underwriting and other costs.

As a result of the decline in earned premium as well as slightly higher expenses, our expense ratio for the quarter was 24.3% compared with 23.2% in the first quarter of 2018. Our tax rate for the quarter was 18.5% compared to 16.7% for last year's first quarter.

Return on equity for the first quarter of 2019 was 18.5% compared to 15.1% for the first quarter of 2018 and operating ROE for the period was 16.9%. In capital management, our company paid its regular quarterly cash dividend of $0.25 per share in the first quarter which represented a 14% increase over last year's amount.

This quarter the board declared a quarterly cash dividend of $0.25 per share payable on June 21st, 2019 to shareholders of record as of June 7th, 2019. And finally just a couple of other notes. Book value per share was $22.33 at March 31st, 2019 up 5% from $21.26 at year end. Our statutory surplus was $401 million at quarter end up from $384 million at December 31st, 2018. And finally we will be filing our Form 10-Q with the SEC tomorrow May 3rd after market closed.

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

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Randy Binner of B. Riley FBR. Your line is open.

Ryan William Aceto -- B. Riley FBR -- Analyst

Hey, good morning everyone. This is actually Ryan Aceto on for Randy. How are you?

Janelle Frost -- President and Chief Executive Officer

Good morning, Ryan.

Good morning, Ryan.

Neal Andrew Fuller -- Cheif Financial Officer

Good morning, Ryan.

Ryan William Aceto -- B. Riley FBR -- Analyst

I was wondering if you could quantify in the expenses the amount of incentive costs in 1Q '19 versus one 1Q '18?

Neal Andrew Fuller -- Cheif Financial Officer

Yeah, the amount of increase was about $400,000.

Ryan William Aceto -- B. Riley FBR -- Analyst

Perfect. And then is 24% to 25% range still what you guys are targeting?

Neal Andrew Fuller -- Cheif Financial Officer

Yeah that's still what we expect for 2019 consistently. It will bounce around a little bit depending upon you know expenses in any one quarter. But overall somewhere between 24% and 25% for the expense ratio not including policyholder dividends.

Ryan William Aceto -- B. Riley FBR -- Analyst

Perfect. And then I guess turning to reserves 2017 accident year, I was wondering if you can give an update if anything materially changed there? And then I know it's early for 2018 but any initial thoughts would be great?

Janelle Frost -- President and Chief Executive Officer

Sure. This is Janelle. For 2017, I think you know we have not made any adjustments to our ultimate ratio for that accident year. As you know you're familiar with our -- our history we typically look at that at the 30, 36 month window. So there's not been anything material that would cause us to make any adjustments prior to that 30 to 36 month window.

For 2018 you know -- I think I said this on last quarter's call as well I feel, I felt good about 2018 at the end of the year I felt confident in our reserve selection and nothing at least in the first three months of 2019 would cause me to change that statement.

Ryan William Aceto -- B. Riley FBR -- Analyst

Perfect. Great quarter. Thanks for taking my questions.

Janelle Frost -- President and Chief Executive Officer

Thank you.

Neal Andrew Fuller -- Cheif Financial Officer

Thanks, Ryan.

Operator

Our next question comes from Matthew Carletti of JMP Securities. Your line is open.

Matthew Carletti -- JMP Securities -- Analyst

Hey, thanks. Good morning.

Janelle Frost -- President and Chief Executive Officer

Good morning, Matt.

Matthew Carletti -- JMP Securities -- Analyst

A few questions maybe to start the high level, there's been a lot talk just broadly about kind of a fully employed economy or kind of heating economy that sometimes can play into loss trends and workers comp and I think some of your peers have made some comments. What were you seeing in your book in terms of some of the typical things you might see when kind of an economy gets a little heated? Are you seeing anything yet or is it really nothing noticeable?

Janelle Frost -- President and Chief Executive Officer

You know we, as I talked about in the prepared remarks, when we were estimating what we thought accident year 2019 was going to be in comparison to '18 and '17 in terms of frequency in particular. We did feel like we'd see a slight increase in the just raw number of claims that we would see. And of course as we stated on the smaller earned premium base. In the first quarter, I will say though however the claim count was less than 2018 at the same point in time. So I don't have anything in three months worth of data to support my assumption for 2019 but it means obviously with three months of data that's not really applicable.

Matthew Carletti -- JMP Securities -- Analyst

Right. It's the right conservative assumption to make based on the fact pattern.

Janelle Frost -- President and Chief Executive Officer

(inaudible) think about we ensure in the first three months of the year there's a lot of winter activity, so maybe not as much work activity in the first three months as we would see in the summer months or fall months.

Matthew Carletti -- JMP Securities -- Analyst

Yeah, that makes sense. And then I apologize if I missed it but did you mention the ELCM or if not could you give it to us?

Janelle Frost -- President and Chief Executive Officer

I did mention early on just to make sure everybody was listening, just kidding, 159.

Matthew Carletti -- JMP Securities -- Analyst

What was it?

Janelle Frost -- President and Chief Executive Officer

159.

Matthew Carletti -- JMP Securities -- Analyst

159, thank you. And then maybe last question if I can just from the competitive environment, where I guess where are you seeing it the strongest. I mean what I mean by that is are there any particular industries within your footprint that it's more competitive than others? Is it, does it tend to just be more by account size which I think is classically kind of where you might see it. Is there anything to note there or is it just kind of a typical cycle?

Janelle Frost -- President and Chief Executive Officer

Yeah, it is, I think its typical cycle obviously where we first started seeing the intense competition for us was in the larger policy size which makes sense because we're competing as this package carriers and we saw slippage early on in the cycle in those larger accounts. Where we've really been monitoring is where we are in terms of the hazard groups and I think I talked a little bit about this on the fourth quarter call. If you're ranking them A to G, G being the most hazardous we see slippage and I call slippage where we are not reached, being able to retain as many accounts is in those lower hazard groups, so that gives me a little bit of comfort in that. Yes people are playing in my space and what I would call hazardous industries but at least in terms of my book of business it's in my less hazardous industries.

Matthew Carletti -- JMP Securities -- Analyst

Right. Less than your wheelhouse?

Janelle Frost -- President and Chief Executive Officer

Exactly.

Matthew Carletti -- JMP Securities -- Analyst

Great. And then actually there's one numbers question and Neal goes $4.5 million of audit premium benefit in the quarter. Do you have handy the Q2 and Q3 last year if you had it so we know what kind of comp we're up against?

Neal Andrew Fuller -- Cheif Financial Officer

Yeah. I'll give you a readout of the last few quarters so starting in the first quarter of 2018, that was $3.3 million. So that compares to the $4.5 million this quarter. Second quarter of '18 was $3.8 million, third quarter of '18 was a minus $2.1 million and then the fourth quarter of '18 was $2.3 million.

Matthew Carletti -- JMP Securities -- Analyst

Great. Thank you very much. And very nice start to the year.

Janelle Frost -- President and Chief Executive Officer

Thank you, Matt.

Operator

Our next question comes from Mark Hughes of Mark Hughes of SunTrust. Your line is open.

Mark Hughes -- SunTrust -- Analyst

Thank you very much. Good morning.

Good morning, Mark.

Neal Andrew Fuller -- Cheif Financial Officer

Good morning, Mark.

Mark Hughes -- SunTrust -- Analyst

So Janelle, did you say how many large losses you had in the quarter?

Janelle Frost -- President and Chief Executive Officer

I didn't Mark. We had one claim in it at the end of the first quarter that was reported we've incurred over $1 million. But I'll caveat that with my usual statement. We are in a lumpy business, so I can't get real excited about one claim in the quarter because you know they can happen at any time. Yes, it was one.

Mark Hughes -- SunTrust -- Analyst

Well, that was a small lump. So we'll take what you can get.

Janelle Frost -- President and Chief Executive Officer

Yes. I'll knock on wood at that point.

Mark Hughes -- SunTrust -- Analyst

Yeah. Neal, you said you made a reference of $0.09 flowing through the P&L. What was that reference to? I'm sorry.

Neal Andrew Fuller -- Cheif Financial Officer

That was just a reference to the equity securities. So that affects net income but not operating income. Equity securities with a premium value during the quarter impacted net income positively.

Mark Hughes -- SunTrust -- Analyst

Understood. Any early read. I'm just sort of curious from a competitive standpoint. Maybe I'm asking the same question again but it seems like we've had this dynamic clearly loss posts have been coming down. Competition has been ramping up. Is the tide starting to stabilize a little bit in terms of the competitive environment loss costs are down if you look over the last three or four years pretty substantially is that tempering the competitive enthusiasm a little better that it's still ramping up?

Janelle Frost -- President and Chief Executive Officer

No, I'd say at this point it really isn't unchanged from what we saw in the fourth quarter. You know you mentioned the rate in the quarter, the rate changes for our states that were effective in the first quarter (technical difficulty) 5%. I would love to do that partly to kicked off but there's no indication as of yet. Pilots are up by (technical difficulty) the largest of those (technical difficulty) with a ranging down to 5.6% and we kind of, just for the latest filings, so that's not cumulative latest filings. Yeah, we would expect -- we would like to keep them down. I think Matt mentioned earlier about what we're seeing in some of our peers or other companies that are writing costs comp.

We're starting to see people take up part of that year loss ratio. So I think it's indicative of what everyone's experience just hasn't come through in the rates data as of yet. But I do think from that perspective it's a profitable question. But I do think companies are a little bit more cautious about what that loss ratio is in this rate environment.

Mark Hughes -- SunTrust -- Analyst

Very good. Thank you.

Janelle Frost -- President and Chief Executive Officer

You're welcome.

Neal Andrew Fuller -- Cheif Financial Officer

Thanks Mark.

Operator

(Operator Instructions) Our next question comes from Freddie Sleeper (ph) of KBW. Your line is open

Unidentified Participant -- -- Analyst

Hi good morning.

Neal Andrew Fuller -- Cheif Financial Officer

Good morning.

Unidentified Participant -- -- Analyst

So I just wanted to go back the result releases. I was wondering if you could give us a little bit more color on how much of the $12 million of releases came from each accident year that you identified in the press release?

Janelle Frost -- President and Chief Executive Officer

Certainly. Accident year 2016 was $6.1 million. 2015 was $2.1 million, accident year 2014 was $2 million. And then prior to that it was one $1.8 million for accident years 2012 and prior.

Unidentified Participant -- -- Analyst

Okay. Got it. Thank you.

Janelle Frost -- President and Chief Executive Officer

You're welcome.

Unidentified Participant -- -- Analyst

And then I think you could use repeat weather growth in payroll audit and related premiums came from which industries and job classes, are you seeing the biggest growth and any additional color you can give perhaps about how you see audit premium growth trending in the next few quarters?

Janelle Frost -- President and Chief Executive Officer

Right. So payroll audits for themselves in the quarter were positive in all of our major industry groups. The industry groups we published in our 10-K. Where we saw the most growth in the quarter was trucking, oil and gas and wholesale retail which own and like in the 10-K that's in the other line of business. But in particular those three were the largest growth in terms of quarter-over-quarter payrolls. What do we expect for the year, you know at this point as long as the economy stays at the levels that it is we do expect to continue to see positive audit premium throughout the year. Now how that compares to the prior year quarters. I -- you know I don't know that it will be as robust. I don't you know that was -- I don't know each quarter if it's going to be a headwind or a tailwind. I would expect it would taper off to some degree from where we were last year but still remain positive and I guess that's the key. Even if the quarter-over-quarter changes is less or a decrease the fact that the audit premiums remain positive at least indicates that our insurers are either having more work activity than they anticipated or they've had wage inflation or something like that where we're having positive payroll growth. So in that regard I do think that will continue in 2019.

Unidentified Participant -- -- Analyst

Okay. Great. Thank you. And then just lastly I think you said you expect an increasing claims because of the economy sort of heating up. So what are you seeing on your own book in terms of frequency and severity?

Janelle Frost -- President and Chief Executive Officer

All right. So I mean our expectation for accident year 2019 is that frequency would go slightly up. I do think we'll probably see an increase in the number of reported claims into 2019. That was not the case in the first quarter but again that's three months worth of data. It's the winter months for us, so I don't -- I don't rely on that data too much but I don't want to base the entire year on that one quarter's worth of data. Because in the first quarter our reported claim counts were actually down for accident year 2019. But that's not my expectation for the full year.

Unidentified Participant -- -- Analyst

All right. Great. Thank you very much.

Janelle Frost -- President and Chief Executive Officer

Thank you.

Neal Andrew Fuller -- Cheif Financial Officer

Thanks.

Operator

There are no further questions. I'd like to turn the call back over to Janelle Frost for any closing remarks.

Janelle Frost -- President and Chief Executive Officer

Yesterday, Amerisafe a mirror say celebrated its 33rd year as an underwriter. Over the decades we have seen varying markets, changing levels of competition, fluctuating economies, technological advances and obstacles. As a company, we have adapted, evolved and thrived by focusing on our niche, relying on our expertise while learning from experience and continually striving for superior service and value for our stakeholders.

I feel privileged to be one of the over 400 Amerisafe employees who are building on the foundation laid 33 years ago. I will also admit an 84% combined ratio and a return on average equity of 18.5% are pretty nice ways to celebrate an anniversary. Thank you for joining us today.

Operator

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

Duration: 22 minutes

Call participants:

Kathryn Shirley -- General Counsel

Janelle Frost -- President and Chief Executive Officer

Neal Andrew Fuller -- Cheif Financial Officer

Ryan William Aceto -- B. Riley FBR -- Analyst

Matthew Carletti -- JMP Securities -- Analyst

Mark Hughes -- SunTrust -- Analyst

Unidentified Participant -- -- Analyst

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