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Edited Transcript of AMSF earnings conference call or presentation 1-Nov-19 2:30pm GMT

Q3 2019 Amerisafe Inc Earnings Call

DE RIDDER Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Amerisafe Inc earnings conference call or presentation Friday, November 1, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gerry Janelle Frost

Amerisafe, Inc. - President, CEO & Director

* Kathryn Housh Shirley

Amerisafe, Inc. - Executive VP, General Counsel & Secretary

* Neal Andrew Fuller

Amerisafe, Inc. - Executive VP & CFO

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Conference Call Participants

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* Christopher Campbell

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Mark Douglas Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Matthew John Carletti

JMP Securities LLC, Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to AMERISAFE's 2019 Third Quarter Earnings Conference. Today's call is being recorded.

At this time, I'd like to turn the call over to Kathryn Shirley, Executive Vice President and General Counsel. Please go ahead.

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Kathryn Housh Shirley, Amerisafe, Inc. - Executive VP, General Counsel & Secretary [2]

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Good morning. Welcome to the AMERISAFE 2019 Third Quarter Investor Call. If you have not received the earnings release, it is available on our website at www.amerisafe.com. This call is being recorded. A replay of today's call will be available. Details on how to access the replay are in the earnings release.

During this call, we will be making forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results 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, in 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 statement. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.

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Gerry Janelle Frost, Amerisafe, Inc. - President, CEO & Director [3]

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Thank you, Kathryn, and good morning, everyone. It has been interesting listening to and reading earnings comments thus far this quarter as insurance CEOs have discussed getting rate. Followed by the pause or parenthetical, except in workers' compensation. The news workers' compensation is that most states continue to improve loss cost declines. For AMERISAFE, this meant voluntary premium for policies written in the quarter were down 18 -- I'm sorry 8.6%, while on account basis, we were down 1.3%. We continue to have strong policy retention of 93.4% as we maintained underwriting discipline, reflected in our 162 effective loss cost multiplier, or ELCM. I'll pause here to remind those of us who like to plot data points that ELCM is best compared quarter over prior year quarter, not sequentially.

Our second quarter ELCM was 161, however, the quarters -- this quarter's 162 was down from 2018's third quarter of 165.

That being said, the primary driver for the decline in premium was simply earning less premium per $100 of payroll. Offsetting the rate declines were stronger payrolls. Audit premium and other premium adjustments added $2 million to top line compared to a decrease of $2.1 million in last year's third quarter.

In total, gross premiums written for the quarter were down 3.2% from third quarter of 2018. While declining rates lowered premium and competition remained strong, we produced an attractive return on equity of 18.6% this quarter. Our ROE, our long-term capital adequacy, along with our commitment to creating shareholder value led to the declaration of an extraordinary dividend of $3.50. This quarter's ROE was supported by favorable loss ratios and expense management. Neal will provide color around the expense management, but allow me to provide additional information about our losses.

Our loss in LAE ratio for the quarter was 53.6%, down from 55.9% in the third quarter of 2018. The current accident year loss ratio remained unchanged from beginning of the year at 72.5%. Both frequency and severity trends were in line with our expectations for the full year.

As for prior accident years, we experienced significant favorable case development this quarter. Slightly higher claim closer rates were one of many factors influenced in the case development and led to $15.6 million of favorable development this quarter.

Neal will now provide more details around expenses and the remainder of the financials.

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Neal Andrew Fuller, Amerisafe, Inc. - Executive VP & CFO [4]

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Thank you, Janelle, and good morning, everyone.

For the third quarter of 2019, AMERISAFE reported net income of $21.4 million or $1.11 per diluted share compared with $19.7 million or $1.02 per diluted share in last year's third quarter. Operating net income for the third quarter was $21.1 million or $1.09 per share compared with $19.5 million or $1.01 per share in the third quarter of 2018. Revenues in the quarter decreased 2.2% to $91.5 million compared with the third quarter of 2018. Net premiums earned decreased 2.9% to $82.7 million when compared to last year's third quarter.

Now turning to earnings from our investment portfolio. Net investment income increased 4.8% in the third quarter to $8.3 million compared with $7.9 million in the third quarter of 2018. The increase was driven by slightly higher interest rates on fixed income securities.

The tax-equivalent yield on our investment portfolio was 3.10% at the end of the quarter. The pretax yield on the portfolio was 2.79% at the end of the quarter, up from 2.70% 1 year ago. There were no impairments on any of the securities held in the portfolio during the quarter, and there were no significant realized gains or losses during the quarter. The investment portfolio continues to be high quality, carrying an average AA rating with a duration of 3.68 with 56% in municipal bonds, 21% in corporate bonds, 11% in U.S. treasuries and agencies and the remainder in cash and other investments. Approximately 59% of our bond portfolio is comprised of held-to-maturity securities, which were in a net unrealized gain position of $22.4 million at quarter end. These unrealized gains, which totaled approximately $0.92 per share after tax, are not reflected in our book value as the bonds are carried at amortized cost.

Moving now to operating expenses. Our total underwriting and other expenses were $19.3 million in the quarter compared with $20.6 million in the third quarter of 2018. The decrease in expenses was primarily driven by lower loss-based assessments, lower premium-based assessments and lower commissions compared to last year's third quarter.

By category, the 2019 third quarter expenses included $6.4 million of salaries and benefits, $6.2 million in commissions and $6.7 million of underwriting and other costs. As a result of the lower expenses, our expense ratio for the quarter was 23.3% compared with 24.2% in the third quarter of 2018. Our tax rate for the quarter was 19.6% compared to 19.5% for last year's third quarter.

Return on equity for the third quarter of 2019 was 18.6% compared to 17.4% for the third quarter of 2018. Operating ROE for the quarter was 18.9%.

Now turning to capital management, and as Janelle mentioned earlier, the company's Board declared a special dividend of $3.50 per share, payable on November 20, 2019, to shareholders of record as of November 13, 2019. This brings the total amount of special dividends paid out in last 7 years to $18.25 per share.

In addition, the company's Board of Directors declared a regular quarterly cash dividend of $0.25 per share, payable on December 27, 2019, to shareholders of record as of December 13, 2019.

And finally, just a couple of other topics. Book value per share at September 30 was $24.29, up 14.3% from $21.26 at year-end 2018.

Our statutory surplus at quarter end was $325 million. This surplus level was lower this quarter due to dividends paid up to the parent company for the special dividend.

And finally, we will be filing our Form 10-Q with the SEC later today after the market close.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll first hear from Matthew Carletti of JMP Securities.

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [2]

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Congrats on yet another very nice quarter.

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Gerry Janelle Frost, Amerisafe, Inc. - President, CEO & Director [3]

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Thank you.

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [4]

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Just a couple of questions. Janelle, I was hoping maybe you could just give a little more color on 2 things, the first being, the competitive environment. I mean we know it's a competitive market, we know what rates are doing. But kind of more the nuances of -- in general, what you're seeing amongst your competitive set? If -- how the larger peers are acting at this point in the cycle? Whether you see kind of capital on the margin moving in or moving out? And then separately, kind of the underlying economic impact? And what you're seeing from the economy? And where in your book you might be seeing better trends or worse trends?

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Gerry Janelle Frost, Amerisafe, Inc. - President, CEO & Director [5]

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Sure. So I'll start with competitive environment. As far as the third quarter of that, it was really unchanged. Yes, we had a healthy policy retention of 93.4%. We think that is a response to our service level, where we're pricing our book of business. I mentioned the ELCM at 162, like down from last year's third quarter. So I think we're being responsive to the market. We still haven't seen, what I would call, new capital or new carriers in this space. So multiline carriers is fine, workers' comp attractive. I'll put a little forward looking into that since Kathryn said I was going to do that at the beginning of the call. I have sort of energized listening to the earnings releases coming out this quarter. Some multiline carriers out there talking about they were getting rate in their other lines of business. For me, that was a little glimmer of, okay, well, maybe they'll deploy that capital away from workers' comp and get back to their core lines of business. Time will tell if that's the case. If we see that in terms of larger carriers to your point -- or to your question, if we see some of the larger carriers starting to pull back a little bit out of workers' compensation in the anticipation that it won't remain a profitable line for a longer period of time. Again, that's all speculation. We'll see what the market tells us going into the fourth quarter and I guess, really the first quarter of 2020.

As far as the economy, I think for our insurance, it's a pretty robust economy. Our payroll audits remain positive. We saw growth in -- and again, this is payroll growth, and construction, obviously, being our largest class, but it was pretty robust this quarter. Less so in trucking, but we saw pretty big increases in terms of marine. Wholesale -- what we call wholesale retailers, so that's like lumber yards and building materials, gas dealers, those type of things where we saw a little bit of slippage. And again, the payrolls were positive but not as positive as third quarter of 2018 was actually in our form book and a little bit in our lumber book.

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [6]

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Okay. Great. And then one other question, just as we're getting closer to 2020, and just want to make sure I'm thinking about this right. Kind of as you've -- we've see the accident year loss ratio, small tick ups kind of the past couple of years. It seemed that set of circumstances are still in place being pricing down, severity, well manageable, still up and kind of probably not making the assumption that frequency will go down forever. Is it right to think about some small uptick in that accident year as we enter 2020?

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Gerry Janelle Frost, Amerisafe, Inc. - President, CEO & Director [7]

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Yes. There are things that are factored into that, Matt. First '19 -- 2019 is not over, we'll see what the rest of the year holds out in terms of -- you're right about frequency, no question. Where it turns in terms of severity, I think we'll see where accident year 2019 falls in as well as the loss costs filings that are still coming in. I think we're a little over halfway there in terms of states that have approved their 2020 rates that'll be impacting those numbers for 2020. But as the loss cost filings come in, we'll keep an eye on those as well. And see -- on the flip side of that, we had significant case development this quarter on some more recent accident years. I mentioned that we had -- in last quarter's earnings release, we had favorable development in accident years 2017, we had it again this quarter. So we'll -- that also impacts where we think in -- what we think in terms of loss ratio.

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Operator [8]

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Next, we'll hear from Mark Hughes of SunTrust.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [9]

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Janelle, you mentioned the 2020 loss costs coming in from NCCI. What are you seeing in those state-by-state numbers?

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Gerry Janelle Frost, Amerisafe, Inc. - President, CEO & Director [10]

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Yes. We're still seeing decreases. Some of them have been single digits, which I like to see. Finally, they're seeing some single-digit decreases. On behalf of our major states, we're still seeing approved decreases. So there's been a couple of, I think, small, maybe some low-only increases. I've heard a couple of jokes amongst just other people in the industry, "Well, Hawaii had an increase." And I think everyone just sort of chuckles about that. But yes, still no major increases at this point coming in.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [11]

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Yes. Can you -- in aggregate, is it kind of mid-single-digit declines? Or low single digit? Or...

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Gerry Janelle Frost, Amerisafe, Inc. - President, CEO & Director [12]

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I think NCCI anticipated 9%, as I'm looking at. I think NCCI anticipated 9% for 2020 -- or go at '19 and '20, going into '20.

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Neal Andrew Fuller, Amerisafe, Inc. - Executive VP & CFO [13]

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Right. That was their projection.

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Gerry Janelle Frost, Amerisafe, Inc. - President, CEO & Director [14]

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So I think that was their projection. We'll see what pans out.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [15]

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Yes. And then the large losses in the quarter, how many of those did you have?

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Gerry Janelle Frost, Amerisafe, Inc. - President, CEO & Director [16]

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We had 12 at the end of the third quarter compared to 18 at the end of third quarter in 2018.

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Operator [17]

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(Operator Instructions) We'll now hear from Christopher Campbell of KBW.

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Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [18]

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Quick question on the expense ratio changes. I guess can you unpack that a little bit? And why were the assessments lower? And where did they originally come from last year?

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Neal Andrew Fuller, Amerisafe, Inc. - Executive VP & CFO [19]

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Yes. Certainly. Yes, the expense ratio, we did see some familiar -- I mean some favorable loss-based assessment activity in the quarter. And it really depends upon where we see favorable reserve development by state because that will affect those loss-based assessments, which are based upon our reserves in various states. So loss-based assessments in the quarter were down $637,000 from last year's third quarter. Premium-based assessments were down about 361,000 from last year. Again, that is more based upon some rate changes in some states where we actually are paying slightly lower premium taxes.

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Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [20]

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Okay. Got it. All right. And then I think, one of Mark's questions previously about like the rate changes. Is there -- when see these like headline rate numbers, like NCCI is like 5% or something, I forget what the number is this year. Is there like a spread that you guys typically do better then? So if the rate declines are 5% for the industry, AMERISAFE typically does, I don't know, 200 bps better than that. Is there like a holistic we can think about in terms of how well you guys can recoup some of those rate declines?

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Gerry Janelle Frost, Amerisafe, Inc. - President, CEO & Director [21]

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Right, right. That's actually a very good question. So as you know -- you're right. When they see the headlines -- let's use Texas as an example. It had an improved loss cost filing for [71] that was 12.4%, that was the headline. So what was that in terms of AMERISAFE's class codes? Well, in the Texas example, it was actually 12.4%. So yes, we -- it does vary sometimes by class codes because I think Arkansas had -- I think their headline was 3.4% and AMERISAFE's was 5.4%. So it does vary by class codes. But I think it goes both ways. I still believe, if you're looking at it in the aggregate at the decreases, I think that's a very good measure of where it is headed directionally, whether it's high hazard or a low hazard.

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Christopher Campbell, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [22]

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Okay. Great. And then just one last one on our policy holder dividends. Obviously, if you guys keep having like great reserve development those probably go up. What's a good way to think about modeling those? Is it like a 100 bps on the combined ratio? Is that like a good way to think about it? Or...

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Neal Andrew Fuller, Amerisafe, Inc. - Executive VP & CFO [23]

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That's a really good question. It does fluctuate from quarter-to-quarter. And it's really driven by our performance in various states where we compete through policy holder dividends. So Florida, Virginia, Wisconsin. And so I think it was actually a little bit high this quarter at 1.5% than we've seen it running in prior quarters. And it really does depend, again, on what policies came up in that period and what dividends they earned. So I don't have a good way to model for you other than to expect that maybe it's going to be between 1% and 2%.

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Operator [24]

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And it appears there are no further questions at this time. Janelle, I will turn the call back over to you for any additional or closing comments.

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Gerry Janelle Frost, Amerisafe, Inc. - President, CEO & Director [25]

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Thank you.

AMERISAFE has shown a strong commitment to creating shareholder value through our operational consistency and long-term capital adequacy. This quarter's combined ratio of 78.4% and a return on average equity of 18.6% were just 2 measures to illustrate that commitment. We are pleased to share those rewards and of that commitment through our extraordinary dividend, while at the same time building a better AMERISAFE for our shareholders, our policy holders and our employees. Thank you for joining us today.

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Operator [26]

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That does concludes today's conference. Thank you, all, for your participation. You may now disconnect.