U.S. Markets closed

Edited Transcript of AMSF earnings conference call or presentation 27-Apr-17 2:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Amerisafe Inc Earnings Call

DE RIDDER May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Amerisafe Inc earnings conference call or presentation Thursday, April 27, 2017 at 2:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* G. Janelle Frost

Amerisafe, Inc. - CEO, President and Director

* Neal A. Fuller

Amerisafe, Inc. - CFO and EVP

* Vincent J. Gagliano

Amerisafe, Inc. - Chief Risk Officer and Executive Vice-President

================================================================================

Conference Call Participants

================================================================================

* Mark Douglas Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Matthew J. Carletti

JMP Securities LLC, Research Division - MD and Senior Analyst

* Weston Clay Bloomer

FBR Capital Markets & Co., Research Division - Associate

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to AMERISAFE's 2017 First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to hand the conference over to Vincent Gagliano.

--------------------------------------------------------------------------------

Vincent J. Gagliano, Amerisafe, Inc. - Chief Risk Officer and Executive Vice-President [2]

--------------------------------------------------------------------------------

Good morning. Welcome to the AMERISAFE 2017 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 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-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.

--------------------------------------------------------------------------------

G. Janelle Frost, Amerisafe, Inc. - CEO, President and Director [3]

--------------------------------------------------------------------------------

Thank you, Vince, and good morning, everyone. Thank you for joining the call today. We are pleased with this quarter's financial results. An 86.6% combined ratio demonstrates AMERISAFE's commitment to providing quality insurance services to our customers and returns to our shareholders.

Before I get to the operational metrics, I would like to make a few remarks regarding the workers' compensation market in which we operate. My description of the market as increasingly competitive has not changed. We continue to receive pressure from multiline carriers on accounts with premium over $100,000. However, I would say, pricing pressure has intensified. Loss costs continue to decline, and carriers are cutting prices to retain accounts. This combination could lead to underpriced books as this softening market continues. For AMERISAFE, this means we must maintain our underwriting discipline and not let the market dictate our approach.

So let me review the operational metrics for the quarter. In the first quarter, premium on voluntary policies written in the quarter declined 0.6%. Our average ELCM decreased from 1.76 in the first quarter of last year to 1.65 this quarter. We feel pricing flexibility can best be measured on those accounts for which we offer renewal.

As I mentioned earlier, we saw the most competition on accounts over $100,000 in premium. For those large accounts, we saw a decrease in policy count retention even though our overall policy count retention increased from 91.6% to 92.7% this quarter. In all, we grew voluntary policy count by 4.5%. Both new and renewal counts were up, yet renewal premium was down 0.9%.

Top line, however, was down 5.3%, primarily driven by audit premium and related adjustments. Payroll audits and related premium adjustments increased premiums written this quarter by $2.2 million. However, last year's first quarter, the adjustments added $6.6 million to premiums written. First quarter last year was our largest quarter for audit premium and related adjustments since 2012. This year's first quarter is more in line with what we saw at the end of last year.

Relative to losses, the quarter's loss ratio was 61.8%. The current accident year is estimated at 69%, which is 1.1 percentage points higher than accident year 2016. I believe this increase in the expected ultimate loss ratio clearly reflects the declining rate environment.

We also experienced $6.5 million of favorable development this quarter, primarily the result of favorable case development. As was the circumstance with audit premium, the year-over-year comparison speaks to our lumpy business. The timing of case reserve changes is random. In last year's first quarter, we experienced significant case development. In fact it was the largest quarter of 2016 for favorable development and not in line with the company's historical quarterly pattern. Simply put, we're in a lumpy business. But this has not changed our reserving philosophy as we believe our reserves are prudent.

I will now turn the call over to Neal Fuller, our CFO, to discuss the financials.

--------------------------------------------------------------------------------

Neal A. Fuller, Amerisafe, Inc. - CFO and EVP [4]

--------------------------------------------------------------------------------

Thank you, Janelle, and good morning, everyone. For the first quarter of 2017, AMERISAFE reported net income of $13.5 million or $0.70 per diluted share compared with $24.3 million or $1.27 per diluted share in last year's first quarter, a decrease of 44.2%. For those following AMERISAFE closely, you will recall that in last year's first quarter, we saw record favorable reserve development and very high levels of audit premium. Operating net income in the first quarter of 2017 was $13.6 million or $0.71 per diluted share, down from the record levels of last year's first quarter. Revenues in the quarter decreased 4.7% to $97.5 million compared with last year's first quarter. Net premiums earned decreased 5.3% to $90.9 million when compared to the first quarter of 2016.

Net investment income was $6.7 million in the first quarter of 2017, an increase of 11% when compared with last year's first quarter. The significant driver of this increase was the decline in the value of a limited partner hedge fund investment in last year's first quarter. This limited partnership is marked to market through net income each quarter. Without the hedge fund, net investment income was up 3.1% compared to the first quarter of 2016. The tax equivalent yield on our investment portfolio at the end of the quarter was 3.4%, up slightly from 3.3% at the end of the first quarter of 2016. There were no impairments or significant realized gains or losses during the quarter.

The investment portfolio continues to be high-quality, carrying an average AA- rating with an average duration of 3.82 and with 59% in municipal securities, 27% in corporate bonds and the remainder in cash and other investments. Over the past year, our allocation to municipal bonds has increased slightly and our allocation to corporate bonds has decreased slightly. Approximately 52% of our investment portfolio is classified as held to maturity, which is in a net unrealized gain position of $8.5 million. These gains are not reflected in our book value as these bonds are carried at amortized cost.

With regard to operating expenses, our total underwriting and other expenses increased 5.4% in the quarter to $21.2 million compared with $20.1 million in the same quarter last year. We saw slight increases in compensation costs, insurance assessments and premium taxes, offset by a decrease in commissions during the quarter compared with last year's first quarter. By category, the first quarter of 2017 expenses included $6.3 million of salaries and benefits, $6.4 million of commissions and $8.5 million of underwriting and other costs. Our expense ratio for the first quarter was 23.3% compared with 21% in the first quarter of last year. The ratio increased 1.1 points due to lower net premiums earned and 1.2 points due to the expenses in the quarter.

Our tax rate decreased to 27.8% in the quarter, down from 29.5% in the first quarter last year. The increase reflects the larger amount of tax-exempt income compared with taxable income during the quarter. Return on equity for the first quarter of 2017 was 11.7% compared to 20.8% for the first quarter of 2016. Operating ROE for the quarter was 11.8%. On April 25, 2017, the company's Board of Directors declared a regular quarterly cash dividend of $0.20 per share, payable on June 23, 2017, to shareholders of record as of June 9, 2017.

And finally, a few other items to note. Book value per share at March 31, 2017 was $24.29, up 2.4% from year-end. Our statutory surplus rose to $408.3 million at March 31, 2017, up $14.3 million from year-end. And then finally, AMERISAFE expects to file both our Form 10-Q for the first quarter and our annual proxy statement with the SEC this Friday, April 28.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

--------------------------------------------------------------------------------

Any change in loss trends in the quarter? Did you have any more large losses than you might have expected?

--------------------------------------------------------------------------------

G. Janelle Frost, Amerisafe, Inc. - CEO, President and Director [3]

--------------------------------------------------------------------------------

No, Mark. We had 2 what we -- when we talk about large losses, internally, we typically talk about the claims over $1 million. We had 2 of those this quarter. Last year, in the first quarter, we had 0. But at the end of the year, we -- and I think we ended the year with 17. So I hate to keep repeating myself, but it's my best way of phrasing it, we're in a lumpy business. These things are rather random. We can't plan which quarters they're going to fall in. But there was nothing about the large losses that I -- would cause me to say it was unexpected.

--------------------------------------------------------------------------------

Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

--------------------------------------------------------------------------------

How about in terms of just underlying frequency, severity?

--------------------------------------------------------------------------------

G. Janelle Frost, Amerisafe, Inc. - CEO, President and Director [5]

--------------------------------------------------------------------------------

Yes, good question. The -- we've seen declining frequency over the last -- I don't know how many years. My assumption, and I've been saying -- I think I said this even on the year-end call, my assumption coming into '17 is that we will see frequency flatten or slightly increase, simply because if I have the same mix of business and the same number of claims, I know I'm getting less premium for that. So the math would tell me there should be pressure on the frequency numbers.

--------------------------------------------------------------------------------

Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [6]

--------------------------------------------------------------------------------

Is that -- was that borne out in Q1 or still waiting for that?

--------------------------------------------------------------------------------

G. Janelle Frost, Amerisafe, Inc. - CEO, President and Director [7]

--------------------------------------------------------------------------------

No, it was not, but 3 months' worth of data does not a trend make.

--------------------------------------------------------------------------------

Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [8]

--------------------------------------------------------------------------------

Right. The case development, I think you had -- I've heard you refer to maybe some delay in settlements in the fourth quarter, maybe some of the legal professionals hoping for a lower tax rate. Was there any kind of an impact that you could see in Q1 from either a factor like that or --- or anything else that might have influenced the case development in the period?

--------------------------------------------------------------------------------

G. Janelle Frost, Amerisafe, Inc. - CEO, President and Director [9]

--------------------------------------------------------------------------------

No. The case development that we experienced in the period, again, was not unexpected. I think in comparison to last year, it certainly looks a lot smaller. But there are couple of things about last year that I'd just reiterate that I think we talked about. One was we had specific claims last year that were large claims that we were able to close or settle in the first quarter that typically wouldn't have happened. I think that was unusual in the pattern. And then plus, if you recall, we actually adjusted accident year 2014 in the first quarter last year because of case development that we saw. Typically, that's not our pattern. We usually wait 30 to 36 months. So -- and I think that was somewhere around $3.9 million in the first quarter of 2016. So I don't think there's anything unusual about the case development that we saw this year. Just comparatively, it does look smaller.

--------------------------------------------------------------------------------

Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [10]

--------------------------------------------------------------------------------

On the expense ratio, assuming relatively steady top line trends, would this be a good level that we should sustain in --- if we're modeling subsequent quarters or any outlook for it to change?

--------------------------------------------------------------------------------

Neal A. Fuller, Amerisafe, Inc. - CFO and EVP [11]

--------------------------------------------------------------------------------

Yes. There's -- this is Neal. There's no outlook for it to change. I think we typically have seen the expense ratio run between 23% and 24%. Last year, the first quarter, I think, was unusually good, and this is more a normalized ratio, I would say.

--------------------------------------------------------------------------------

Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [12]

--------------------------------------------------------------------------------

When you think about -- one final question on the favorable development. You've emphasized that it's largely case development. Is there some point at which you have more potential for IBNR to look at those numbers and make some updated adjustments? Is that more likely in coming quarters? Or is it -- it's always equally as likely?

--------------------------------------------------------------------------------

G. Janelle Frost, Amerisafe, Inc. - CEO, President and Director [13]

--------------------------------------------------------------------------------

I think it's always equally as -- but yes, that's a great question. We do look at our IBNR levels every quarter. And as I said before, for more recent accident years, we try to get that 30- to 36-month window just because we feel like we have a better handle on the case reserve. At that point, if there's going to be a movement in a large claim that has typically happened by that point. But we do look at it every quarter.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

And our next question comes from the line of Randy Binner from FBR.

--------------------------------------------------------------------------------

Weston Clay Bloomer, FBR Capital Markets & Co., Research Division - Associate [15]

--------------------------------------------------------------------------------

This is Weston Bloomer on for Randy. Thanks for all the commentary on PYD lumpiness. Could you possibly break out the accident years for the $6.5 million of PYD? I think last year, you called out there was development in 2012. Has that started to dry up? Or is that still...

--------------------------------------------------------------------------------

G. Janelle Frost, Amerisafe, Inc. - CEO, President and Director [16]

--------------------------------------------------------------------------------

Great question. So accident year 2014 was $4 million, 2013 was $2.4 million and prior to 2012 was $0.1 million. I think that gets --- that's about right --- I think that gets you to $6.5 million. And like I said, it was driven by case development. And 2012, I certainly -- I don't know about what drying up would entail. Last year, in the first quarter, our large movement was a 2012 case that we were able to settle. So I --- it just -- it's random.

--------------------------------------------------------------------------------

Weston Clay Bloomer, FBR Capital Markets & Co., Research Division - Associate [17]

--------------------------------------------------------------------------------

Okay. And jumping to the premium audit. Was -- is this kind of a new normal for the pace of premium audit that should we expect at this current pace? And then was the exposure more concentrated or broad-based? I think in the past, you'd called out oil and gas. Is there anything else to call out there?

--------------------------------------------------------------------------------

G. Janelle Frost, Amerisafe, Inc. - CEO, President and Director [18]

--------------------------------------------------------------------------------

Yes, good question. So yes, the audit premium this --- audit premium and related adjustments this quarter were more in line with what we saw in the fourth quarter. So if that's normalizing, then I would say, yes, that's the case. Compared to first quarter last year, it does look unusual. But it's more in line with what we saw in the fourth quarter. As far as audit premium itself this quarter, we continue to see negative audits come from the oil and gas industry. And actually, this quarter we saw it coming. It was in our trucking book. It was also in our construction book.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Matthew Carletti from JMP.

--------------------------------------------------------------------------------

Matthew J. Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [20]

--------------------------------------------------------------------------------

Two questions. One, just kind of triangulating your comments on frequency with the 1 point addition to the accident year. So would I be correct that -- you mentioned kind of the declining rate environment, which is kind of we all know about in terms of a factor and to bumping it up 1 point. Are you also in there, implicitly assuming that frequency does turn the corner and go up? Because it seems to me that given where severity and frequency are currently being observed, that those 2 items might largely cancel each other out. But you're looking forward, and it sounds like maybe -- assuming the flat to up?

--------------------------------------------------------------------------------

G. Janelle Frost, Amerisafe, Inc. - CEO, President and Director [21]

--------------------------------------------------------------------------------

Yes, I think you're right on. I think we're anticipating that it will increase.

--------------------------------------------------------------------------------

Matthew J. Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [22]

--------------------------------------------------------------------------------

Okay. All right, perfect. And then -- go ahead. Oh, sorry, started cutting you off. The other question I have is more of a, just a higher level one. But you mentioned about the kind of the competition, particularly in large accounts. Have you guys looked back over time in terms of dissecting out the profitability in your book, the underwriting profitability, based on -- how much of your profitability, over time, has come from those large accounts versus small and medium-sized accounts?

--------------------------------------------------------------------------------

G. Janelle Frost, Amerisafe, Inc. - CEO, President and Director [23]

--------------------------------------------------------------------------------

That's a really good question. We have looked at the profitability of large accounts. They -- we tend to make -- they tend to be profitable for us. Maybe a couple of points here or there on the loss ratio perspective. Our issue with the large accounts is they're just not sticky. They don't stay with us. They're extremely competitive. So as the market changes, so goes those accounts.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Janelle Frost for any additional comments.

--------------------------------------------------------------------------------

G. Janelle Frost, Amerisafe, Inc. - CEO, President and Director [25]

--------------------------------------------------------------------------------

Thank you. I started the call stating we were pleased with our results this quarter, and I will end reiterating the same. An 86.6% combined ratio, our disciplined approach to the softening market and a clean balance sheet are a great way to start 2017.

Thank you for joining us today.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

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