Q2 2023 Amerisafe Inc Earnings Call

Participants

Anastasios George Omiridis; Executive VP & CFO; AMERISAFE, Inc.

Gerry Janelle Frost; President, CEO & Director; AMERISAFE, Inc.

Kathryn Housh Shirley; Executive VP, Chief Administrative Officer & Secretary; AMERISAFE, Inc.

Mark Douglas Hughes; MD; Truist Securities, Inc., Research Division

Matthew John Carletti; MD & Equity Research Analyst; JMP Securities LLC, Research Division

Presentation

Operator

Good day, and welcome to the AMERISAFE 2023 Second Quarter Earnings Call. Today's conference is being recorded.
At this time, I would like to hand the call over to Kathryn Shirley. Please go ahead.

Kathryn Housh Shirley

Good morning. Welcome to the AMERISAFE 2023 Second Quarter Investor Call. If you have not received the earnings release, it is available on our website at amerisafe.com. This call is being recorded. A replay of today's call will be available. Details on how to access the replay are in the earnings release.
During this call, we will be making forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results may differ materially from the results expressed or implied in these statements if the underlying assumptions prove to be incorrect or as the result of risks, uncertainties and other factors, including factors discussed in the earnings release, in the comments made during today's call, and in the Risk Factors section of our Form 10-K and 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.

Gerry Janelle Frost

Thank you, Kathryn, and good morning, everyone. The state of the workers' compensation market overall remains profitable despite continued rate softening. The line is reporting an industry-wide combined ratio below 100%, reserves remain redundant and approved loss cost declines are expected to continue.
AMERISAFE is a disciplined underwriter in the high-hazard workers' compensation market that has demonstrated the ability to maintain strong margins throughout many market cycles. In the second quarter, we reported a combined ratio of 85.4% and a return on average equity of 18.6%.
During the quarter, our top line decreased 3.7%, driven by continued rate declines and wage inflation slightly slowing, when compared with a strong year-over-year growth in the second quarter of 2022. We continue to see strong retention in policies for which we offer renewal, with 93% retention for the second quarter, largely in line with the recent experience, despite continued competition. As we look ahead, competitive pressures and rate declines are expected to remain a headwind, offset by strong payrolls.
Moving to losses. The current accident year loss ratio remained a steady 71%. During the quarter, our claims handling practices drove better-than-expected outcomes, resulting in favorable period development of $10.9 million or 16.7% loss ratio points. These reserves were primarily released from accident years 2018 through 2021.
As it relates to loss trends, frequency and severity are both in line with our expectations, trending slightly lower than compared to the previous accident year at 6 months. As stated last quarter, we continue to expect medical inflation to increase as the year progresses and reflect these trends in our [standing] case reserves. Our balance sheet is conservatively positioned with roughly $960 million in investments in cash, a solid reserve position and no outstanding debt.
We expect our market dynamics to remain challenging. However, given our long tenure of experience through market cycles, we are well positioned to retain our policyholders and attract business, while delivering robust returns to our shareholders.
Finally, I'd also like to highlight AMERISAFE's inclusion in the Ward's 50 top-performing property and casualty companies for the 15th consecutive year. This recognition is a testament to our employees' expertise in the high-hazard workers' compensation niche, resulting in financial strength and stability of our company.
With that, I'll turn the call over to Andy to discuss the financials.

Anastasios George Omiridis

Thank you, Janelle, and good morning to everyone. For the second quarter of 2023, AMERISAFE reported net income of $15.6 million or $0.81 per diluted share, and operating net income of $14 million or $0.73 per diluted share. This surpasses the second quarter of 2022 net income of $6.1 million or $0.32 per diluted share, and operating net income of $13.1 million or $0.68 per diluted share.
Net income was higher primarily driven by gains in our equity securities as compared to losses in the second quarter of 2022. Gross written premiums were $71.7 million in the quarter as compared to $74.5 million in the second quarter of 2022, a decrease of 3.7% on a year-over-year basis.
During the quarter, voluntary premium decreased 2.3%, primarily due to continued rate pressure. Payroll audit and related premium adjustments decreased by $800,000 for the second quarter of 2023 as compared to the second quarter of 2022. However, payroll audits stand-alone increased by $200,000 for the quarter as compared to the prior year.
While audit premium remains strong, we are seeing some leveling off in the incremental growth due to the lower wage growth. Ceded premiums increased $1.2 million for the quarter and $2.9 million for the first 6 months of 2023 as compared to the second quarter of 2022, primarily due to costs related to additional reinsurance coverage.
Turning to our investment portfolio. In the second quarter, net investment income increased 19.1% to $7.7 million from $6.5 million in the prior year. The increase was driven by higher yields on cash as well as higher reinvestment rates on fixed maturity securities. For the quarter, yield on new investments increased approximately 260 basis points, driving our tax equivalent yield to 3.62% or 76 basis points higher than the second quarter of 2022.
AMERISAFE's investment portfolio is high quality, carrying an average AA- credit rating with a duration of 3.9 years. The composition of the portfolio is 57% in municipal bonds, 28% in corporate bonds, 3% in U.S. treasuries and agencies, 7% in equity securities and 5% in cash and other investments.
Approximately 57% of our bond portfolio is comprised of held-to-maturity securities, and with the moderate increase in rates during the quarter, resulted in a net unrealized position of $21 million. As a reminder, these held-to-maturity securities are carried at amortized costs, and therefore, unrealized gains or losses on these securities are not reflected in the book value.
Our total underwriting and other expenses were $20 million in the quarter, largely in line with the prior year, resulting in an expense ratio of 30.4% as compared with 28.3% in the second quarter of 2022. Despite the dollar level of expenses remaining flat, the expense ratio increased due to a lower level of net earned premiums.
Our tax rate was 20.1% compared to 13.9% for last year's second quarter, largely due to low proportion of tax-exempt income versus underwriting income in the quarter. Our capital position is strong with a high-quality balance sheet, solid loss reserve position and conservative investment portfolio.
Our company paid its regular quarterly cash dividend of $0.34 per share in the second quarter. Earlier this week, the Board declared for the third quarter a quarterly cash dividend of $0.34 per share, payable on September 22, 2023, to shareholders of record as of September 8, 2023.
And finally, just a couple of other topics. Book value per share at June 30, 2023, was $17.76, up 7.2% from $16.57 at December 31, 2022, and our ROE -- and an ROE of 18.6%. Our statutory surplus was $284 million at quarter end, up from $270.1 million at March 31, 2023, and $252.5 million at December 31, 2022. And finally, later today, we will be filing our Form 10-Q with the SEC after market close.
With that, I would like to open the call for the question-and-answer portion of the call. Operator?

Question and Answer Session

Operator

(Operator Instructions) And we will now take our first question from Matt Carletti with JMP.

Matthew John Carletti

Janelle, I was hoping -- you talked a little bit about wage inflation in your opening comments, I was hoping maybe you could dive in a little deeper there. I'd be curious just kind of how those trends have evolved over kind of the past several quarters. Are there particular areas in your book? Or if it's stronger versus weaker or is it pretty uniform across different insureds? And just kind of your outlook for how that might impact your results going forward.

Gerry Janelle Frost

Right. I mean I think, Matt, the last few quarters we've kind of been giving what it's looking like as payrolls are coming in the door, being reported coming in the door, which I guess, in some way, bodes for future audit premium. So we continue to see wage growth, not at probably the record levels we have been seeing probably the last few quarters, I think things have moderated to some degree.
So I think the -- starting in third quarter of 2022, we had double-digit payroll growth. And most of that was wages, right, wage growth. I think the last few quarters, it was averaging around 8% from wage growth itself, not counting new employees. And in this quarter, it was closer to 5%. So still a very healthy growth number, about equivalent to what we're seeing on a national average. I think the latest data point I saw for the national was, I think, 5.5%. So very much in line with that in terms of wage growth.
When I look at it by industry, obviously, construction being the largest book of our business, construction did show some slowing in the wage growth, but still very healthy numbers. If I look at BLS data or Bureau of Economic Analysis data, construction spending is still up. The labor market for construction is still up. Layoffs were down in the last sequential data point. So I think things bode well for that particular industry group, which is over 40% of our book of business.
From a new employee count, it was very steady from the prior quarters. We've been averaging somewhere around 2% for new employees, and that's what it was for this quarter as well. So we're not really seeing additional workforce.

Matthew John Carletti

Perfect. That's super helpful. And then maybe shifting gears a little bit. Could you just update us on kind of how you might be thinking about capital management as you come into the end of the year? Top line has been kind of flattish year-to-date, you continue to throw off really good returns. Just how should we think about that as -- going forward.

Gerry Janelle Frost

Yes, absolutely. We -- our Board actively talks about capital management each and every quarter. Certainly, as you mentioned, we're putting up really good returns this year. Our stance in the last few years has been to return that capital to shareholders. The year is looking great this year, so I don't really see a change in that strategy while I sit today, at 6 months. Obviously, we would like to see some organic growth. We think there's some opportunity for that to happen.
We saw an increase in policy count this quarter even though the premium dollars didn't quite even out the way we would like them to due to loss cost changes. We are -- I do feel like we've gained a little bit of momentum in terms of how we're approaching new business. But again, I don't -- here we are at 6 months, I don't see that really impacting our ability to pay a special dividend between now and year-end.

Matthew John Carletti

Okay. Perfect. And then last quick one, and I apologize I probably missed it in your opening comments, just the ELCM for the quarter.

Gerry Janelle Frost

146.

Operator

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

Mark Douglas Hughes

The audit premium in the quarter, you kind of broke that out in a little more detail, but I'm not sure that I could put the pieces together properly. I think your audit premium in the second quarter of last year was $5.5 million. What's the number that I should use for the second quarter, if you could just report...

Gerry Janelle Frost

I'm sorry, it is $4.8 million.

Mark Douglas Hughes

$4.8 million, okay. Very good. The ceded premium, you mentioned was up a little bit because of reinsurance. Is this the kind of level we should expect going forward, about $5 million $5.5 million, something like that?

Gerry Janelle Frost

It is. It is. Yes. Great question, Mark. We -- as you may recall, we have a structured product that we call our working layer product or [$8 million in excess of 2], which renewed this year. In addition to that 8x of 2, and all the finite details are in the 10-K, we added a 10x of 10 layer, which also extended our topside 20x of 80. So we have a little -- we have more coverage there and there's obviously dollars associated with that. But yes, the rate -- the run rate you see this quarter would be an accurate run rate.

Mark Douglas Hughes

Yes, yes. Then Andy, the expense ratio was -- as you said, dollars were relatively steady, ratio is a little higher. Were there any assessments or anything like that, that influenced the number?

Anastasios George Omiridis

No. Actually, there were no assessments this quarter that would have affected our -- they were flat.

Mark Douglas Hughes

Okay. So is the kind of expenses, $20 million, $20.5 million, is that a good baseline perhaps on a go forward?

Anastasios George Omiridis

I would say, yes. I mean we are -- again, the difference between the 2 years was $50,000. So the $20 million, $20.5 million, I think, is correct from a run rate perspective.

Mark Douglas Hughes

Yes. Okay. And then Janelle, you had mentioned the idea of potentially pursuing partnerships with other carriers. Any update on that or any other kind of marketing or new business initiatives that you can speak to at this point?

Gerry Janelle Frost

Sure. No update as in, hey, this is what we've done. We are still exploring avenues. I'm very excited -- you're taking my closing remarks, I'm very excited that we've added a new Chief Sales Officer, Ray Wise, who's going to be joining the company. So we're really excited to have Ray on board. He has a tremendous amount of experience, particularly in workers' compensation. And we've been talking about our agent relationships and how to, I'm going to say, broader or widen that pipeline, whether that -- that doesn't necessarily mean we're agents, it just means be more efficient and more effective with our agent force. And I think Ray is going to do a great job for us in that regard.

Mark Douglas Hughes

Yes. And then on the medical inflation front, you've pointed out that it's been as expected. You anticipate that it will -- or at least you're reserving with the idea that it will accelerate as the time goes by. Any new signs of that, any actual data points, anything you're seeing in the claims trends as the...

Gerry Janelle Frost

No. I mean other than the pockets that we've talked about numerous times on these calls, just pockets here and there. I know I've had this conversation with you, Mark. One of our concerns is all the things that are happening in the health care industry -- I think inflation is going to find its way into our cost in 1 of 2 ways. Either we're going to see updated fee schedules or updated expenses directly related to our reimbursement rates for medical care, or we're going to start seeing a constriction of the supply.
In prior calls, I talked about home health. That's an example of where there's just less supply available. And I think if it is -- I am of the opinion, this is the world according to Janelle. I am of the opinion if providers reach a point where their reimbursement rates for workers' compensation is not advantageous to them as a medical care provider, they will limit or constrict their availability for workers' comp carriers.
That's a fear, I think, a lot of people in the industry have. Not that we've seen a widespread, but ultimately, we know all the increased labor cost that the medical community has incurred is going to work its way through the system one way or another. I mean in any given workers' comp company, whether you're high hazard or not, 50% to 60% of your costs are medical -- specifically related to medical costs. So using AMERISAFE as an example -- I'm sorry. Go ahead.

Mark Douglas Hughes

No, no, you -- please keep going.

Gerry Janelle Frost

I was going to say using AMERISAFE as an example, one of the things we really focus on is closing claims. So we've been fortunate this year. Although claim counts are starting to come back, I think we still have -- this quarter, we still have 56 fewer claims reported than we did at second quarter last year, but our closing rates have been really good. So my open inventory, I have 275 claims less than I had second quarter last year and over 100 fewer than I had even at year-end, even though I'm adding reported claims.
So we're really focused on closing those claims and getting them settled, sort of hedging against future medical costs, for lack of a better term. So not only reflecting it in our case reserves, but finding ways to reserve -- to close claims and settle claims to sort of limit that liability.

Mark Douglas Hughes

Yes, yes, exactly. And then the -- Andy, what's a good tax rate going forward?

Anastasios George Omiridis

I would say the 19.5% is a good tax rate.

Operator

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

Gerry Janelle Frost

Thank you. I would -- as I said to Mark, I would like to officially welcome Ray Wise to AMERISAFE in the leadership team. Ray has been appointed our Chief Sales Officer. He has more than 30 years of experience in the industry. His background of driving results through customer experience fits well with AMERISAFE's model and will play an integral role in the company moving forward.
Thank you for joining us today.

Operator

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