AMERISAFE - Q3 2023
October 26, 2023
Transcript
Operator (participant)
Welcome to the AMERISAFE 2023 third quarter earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kathryn Shirley. Please go ahead.
Kathryn Shirley (EVP, Chief Administrative Officer, and Secretary)
Good morning. Welcome to the AMERISAFE 2023 third 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 the earnings release, in the comments made during today's 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 statements. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.
Janelle Frost (President and CEO)
Thank you, Kathryn, and good morning, everyone. During the third quarter, momentum in our top line grew with increased in-force policy count as well as an increase in audit premium. However, our expense ratio was elevated due to some infrequent items during the quarter, which Andy will provide more detail on. The overall workers' compensation market has remained fairly stable from the last quarter, with declining rates partially offset by wage inflation. Our underwriting discipline is demonstrated in our ability to maintain strong margins throughout many market cycles. In the third quarter, we reported a combined ratio of 90.6% and a return on average equity of 11.8%. Our top line increased 3.9% compared with the third quarter of 2022, with voluntary premium for policies written in the quarter growing 1.1%.
We continue to see strong retention in policies for which we offer renewal, with a 95% retention for the quarter. Moving on to losses. The accident year loss ratio remained steady at 71%. During the quarter, our claims handling practices drove better-than-expected outcomes, resulting in favorable prior year development of $10.2 million, or 15.2 loss ratio points. These reserves were primarily released from accident years 2019, 2020, and 2021. As it relates to loss trends, frequency and severity were both in line with our expectations, trending lower than when compared with previous year at nine months. It's been a while since I used the word lumpy in my prepared remarks, but when reporting favorable claims trends before the end of an accident year, I am reminded that there's no seasonality to when severe claims happen.
While the market remains challenging, we continue to utilize our focus on high hazard risks to position the company for outperformance within the industry. High retention, with policyholders demonstrating our strong position while we work to attract new business, delivering robust returns to shareholders. Before returning the call over to Andy, I wanted to discuss our special dividend. The company's board of directors declared a special dividend of $3.50 for shareholders of record as of December 1st, 2023. This dividend reflects the operational excellence of AMERISAFE and our commitment to shareholder value creation through capital deployment and returning excess capital when appropriate. With that, I'll turn the call over to Andy to discuss the financials.
Andy Omiridis (EVP and CFO)
Thank you, Janelle, and good morning to everyone. For the third quarter of 2023, AMERISAFE reported net income of $10 million, or $0.52 per diluted share, and operating net income of $11.7 million, or $0.61 per diluted share. During the third quarter of 2022, net income was $11.4 million or $0.59 per diluted share, and operating net income of $14.1 million or $0.73 per diluted share. The lower net income was primarily driven by certain items in the quarter, driving the expense ratio higher, as well as less tax-exempt interest income, driving a high tax rate compared to the third quarter of 2022. Gross written premiums were $70.8 million in the quarter versus $68.2 million in the third quarter of 2022, growing 3.9% on a year-over-year basis.
Payroll audit and related premium adjustments increased premiums written by $5.6 million, as compared to an increase of $3.4 million in the third quarter of 2022. While audit premium was strong this quarter, we continue to expect some flattening out in coming periods. Ceded premiums increased $1.6 million for the quarter compared to the prior year quarter, primarily due to costs related to additional reinsurance coverage. Our total underwriting and other expenses were $22.4 million in the quarter, a 14% increase compared with the $19.6 million recognized in the prior year quarter. This increase resulted in an expense ratio of 33.6%, compared with 28.9% in the third quarter of 2022.
The increase was primarily due to a $1.6 million reduction in reinsurance profit-sharing commission due to adverse development from an older treaty, a $600,000 increase in commission expense, and $400,000 increase in regulatory assessments and fees. Our tax rate was 19.2%, compared to 15.5% for last year's third quarter, largely due to a lower proportion of tax-exempt income versus underwriting income in the quarter compared with last year. Turning to our investment portfolio. In the third quarter, net investment income increased 16.1% to $8.1 million from $7 million in the prior year quarter. The increase was driven by higher yields on cash, as well as higher investment rates on fixed maturity securities.
For the quarter, yields on new investments increased approximately 230 basis points, driving our tax equivalent book yield to 3.77% or 60 basis points higher than the third quarter of 2022. Realized gains for the portfolio on securities sold were $5.1 million in the quarter, compared with $600,000 during the third quarter of 2022, primarily related to realized gains on equity security. The investment portfolio is a high quality, carrying a AA- credit rating with a duration of 4.3 years. The composition of the portfolio is 56% in municipal bonds, 27% in corporate bonds, 4% in US Treasuries and agencies, 6% in equity securities, and 7% in cash and other investments.
Approximately 57% of our bond portfolio is comprised of Held-to-Maturity Securities, and due to the notable increase in rates during the quarter, the net unrealized loss position was $35.1 million at quarter end. As a reminder, these Held-to-Maturity Securities are carried at amortized cost, and therefore unrealized gains or losses on these securities are not reflected in our book value. Our capital position is strong, with a high-quality balance sheet, solid loss reserve position, and conservative investment portfolio. At quarter end, AMERISAFE carried roughly $950 million in investments, cash and cash equivalents. Our company paid its regular quarterly cash dividend of $0.34 per share in the third quarter. This quarter, the board declared a quarterly cash dividend of $0.34 per share, payable on December 15, 2023, to shareholders of record as of December 1st, 2023.
And finally, just a couple of other topics. Book value per share was $17.51, an increase of 5.7% from year-end 2022, and operating return on average equity was 13.2%. And finally, tomorrow, Friday, October 27, 2023, 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?
Operator (participant)
Well, thank you. If you would like to signal with questions, please press star one on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one if you would like to signal with questions, star one. Our first question today comes from Mark Hughes with Truist.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Thank you. Good morning.
Janelle Frost (President and CEO)
Good morning, Mark.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Did you give the ELCM number, Janelle?
Janelle Frost (President and CEO)
One fifty.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
And then, how do you... Are you seeing anything happening with medical inflation? There's all this talk about employee benefits expenses going up and healthcare costs. What do you think about that?
Janelle Frost (President and CEO)
It is certainly the topic du jour amongst everyone in the industry in workers' comp. I think we all believe, I know, I believe that given the cost of healthcare, that we will indeed see that eventually work its way into the workers' compensation system, but can't point to any data elements at this point other than pockets here and there of anecdotal experiences. Nothing prolific that I would say that we've seen it truly impact the industry. However, I do think it is top of mind for people in the industry, and when they're contemplating reserving, I do think people are companies are probably being a little more cautious or a little more thoughtful about medical cost expectations in their reserves, depending on how they view that. You know, AMERISAFE relies heavily on our case reserves.
Our FCMs have always taken a long-term approach to medical case inflation or medical inflation within their individual case reserves. That has benefited us in our past, and we haven't changed that practice. We are closely monitoring what's happening, and really trying to look for pockets of savings, as we always are, but particularly when I feel like the medical landscape to some degree has changed.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Yeah. Yeah. The top-line ex audit premium, and I think-
Janelle Frost (President and CEO)
Mm-hmm.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
We calculate it a little differently than you presented, but this is the first positive number since 2018, first quarter of 2018, if I'm looking at it properly. Not a dramatic change, but is there anything going on that's helping to support the top line here?
Janelle Frost (President and CEO)
Yeah, I'll talk... There's a couple of things I think are happening there. You know, we've reported some policy growth over the last few quarters, so that's been a positive, but certainly rate decreases have, you know, the premium dollars necessarily didn't follow the policy growth. So this quarter, we still had rate declines, no question, but we were able to grow even more policy count growth. And I really attributed that to, you know, the hard work of the AMERISAFE employees trying to make the most of their agent relationships, ease of doing business, making sure that we're making the right contacts and penetration within the agency. So kudos to them for really making a difference there. I don't view it as a shift in the marketplace....
I think it's more of efforts within, within the AMERISAFE four walls of moving that needle. At the same time, wage inflation is sort of acting as a rate increase, right? So we've talked about wage inflation for a number of quarters. You know, if I look back, we were reporting 12%, 10%, 8%. This quarter, it was down to 5.9%, but still higher than the industry, the countrywide average in terms of wage inflation. So we're certainly benefiting that, both in terms of premium that we're putting on the books now and then, of course, the audit premium as well. We're not seeing new employee counts really shift all that much, so I don't...
I feel like the economies for our insurers are strong, but not to the point where they're experiencing a labor shortage in terms of being able to add new workers.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Yeah. Could you give the number of large claims through nine months?
Janelle Frost (President and CEO)
We ended the quarter with eight claims within case incurred over $1 million. If you look at that compared to where we were at 9/30 last year, I think that was 11. So still slightly down from where we were last year.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Yeah. The reinsurance treaty where you had the adverse and you had to reverse the profit sharing or reduce the profit sharing, what was the circumstance there? Did that impact your own reserves? Clearly, they would have been offset by-
Janelle Frost (President and CEO)
Certainly
Mark Hughes (Managing Director and Senior Equity Research Analyst)
elsewhere, but what, what was that circumstance?
Janelle Frost (President and CEO)
Right. This is a very good point. Yeah, these were older treaties prior to 2017, where there were claims that had had some adverse development, and it just caused that ceding commission or that profit sharing that was associated with those treaties to reverse. So it had been accrued over a period of time, and that is... We use the word infrequent. I really didn't know how to describe it because it's not something that happens very often, but that, that, that profit commission was on older reinsurance treaties. But you're absolutely right. Obviously, it didn't impact the net aggregate development that we experienced in the quarter. It was just particular to those years.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Then I'll ask one more. I know I'm being fairly rude, but the 2020 and 2021 accident years, kind of the COVID years, you're-
Janelle Frost (President and CEO)
Mm-hmm
Mark Hughes (Managing Director and Senior Equity Research Analyst)
... obviously taking gains on those. Any observations about how those have been developing?
Janelle Frost (President and CEO)
You know, that's a great question. I would, I would say they're, they're within our, within our expectation. You know, the COVID years for us are, I think, a little bit different than a lot of the industry expected. Yes, our claim counts were down per se, but, but yet we still had severe claims, right? So, those claims are developing, they're not developing any differently than any other accident year from that standpoint. So I think, they're within our expectations. At this point, I would just say they're within our expectations. For, for, you're talking about 2021 and 2022, right? Or 2020 and 2020 and 2021, either way. Obviously, in 2021, we had-
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Yeah, yeah
Janelle Frost (President and CEO)
... the cat claim in the fourth quarter. That hasn't developed any differently than our expectation that we had at the end of that accident year.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Great. Thank you very much.
Janelle Frost (President and CEO)
Thank you, Mark.
Operator (participant)
As a reminder, if you would like to signal with questions, please press star one on your touch tone telephone. Again, that is star one if you would like to ask questions. Our next question will come from Matt Carletti with JMP.
Matt Carletti (Managing Director and Equity Research Analyst)
Hey, thanks. Good morning.
Janelle Frost (President and CEO)
Good morning, Matt.
Matt Carletti (Managing Director and Equity Research Analyst)
Mark, Mark covered a lot of ground there, so I don't have to-
Janelle Frost (President and CEO)
Yes, he did.
Matt Carletti (Managing Director and Equity Research Analyst)
He was not being rude. He was not being rude. Could you just maybe dive in a little deeper on the question he had about growth, and specifically kind of some of the focus on what you're doing at agencies? I mean, I noted you appointed a new chief sales officer this summer. It feels like there's a little more concerted effort towards, you know, making sure maybe every no stone is left unturned within kind of your, of course, your underwriting appetite. Could you just expand on that a little bit?
Janelle Frost (President and CEO)
I think that's a great way to put it, no stone left unturned. I'll start with this. Our underwriting appetite and our discipline and risk selection has not changed. You're... So I'll start there. You're absolutely right. We brought in a Chief Sales Officer, Ray Wise, and I, how you phrased it was the way I would phrase it is, I feel like we've elevated the focus within the company on our agent customers and our agent relationships. You know, we've had head of sales in the past, but they were not at the executive level. So it's really having a person sitting at the table when we're making strategic decisions, focused on that agent customer and what we need to be doing from that standpoint.
So I look for good things to come from that relationship. At the same time, even like I said before, even within the company, we have had a concerted effort in trying to change, you know, ease of doing business, working with our agent customers, and our employees have really pushed hard on that. You know, sometimes it takes a while for these things to take root, and I feel like that momentum is starting to take root.
Matt Carletti (Managing Director and Equity Research Analyst)
Perfect. That makes a lot of sense. Thank you for the color.
Janelle Frost (President and CEO)
Thank you, Matt.
Operator (participant)
And our next question will come from Mark Hughes with Truist.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
... Yeah, thanks. Just a couple more.
Janelle Frost (President and CEO)
Sure, Mark.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Any commentary on the construction and market? You know, the concept of the next job is very important. How are you seeing that shape up?
Janelle Frost (President and CEO)
Right. You know, the my best way, my best gauge of that is what's being reported to us in payrolls on a monthly basis. And our construction book, the payrolls have been relatively strong. They show both wage growth and some new employee count, but not large increases. So from that aspect, it's holding up quite well. You know, I always like to remind people, you know, we report out construction as an aggregate group, but the largest class within that is roofing. Roofing risk is something that we think we really are experts at. And roofing is not always necessarily new construction. There's a maintenance component to that, which I think we benefit from.
Even if there is a lag or a downturn in commercial construction, I feel like that holds up pretty well, pretty resilient.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
And then what are your thoughts on capital, another nice special dividend, I think. Where is that gonna position you? I guess you've got, at this point, no debt, if I'm looking at it properly.
Janelle Frost (President and CEO)
Correct.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
So kind of your underwriting leverage, if you did lever up with debt, you know, how much more capacity could you add?
Janelle Frost (President and CEO)
Yeah, you know, I'll say this about the special dividend, and you're so right about thinking about it in terms of leverage. You know, AMERISAFE has been profitable from an underwriting standpoint, has been profitable for a very long time, and that has enabled us to build excess capital. And then when those rates started declining and the market really started softening, I think the question the board was asking itself is, what do we do with this capital? You know, do we invest it in writing unprofitable business? Do we protect our margin? Obviously, our decision was protect the margin. And so that, in turn, led to us declaring special dividends to return that capital to shareholders.
At this point, you know, we're starting to see some growth, which is great. The decision was to return capital to the shareholders. But we've said this all along, and I'll repeat it, is as we are able to grow organically and put that capital to work to grow organically, to generate the returns that our shareholders are accustomed to, I would expect there may be some change to that. But as of right now, we're seeing momentum, but we're not there yet, right? We're not there yet. And then, of course, there's always the possibility of a merger and acquisition. You mentioned we have no debt on the balance sheet, so that's another use of capital if we were to go out and buy something. And we have a share repurchase program as well.
I know we haven't purchased any shares recently, but there's still roughly a little over $12 million left in that share repurchase program.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Appreciate that. And then, loss cost trends. I don't know if you put that in the release or made a comment, but-
Janelle Frost (President and CEO)
Um.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Just very curious what you're seeing out of the NCCI.
Janelle Frost (President and CEO)
Yeah. I think for NCCI's latest number for 2023 and going into 2024 is somewhere around, averaging around, somewhere around 7.5%. So loss costs that were effective, that became effective this quarter for AMERISAFE averaged around 5%. So still, still rate declines or still loss cost declines, but maybe a slowing in that decline. But, you know, if I'm, if I'm being completely candid, there's nothing on a macro basis that I see in the industry, either in data that were reported or just what other CEOs are sharing, that is gonna move that needle anytime in the near future in terms of approved loss costs. I think that's just something we're, we're-
Mark Hughes (Managing Director and Senior Equity Research Analyst)
You can be candid with me, Janelle.
Janelle Frost (President and CEO)
Pardon? Oh, thank you, Mark. I appreciate that.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
You can be candid.
Janelle Frost (President and CEO)
I appreciate that.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Okay. All right. Appreciate it. Thanks, Janelle. Thanks, Andy.
Janelle Frost (President and CEO)
Thank you.
Andy Omiridis (EVP and CFO)
Thank you.
Operator (participant)
Thank you. That does conclude the question and answer session. I'll now turn the conference back over to Janelle Frost for any additional or closing remarks.
Janelle Frost (President and CEO)
We are pleased with the quarter's results, particularly when driven by the fundamentals we focus on: disciplined underwriting, proactive safety, and extensive claims management. Thank you for joining us today.
Operator (participant)
Well, thank you. That does conclude today's conference. We do thank you for your participation, and have an excellent day.