AMSF
#Good morning.
Welcome to the AMERISAFE 2017 Second 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.
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, 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 <UNK> <UNK>, AMERISAFE's President and CEO.
Thank you, <UNK>, and good morning, everyone.
Before I discuss the operations this quarter, I'd like to provide some color regarding the workers' compensation industry in general as competition continued to intensify this quarter.
As reported by NCCI in May, the workers' compensation industry, excluding state funds, reported a 94% combined ratio for 2016, which was unchanged from the 94% combined ratio reported for 2015.
To add perspective, the P&C industry's combined ratio increased from 98% in 2015 to 101% in 2016.
Workers' compensation was the only line within the P&C line whose combined ratio did not worsen from 2015 to 2016.
Also adding to the competitive environment, loss costs continued to decline in the second quarter.
NCCI reported, through May, approved rates were down 6.7%.
I share this industry overview to provide background as we are pleased with this quarter's 81.9% combined ratio and the financial strength of AMERISAFE, which was achieved by focusing on underwriting discipline and consistent approach in handling our claims and expenses.
Now on to the second quarter's operational results.
As I've already stated, competition increased this quarter, and our gross premium written decline of 15.7% reflected it.
The decline was driven by both policies written in the quarter as well as audit and related adjustments for policies written in prior quarters.
Of the policies written this quarter, renewal premium was down 6%.
However, policy retention remained high at 92.2% for those policies for which we offered renewal.
Our renewal premium was obviously impacted by declining rates.
In the aggregate, pricing in the quarter, as measured by ELCM, was a 1.68, down from a 1.73 in the second quarter of 2016 but slightly higher than the 1.65 in the first quarter.
While comparing consecutive quarters is not apples-to-apples, I do feel this emphasizes our commitment to risk selection with appropriate pricing for long-term stability.
As for audit premiums and other adjustments, audit premiums themselves were positive.
However, the change, quarter over prior quarter, for audit and all premium adjustments was a headwind to top line, decreasing gross premiums written $4.1 million.
Moving on to losses.
The loss and LAE ratio for the quarter was 56.1%.
The current accident year ratio was 69%, and the prior accident year loss ratio was a negative 12.9%.
Here are some key metrics to note regarding loss expenses.
Reported claims in the calendar year were down 5.1%, and the open inventory of claims was down 5.8% for the first half of 2017.
The $10.7 million of favorable development this quarter resulted primarily from favorable case development, most impacted accident years 2015, '14 and '13.
To delve more into the financial metrics, I will now turn the call over to <UNK>.
Thank you, <UNK>, and good morning, everyone.
For the second quarter of 2017, AMERISAFE reported net income of $15.5 million or $0.81 per diluted share compared with $16.6 million or $0.87 per diluted share in last year's second quarter, a decrease of 7%.
Operating net income in the second quarter of 2017 totaled $15.7 million or $0.82 per share, slightly below last year's $0.85 per share in the second quarter.
Revenues in the quarter decreased 7.8% to $89.9 million compared with last year's second quarter.
Net premiums earned decreased 8.8% to $82.7 million when compared to the second quarter of 2016.
Net investment income was $7.5 million in the second quarter of 2017, an increase of 20.5% when compared with last year's second quarter.
The significant driver of this increase was the decline in value of a limited partnership hedge fund in last year's second quarter.
This limited partnership is marked to market through net investment income each quarter.
Without the hedge fund, net investment income was up 9.6% compared to the second quarter of 2016.
The tax equivalent yield on our investment portfolio at the end of the quarter was 3.3%, up slightly from 3.2% at the end of the second quarter of 2016.
There were no impairments of securities or significant realized gains or losses during the quarter.
The investment portfolio continues to be high-quality, carrying an average AA- rating.
Our duration of the portfolio at quarter-end is 3.69, and we hold 57% in municipal securities, 25% in corporate bonds, 11% in U.S. Treasury and agencies 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 51% of our investment portfolio is classified as held-to-maturity, which is in a net unrealized gain position of $11.5 million.
These gains are not reflected on our book value as these bonds are carried at amortized cost.
With regard to operating expenses, our total underwriting and other expenses decreased 10.5% in the quarter to $20.2 million compared to $22.6 million in the same quarter last year.
We saw decreases in insurance assessments and commissions during the quarter compared to last year's second quarter.
By category, the second quarter of 2017 expenses included $6.6 million of salaries and benefits, $6 million of commissions and $7.6 million of underwriting and other costs.
Our expense ratio for the second quarter was 24.4% compared with 24.9% in the second quarter last year.
Our tax rate decreased to 30.1% in the quarter, down from 32.4% in the second quarter last year.
The decrease reflects the larger amount of tax-exempt income compared with taxable income during the quarter.
Return on equity for the second quarter of 2017 was 13.1% compared to 13.7% for the second quarter of 2016.
Our operating ROE for the quarter was 13.3%.
On July 25, the company's Board of Directors declared a regular quarterly cash dividend of $0.20 per share, payable on September 22 to shareholders of record as of September 8.
And finally, just a couple of other items of note.
Book value per share at June 30, 2017, was $25.02, up 5.5% from year-end.
Our statutory surplus was $406.4 million at June 30, 2017.
That was also up $12.4 million from year-end.
And then finally, we'll be filing our 10-Q for the second quarter later today, after the market close.
That concludes my remarks.
And we would now like to open the call up to investors for our question-and-answer session.
Operator.
Right.
That's a really good angle.
We individually underwrite every account, so we do monitor the ELCM in the aggregate.
But we do base it on the risk that we're evaluating at that time.
And I can tell you, in the quarter, I was surprised at some of the lower ELCMs that we have that quoted and failed.
So there are some pricing out in the marketplace that is well ---+ significantly below AMERISAFE's.
And at that point, we're not going to chase the price that low.
It's just not what we do.
And <UNK>, I think sometimes, we see a mix shift, and maybe the retention was in states where we had higher ELCM, so that can drive the number a little bit in terms of what's happening, where we've renewed.
But as <UNK> mentioned, there were some quotes out there that were pretty low relative to an ELCM and much lower than where we would want to go.
We're not seeing any specific trends that I think are of note.
We're probably ---+ I'm probably going to be a little bit more cautious on this call than maybe we have been in prior calls in giving state-specific data because it is highly competitive out there, and I wouldn't want to give away competitive data.
But obviously, you know our larger segments, our construction and trucking, we see declines in both.
From an audit perspective, oil and gas was still negative audits.
But the payrolls were improving from prior quarter, so we take that as a good sign.
No, actually, audit premiums themselves were positive.
Now when we add them in with endorsements and cancellations, yes, they were negative.
But audit premiums themselves were positive.
It's the quarter-over-quarter change that brought ---+ was the $4 million decrease.
But the only class of business where we've actually had negative audit premium in the aggregate is oil and gas.
No, the $2.6 million is audit premium, endorsements and cancellation premium.
We see and typically, you see this in a competitive environment.
You see more cancellations.
We've seen a slight uptick.
It's not been dramatic, but certainly, we're seeing more cancellations than we saw last year.
Someone gets a better rate partway through their cycle and cancels the policy with us.
It doesn't happen as often, but that drove some of the change in the quarter.
It's pretty consistent.
It's just that it tends to be in more competitive markets, and it also tends to be in those classes of business that have the highest rates, right.
They're much more price-sensitive if you're a roofer versus if you're a landscaper, for instance.
Brokers are, in some regards, in the same predicament that insurance companies are.
They're looking for premium because their base of their commission is premium.
So they're very protective of their large accounts in placing those and making sure that they get renewed at appropriate rates for the client, that the client can accept, at the same time, commissions that are beneficial to the agent.
Yes, that's a good point.
I haven't really seen a swing in the distribution, no.
Yes, <UNK>, I'll give the same answer I gave last quarter, which is we sort of expect the expense ratio to be 24% to 25%.
And obviously, if net earned premium declines, then we'll be towards the higher end of that range.
But we're not expecting any dramatic changes.
But we're aware that we're in a soft market, and we have to continue to manage our expenses the way that AMERISAFE typically has, with a pretty frugal culture and focus on underwriting.
Yes.
I appreciate you asking, <UNK>, but we typically wouldn't give out those numbers until the quarter is over because, as I mentioned with the second quarter, it varies month by month.
I just have a couple.
Just going back in investment income.
Was there anything unusual outside of the mark-to-market on the alternatives like bond prepayment or anything unusually good in the quarter just from kind of a core yield perspective in the general account.
Yes.
I think we've been increasing our duration and investing in higher-yielding securities, particularly when yield spiked up in the muni market and overall in the fourth quarter.
So we're starting to see some of that come into the portfolio.
There were some calls during the quarter that did influence investment income a little bit, but that is sort of the components.
It can be volatile.
But it certainly was up, still 9% or so, without the hedge fund adjustment.
Okay.
Yes, that's helpful to have in the model.
And then just on capital.
So presuming that the top line continues to be managed in light of a competitive market, the premiums-to-capital measure gets to be pretty darn low.
And so I just kind of be curious how you're thinking about that.
I mean, the company isn't well capitalized, but it's ---+ I got you like 0.8 to 1 right now, premiums and surplus, and that could move lower even with special dividends.
So is there any change on how you're thinking about it.
Because I feel like you're kind of moving from being overcapitalized to maybe really overcapitalized.
And I don't know if there's any thought of kind of how to manage that if you have to continue to be really selective in a soft market.
Randy, that's a good question.
Our board does discuss our capital situation every quarter, when they look at the regular dividend, and they'll continue to evaluate that.
Certainly, you're talking about all the right dynamics in terms of the things that they look at when they look at capital, what are we going to need that capital for, organic growth, M&A, whatever it might be, and then what is the likelihood.
And then being disciplined about returning that back to shareholders if we cannot use it through dividends and other means.
And so they'll continue to look at that.
But you're right.
If the ratio continues to go lower, it certainly causes us to be more capitalized ---+ more well-capitalized than in the past.
Is there any thought that there could be some opportunity out there from a business perspective.
Or is the market just ---+ I guess what I mean is, if you go back maybe 3 or 4 years, there was this idea that some folks could have some issues out there.
Some blocks might become available.
It seemed like maybe there were a couple of things that came around, but they went for pretty high prices.
Are we just past that part of the cycle now.
And where - which any kind of strategic opportunities be within comp.
Meaning to allocate some of that capital writing more business in size or in bulk.
Right.
I think when you're talking about buying books of business in a declining environment, I'm not quite sure what we would be buying at this point because consumers ---+ the end consumer is expecting rate declines.
And given our underwriting discipline, I would assume we'd be a little bit more pricey than they were accustomed to or looking for.
So if we were to purchase a renewal book, I'm not quite sure how much of that we would actually retain.
Yes.
But we do look at it from time to time, and it is something that we think about as a use of capital.
I think, as <UNK> points out, it's probably less likely in this market than a few years ago.
Thank you.
AMERISAFE has a consistent history of turning risk into opportunity through the experience and performance of its employees, evidenced this quarter in our 89.1% combined ratio.
Our commitment to maintaining discipline enhances our financial stability for the protection of our policyholders and our shareholders.
Just this month, Ward Group named AMERISAFE to its 2017 Top 50 in the P&C industry.
This recognition was for outstanding financial results in the areas of safety, consistency and performance over a 5-year period, 2012 to 2016.
Congratulations to the AMERISAFE family on this achievement.
Well done.
And with that, I'd like to thank you for joining us on the call today.
Have a good day.
