AMSF
#Thank you, <UNK>nt, and good morning, everyone.
Thank you for joining the call today as we discuss our second-quarter results.
Before discussing AMERISAFE's operations let's talk about the operation as a whole.
Companies are fighting to retain renewal accounts.
In many cases, the underlying rates for those risks have declined resulting in a decline in premium.
To maintain or grow top line, companies are becoming increasingly competitive, a sign of a softening market.
What's preventing a soft market.
I believe we have not returned to the soft market of previous cycles because of low investment yields.
Underwriting profit is necessary for companies to meet ROE goals.
As I stated in orr earnings release, AMERISAFE remains unwavering both in our disciplined underwriting focus, on our market niche and in producing consistent and superior results.
This quarter we reported a combined ratio of 80.4% an ROE of 13.7% and earnings per share of $0.87.
How does that discipline work this quarter.
Gross premiums written declined 2.6%.
This decline was a result of audit and related premium adjustments.
More importantly for policies we wrote in the quarter, premium grew 1.1% and policy count grew 3.4%.
Our policy count retention for the quarter was 93.5% compared to 92.9% in the second quarter of 2015.
The effective LCM for the quarter was 1.73, down from 1.81 in the second quarter of 2015.
Our pricing concessions have been in response to the competitive market, but without losing sight of protecting the underwriting margin.
Also keep in mind, our pricing declines have been moderate and deliberate coming off from all-time high of 1.86 second quarter of 2014.
As for the audit premium and related adjustments, I mentioned, this was a drag to top line and it was expected.
Audit premium continued to remain positive but not at the same levels as the previous year.
This is driven by economic activity in the industries that we insure, and unless there's a significant change in the economy, I would expect this trend will continue in 2016.
Relative to losses, the current accident year selection is 67.9%, a 1.9 percentage point improvement from accident year 2015.
Coupled with favorable development from prior accident years, the quarter's loss ratio was 54.2%.
The favorable development was largely a result of case development experienced in the quarter, primarily in accident years 2014, 2013 and 2009 and prior.
Once again, I believe these favorable results are driven by our unique claims management process focused on maximum medical improvement, returned to work and expedient resolution.
Yet another example of our focus on discipline.
I would now turn the call over to <UNK> <UNK>, our CFO, to discuss the financials.
Thank you, <UNK>, and good morning, everyone.
For the second quarter of 2016, AMERISAFE reported net income of $16.6 million, or $0.87 per diluted share, compared with $14.3 million, or $0.75 per diluted share, in the same quarter of last year, an increase of 16.2%.
Operating net income in the quarter was $16.3 million, or $0.85 per share, a 1.7% increase from the second quarter of 2015.
Revenues in the quarter decreased by 2.4% to $97.6 million compared with the second quarter of last year.
Net premiums earned decreased 5.1% to $90.7 million when compared to the second quarter of 2015.
This decrease was largely due to $3 million in lower payroll audits that <UNK> mentioned previously, as well as an additional $0.9 million in lower assumed premium from mandatory state pooling arrangements.
Net investment income was $6.2 million in the second quarter of 2016, a decline of 10% when compared with last year's second quarter.
The decrease was largely due to the decline in value of a hedge fund investment, which is mark-to-market through net income each quarter.
Without the hedge fund, net investment income was down 2.6% compared to the second quarter of 2015.
The tax equivalent yield on our investment portfolio was 3.3% in the quarter compared with 3.6% in the same quarter of last year.
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 minus rating with an average duration of 3.04 with 52% in municipal securities, 32% in corporate bonds and the remainder in cash and other investments.
53% of our investment portfolio is classified as held to maturity, which is a net unrealized gain position of $23.2 million at June 30, 2016.
These gains are not reflected in our book value per share as these bonds are carried at amortized cost.
With regard to operating expenses, our total underwriting and over expenses increased 2.2% in the quarter to $22.6 million compared to $22.1 million in the second quarter of 2015.
We saw an increase in bad debt expense largely as a result of a change in estimate, or reduction, we made last year in the second quarter and a slight increase in compensation costs.
By category, second-quarter 2016 expenses included $6.3 million of salaries and benefits, $6.5 million of commissions and $9.8 million of underwriting and other costs.
Our expense ratio for the second quarter was 24.9 compared with 23.1 in the second quarter of last year.
The majority of the change in expense ratio was due to the decline in net earned premium mentioned earlier and with the remainder due to the increase in expenses mentioned above.
Our tax rate increased to 32.4% in the quarter up from 28.8% in the second quarter of last year.
The increase reflects the larger amount of taxable income compared with tax exempt during the quarter as a result of the increased amount of favorable prior-year development.
Return on equity for the second quarter of 2016 was 13.7% compared to 12.3% for the second quarter of 2015.
Operating ROE for the second quarter was 13.6%.
On July 26, 2016, the Company's Board of Directors declared a regular, quarterly cash dividend of $0.18 per share payable on September 23, 2016 to shareholders of record as of September 9, 2016.
And just a couple of other items to discuss.
Book value per share increased 8.8% from year end to $25.83 at June 30, 2016.
Our statutory surplus rose to $409.4 million at June 30, 2016, up $38 million from year end.
Finally, AMERISAFE will file our Form 10-Q for the second quarter this afternoon after the market close.
That concludes my remarks, and we would now like to open the call up to analysts and investors for our question-and-answer session.
Operator.
We do.
We think audit premium will remain positive, but not nearly as robust as it was last year.
So it will be a drag to top-line for, I assume, the rest of 2016.
I will.
Sure, yes, this is <UNK>.
We have a hedge fund investment at the parent company and it has a large portion of it invested in life insurance stocks and so with the Brexit vote coming right at the end of the quarter, those stocks tanked pretty significantly and that drove down the value of the hedge fund investment which is mark-to-market.
Since that time, we believe that those stocks have risen somewhat and recovered some of their value, but we think that overall, it's still down from where it was at the year end.
So we continue to look at that investment and think about that, but that's what's causing that volatility in the net-investment income.
Yes, you are hearing that properly.
We made an adjustment to our allowance based upon our historical experience, last year, second quarter and we took bad debt down by about $1.1 million.
And so the significant increase you see here is just a year-over-year comparison and we don't expect to see that significant increase from a comparative standpoint in future quarters.
That is correct.
We would expect them to run at about the rate they've run so far this year, probably about 1% to 1.3%.
We have seen an increase in the amount of policyholder dividends as a result of activities that we have in certain states, certain states where we compete on the basis of policyholder dividends.
So we expect them to be around 1% to 1.3% going forward.
Yes, we think the run rate will be somewhere between 24% and 25%.
That's a good question.
You know, the tax rate is largely driven by the amount of favorable development that we see each quarter.
And so, I would look just to the historical record to try to estimate the tax rate.
Yes.
You know, it is going to fluctuate based upon the earnings of the Company and the amount of underwriting to profit.
That's largely what drives it.
Yes, that's a really good question and I guess the question everyone is looking at is where it is going to head in the next few quarters.
There's definitely an increasingly competitive market.
We are not seeing, and I think I said this on last quarter's call, we are not seeing the irrational behavior we've seen in prior soft markets, but we are starting to see some multi-line carriers that have typically, or in the last few years quarters, have pulled away from workers comp because it wasn't profitable, deciding that yes, we will quote some workers comp.
From an AMERISAFE standpoint, you mentioned our sales initiatives, we are starting to, I think, see traction there.
I've talked in past about our green, yellow red.
We are seeing more greens and so we are doing a better job of bringing in the things we want to see, but our submission count is down, so we would just like to see more of that.
You know what, we will protect the underwriting margin.
We are trying to be as responsive as we can to the market, but only at what we are willing to accept.
It really depends on what the competitive market is going to do.
I think we're doing a good job of holding steady.
I mentioned that we grew policy count and I talked about a couple quarters ago on the call that going into this softening market, or if we reach a soft market, policy count is where I was focused because if I can maintain those policies I know I want to keep in our renewal retention rate, which was up this quarter, I feel like we are positioning the Company correctly.
Yes.
At the end, when we reported first quarter at the time that we ended the quarter, we didn't have any large losses.
I think on the call, I alluded to, we had one come in subsequent to, reported for the quarter before the call.
So right now, when we say large losses, that's excess of $1 million.
We are at a count of 5 and, just to put that in some perspective, accident years 2014 and 2015 are at 12.
So that's not unusual amount for us.
There's nothing in those losses that would cause us to want to change our loss pick for the year.
Thank you, <UNK>.
I believe you know AMERISAFE and you know AMERISAFE well.
We are in a lumpy business, but we are conservative about what we do.
There's nothing in the underlying data six months in that would cause us to believe our loss ratio needs to change at this point.
The frequency is about where we thought it was; severity is about where we thought it was.
So your point about the favorable development, that's case-by-case.
That's just how it happens for us.
We've had good things happen, but bad things can happen as well.
Thanks, <UNK>.
Sure, accident-year 2014 was $3.8 million; 2013 was $4.2 million; 2012 was $1.7 million; 2011 was $0.1 million; and 2011 and prior was $2.6 million.
I'm going to write that one down, a mini hard market, I like it.
Right, we have been pretty vocal about the fact that the favorable development that we received of particularly those years that you're talking about, 2012 and 2013, have come from case development.
And I've said all along, I think that those years, from case-reserving standpoint probably, were a shift in the paradigm if you will because that was coming off of accident-year 2010 where we got it wrong; the industry got wrong.
I think we all took a look and said, are we being realistic about how we are setting these case reserves, in particular return to work.
Coming out of the great recession, return to work is a large part of what we do and there weren't jobs (technical difficulties).
So we factored that into our case reserving and now I think, the Company is reaping the benefits of that.
So that would have been a change from 2012 and forward, which would include 2014, 2015 and 2016.
Thank you.
Thank you.
I began my comments calling this an increasingly competitive time in the market.
There are numerous macro factors which influence the direction the market goes from here.
Regardless, AMERISAFE is well-positioned for the upcoming twists and turns.
Our focus on underwriting discipline, claims management and expense frugality will continue to support our commitment to our stakeholders.
