Amerisafe Inc

NASDAQ:AMSF

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the AMERISAFE's 2024 Second Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kathryn Shirley, Chief Administrative Officer. Please go ahead.

[Kathryn Shirley, executive]

Good morning. Welcome to the AMERISAFE's 2024 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 and 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.

[G. Frost, executive]

Thank you, Kathryn, and good morning, everyone. The state of the workers' compensation market remains profitable despite continued rate softening. The industry-wide data published by NCCI in May was similar to what we've seen over the last few years. An accident year combined ratio below 100 and redundant reserves driving approved loss cost declines. These conditions translate to a competitive marketplace, one in which AMERISAFE's disciplined underwriting is critical to long-term profitability.

For several quarters, we have discussed our investment in profitable growth through greater agent engagement and pipeline efficiency. These actions drove year-over-year gross premiums written growth of 6.6% in the quarter. We saw policy count growth in the quarter, and we continue to see strong retention for policies for which we offer renewal with 93.3% retention. Audit premium supported by wage inflation would also a boost to top line.

Turning to losses. Our accident year loss ratio was in line with the prior year at 71%. Loss cost trends remain in line with previous quarters. We continue to see -- continue to monitor medical inflation. However, medical fee schedules are in general containing costs. The company experienced $8.1 million in favorable development on prior accident years, primarily from accident years 2020, '21 and 2022.

We attribute our favorable development to lower claim severities and proactive claims handling. Despite challenging market conditions, AMERISAFE's focus on providing protection to small to midsized businesses and caring for their workers has a track record of strong retention and delivering robust returns to shareholders throughout the cycle.

With that, I'll turn the call over to Andy to discuss the financials.

[Anastasios Omiridis, executive]

Thank you, Janelle, and good morning to everyone. For the second quarter of 2024, AMERISAFE reported net income of $11 million or $0.57 per diluted share and operating net income of $11.1 million or $0.58 per diluted share.

During the second quarter of 2023, net income was $15.6 million or $0.81 per diluted share and operating net income was $14 million or $0.73 per diluted share. Gross written premiums were $76.4 million in the quarter compared with $71.7 million in the second quarter of 2023. The increase in the top line was driven by a combination of increased sales efforts with agents, which drove increased new business and strong retentions.

Audit premiums increased the top line by $7.3 million compared with $4.8 million in the second quarter of 2023. Our total underwriting and other expenses were $20.4 million in the quarter compared with $20 million in the second quarter of 2023, resulting in an expense ratio of 29.8% compared with 30.4% in the prior year. We continue to invest in our business, leveraging AMERISAFE's disciplined approach to take advantage of attractive market opportunities.

For the quarter, our tax rate was 20% compared to 20.1% in the prior year. Turning to our investment portfolio. In the second quarter, net investment income decreased 3.6% to $7.4 million due to a lower asset base versus the prior year. On a consecutive quarter basis, net investment income increased 1.1% for Q2 of 2024 versus Q1 of 2024. For the quarter, the yield on new investments increased approximately 165 basis points in relation to roll off, driving our tax equivalent book yield to 3.79% or 17 basis points higher than the second quarter of 2023.

The investment portfolio is high quality, carrying an average AA- credit rating with a duration of 3.9 years. The composition of the portfolio is 58% of municipal bonds, 28% in corporate bonds, 3% in U.S. treasuries and agencies, 6% in equity securities and 5% in cash and other investments. Approximately 57% of our bond portfolio is comprised of held-to-maturity securities. 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 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 $884 million in investments, cash and cash equivalents. The company's Board of Directors declared a regular quarterly cash dividend of $0.37 per share on Friday, July 26, 2024, to shareholders of record of September 6, 2024.

And finally, a couple of other topics. Book value per share was $15.78 and operating return on average equity was 14.4%. Our statutory surplus was $280.6 million at quarter end, up 10.1% from $254.9 million at December 31, 2023. And finally, today, July 30, 2024, 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]

[Operator Instructions] And our first question is coming from Matt Carletti with Citizens JMP.

[Matthew Carletti, analyst]

I guess my first question, I was hoping Janelle maybe you could expand a little bit on the growth in the quarter. I know you made a comment in your opening comments about some of the recent efforts and investments you've made in kind of agency relationships. Yes, I'm hoping maybe you can just give us a little more color, I mean, noted it was the voluntary grew nicely. The press release referenced [ PIF ] growth. Just kind of how you feel about the sustainability of that as we move forward or kind of the ability to build that going forward?

[G. Frost, executive]

Certainly, Matt. This is our fourth quarter, I want to say of either slight growth in voluntary debt premium are relatively flat. So that's something that we have made a concerted effort on with our employees and with our agents and just trying to make the pipeline more efficient, in terms of ease of doing business and building on those agent relationships.

So I do feel like we're gaining some momentum there through our employee efforts. It's really not a change in AMERISAFE's approach to the business at all. It's really just about creating efficiencies and valuing those relationships. So I feel pretty good about the growth. You're absolutely right. We've had voluntary debt growth of 2.7% in the quarter. We've grown policy count, I believe, for the last 5 quarters. So those are all signs there pointing to the efforts that we're putting in place are generating business growth for us.

[Matthew Carletti, analyst]

Wonderful. And then there's a couple of numbers questions, if I could. One is what was the ELCM in the quarter?

[G. Frost, executive]

1.48.

[Matthew Carletti, analyst]

1.48, okay. And then on audit premium, do you have handy what third quarter of '23 audit premium was just to get an idea of kind of the potential comparison this quarter.

[G. Frost, executive]

Exactly. Third quarter last year was $5.6 million. Second quarter was $4.8 million.

[Operator]

Our next question is coming from Mark Hughes with Truist.

[Mark Hughes, analyst]

Janelle, if I heard you properly, it sounds like the 1.48, I think that's up year-over-year, which I think you had a flat result in 3Q, but then that's the first positive number, still scrolling, still scrolling for quite a while.

[G. Frost, executive]

Yes, that's right, Mark. I mean when I think or when we report the ELCM, I have to remind myself and I like to remind others that really that's really an index over the underlying loss cost. So as we all know, the underlying loss cost, the approved rates coming out of the states continue to decline. Because we individually underwrite every account, we have to make sure that we are doing so profitably. And so as we -- we're -- just like every other carrier right now, we're battling the fact that rates continue to soften. The results for the industry, while below 100, if you look at accident year combined ratios for the industry as a whole, each year, there is some deterioration there. So I just like -- we are reaching that point where we have to be very protective of that.

[Mark Hughes, analyst]

Right. Yes. Any details on the approved loss costs. Obviously, they're down. Any trend of new state data in the quarter is worth noting?

[G. Frost, executive]

No. The overall approved loss cost is somewhere around 8% to 9% decrease for the year for the 2024 filings. So -- and I think that's pretty much on course with what NCCI was predicting. Again, because at this point, the industry is -- even on an accident year basis, the industry is below 100% combined.

[Mark Hughes, analyst]

Yes. The -- you talked about medical inflation that the fee structures or the fee schedules continue to restrain that. Is that ever going to separate? I mean is there ever any reason to think that's not going to just keep a lid on it and you'll continue to benefit from kind of the government rate suppression one might say?

[G. Frost, executive]

Mark, I believe that's actually where we're going to see pressure. For the most part, fee schedules have been doing their job in terms of containing costs. But I do believe there are pressure and particularly in certain types of services, there is pressure from the provider side of what they're being reimbursed for workers' compensation. And when I talk about we're keeping our eye on medical inflation, that's actually what I'm referring to the fact that at some point, the rubber hits the road in terms of what providers, whether it's hospitals, physicians, surgeons, whatever the case may be, are being reimbursed for workers' compensation and what fits within their own operating models. There will be, in my opinion -- in my humble opinion, there will continue to be pressure there.

[Mark Hughes, analyst]

Yes. Does the uptick in the ELCM, does that reflect a little less competition? I know you're being disciplined around.

[G. Frost, executive]

I wish. No, it does not reflect less competition. It is still a very competitive marketplace.

[Mark Hughes, analyst]

Yes. And then anything on the large claims? How have they trended through the 6 months?

[G. Frost, executive]

Through the 6 months, we are at 4 claims over $1 million. So that's -- again, I have to -- every time I throw out that number, I have to caution that, that is lumpy. I never know what quarters are going to happen is or is not going to happen. But at this point, we haven't had a frequency of severity in terms of million-dollar claims.

[Mark Hughes, analyst]

Yes. And then on the reserve development, you guys are still performing tremendously, but no deed going unpunished, it was down a little bit from an even more stellar performance in recent quarters. Anything you would say as to why just sort of -- so from a very simplistic perspective, that was a little bit lower this quarter compared to the last couple of years?

[G. Frost, executive]

Yes. I like how you phrased that. Reserve development, at least for AMERISAFE, reserve development is not linear, right? I often talk about the favorable case development that we have or the favorable development that we recognize is truly coming from individual cases. I can't predict when -- which quarters those are not going to happen. It's hard for me to balk at $8 million of favorable development, even though, to your point, it is less than the [ $10.9 million ] that we had in the second quarter of last year.

I still consider that to be a very healthy number. I can certainly assure you from a AMERISAFE's standpoint, our reserving philosophy has not changed. And I do feel like my claims adjusters because of their practices and the way they reserve claims and the way they intimately know their claims are truly reflecting in our reserves, what we believe is most likely outcome and have their -- for lack of a better term, their finger on the pulse of what's happening in terms of survivability and procedures and the assumed inflation that goes into that.

So I believe that's built into my case reserves so that when we find the opportunities to help an injured worker move on and return to work and have their medical care taking care of, we find those opportunities. And for us, at least, that has resulted in favorable development. I don't see that pattern, that philosophy has not changed.

[Mark Hughes, analyst]

Understood. And then how about the construction end market, the question about the next job, we've talked about I think many times over the years, but how does that stand today?

[G. Frost, executive]

Our insurance are working. Hence, why we have it, we're having this favorable audit premium. We're still experiencing wage inflation within our industry groups. For the quarter, wage inflation was around 6%, 5% almost all of that really came from increased wages, less so from new employees. So -- and that's been very consistent. So the fact that we're not seeing a large influx of new employees doesn't really surprise me, given that we ensure small to mid-sized employers. But they're obviously working and wages and payroll -- insured payrolls are going up. So I think that speaks positively for our industry groups.

[Operator]

[Operator Instructions] Our next question is coming from Gregory Peters with Raymond James.

[Charles Peters, analyst]

I was looking at the 6 months result on the expense ratio versus last year and it's up a little bit, say, 90 basis points. Just curious if there's anything structural that's going on driving that expense ratio higher?

[Anastasios Omiridis, executive]

The growth that you're seeing in the expenses for the 6 months is really just further investing in the sales side underwriting, just a front of the house. But again, based on the fact that expenses are never linear either, the investment is probably more upfront now in these first 6 months, and then it should level off and then we assume to be back in what the range is for us for an annual expense ratio.

[Charles Peters, analyst]

Okay. And then just pivoting back to the growth comment. Janelle, I thought you said in the comment on the call, the policy count growth has been positive for the last 5 consecutive quarters. I don't want to misquote you, but has there been concentrated with certain distribution partners or certain geographies? Or maybe you can give us some color on where the growth is coming from?

[G. Frost, executive]

Yes. Great question. And the answer is no. It's not coming from a particular distribution network. As you know, we use independent agents that hasn't changed. Actually, if you look at our agent count, they're probably slightly down. And that's really because, as I mentioned earlier, we're really working on pipeline efficiency, making sure that we're doing business with the right agents and the agents that we can serve best.

So that's been a very positive thing for us. The policy growth has really been, I'm going to attribute this to what I just mentioned, which is just the pipeline efficiency, trying to make things a little bit more efficient for our agents in terms of ease of doing business, the time we turn around quotes making sure that we're giving -- we are making the most of the opportunities that we have. And because of those things and the efforts of our employees, and we have been able to grow policy count, but it's not to your point about industry groups or state. It's not particular to an industry group, it's not particular to a certain type or particular agency distribution. And I guess, it goes back to what I was saying earlier in the call, it's not -- I wouldn't say it's nothing -- it's anything new that AMERISAFE is doing. It's really just being better at the way we're handling our agency relationships.

[Charles Peters, analyst]

And I'm going to come at the severity question again. I know you were addressing it in your previous answers, but on some of the other conference calls, the concept, the fact that Florida has raised its reimbursement schedules, Medicare reimbursement rate schedules beginning next year that's come up in a couple of other calls. And so I'm just curious, as we look forward, what you think about, how are you measuring out or gauging what your outlook is on severity?

[G. Frost, executive]

Right. That's -- yes. So Florida is certainly top of mind for everyone because they've made adjustments to both physician charges and surgical procedures, and that seems to be the two that everyone is talking about. Because when you look at the percentage increases, you think, wow, that's pretty significant. I believe a couple of things about that. Those are the kinds of things that I mentioned when I was talking earlier about medical inflation and things we're keeping our eyes on that's exactly the kinds of things that we're talking about.

Now when you look at the large percentages, one of the things that you do have to keep in mind is that we do have networks within each state that work on containing costs as well. So even it's not dollar for dollar in terms, oh, the reimbursement rate has gone up from 100% -- 110% to 175% for physician services. We also have to keep in mind that we have other cost savings mechanisms on top of that within our provider networks and those type of things. So it's not dollar for dollar. So that's one caveat.

The second thing I'll say is I think one of the beauties of AMERISAFE and how we think about severity and case reserving, using this Florida example -- Florida as an example, I think really speaks to how our model works so efficiently because my claims adjusters are experts in their fields, and they are wholly focused on the workers' compensation reserve because we're a monoline carrier, a, they're very attuned to what's happening in terms of their individual states and reflecting that in our initial reserves really, really quickly. So we're not -- it's not playing out over a long period of time in terms of AMERISAFE's loss experience. We're building that into our initial case reserves whenever that accident happens. That's important to us in terms of the severity and our recognition in the loss ratio. But keep in mind, it also helps us in terms of our pricing because then when we are underwriting a Florida account, we're taking all of that into account as to our real loss costs live and reflecting that in our individual rates. That was a very long answer to your severity question.

[Operator]

And our final question is coming from Bob Farnam with Janney.

[Ron Bobman, analyst]

I've got more of a philosophical question. I'm thinking of the loss cost and they keep going down. And I'm wondering what is it going to take or what's the market condition is going to look like to have the loss cost bottom out? And how much of a lag would there be for the actual filings to catch up with the actual need to start raising rates?

[G. Frost, executive]

Yes. Great question. So what's it going to take? As I mentioned earlier that accident year combined ratio for the industry continuing to tick up and eventually break a 100, that will help, at least, I believe, slow the bleeding in terms of the rate decreases because then accident years will not be considered profitable.

To your point about these changes and using -- again, using Florida, as an example, typically what happens when there's a major change going on and I'll use Florida as an example in NCCI state. NCCI will take those costs like and try to figure out what's that actually going to cost the industry. And even if it's off cycle from a normal rate filing because each state has their own rate filing dates, they can make like a law only filings. So in other words, something change in the law that needs to be reflected in the rate, and that should theoretically happen. But what happens immediately is when a carrier is aware of it, they start trying to reflect that in their pricing. So hence, in their ELCM. So forget if the underlying loss cost, let's use as an example, Florida that wouldn't change anything at all, then I would assume carriers within Florida, would try to, within their own pricing, of course, Florida is an administrative pricing state, so it's a little tricky.

But through their own competitive methods, so let me just use it that way, try to make sure that they're building that into their premium dollars, the fact that they're going to be paying out more on the loss cost side. I believe that pressure will continue, and we're going to see more and more examples of that, which hopefully will slow the rate of decline or even flatten out the declines in approved loss costs because I think those pressures are going to continue to happen. For the very reason I was speaking of earlier, physicians have an operating model for which they have a profit margin that they're trying to achieve. And if they're getting reimbursed by workers' compensation for something less than that, there's going to be either a shortage of providers. In other words, they're going to say, you know what, I don't want your workers' compensation patients or there's going to have to be some adjustment to the pricing.

[Ron Bobman, analyst]

Right. So I mean it sounds like, yes, despite the fact that loss costs are going down, the fact that even just this quarter, for example, your ELCM increased, it's kind of taking away some of that loss cost pressure just because you are getting more rate there. Is there a happy point with your retention that you'd be willing to go to if you keep raising rates and customers choose to go elsewhere?

[G. Frost, executive]

That's a really great quick way to look at it. If I try to rephrase that, how low would I let my retention go? I don't -- you know that's a great question. We've always had really strong retention numbers simply because we -- if you think about loss ratios or loss experience, typically, you have better loss ratios and better loss experience on the renewal account than you would on a new account because you know the accounts. And then AMERISAFE case, not only do we know the account really well, we've been providing safety services to that account. So we know what their attitude towards safety is.

So retention is extremely important to us. Do we test the market or do we think about when we do know, hey, we have to write -- underwrite something at a profitable level, and that's going to affect our retention? Yes, we pay attention, but I will say underwriting profit above all other things.

[Ron Bobman, analyst]

Right. And I'm not saying you should start raising your rates significantly. I don't want to start dragging an adverse selection in there as well. So it's just something that, I was just curious, as you hopefully start to tweak your ELCM up. I just want to make sure your retention stays where it is.

[G. Frost, executive]

Absolutely. Absolutely. And the other thing I'll say this about rates, I have I don't think I've really talked about on this call, Bob, one of the things we have to consider is the fact that wage inflation has been really strong for over a year now, and it's starting to wane a little bit, but it's still -- 6% is nothing to balk at. And that, in some ways, has effectively acted as rate for lack of a better term, right? If you have the same employees, but they're making higher wages, and that's the basis of premium. It's sort of help bridge the gap a little bit in terms of the approved loss cost declines.

[Operator]

There are no further questions at this time. I will now turn the conference over to Janelle Frost, CEO, for any additional or closing remarks.

[G. Frost, executive]

I'd like to highlight AMERISAFE's inclusion in the Ward's 50 top-performing property and casualty companies for the 16th consecutive year. This recognition underlies our employees' ability to use their expertise in high hazard workers' compensation niche to produce financial strength and stability for the company's stakeholders. Congratulations to the AMERISAFE team and thank you for joining us today.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.