Amerisafe Inc

NASDAQ:AMSF

Earnings Call Analysis

AMERISAFE Q3 2023: Steady Growth and Dividends

AMERISAFE reported a robust third quarter with steady top line growth, a combined ratio of 90.6%, and a consistent accident year loss ratio of 71%. Net income reached $10 million, equating to $0.52 per diluted share. Gross written premiums grew by 3.9% year-over-year, amounting to $70.8 million. A special dividend of $3.50 was declared alongside a regular quarterly dividend of $0.34 per share. The company recorded a 16.1% increase in net investment income, although it faced an unrealized loss position of $35.1 million due to market conditions. Importantly, the book value per share increased by 5.7% to $17.51, with an operating return on average equity at 13.2%.

Revenue Growth But Increased Expenses

AMERISAFE reported a positive swing on the top line with a 3.9% increase in revenue compared to the same period last year, and a 1.1% growth in voluntary premiums. This growth was supported by more in-force policies and an uptick in audit premium. Despite these increases, the company faced higher expenses leading to an elevated expense ratio. Several unusual items within the quarter contributed to a 14% rise in total underwriting and other expenses, taking the expense ratio from 28.9% in the previous year to 33.6%.

Strong Underwriting and Operational Execution

The company showcased its underwriting excellence through a stable accident year loss ratio of 71% and strong policy retention at 95%. AMERISAFE's disciplined approach was evident in its ability to maintain robust profit margins despite market challenges, posting a combined ratio of 90.6% and a return on average equity of 11.8%. Additionally, the company's adept claims handling resulted in $10.2 million of favorable prior year development, further solidifying the underwriting achievements.

Commitment to Shareholder Returns

Reflecting its operational successes and surplus capital, AMERISAFE declared a generous special dividend of $3.50 per share for shareholders of record as of December 1, 2023. Such actions emphasize the company's strategy to enhance shareholder value. Moreover, it continues to pay its regular quarterly cash dividend, with the latest being $0.34 per share.

Net Income and Investment Income Analysis

For the third quarter of 2023, the company reported a 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). This represents a decrease from the previous year due to the aforementioned higher expense ratio and a higher tax rate resulting from less tax-exempt interest income. On the brighter side, net investment income rose by 16.1% mainly due to higher yields on cash and fixed maturity securities, with realized gains contributing significantly to the performance of the investment portfolio.

Investment Portfolio and Capital Strength

AMERISAFE's investment portfolio maintains a high-quality AA- credit rating, with strategic distribution across various asset types and a tax-equivalent book yield benefiting from climbing interest rates. Despite an unrealized loss of $35.1 million stemming from rate increases, the portfolio is largely held-to-maturity, indicating stability and long-term planning. The company's capital position showcases a strong balance sheet and significant investments, underscoring a solid financial foundation.

Forward-Looking Statements

Looking ahead, AMERISAFE's financials will be further detailed when their Form 10-Q is filed with the SEC, providing a more granular view for investors and analysts. The company's current book value per share has increased by 5.7% from year-end 2022 to $17.51, and its operating return on average equity stands at 13.2%.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and 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, executive]

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 amerissafe.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, 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.

[G. Frost, executive]

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 9 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 is no seasonality to when severe claims happen.

While the market remains challenging, we continue to utilize our focus on high hazard risk 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 1, 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.

[Anastasios Omiridis, executive]

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 the last -- 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, yield 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 an equity security.

The investment portfolio is a high-quality carrying a AA minus 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 U.S. 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, this 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 $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 1, 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]

[Operator Instructions] Our first question today comes from Mark Hughes with Truist.

[Mark Hughes, analyst]

Thank you. Good morning.

[G. Frost, executive]

Mark.

[Mark Hughes, analyst]

Did you give the ELCM number?

[G. Frost, executive]

150.

[Mark Hughes, 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 health care costs. What do you think about that?

[G. Frost, executive]

It is certainly the top of du jour amongst everyone in the industry and workers' comp. I think we all believe -- I know I believe that given the cost of health care 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. AMERISAFE relies heavily on our case reserves. Our FCMs have always taken a long-term approach to the medical case inflation or medical inflation within their individual case reserves, and that has benefited us in our past, and we haven't changed that practice. So 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, analyst]

Yes, yes. The top line ex-audit premiums -- and I think we calculate it a little differently than you presented, but this is the first positive number since 2018 -- 1st quarter 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?

[G. Frost, executive]

Yes, I'll talk -- there's a couple of things that is happening there. We've reported some policy growth over the last few quarters. So that's been a positive. But certainly, rate decreases have -- the premium dollars necessarily didn't follow the policy growth. 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 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 -- and making a difference there.

I don't view it as a shift in the marketplace. I think it's more of efforts within the AMERISAFE 4 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. If I look back, we were reporting 12% -- 10%, 8%. This quarter, it was down to 5.9%, but still higher than the industry -- as 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, analyst]

Yes. Could you give the number of large claims through 9 months?

[G. Frost, executive]

We ended the quarter with 8 claims within case incurred over $1 million. If you look at that compared to where we were at [indiscernible] last year, I think that was 11, so still slightly down from where we were last year.

[Mark Hughes, analyst]

Yes. The reinsurance treaties where you had the adverse and you had to reverse the profit sharing or reduced profit sharing, what was the circumstance there? Did that impact your own reserves? Clearly, they would have been offset -- what was that...

[G. Frost, executive]

This is a very good point. Yes, these were older treaties prior to 2017 where there were claims that 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 -- we used the word infrequent. I really didn't know how to describe it because it's not something that happens very often, but 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, analyst]

And then I'll ask 1 more and I'm being fairly rude, but the '20 and '21 accident years, kind of the COVID years, you're obviously taking gains on those. Any observations about how those have been developing?

[G. Frost, executive]

I think that's a great question. I would say that within our expectation, 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 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 -- at this point, I would just say they're within our expectations for -- you're talking about '21 and '22, right, or '20 and '21 either way. Obviously, in '21, we had 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.

[Operator]

[Operator Instructions] Our next question will come from Matt Carletti with JMP.

[Matthew Carletti, analyst]

Mark covered a lot of ground there, so I don't have to -- and 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 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?

[G. Frost, executive]

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. So I'll start there. You're absolutely right. We brought in a Chief Sales Officer, Ray Wise. And 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.

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 -- ease of doing business, working with our agent customers and our employees have really pushed hard on that. And sometimes it takes a while for these things to take root. And I feel like that momentum is starting to take root.

[Operator]

And our next question comes from Mark Hughes with Truist.

[Mark Hughes, analyst]

Just a couple more. Any commentary on the construction end market. The concept of the next job is very important. How are you seeing that...

[G. Frost, executive]

Right. 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, large increases. So from that aspect, it's holding up quite well.

I always like to remind people, we report out construction as an aggregate group. 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. So even if there is a lag or a downturn in commercial construction, I feel like that holds up pretty well -- pretty resilient.

[Mark Hughes, analyst]

And then what are your thoughts on capital? I know there is nice special dividend, I think. Where is that going to position you? I guess you've got, at this point, no debt if I'm looking at it properly, so kind of your underwriting leverage. If you did lever up with debt, how much more capacity could you add?

[G. Frost, executive]

Yes. I'll say this about the special dividend. And you're so right about thinking about it in terms of leverage. 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, the question was to -- and I think the question the Board was asking itself is what do we do with this capital? Do we invest it in writing unprofitable business? Do we protect our margin?

Obviously, our decision was to protect the margin. And so that, in turn, led to us declaring special dividends to return that capital to shareholders. At this point, we're starting to see some growth, which is great, as 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 there's -- that's another use of capital, if we were to go out and buy something. And we have a share repurchase program as well. And then 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, analyst]

Appreciate that. And then loss cost trends, I don't know if you put that in the release or made a comment, but just sort of curious what you see out of the NCCI.

[G. Frost, executive]

Yes. 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 average around 5%. So still rate declines or still loss cost declines, but maybe a slowing in that decline.

But 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 were sharing that is going to move that needle anytime in the near future in terms of approved loss costs. I think that's just something we're -- pardon? Thank you, Mark. I appreciate that.

[Operator]

Thank you. And 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.

[G. Frost, executive]

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]

Well, thank you. And that does conclude today's conference. We do thank you for your participation, and have an excellent day.