Amerisafe Inc

NASDAQ:AMSF

Earnings Call Analysis

AMERISAFE Positive Year Despite Lower Q4 Income

AMERISAFE, amidst intense competition in the workers' compensation industry, maintained a disciplined underwriting approach, leading to an 85.9% combined ratio, 3.3% gross premium growth, and a strong operating ROE of 17.7%. The company saw good policy retention at 93.9% and closed the year with 9 severe claims, showing effective claim management with a 6.4% drop in open claims from the previous year. Furthermore, AMERISAFE announced an 8.8% increase in its regular dividend to $0.37. Despite a lower Q4 net income at $19.2 million and a slight increase in expense ratio, the overall net income for the year was solid at $62.1 million, benefiting from higher net investment income due to improved yields.

Robust Financial Performance

The company concluded the year on a strong note, boasting a combined ratio of 85.9% and gross premium written growth of 3.3%. This financial stability is underscored by an operating return on equity (ROE) of 17.7%. These results reflect a healthy balance between costs and earnings, allowing the business to thrive despite the challenging economic landscape.

Growth in Gross Written Premiums

Gross written premiums climbed to $60.3 million for the quarter, marking an 8.4% rise, which is further complemented by a 4.7% uptick in premiums for policies written within the same timeframe. This demonstrates a solid demand for the company's offerings, in conjunction with an impressive policy retention rate of 93.9%.

Promising Claims Development and Decreasing Claims Count

AMERISAFE saw $41.1 million in favorable development from prior accident years, which can be credited to lower claim severities and effective claims management strategies. In line with a decreasing trend, the company's open claim count dropped by 6.4% compared to the previous year.

Steady Capital and Investment Position

The balance sheet remains conservatively managed with roughly $897 million in investments and cash, a solid reserve position, and no outstanding debt, which speaks to the company's preparedness for persistent stable results.

Quarterly and Annual Net Income

The net income reached $19.2 million, which translates to $1 per diluted share, and the operating net income stood at $14.3 million, or $0.74 per diluted share for the fourth quarter of 2022.

Rising Underwriting and Other Expenses

A 9% increase in total underwriting and additional expenses brought the quarter's total to $19 million, leading to an expense ratio of 28.9%, up from 26.4% the previous quarter. For the entire year, the expense ratio was notably higher at 29.3% compared to 26.5% in 2022.

Tax Rate and Investment Income

The tax rate nudged up to 19.7%, impacted by a smaller proportion of tax-exempt income. Yet, the company saw net investment income surge by 5.7% to $8.1 million for the fourth quarter, resulting in a year-end net investment income of $31.3 million, which surpassed the $27.2 million from the preceding year.

Investment Portfolio and Shareholder Returns

Boasting a high-quality, predominantly AA- rated investment portfolio, AMERISAFE maintains a strong capital position. The company forwarded $93.3 million back to shareholders through dividends and share repurchases, reflecting their capability to generate and return value.

Sustainable Growth and Underwriting Discipline

Even with the pressures of preceding rate decreases, the company executes a disciplined approach to underwriting, amplifying their capacity for sustainable growth. AMERISAFE has kept a firm grip on their underwriting standards, ensuring that every single account is subject to meticulous scrutiny.

Market Forecasts and Strategy Stability

Looking ahead, projections suggest a continuation of single-digit rate decreases into 2024, but AMERISAFE appears well-positioned against this backdrop thanks to stringent underwriting practices and enduring agent relationships. The organization stands firm, with no shifts in their underwriting methodology, business mix, or risk tolerance, which speaks to their strategic consistency.

Controlled Medical Inflation and Loss Performance

Industry-wide medical inflation is a concern; however, forecasts estimate a medical inflation rate between 2.5% and 3.5%. AMERISAFE has managed to contain its loss perspective within expectations, indicating efficient control over potential volatility due to medical costs.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and welcome to the AMERISAFE 2023 Fourth Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the presentation over to Ms. Kathryn Shirley, Chief Administrative Officer. Please go ahead, ma'am.

[Kathryn Shirley, executive]

Good morning. Welcome to the AMERISAFE 2023 Fourth 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, 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. We are pleased to report solid operating earnings -- or results for both the fourth quarter and full year of 2023. For the year, we reported a combined ratio of 85.9%, gross premium written growth of 3.3% and operating ROE of 17.7%. These results come during a period in the workers' compensation industry of multiyear rate decreases, somewhat offset by recent wage inflation.

Competition has not lessened as workers' compensation is one of the more profitable of the property and casualty lines. Remaining true to our disciplined approach of underwriting high-hazard risk while being responsive to our agents and caring for the needs of injured workers and their employers is evident in our consistent results year after year and serves all of our stakeholders.

Gross written premiums for the quarter were $60.3 million, increasing 8.4%. During the quarter, premiums for policies written in the quarter increased 4.7%, which was further improved by payroll audit and related premium adjustments of $4.8 million.

At AMERISAFE, we continue to see strong retention in policies for which we offer renewal with 93.9% retention in the fourth quarter. For the full year, our accident year loss ratio was in line with the prior year at 71%.

The company experienced $41.1 million of favorable development on prior accident years in 2023, which we attribute to lower claim severities and proactive claims handling. In addition, we ended the year with 9 severe claims of those with case incurred in excess of $1 million.

As of December 31, 2023, our open claim count was down 6.4% from 2022. This metric demonstrates the success of our focus on resolving and closing claims and the decline in reported claims.

Our balance sheet is conservatively positioned with roughly $897 million in investments in cash, a solid reserve position and no outstanding debt. Despite challenging market conditions, our tenure ensuring high hazard risk positions the company for continued solid results.

AMERISAFE's strong retention, coupled with our focus on profitable growth, is delivering robust returns to our shareholders. Finally, as it relates to capital management, AMERISAFE's Board of Directors has approved 8.8% increase in our regular dividend to $0.37.

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 fourth quarter of 2023, AMERISAFE reported net income of $19.2 million or $1 per diluted share and operating net income of $14.3 million or $0.74 per diluted share. During the fourth quarter of 2022, net income was $20.8 million or $1.08 per diluted share and operating net income of $16.1 million or $0.84 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 higher tax rate compared with the fourth quarter of 2022.

For the full year, net income was $62.1 million, and net operating income was $55.9 million compared with $55.6 million and $59.3 million in the prior year, respectively.

Our total underwriting and other expenses were $19 million in the quarter, a 9% increase compared with the $17.4 million recognized in the prior year quarter. This increase resulted in an expense ratio of 28.9% compared with 26.4% in the fourth quarter of 2022. The increase was primarily due to wage inflation and an increase in insurance-related assessments. For the full year, the expense ratio was 29.3% compared with 26.5% in 2022.

For the year, our tax rate was 19.7% compared to 17.8% in the prior year largely due to a lower proportion of tax-exempt income versus underwriting income in the quarter compared with the last year.

Turning to our investment portfolio. In the fourth quarter, net investment income increased 5.7% to $8.1 million from $7.6 million in the prior year quarter. For the full year, net investment income was $31.3 million compared with $27.2 million in 2022. The increase was driven by the yield on new investments, which exceeded that of portfolio roll-off by approximately 200 basis points and drove the portfolio tax equivalent book yield to 3.69% or 31 basis points higher than the previous year.

Realized gains for the portfolio on securities sold were $1.1 million in the quarter compared with $1 million during the fourth quarter of 2022. The investment portfolio is high quality, carrying an average AA- credit rating with a duration of 4.2 years.

The composition of the portfolio is 61% in municipal bonds, 25% in corporate bonds, 4% in U.S. treasuries and agencies, 6% in equity securities and 4% in cash and other investments. Approximately 60% of our bond portfolio is comprised of held-to-maturity securities.

During the fourth quarter, interest rates moved noticeably lower, which improved the net unrealized loss position of held-to-maturity securities to $10.5 million from $35.1 million in the third quarter. 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. For the year, the company returned $93.3 million to shareholders through a combination of regular and special dividends plus an additional $2.2 million of shares were repurchased.

And finally, just a couple of other topics. Book value per share was $15.28 after paying the special dividend in December 2023, a decrease of 7.8% from year-end 2022. And operating return on average equity was 17.4% for the quarter and 17.7% for the full year.

Our statutory surplus was $254.9 million at year-end, up from $252.5 million at the prior year-end. And finally, tomorrow, February 23, 2024, we will be filing our 10-K 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] We'll take our first question from Matt Carletti with JMP Securities.

[Matthew Carletti, analyst]

Maybe if I could start with the top line, specifically the voluntary premiums showed some modest growth. And I think you commented that policies in-force also grew. And so the question is just can you give us a little bit of color on are there certain geographies or kind of underlying sectors of the economy, exposures that you have that you're seeing certain success with? Or is it more just broad-based?

[G. Frost, executive]

I'll start with your question about geographies. I'll steer away a little bit from that. And the only thing, I'm not -- directly answer your question, but for competitive reasons, I want to be careful about speaking about geographies that I feel like we're being more successful in at the moment.

And -- but I will say I think it's more broad-based, to be honest, Matt. We've talked a lot over the last few quarters about our internal focus on ease of doing business with our agents. We've had really strong retention for a number of years, which we are very appreciative of and I think really speak to the service level of the AMERISAFE employees.

At the same time, agents are trying to -- shopping new business does come at fewer and fewer opportunities during this market where everyone is getting a rate decrease. So we really have been focusing on ease of doing business with our agents, streamlining processes, making sure we have the right workflows and just focusing on those agent relationships so that when the opportunities do present themselves from a new business perspective, we are at the ready.

And I do think just a combination of those things happening over a period of time, we've been successful in growing some new business along with our strong retention. And you were spot on about the policy count. We're very excited that we were able to grow policy count in 2023.

[Matthew Carletti, analyst]

Great. And then if I shift to thinking about where kind of margins are in the business, and as we look forward, I mean you mentioned frequency was down. I think I caught about a 6% number. We know there's pressure on pricing, but we know there's wage inflation, and that's good for margins.

I guess you throw severity in there, too. I guess I'm asking, look at your crystal ball a little bit and kind of how do you feel about sustainability of accident year margins when you kind of put all those pieces of the puzzle together and any other ones that I'm forgetting?

[G. Frost, executive]

No, the -- you hit all the right elements. Certainly, we have the realities of multiple years of rate decreases. And I think if we look at 2024, nothing on a macro basis that seems to be changing that directionally. I still think it's going to be higher single-digit rate decreases going into 2024.

I like how AMERISAFE is positioned because we are very disciplined in our approach, in our underwriting approach and that we individually underwrite every single account. That's built into -- that margin is built into how we are underwriting those accounts today and in our pricing for those accounts. So I feel really good about that.

From the loss perspective, you're absolutely right. Frequency is down. Frequency is down for the industry. Frequency is down for AMERISAFE, which we are appreciative of. But I -- keep in mind, the things that we write are more severity-driven than frequency-driven. So severity has been relatively modest within our expectations.

There's certainly a concern in the industry -- across the industry. Every article you pick up talks about medical inflation and concerns about medical inflation. But to the credit of the industry, right now, fee schedules are helping contain costs.

I read an article recently that the CMS is predicting medical inflation to be somewhere between 2.5% and 3.5%. Going in 2024 and the years to come, if the industry can hold on to that, that would be fantastic. But there's going to be pressure, no question, on medical inflation. So I feel really good about our margins going forward because I know we're maintaining that discipline.

[Matthew Carletti, analyst]

Great. And then one last quick one if I could. ELCM for the quarter?

[G. Frost, executive]

1.46.

[Operator]

We'll now take our next question from Mark Hughes with Truist.

[Mark Hughes, analyst]

Yes. So Janelle, frequency down 6%, and then I think -- did you say severity was within your expectations? Did you give a number for that? I missed the first couple of minutes.

[G. Frost, executive]

I did not. I did not. So within our expectations, built into the 71% that we've been carrying for accident year 2023.

[Mark Hughes, analyst]

Yes. And have you ever historically outlined your expectations on severity, low single digits?

[G. Frost, executive]

That's a great question, Mark. I mean if you think about it in terms -- again, I was just talking to Matt, if you think about in terms of medical inflation, we've always took a long-term approach to that, and it's always been mid-single-digit range in terms of medical inflation.

The other side of that is just how many -- given the types of injuries that we deal with, I don't know in any given year how many of those are going to be the horrific catastrophic claims. I mentioned in my prepared remarks, we had 9 claims with $1 million -- in excess of $1 million case incurred this year, which is a little bit lower than prior years. So I hate to go back to my favorite term when I'm talking about severe claims, but we're just in a lumpy business. I don't know when the accident is going to happen or the severity of those accidents.

[Mark Hughes, analyst]

Yes. Did you have any movement in the reserves on the large accident that came at the end of -- was it 2022?

[G. Frost, executive]

No. No, we have not. No, we have not. We feel very comfortable with the reserves that we initially recorded for that claim.

[Mark Hughes, analyst]

Yes. This is a -- the audit premium is holding in there pretty well. One might have thought with the economy slowing, that would be tapering a bit. Is there any particular area you're seeing better audit premium?

[G. Frost, executive]

Mark, across our book, we're seeing strong audit premium. We -- across our book, I can tell you, we had about 7.4% of what I would call payroll growth, 5.6% of that was wage growth. And if you look at BLS data, I think the wage growth number projected at least for construction or maybe the country-wide was -- is 4.1% as of the last quarter. So we're running a little -- slightly higher than that.

That doesn't really surprise me, given the skilled labor jobs that we insure. And we're still not seeing a large influx of new employees. Now what the labor market will do in 2024, that I don't know, but construction jobs are up. So we feel pretty confident in that being a large part of our book of business, that should be pretty resilient in 2024.

[Mark Hughes, analyst]

Yes. I was going to ask you that question. You used the formulation of kind of the next job, but it sounds like you see construction holding in there pretty well?

[G. Frost, executive]

We do. We do.

[Mark Hughes, analyst]

Okay. And was the 7.4% and 5.6%, is that the fourth quarter or is that full year?

[G. Frost, executive]

That was fourth quarter, and it was right in line with third quarter. If you recall, third quarter was 7.5%. So in line, not -- no real deterioration between the 2 quarters.

[Mark Hughes, analyst]

Yes. And do you think the still projected loss cost going to be down high single digits again?

[G. Frost, executive]

I do. And again, that's Janelle's opinion, but I do. I mean based on the things that we've seen come in, the approved loss costs that have already come in the door this year, I do think that. And I just don't see anything on a macro basis that's going to change that.

I mean we'll get industry-wide results in May, and we'll see what that looks like. But just based on following other companies and their reporting, I don't think anyone has had any large surprises in terms of losses. Concerns, I think we can all list the things we worry about, but haven't really seen it in the results. So I don't know that, that will change the perspective on loss costs.

[Mark Hughes, analyst]

Yes. You mentioned the growth being helped by your ease of doing business. Anything on the competitive front or your -- change in your own appetite in terms of end markets, class codes, anything like that?

[G. Frost, executive]

No, I appreciate the -- looking for clarity on that. No, we really -- we have not changed our underwriting approach. We have not changed our mix of business. We haven't changed our risk tolerance. This is really just about trying to further our relationships with our agents.

[Operator]

[Operator Instructions] We'll take our next question from Bob Farnam with Janney.

[Robert Farnam, analyst]

I have additional questions on the approved loss cost. So this year, you got Florida down 15%. You have a change coming up in Louisiana, down 9% or so. I'm curious, do the classes of business that you write, are they comparable to the overall the statewide averages? Or are they better or worse in terms of kind of loss cost...

[G. Frost, executive]

That's a really good point, Bob. They are. They run -- it run -- our book of business sometimes varies a little higher, sometimes a little lower. But on average, I think using the industry-wide -- if you're trying to model out, I think using the industry-wide approved loss costs does track with our own experience.

[Robert Farnam, analyst]

Okay. And this is probably more of a kind of a philosophical question. But as the approved loss costs continue to go down, at some point, you're going to go beyond where they should go down. So you're going to kind of miss the inflection point, I believe. So how do you ensure that your strong profitability remains if kind of the underlying loss costs have gone too far?

[G. Frost, executive]

It goes back to what I was just saying earlier, the fact that we are individually underwriting our accounts, and we've had a very consistent book of business for a long period of time. So I think my underwriters have a true expertise in understanding how much rate or how much -- how many dollars of payroll we need to cover our loss and to cover the margin that we want in that individual book of business.

Hence, why we always try to report the -- we have been reporting the ELCM. It was just trying to give you a measure. It's not absolute cost. But the fact that we're not chasing that 10%, 20% -- or 10%, 15% down in terms of the rate that -- the approved rate.

We have -- I think we have the expertise to understand that rate per $100 of payroll and what it takes for an individual risk. But we're highly relying on our expertise versus the industry-wide averages.

[Robert Farnam, analyst]

Right. Just refresh my memory, does the ELCM, does that include or not include kind of scheduled credits and debits?

[G. Frost, executive]

The ELCM would include that. So it's sort of the aggregate. If I took all my states and aggregated them together, it would be inclusive of that.

[Operator]

And it appears there are no further telephone questions. I'd like to turn the conference back over to Ms. Frost for any additional or closing comments.

[G. Frost, executive]

Thank you for joining us today. We are pleased with both the quarter and full year results reported. These results are reflective of the dedication of AMERISAFE employees, fulfilling commitments to our policyholders, agents and shareholders. Our belief -- I believe our consistent returns year in and year out clearly reflect our unwavering focus on turning risk into opportunity.

[Operator]

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.