Q3 2019 Earnings Call
Please standby we're about to begin.
Good day everyone.
Two Amerisafes 2019 third quarter earnings conference today's call is being recorded.
At this time I'd like to turn the call over to Catherines, Shirley Executive Vice President and General Counsel. Please go ahead.
Good morning, welcome to the Amerisafe 2019.
Third quarter Investor call.
I'm not received the earnings release is available on our website at Www Dot Amerisafe Dot com.
This call is being recorded a replay of today's call.
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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 Andy statement, if the underlying assumptions prove to be incorrect.
Or as a result, such risks uncertainties and other factors, including factors discussed in todays earnings release.
Comments made during this call and in the risk factor section of our Form 10-K form 10, Qs and other reports and filings with the Securities and Exchange Commission, we do not undertaking.
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I will now turn the call over to Janell Frost, Amerisafes, President and CEO .
Thank you Catherine and good morning, everyone.
It has been interesting listening to you in reading earnings comments, thus far this quarter as insurance Ceos have discussed getting rate.
All by the pause or parents medical except in workers' compensation.
The news workers compensation is that most states continue to approve loss cost declines for Amerisafe dismissed voluntary premium for policies written in the quarter were down 18, Oh, I'm, sorry, 8.6% well my count basis, we were down one.
1.3%.
We continue to have strong policy retention of 93.4% as we maintained underwriting discipline reflected in our once you teach you affective lost cost multiplier LCM.
I'll pause here to remind those of US you watch the plot data points that lcms.
It's best compared quarter over prior year quarter not sequentially.
Our second quarter LCM was a 161 however, the quarters. This quarter's onesixty too was down from 2018 third quarter of 160 fives.
That being said the primary driver for the declining premium.
Was simply earning less premium per hundred dollars of payroll.
Offsetting the rate declines were stronger payrolls.
Audit premium and other premium adjustment added $2 million to topline compared to a decrease of 1.2 point 1 million in last year's third quarter.
In total gross.
Greetings written for the quarter were down 3.2% from third quarter of 2018.
While declining rates lower premium in competition remains strong we produced an attractive return on equity at 18.6% this quarter.
Or are we are long term capital adequacy.
He along with our commitment to creating shareholder value led to the declaration of an extraordinary dividend a $3.50.
This quarter's or are we were supported by favorable loss ratios and expense management.
Yeah, we'll provide color around the expense management, but allow me to provide additional information about.
Our losses.
Our loss in L.E. ratio for the quarter was 53.6 person down from 55.9% in the third quarter of 2018.
The current accident year loss ratio remained unchanged and beginning of the year at 72.5%.
Both frequency and severity.
Ends were in line with our expectations for the full year.
As a part accident years, we experienced significant favorable case development this quarter.
Slightly higher claim closure rates were one of many factors influencing the case development and led to 15.6 million a favorable development this quarter.
I will now provide more details around expenses and the remainder of the financials.
Thank you Chanel and good morning, everyone.
For the third quarter of 2019, Amerisafe reported net income of 21.4 million or $1.11 cents per diluted share compared with 19.7 million or one dollar.
And two cents per diluted share in last year's third quarter.
Operating net income for the third quarter was 21.1 million or $1.90 cents per share compared with 19.5 million or one dollar and one cents per share in the third quarter of 2018.
Revenues in the.
Quarter decreased 2.2% to 91.5 million compared with the third quarter 2018.
Net premiums earned decreased 2.9% to 82.7 million when compared to last year's third quarter.
Now turning to earnings from our investment portfolio.
Net investment income increased 4.8% in the third quarter to 8.3 million compared with 7.9 million in the third quarter 2018.
The increase was driven by slightly higher interest rates on fixed income securities.
The tax equivalent yield on our.
Portfolio was 3.10% at the end of the quarter the pretax yield on the portfolio was 2.79% at the ended the quarter up from 2.70% one year ago.
There were no impairments on any of the securities held in the portfolio during the quarter and there were no significant.
Realized gains or losses during the quarter.
The investment portfolio continues to be high quality carried an average steadily rating with the duration of 3.68 with 56% in municipal bonds, 21% in corporate bonds, 11% in U.S. treasuries and agencies.
And the remainder in cash and other investments.
Approximately 59% of our bond portfolio is comprised of held to maturity securities which were in a net unrealized gain position of 22.4 million at quarter end.
These unrealized gains which total approximately nine.
He two cents per share after tax are not reflected in our book value as the bonds are carried at amortized cost.
Moving now to operating expenses, our total underwriting and other expenses were 19.3 million in the quarter compared with 20.6 million in the third quarter of 28.
Team.
The decrease in expenses is primarily driven by lower loss based assessments lower premium based assessments and lower Commission.
Compared to last year's third quarter.
By category. The 2019 third quarter expenses included 6.4 million of salaries.
Benefits 6.2 million in commissions, and 6.7 million of underwriting and other costs.
As a result at the lower expenses, our expense ratio for the quarter was 23.3% compared with 24.2% in the third quarter 2018.
Our tax rate.
For the quarter was 19.6% compared to 19.5% for last year's third quarter.
Return on equity for the third quarter, 2019 was 18.6% compared to 17.4% for the third quarter of 2080.
Operating or are we for the quarter was.
18.9%.
Now turning to capital management, and as Jim mentioned earlier, the company's board declared a special dividend $3.50 per share payable on November Twentyth 2019 to shareholders of record as of November 13, 2019.
This brings the total amount of special dividends paid out in the last seven years to $18.25 per share.
In addition, the company's board of directors declared a regular quarterly cash dividend of 25 cents per share payable on December 27th 2019.
To shareholders of record as of December 13th 2019.
And finally, just a couple of other topics.
<unk> per share at September Thirtyth was $24.29 up 14.3% from $21.26 at year end 2018.
Okay.
Our statutory surplus at quarter end was $325 million. This surplus level was lower this quarter due to dividends paid up to the parent company for the special dividend.
And finally, we will be filing our Form 10-Q with the FCC later today.
After the market close.
That concludes my remarks, and we would now like to open the call up for the question and answer session operator.
Thank you if you would like to ask a question simply press the star key followed by the digit one on your telephone keypad.
Oh, so if you're using a speaker phone please make sure your mute function.
It's turned off to a lighter signal to reach our equipment. Once again press star one at this time, we'll pause for a moment.
And we'll first hear from Matthew Carletti of JMP Securities.
Hey, good morning.
Good morning, Matt Good morning.
Congrats.
On yet another very nice quarter.
Just a couple of questions.
No I was hoping maybe you could just give a little more color on two things the first being the competitive environment. I mean, we know what's a competitive market, we know what where rates are doing but kind of more the nuances of in general what you're seeing.
Being amongst your competitive set if how the larger peers are acting at this point in the cycle I'm, whether you see kind of capital on the margin moving in are moving out and then separately kinda the underlying economic impact than what you're seeing from from the economy and where in your book you might be seeing better.
Your worst trends.
Sure I'll start with competitive environment as far as the third quarter that it was really unchanged. Yeah. We we had a healthy policy retention of 93.4%. We think that his response to our service level, where we're pricing our book of business I.
I mentioned the L.C.M. at a 162 down from last year's third quarter I'm. So I think we're being responsive to the market. We still haven't seen what I would call new capital or new carriers in the space still multi line carriers.
Comps attractive.
I'll put a little forward looking into that since Kathryn.
I was going to do that the beginning of this call I was sort of energized listening to the earnings releases coming out this quarter I have some multi line carriers out there talking about they were getting rate and there are other lines of business for me that was a little glimmer of okay, well, maybe they'll deploy that capital away from workers comp and get back to their core.
Lines of business, a time will tell if that's the case, if we see that in terms as a larger carriers to your point to your question. If we see some of the larger carriers starting to pull back a little bit out of workers compensation in the anticipation that it won't remain a profitable line for a longer period of time again, that's all.
Relation, we'll see what does the market tells us going into the fourth quarter and I guess really the first quarter after 2020.
As far as the economy, a you know I think for our insurance or it's a pretty robust economy. Our payroll audits remained positive we saw growth and again this is.
Overall growth in construction, obviously being our largest class, but it was pretty robust this quarter a less so in trucking, but we saw pretty big increases in terms of marine.
He said, what we call hotel retailers, so that's like lumber yards and building materials gas enjoyed dealers those type of things.
Where we saw a little bit of slippage and I and again, the payroll positive, but not as positive as a third quarter 2018 was actually in our form book and a little bit in our lumber.
Okay, Great and then one one other question just as we were getting closer to 2020, and just want to make sure I'm thinking about this right.
Kind of as you we've seen the accident year loss ratio small pickups kind of yeah. The past couple of years.
It seems that set of circumstances is still in place being pricing down severity wall manageable still up and kind of probably not making the assumption that frequency will will go down forever is it right.
I think about some small uptick in that accident year as we enter 2020.
Yeah, you know, there's things that a factor into that not a first 1929, he's not over we'll see what the rest of the your holds out in terms, that's you're right about frequency no question I wear it turns in terms of severity I think we'll see where accident year 2019 falls in.
As well the loss cost filings that are still coming in I think we're a little over halfway there in terms of states that have approved there 2020 rates thatll be impacting those numbers for 2020, but as the loss cost filings come and we'll keep an eye on those as well.
See you know on the flip side of that we had significant case development this quarter.
Let's turn some more recent accident years I mentioned that we had.
In last quarters earnings release, we had favorable development in accident years 2017, we had it again.
This quarter I'm. So that also impacts where are we thinking what we think in terms of loss ratio.
Of course that makes sense well, thank you for the color and congrats again.
Thank you Matt Thanks.
Next we'll hear from Mark Hughes of Suntrust.
Yes. Thank you good morning.
Good morning, Mark to go you mentioned the.
Good morning, Oh, you listen the Oh 2020, a lot.
Well, it's going to get them and what are you seeing in the state by state numbers.
Yeah, we're still seeing decreases as some of them had been single digits was I like to see finally, starting into a single de descended decreases.
Our major states, we're still seeing approved decreases so there's been a couple of I think.
So maybe some long only increases I've heard a couple of jokes amongst other people in the industry well, Hawaii had an increase in I think everyone. Just started chuckles about that but yet still no major increases at this point coming in.
Yeah. Good you.
Good good we would sell a mid there.
Good good declined low single digit or.
I think is easy I anticipated, 9% as I'm looking at Neal I think entity I anticipate at 9% for 20.
19, and 20 going into 20 right their projections. So I think that was their projection, we'll see what pans out.
Yeah.
And then we are large losses in the quarter one of the both digital.
We had 12 at the end of this third quarter.
Compared to 18 at the end of third quarter in 2018.
Okay.
Oh really good appreciate it thank you.
Thank you Mark Thanks, Mark.
As a reminder, if you'd like to ask a question or make a comment press star one well now hear from Christopher Campbell of KBW.
Okay.
Hi, good morning.
Good morning Press, Hey, quick question on the expense ratio changes I guess can you unpack that a little bit and why we're the assessment is lower and where do they originally come from last year.
Yeah certainly.
Yeah. The expense ratio, we did see some sense familiar I mean, some favorable loss based assessment activity in the quarter and it really depends it depends upon where we see favorable reserve development by state because that will affect those lost based assessments, which are based upon our reserves in various states.
So last based assessments in the quarter were down 637000 from last year's third quarter.
Premium based assessments were down about 361000 from last year again that that is more based upon some rate changes in some states, where we actually are paying slightly lower premium taxes.
Okay got it.
And then I think you are that you know a one on Mark's question previously about like the the rate changes is there when we see these like headline rate numbers like M.T.I. is like 5% or something I forget what what that number is this year is there like spread that you guys typically do.
Better than so if they if the rate declines.
5% for the industry Amerisafe typically does on a 200 vips better than that is there like a here what they think about in terms of.
You guys and.
Recoup some of those rate declines.
Right right that's actually.
Very good question. So as you know when you're right you're right when they see that line, let's use our Texas as an example, how doesn't approve lost cost filing for seven one that was 12.4% that was the headlines. So what was that in terms of Amerisafe class codes well Independent example, it was actually 12.4% I'm. So yeah, we it does vary.
Sometimes by class code, because I can think Arkansas ads I think there headline was 3.4 person and Amerisafes was 5.4%. So it does vary by class codes, but I think it goes both ways I am I still believe if you're looking in the aggregate at the decreases I think that's a very good measure of where it is headed directionally, whether its high hazard.
Our low hazard.
Okay, Great and then just one last one.
I will say, David policyholder dividends, obviously, if you guys keep having like Great Reserve development, that's probably go up what's a good way to think about modeling those is like 150 bips on the combined ratio is that like a good way to think about it or.
You know a that's a really good question it does fluctuate from quarter to quarter, and it's really driven by our performance in various states, where we compete through policyholder dividends, So, Florida, Virginia, Wisconsin, and so I think it was actually a little bit high this quarter at 1.5% than we've seen it running in prior quarters.
And it.
He does depend again on what policies came up in that period and what dividends they earned.
So I don't have a good way to model. It for you other than to expect that maybe it's going to be between one and 2%.
That's right won't things all the answer is about the lock in the fourth quarter.
Thank you. Thank you.
And it appears there no further questions at this time to now I will turn the call back over to you for any additional or closing comments.
Thank you.
Amerisafe has shown a strong commitment to creating shareholder value through our operational consistency and long term capital adequacy.
This quarter's combined ratio of 78.4% and a return on average equity at 18.6%. We're just two measures to illustrate that commitment. We're pleased to share as I read those rewards and to have that commitment through our extraordinary dividends while at the same time building a better amerisafe for our shareholders our policyholders and.
Employees. Thank you for joining us today.
That does conclude today's conference. Thank you all for your participation you may now disconnect.