Q4 2019 Earnings Call
Please standby.
Good day, everyone and welcome to Amerisafe 2019 fourth quarter and your and earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference to Catherine Shirley Chief Administrative officer. Please go ahead.
Good morning, welcome to the Amerisafe 2019 fourth quarter Investor call. If you've not received the earnings release. It is available on our website at www Dot Amerisafe Dot com.
This call is being recorded a replay of todays call will be available details on how to access the replay or 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 a result of risks uncertainties and other factors, including factors discussed in today's earnings release in the comments made during this call and in the risk factor section of our form 10.
Okay 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 statement.
I will now turn the call ever to Janell fro, Amerisafes, President and CEO.
Thank you Catherine and good morning, everyone.
The current soft market is unique and its challenges given the state of the property and casualty industry.
Over the past here, there's been a lot of focus on the continued rate declines in workers' compensation.
And yes, the impact is significant to the industry.
Carriers are collecting less premium for growing exposure base.
However, there's also been favorable trends payrolls expanded with a strong economy frequency trends were stable and medical inflation tempered.
These favorable trends coupled with our distinctive approach to workers compensation produce another year of excellent financial results for Amerisafe.
We reported a combined ratio of 76.6% and a return on average equity of 22.1 person in 2019, the fourth year of workers compensation rate declines.
Our amerisafe less than anticipated average loss severity for prior years offset the impact of lower premiums.
Our gross premiums written in the quarter were down 6.1 person from the fourth quarter of 2018.
Strong payrolls and audit premiums lessen the impact of rate declines and a slight drop in overall policy count.
Our retention for policies for which we chose to offer renewal remains strong at 94.1%.
However, new business bonds were not enough to cover lost renewals in terms of policy count.
Our pricing for the quarter as shown in our LCM was a 159 compared to a 162 in the fourth quarter of 2018.
Back to those trends I open the call discussing and the impact to losses.
First is frequency.
I choose to talk about frequency in terms of earned premium.
For Amerisafe, we anticipated flattening to slight increases in frequency for the last few accident years more a function of decreased premium than actual claim counts. For example, our reported claims for accident year 2019 were down 4.4% from the accident year 2018 at 12 months.
Well earned premium for the calendar year was down 5%.
I still believe that in a full employment economy, we have more on skilled workers in high risk industries, which will lead to an increase in workplace injuries.
For these reasons I anticipate there to be continued pressure on frequency.
The second loss trend is severity.
Average severity was distinctly impactful to this quarter's results as it relates to par accident years.
I believe we've been transparent of how we think about the more recent accident years, often referring to them is green.
Our consistent book of business provides us richer data based on historical patterns, we rely heavily on our case reserves, which were established timely and with expertise gained through our experience in specialization.
Given the types of injuries, we deal with 30 to 36 months of maturity gives a better indication of how an accident year, but ultimately develop.
This quarter favorable case reserve patterns led to a name recognition of lower average severities than previously anticipated for accident years 2014 to 2017.
In the quarter, the financial impact was a reduction of loss and loss adjustment expense, a 26.1 million or 31.7 loss ratio points.
As for the current accident year. The loss ratio was 72, five and it remained unchanged throughout 2019, we did not address our assumptions for those accident years 18, or 19 due to their greenness.
We also do not anticipate a change in the loss ratio for accident year 2020, barring some material change between now and ended the first quarter.
I'll now turn the call overdone yield to discuss the financials.
Thank you Janell and good morning, everyone.
For the fourth quarter of 29, cheat Amerisafe reported net income of 34 million or dollar in 76 cents per diluted share compared with 18.8 million or 98 cents per diluted share in last year's fourth quarter.
Operating net income was 32.8 million for the quarter $4 70 per share an increase from a dollar seven in the fourth quarter of last year.
For the full year 2019, Amerisafe produced net income 92.7 million or $4, an 80 cents per share.
Operating net income for the full year 2019 was 89 million or $4 in 60 cents per share.
This level of operating income is our highest year ever and was influenced by benign severity trends, which drove significant prior year favorable reserve development as you know mentioned earlier.
Revenues in the quarter were down 2.9% to 91.9 million compared with the fourth quarter of 28 tea.
Net premiums earned decreased 7.4% to 82.3 million when compared to last year's fourth quarter.
For the full year net premiums earned were off 5% totaling some $332.9 million.
These trends were driven by the continued decline in workers' compensation loss costs in 2018 and 29 too.
Turning to net investment income, we saw a slight decrease of 0.3% in the fourth quarter to 8 million compared with 8.1 million in the fourth quarter of 2018.
Net investment income for the full year was up 6.7% to 32.5 million compared with 30.5 million in 2018.
Due to slightly higher average investment yields.
The tax equivalent yield on our investment portfolio was 3.12 person at yearend and almost unchanged from 3.15% at yearend 2018.
Pre tax yield on the portfolio at year end was 2.79%.
There were no impairments on any of the securities held in the portfolio during the quarter or for the full year of 2019.
And Additionally, there were no significant realized gains or losses during the quarter or the full year.
The investment portfolio is high quality carrying an average doubleday rating with the current duration of 3.95 and the portfolio is comprised of 61% in municipal bonds, which includes taxable municipal bonds, 21% in corporate bonds, 12% in U.S. treasuries and agencies to.
2% in equities and the remainder in cash and other investments.
Approximately 58% of our bond portfolio is comprised of held to maturity securities which were in an overall unrealized gain position of 21.9 million at year end.
These gains are not reflected in our year end book value as these bonds are carried at amortized cost.
Moving now to operating expenses, our total underwriting and other expenses were 14.7 million in the quarter compared with 19 million in the fourth quarter of 2018.
The decrease in operating expenses was primarily due to a 3.5 million dollar benefit as the result of an end of a multiple into refund assessment.
By category. The 2019 fourth quarter expenses included 7.9 million of salaries and benefits 6.2 million of commissions and 500000 of underwriting and other costs.
Our expense ratio for the quarter was 17.8% compared with 21.4% for the fourth quarter of 2018.
For the full year 2019, operating expenses decreased 6.8 million or 8.4%.
Heavily influenced by a reduction in insurance assessments, including the fourth quarter benefit mentioned earlier.
As a result, our expense ratio for the full year was unusually low at 22.3% compared with 23.2% in 2018.
Our tax rate for the fourth quarter was 20.8% and 19.8% for the full year, both higher than in 2018, as a result of stronger underwriting profitability.
Return on average equity for the fourth quarter of 2019 was 30.3% compared to 17.3% for the fourth quarter of 2018.
For the full year are are we was 22.1% compared with 17.2% last year.
Operating ROE for the quarter was 30% operating or are we for the full year was 21.5% compared with 17.9% in 2018.
And now to capital management.
During the fourth quarter the company paid its regular quarterly cash dividend of 25 cents per share as well as an extraordinary dividend of $3.50 per share.
This quarter the board of directors declared a quarterly cash dividend of 27 cents per share payable on March 27th 2022 shareholders of record as of March 13th 2020. This represents an 8% increase in the regular quarterly dividends.
And finally, just a couple of other noteworthy items book value per share at December 30, Onest 2019 was $22.29 up slightly compared with last years $21.26 per share.
And we paid out $4.50 per share in dividends to shareholders throughout the year.
Our statutory surplus was 360 million at December 31st 2019, compared with $384 million at the end of 2018.
And finally, we will be filing our form 10-K with the FCC next week.
That concludes my remarks, and we would now like to open the call up for the question and answer session.
Operator.
Thank you good question and answer session will be conducted electronically to ask a question. Please press star one on your telephone keypad.
Any speakerphone. Please make sure your mute function is turned off to allow the signal to reach our equipment again not star one to ask a question. We'll go first to Randy dinner with B. Riley FBR.
Hey, good morning, Thanks, So I think we'd we'd like to kind of dig into the expenses.
Better understand how that would run rate in the future. So.
Starting with the second injury fund I think that was quantified at three and a half million dollars is that was that something that was coming out.
In the fourth quarter was that kind of ratable throughout the year.
No that was in the fourth quarter. It was a reversal of an accrual that we tied up for the most full injury Trust fund, but the trust fund that is being shut down or has shut down did its actuarial analysis in 2018 in indicated that there would be no. Further assessments. So we had a 3.5 million up for those future.
Assessments, and we took that down during the quarter.
So that's a one time or and then that I'm sorry, Whats fund was it what state was therefore.
It was for South Carolina.
And that that fund is is no longer its itself.
It's it's shutdown effectively is that right.
That is correct. They don't expect to see future assessments. That's why we took the full accrual due.
Hello.
Okay. So that had been but that hadn't been that had been accrued for I guess over time through expenses. So.
Okay. Then the other question it's just.
So if we if we add that back then that would be more of that the normal run rate, but it still seems a little like you were a little lower quarter over quarter maybe on.
General compensation expense was there anything there that was it was lower or is there something else that's affecting the year over year comparison X.
Second injury fun reversal.
No I typically you'll see our fourth quarter expenses are a little bit lower as we accrue assessments throughout the year for loss based assessments and other types of.
Guarantee fund assessments and then in the fourth quarter, if those assessments have not been charged by the states. We will reverse those that's why our fourth quarter expense ratios typically a little bit lower I would say generally the past two years, we've seen some favorable trends in those assessments be lower than expected and I think thats because the trends the favor.
Well trends in the workers comp market in general.
Have impacted those assessments because of the favorable severity trends and other trends that we see.
Okay, and I said, one on medical loss inflation, obviously, the the reserve result was was benign for the 14 17 accident years and I think it usually takes about.
Yeah like.
36 months and 24 to 36 months to us season Workers' comp book, So I'm, giving you any view, though on how medical loss inflation and other severity trends are trending now like in 2019 and 2020, just as you observe that business.
Yeah, I know I think when we establish the 72 five for 2019 in that assumption, we had mid single digit medical inflation.
Expected for 19.
Right, Okay, I guess that would be that would be similar to forge and that.
Yes.
Yes, so that would be similar to what we had accrued in 18 in 17.
Alright, thank you.
You're welcome.
Our next question will come from Matt Carletti with JMP.
Hey, good morning.
Good morning, Matt.
Well you questions, one hoping to start with quite a redevelopment.
You mentioned.
14, 17 years and it came from you'd be just little more specific the crosses four years was there any year or anything of years that drove the bulk of it or was it fairly easy to call for years.
I'll give you I'll give you the numbers by accident year for the quarter. So accident year 17 was 6.3 million.
Seen was 7.5 million.
15 was 6.2 million.
14 was 2.3 million and then the remainder of the balance was prior to 14.
Got you okay.
Great and then just shifting to your your comment about expecting a flat accident year.
For 2020, Atkinson macro surprise I am I thinking about that right.
Paul a methodology.
On the frequency view of expected.
We think feet to kind of increase in your opinion view still holds and that the offset to that.
Different view of severity.
Maybe informed by.
I agree development, that's taking place.
Yeah, I think that's a good way to look at it I mean as I said in my prepared remarks, we I still believe that we're going to see an uptick in claims just as an skilled workers are working in the hazardous industries that so that should drive frequency in at least flat to slight increases in frequency that hasn't changed and but we have seen as I as I.
I mentioned in the severity front, we have seen severities I'd be less than we anticipated again, the akcea is 14 to 17.
And we're not willing to call it as I like to say on 17, and 18, just yet, but I see our yeah, 18, and 19 I, but I think looking into 2020, we expect that to be relatively flat with 19.
You've you've followed us for a long time, Matt I think we're pretty were quicker about recognizing things when we see negative trends are negative things in the data harken back to accident year 2017 during the accident year, we raised our loss pick as we saw an uptick in frequency at that point I think we're a little slower to they're a little bit.
We're cautious about recognizing a more positive trends in our data. This is a long tail line of business, it's lumpy so.
So we don't try not to be too.
Ready quick on the draw when it comes to the positive side of that.
Yes, definitely seems you all over the years.
Last one if I can default on capital management mortgage.
[noise] methodology and strategy am I right in thinking that you know assuming we're still in a flat to down revenue environment.
Yes, that's pressuring bear in absolute terms.
Turning to market, that's probably the cases or foreseeable future that it would be expecting kind of you.
Earnings costs to be return in some form of dividend.
So kind of the norm that to keep the capital ratios.
Stable or improving your absent growth.
Yeah, Matt. This is Neil you know, we don't typically comment on future dividends I would point out we did pay out $4.50 in dividends. This year and we ended up having operating earnings of $4 in 60 cents. So we sort of out earn the dividend pace.
But management in the board you know addresses the Companys capital position and looks out at each quarter and periodically makes adjustments, which in recent years have included special dividends.
Okay. Thank you think that color that for next year.
Thank you Matt Thanks, Matt.
As a reminder, that star one if he would like to ask a question well go next to Mark Hughes Suntrust.
Thank you good morning.
Good morning remark.
The.
Number of large losses for 20, Ninee came via that number and the comparison with 18.
Sure a we ended the year with 16, Oh, well, we would cause severe claims claims over a million dollars of case incurred and that compares to 18 at the end of the calendar year for accident year, 18, and 17 for accident years 17.
And then how do we think about I'd be at our I think you emphasize the Youre your savings here the better performance was good on case reserve.
How much is sitting there and I'd be at our and when do you evaluate Uh huh.
Yeah. So.
Our historical pattern has been a you know obviously when we begin an accident year, we haven't anticipated loss ratio, we try not to unless there's something compelling in the data that doesn't really change during the current accident year, although as I mentioned earlier harken back to 17, we didnt change it.
But at that point, we try we try and let's just take something completely compelling in the data are really a handful of really large losses that chain moves the needle. We typically don't adjust our IP in our balances until we get to that 30 to 36 month window.
Hence the changes that use we saw this quarter yet wouldn't do it the favorable case development that we've been experiencing throughout the year.
And accident years, 14, 15, 16, I you saw some adjustment in the as I've mentioned in my remarks the anticipated.
Uh Huh severities were lower.
Then or the actual severities were coming in lower than we anticipated, hence we made the adjustment.
Right to case reserve.
And our.
And I'd be okay.
The loss costs multiplier for 2020, when you look at your footprint the kind of roughly what is the expectation on on loss cost trend.
And then.
Central Los Cabos, Yeah, Yeah, yeah understood. So are.
Our rate and turn the rate that we charged our clients. If we are we talking about you'll see them a lot, but the premium per hundred which is something we disclosed in our 10-K.
The decrease in 19 was around 9.1%, which oddly enough is about what I think nzz I projected for the loss cost changes around that number.
For 2019, so we were in a quote unquote in line with that their expectation for 2020 I believe it I don't think they publish that as of yet.
But I would expect it to be higher single digit.
Right.
Based on just the rate filings, we've seen thus far.
You want to think about your loss pick out look to hold steady.
Uh huh.
I guess the on one hand that you've got a competition in the market you've got declining loss costs. You're you see M numbers have continued to come down slowly, but what Phil come down all that would suggest pressure on current accident year.
But it sounds like.
The.
Verity.
And I wouldn't think frequency, it's been more benign than expected. The last couple of years youre able to kind of restrain that upward pressure and therefore, a whole that that a seth.
Right way to think about a very i. I think that's a very accurate way of summarizing it yes.
Right, which is to say.
So far so good on the 18 or thing [laughter] I, maybe that has said is that yes, there's still very green for us. So we're not willing to sell yeah. This is this is all good but you're right. So far so good.
Yeah Yeah.
And then the audit premium was up a bit the any general comment on payroll I don't know what do you.
Made any.
Any comments about that in your earlier remarks, but a trend.
That wages.
Audit.
Right, we like the industry are certainly benefiting from a stronger economy, particularly in our industries, we continue to see.
Positive audit premiums from our insured so at the signs that the economy remains strong I think that bodes well for us it it certainly helps offset a the rate declines.
And then the Neil the tax rate.
Outlook for 2020.
[noise], Yeah, you know there shouldn't be any change in tax rate, it's really driven by the fact that how much of underwriting gain we have because that is taxed at 21% and then how much of our investment income is tax exempt through our municipal portfolio.
So it was higher this year, but that was mainly because we had stronger underwriting profitability, obviously expenses affects that as well.
Yeah.
The that Didnt competition when are we thinking about the yield the.
I will just looking at the a trend here.
Year over year, the yield can have been coming down kind of 2% to 3%.
Each of the last four quarters of prior to that it was 1% to 2% for years.
Continue to drift down low single digits.
[laughter] yet again.
Feel like that'll.
That will shape up given the current nature of the competition.
Yeah, you know, it's still very competitive out in the marketplace I I always try to think when a we prepare for these calls you know do I think do I feel differently about the competition now than I did the last time, we all spoke.
The answer is no. It's still just competitive out there there's still a lot of people that are willing actually wanting to write workers comp and willing do right high hazard workers comp.
We see.
As per I guess were somewhat see some protection and the fact that that in our hazard groups. You know again aided G, where we see positive results our E F and G. In terms of not only retention, but also binding new business. So that's a positive sign for us, but let me be very clear I.
And I've said this in my caught my eye opening comment you know we did we did not grow policy count or keep policy count flat and 2019, which is something that we wanted to do throughout this off market. We we I think I've been saying that at least since 17, maybe even since 16, that's a disappointment to us.
Yeah, and see that point again that you're seeing.
Positive results in the F and G.
Yeah, and what I meant by positive result is you know our retention in those classes I and I think I talked about this on the last call our retention in those classes is high.
The new business that we are able to buying is coming in those same classes. So that's a good sign for us at least maybe there are a lot more carriers out there wanting to write workers comp and looking for those premium dollars.
What were they are high hazard focus gives us some protection from that.
Is that okay chlor, okay. It does it would you say that different or that buckets, saying that feel and thing I think that's been throughout this off market, but that's I guess the way I gauge whether is the competition got more attentive all of us side and I started losing rich engine in E that I'd policies I really wanted to retain.
Then that would say that's how I would say Oh, there has been a shift in the competition.
Oh, I apologize for going on but the the up what it's been the I don't if you ever there in front of you need over the.
Oh cumulative development on 16 and 17.
I don't have the cumulative development on those accident years in terms of overtime.
Yeah, I have a full I have the x. I have a full amount for this year this calendar year that weve recognized.
In 16 for instance, if.
It was.
Out of the total 65 million a favorable development. This year exiting or 17 was 9.5 million 16 was 23.4 million 15 was 14.5 million.
14 was 8.6 million and then 13 and prior was 9 million.
Then refresh me when I took the first year you took a gains on 17.
Correct.
Okay.
Okay. Thank you very much.
Hey, Mark.
We have no other questions at this time I'd like to turn it back to now Frost for closing remarks.
Thank you for joining us today.
February is insurance careers month surely all this talk about trends in challenges aptly highlights the exciting opportunities a career in insurance offers and amerisafe, our careers or based on turning risk and opportunity and in 2019, our employees delivered thank you.
That does conclude today's conference. Thank you all for your participation you may now disconnect.
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