Q2 2020 Amerisafe Inc Earnings Call
Please standby.
Good day, everyone and welcome to the Amerisafe 2022nd quarter Earnings Conference call today's call is being recorded.
I'd like turn the conference over to Catherine Shirley Chief Administrative officer. Please go ahead.
Good morning, welcome to be Amerisafe, 2022nd quarter Investor call. If you're not received the earnings release. It is available on our website at www dot on their site Dot com.
This call is being recorded.
Replay of today's call will be available.
Jails 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 and they start much if the underlying assumptions prove to be incorrect or as a result of risks uncertainties and other factors, including the impact of because it not teams have do like on the business operations at the company and our policies.
And the market value of the security in our investment portfolio.
Other factors.
It may affect our results are discussed in todays earnings release in the comments made during this call and in the risk factor section of our fortune.
Fortune shoes, 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 over to know for all I'm airstrikes President and CEO.
Thank you Catherine and good morning, everyone.
Amerisafe and the workers compensation industry began the year facing rate declines in strong competition.
Then a pandemic disrupted the market the economy and the workforce.
Just first 212 days this year shifted focus for many companies and tested fundamentals.
For Amerisafe, our fundamentals are crucial in these unprecedented times.
We are serving our stakeholders the disciplined underwriting corrective safety and intensive claims management, which produce consistent returns quality insurance services and financial stability.
This quarter those fundamentals led to favorable prior year case development and a combined ratio of 78.5%.
I will begin with our niche, though just fundamentally.
We ensure small to midsize employers working in tragic <unk> industries.
Thus far in this pandemic those industries appeared to be less impacted the main street businesses, such as retail in hospitality.
Therefore in the quarter, our gross premiums written were down 7.7% from the second quarter of 2019.
Oh, the jury deck premium was down 6.4% driven by underlying loss cost declines.
Policy count written in the quarter was up 2% with strong policy retention of 93.7%.
Pricing as reflected in our LTM has a 158 down from 161 in the prior year quarter.
The market remains highly competitive and there is additional uncertainty on what the second wave infections will mean for employers.
Audit premium and related adjustments added point 5 million to top line, which was a decrease of 1.3 million from the second quarter of 2019.
Audit premiums for policies audited in the quarter remained positive.
We're pleased during the quarter that are insured, we're reporting payrolls, which meant they were working.
However in anticipation of depend didn't make in subsequent recession's impact on policies estimated annual premium we did record a decline of 1.44 million in the estimate for anticipated future audit premium known in the accounting terms as <unk> earned a bit unbilled premium.
Eva is not often a quarterly topic because the estimate does not meaningfully fluctuate.
However, you can find new description in the critical accounting policy section of our 10-K.
After our fundamentals our disciplined underwriting proactive safety and intensive claims management led to loss ratio of 49.4% down 9.5 points from the second quarter of 2019.
The current accident year loss ratio remained 72.5% same as the first quarter of 2020 in the full year 2019.
For the current accident year frequency declined with fewer reported claims and severity was within our expectations. We had 10 cobot 19 claims reported with minimal incurred losses.
The primary driver of declining loss ratio was favorable case development from prior accident years.
We continue our focused on achieving maximum medical improvement returning injured workers to work in closing claims.
The result was 17.5 million a favorable development, primarily attributable to accident years 2015 through 2018.
I would now I'll turn the call over lineal to discuss expenses and other key financial measures.
Thank you to nail and good morning, everyone.
For the second quarter of 2020, Amerisafe reported net income of 23.9 million or dollar 24 per diluted share compared with 17.9 million or 93 cents per diluted share in last years second quarter.
Operating net income for the second quarter was 19.4 million or one dollar even per share an increase of 10 cents or 11.1% from the second quarter of 2019.
Revenues in the quarter decreased to 89.1 million compared with 91.8 million in the second quarter of 29 G.
Revenues were positively impacted by 5.6 million in unrealized gains on equity securities.
Offset by premium declines with net premiums earned decreasing 8.4 person just 76 million when compared to last year's second quarter.
Turning to our investment portfolio net investment income decreased 10.3% in the second quarter to 7.3 million compared with 8.2 million in the second quarter of 29 gene.
The decrease was driven by lower interest rates on fixed income securities, particularly on cash overnight and short term investment securities.
The tax equivalent yield on our investment portfolio was 2.87 at the end of the second quarter.
Pre tax yield on the portfolio was 2.5% at the ended the quarter down from 2.83% one year ago.
There were no significant realized gains or losses for the portfolio during the quarter.
The investment portfolio remains high quality care in an average stubbly credit rating with a duration is 3.74 and with 60% and municipal bonds, 17% in corporate bonds, 11% in U.S. treasuries and agencies, 3% in equity Securities at night.
Per cent in cash and other investments.
60% in municipal bonds includes taxable municipal bonds, which now make up 8% up the overall portfolio.
Approximately 60% of our bond portfolio is comprised of held to maturity securities which were in a net unrealized gain position of 33.1 million at quarter end.
These unrealized gains are not reflected in our book value as the bonds are carried at amortized cost less than allowance for credit losses.
Moving now to operating expenses, our total underwriting and other expenses were 21.1 million in the quarter compared with 19.7 million in the second quarter of 2019.
Last years second quarter expenses included favorable downward adjustments of 1 million in variable share price based incentive compensation and point 6 million in favorable lower insurance assessment comps.
By category, the 2022nd quarter expenses included 7.5 million of salaries and benefits 5.8 million in commissions and 7.8 million of underwriting and other costs.
As a result of the decline in earned premium as well as to higher expenses in the quarter. Our expense ratio was 27.8 compared with 23.8 in the second quarter 2019.
Our tax rate for the quarter was 18.5% compared to 19.3% for last year second quarter.
This is largely due to more tax exempt income on our investment portfolio than last year second quarter.
Yes.
Return on equity for the second quarter, 2020 was 21.3% compared to 16.3% for the second quarter of 2019.
Our operating our we for the quarter was 17.9%.
In capital management, our company paid its regular quarterly cash dividend of 27 cents per share in the second quarter.
This quarter the board declared a quarterly cash dividend of 27 cents per share payable on September 25th 2022 shareholders of record as of September 11th 2020.
And finally, just a couple of other topics book value per share at June Thirtyth, 2020 was $23.94 up 7.4% from $22.29 at yearend.
Our statutory surplus was 402 million at quarter end up from 360 million at December 31st 2019.
And lastly, we will be filing our form 10-Q with the FCC today after the market close.
That concludes my remarks, and we would now like to open up the call for the question and answer session operator.
Thank you to ask a question. Please press the star keep caused by the digit one on your Touchtone phone and also make sure. Your mute button is turned off to a lighter signaled to return equipment again, another star one to ask a question.
Wearable Tech our first question a day for Matt Carletti with JMP Securities. Please go ahead.
Thanks, Good morning.
Good morning.
Keep a couple of questions first one I just wanted to start with if you could dig a little deeper into kind of just the loss trends that you're seeing so I'm wondering if you could update us on what kind of the number of large losses argued that last quarter and kind of where it is versus what you might expect.
And then and then also as we think about.
You look at what's going on with the prior period development, which has been quite strong of late what that implies kind of four for accident year loss ratios, because clearly the bars changing starting point bars changing a few years back in.
That has any implication or other changes, you're thinking about where where you're picking things today.
Yeah, I'll start and then no could feel free to chime in a I'll start with or is it. The first part of your question, which is the large losses are we had five at the ended the quarter. We had five claims I had reserves in excess of the million dollars and so and that compares to I think at this time last year, we had said.
In.
At the same point in time, so and in line again lumpy business always say that every quarter, just says my caveat, but yet not not any lower or higher than what would be within our expectation.
Great question about what we're experiencing loss trends and how that impacts the prior year development Oh I'll start with what we're seeing in 2020 frequency is down I think that's a surprise to anyone we're not a frequency driven business, we were severity driven business, but our frequency is down.
And when you see that tend to later today when it's filed you'll see that the claims reported.
For the quarter were down I think it's 300 somewhat claims about 25% for the quarter and then for a year to date that brings us to about 18% in terms of reported claims being down so that's a pot definitely a positive trend.
Severity has been within our expectations are the uncertainty I think around severity when we're talking about 2020, specifically is.
What's going to happen.
As it relates to the pandemic and not the coated specific claims that 10 claims I mentioned and the prepared remarks, but more importantly, what the impact of this pandemic is gonna have to the alternate cost of our claims I think most companies have been talking about at least initially there were delays.
Is there procedures not happening.
And you know I think ever rights on in innovative ways of taking care of injured workers and tremendous effort by the industry tremendous effort.
By the Amerisafe employees I applaud that the question is will that affect the long term result of those claims.
Delay in some way us reaching that maximum medical improvement extended the duration of the claim in that aspect I think it's just a little bit too early to tell we feel good about 2020.
We felt good about 2020 coming into this year, you know thinking back I'm pleased to be our last our last election for 22 with the same is 29 2020 was the same is 2019 I'm said, we were expecting it not to deteriorate I just think it's a little too early to tell in terms of the trends, we're seeing six month and.
And again with this pandemic, adding a layer of uncertainty for US this yeah to save for sure, where we think 20 training and but I feel good about it the prior accident years, which was I think the story for Amerisafe this quarter.
Again speaks to our disciplined speaks to the way we handled claims.
Don't feel that our claims approach really changed due out this pans and make that these these months of what's happening obviously, we had a little bit lighter inventory.
But we were working as we always do to close those claims to reach settlements to get maximum medical improvement and we saw us and some favorable action in that a couple of things I'll I'll talk about accident year 2018, because this is the first quarter that we've adjusted 2018, and what was really driving that.
We had an accelerated claim closure rate for that accident year in this particular quarter now when quarters and I was trying to make.
But it happened this quarter and I truly don't believe it was anything different in terms of our efforts I think it was more on the flip side I think people were little people you know injured workers there attorneys their doctors were little one more uncertain about.
What's what's what's out there do I needed liquidity event, maybe I should take this liquidity event and we just seem to be able to close a few more claims. So I think it was just a more receptive audience. If that's the right term to use in terms of the prior year development for at least you accident year 2018, I sort of ramping their apologize did I answer your.
Question No you did yet another makes a lot of them just one other one you know I, just hoping you could dig a little bit into more into kind of the what Colby impacts you might see I understand it's not a big exposure for Mercedes and I'm not really talking about claims you mentioned, but more so just you know from up from a exposure.
Endpoint or payroll standpoint, where there are certain industries within your book or certain geographies within your book <unk> did feel a little bit more I mean.
A lot that you bought back up and what not very big but if you can impact right now would be helpful.
Yeah, I, certainly I can do that.
You know we were we were pleased early on and I think we've even alluded to we talked about this on the first protocol that it appeared that are in our Insureds. We're working so that was a positive sign for us and we've continued to see that in terms of we're not getting a lot of zero reports as a percentage of our total book of business, So our insurance or worse.
Looking certainly they are impacted by Kobin same as same as every employer in the country Oh I see our safety focus is tremendous effort in terms of.
We stress safety, we want our insurers distress safety, but you know when you think about the industry's reinsurer. Its a lot of outdoor work so that seem to be a magic formula in terms of Kobe, then transmit awarded the virus and everything outdoor work seemed to be a little bit.
More protected in terms of transfer and so I think that that helped the industry. It's interesting you know we didn't really see a large differential in the industries as far as the impact I was like oil and gas probably had a bigger impact and not sure. That's covert related I think that's more gas price oil price related been Kobe.
It is like health.
So it's really helped your.
It does yeah, that's great.
Oh well done.
Thank you.
Thank you Matt.
Thanks, Matt.
Okay next question from Randy Binner with B. Riley. Please go ahead.
Hey, good morning.
Good morning, Randall morning Radisys.
I just that was really helpful. On the loss I guess, the only piece I didn't hear about the responses. The matts question just the tickets through the there was a lower number of large claims.
Terrified kinda year to you.
Okay. So that's that normal.
Yeah. That's I mean, I think we're at this point last year, we were at seven so yeah, it's not dramatically different either way.
Okay.
And then.
I guess I'm net investment income you know there the the tenure treasury yields as well above water today. So obviously, there's a lot of had one there it seems that the run rate for investment incomes coming down across the board for insurance companies. So this is this kind of the right level or can you dimension for us.
How much.
Lose and kind of prevailing yields in the portfolio as we roll forward and Remodels.
Yeah. Randy this is Neil along with the change in terms of just being down 10.3% was really on the short end in terms of what we could get on short overnight investments and stuff within the one year period, because the portfolios out there and you know it turns off.
Cash periodically that needs to be reinvested. The overall decline from here I think will be.
Much more gradual in terms of the net investment income, but it will be I think an overhang for us and also for the industry.
The next several years as the economy recovers I think one of the things we've seen without before is that sometimes causes people to be a little bit more disciplined on the underwriting side because they need to earn an operating profit to be able to get an appropriate level return for their shareholders.
Okay. That's helpful.
I just saw the expense ratio I apologize if I missed this was that was that a normal so it's a little hard to calibrate just with the premiums coming in but at this.
Yeah, I guess, a generally expected to run a little bit lower the for half of the year, but then again you tend to be lower the back part of the or at least the last couple of years. So I guess my question is.
So what should we expect the expense ratio to have.
To be lower especially in the fourth quarters, we think about the rest of the year.
Yeah, the fourth quarter, we typically have a little bit lower expense ratio because there are accruals for guaranteed funds and if they're assessments are not made in those accruals come down. So that's usually a positive impact on the expense ratio in the fourth quarter in terms or overall expense ratio you know the challenges net earned premium continues to come down.
And then it's lost costs come down we have out a lot of fixed costs that we really cannot jettisoned. So that that puts pressure on the expense ratio. We expect it to continue to to sort of be.
This level I think right now last year, there were several beneficial things that we pointed out that caused the second quarter expense ratio to be lower than it would have been otherwise about half of it is really due to the decline in net earned premiums in terms of the increase in expense ratio this quarter.
About half of it was due to the actual increase in expenses.
Got it okay. That's great. Thank you.
After that time those tend to.
At this time, there's one name or maybe on the roster. So if there aren't any additional questions. Please press star one at this time, we will now go to Mark Hughes from Suntrust.
Thank you good morning.
Good morning landmark.
Let's talk about a new business activity the your ability to.
Yes.
Sign up new it'd be policyholders, who used to have a submission or you fully back to normal and the within that you know what's the competitive environment.
At this point.
Yeah, and I will say can competition, it's still very strong certainly and new business flow has been impacted by the pandemic I'm not only for the.
The insurance company or Amerisafe, but for agents right. So stay at home orders impacted their ability to prospects new business. So amerisafe like many companies are trying to protect protect our renewals there's not a lot of new business being shopped I'm said that submission flow is still I think we reported in the first quarter.
That it was down it continues to be down we really haven't seen that recovering as much as we've seen other things recover throughout the pandemic.
Amerisafe kudos to the Amerisafes employees, both safety sales underwriting really trying to make the most of those relationships and trying to.
Evolve their relationships with the agents and so we did see a little bit more success in terms of quote said, we did put out this quarter I being able to convert those to buying policies, but yes, new business certainly declined more so than I would certainly like into.
What was the second part of your question the pace of submissions and then there was another part I apologize I know I think you.
You got it the ER there seems to have been some discussion about workers comp pricing, maybe stabilizing or maybe a.
You've been going up.
Pointed in the future, maybe not too distant future.
Maybe we could be a the end of that.
Down cycle here.
Any opinion on the line.
[laughter] from your let's think about [laughter] I, you know what I as far as the impact of the pandemic on pricing I I don't see that happening in the near future I'm, just because I don't think there's gonna be enough data collected to and to really know the true and Pat do you know I'm as far as this pandemic goes whether.
You first wave second wave as far as but cost related we're a long way from knowing that a what's going to be covered I think we're a long way from knowing that so I can't see it the pandemic itself impacting rates per se now I do think the fact that we've been in this low.
Interest rate environment and that that doesn't have any.
Upside at near future that could impact rates, but then maybe more of a disciplined side than the rate side, yeah, I I'm not as optimistic that rates are going to.
Increase our flatten.
Hi, good question.
You know could really answer this or if anybody could that in thinking about your book of business, you've got a lot of construction.
And when we think about EUR 2020 warm I think you've made the point good it's that next job that.
It's going to be important for many of your.
Policyholders, how should we think about.
Your book of business to the extent that you are insulated from or any volatility.
Particularly the new construction market.
Yeah, you know you're right I my concerns lie in I see car Insureds are working the question as well the next job be there.
All the forecast I've been looking at and Yeah, I don't think anyone's willing to call it and say that big projects are projects are being canceled at this point most other things I read in the news are these are being just delayed or 'cause pound.
So that's a positive sign for me that it's not going to be quite like maybe the prior recession I saw a great a report.
Last week about the jobs I'll use the job losses as an example.
Low skill jobs media skill jobs high school jobs, and comparing this recession to the prior recession and and the prior recession. It was that those middle skilled jobs Amerisafes works, we heard that people, we ensure that experienced the most job loss and they know so far in this recession the pandemic.
Really recession, it's the lower skill jobs, the hospitality either retail those type of thing, but again.
I I view that as somewhat of a positive change I think yeah. This is a little bit different stimulus was early on I think that was impactful in terms of keeping amerisafes insured base, a small to midsized employers and keeping them going keeping them working keeping their employees staffed I'm. So if those projects are.
Just postponed one or two quarters that could be a positive sign but again, that's a huge unknown in terms of what's going to happen I would the construction industry. There's been obviously speculation about what work from home does to commercial construction right. If people don't need office buildings anymore.
But at the same time people are going to be driving a lot more because you're not going to be relying on public transit transportation and I. We ensure people that do a road work and excavation so right.
The big I hate to say, it's a big unknown.
But it isn't it.
And then just one final question you give us that you'll see them I think is 1.5 days this quarter.
The basis for that is a steep loss costs.
And I'm just sort of curious the recent ski.
And I'm not even got good team did a good timing on when the state by state Okay.
Observation about so [noise].
Loss cost the calculation has been trending.
Yeah.
Recently, certainly you know my opening remarks, I commented that our voluntary debt was down six 6.4% for the quarter and the driving the driver there was the declining lost cost. So if the rates that went into effect this quarter I'm for our shades and some of those where our larger states the ABL.
Rich impact was down 9%.
I mean, we're still at high single digit rate declines.
And I was.
Underlying clients.
Yeah, that's something you track on a quarterly basis, when the new rates doing.
Order programs, we could.
We do.
What was that that nine how does that compare to Q1.
Oh, Great question, let me and.
I don't have that with me.
I think the Darren.
You know I somebody never being 12, but don't quote me on that let me.
Find out for you I get back with you.
Okay.
Domestic <unk> ER was all ahead.
We should the although the good answers.
Thank you.
Next time.
And I would now like to turn the call back over to can all Frost, president and CEO for concluding remarks.
This is our second quarter reporting under the cloud at the Corona virus pandemic. We're pleased with this quarter's results and we except the challenges and uncertainties ahead, we do so because of our firm foundation of the strong balance sheet, a proven operating model and the employee experience and dedication to serve our.
Stakeholders. Thank you for joining us today.
And that concludes our conference for today I'd like to thank everyone for your participation and you may now disconnect.
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