Q3 2021 Amerisafe Inc Earnings Call

Please standby we're about to begin.

Good day and welcome to the Amerisafe 2021 third quarter earnings Conference call. Today's conference is being recorded at this time I'd like to turn the comments over to Kathryn Shirley Chief Administrative officer. Please go ahead.

Good morning, welcome to the Amerisafe 2021 third quarter Investor call.

If you have not received the earnings release it is available on our website at Www Dot Amerisafe Dot com.

Call is being recorded a replay of today's call will be available.

Sales 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 a result of risks uncertainties and other factors, including factors discussed in today's earnings release and the comments made during this call and in the risk factors section of our form.

10-K 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 over to Jenelle bra, Amerisafe President and CEO.

Thank you Catherine and good morning, everyone. We were pleased with this quarter's results reporting a 71, 5% combined ratio and an ROE of 16, 1%.

Competition was strong in the quarter, we remain competitive by deploying our strategy of evaluating individual risk through safety services and underwriting promoting safe workplaces and caring for injured workers.

These services performed by our expert expertise in workers compensation benefit our policyholders and agents created value for our shareholders and build a foundation on our strong balance sheet.

In the quarter, we maintained a strong retention rate of 93, 5% and we also found solid opportunities to buy new business, allowing us to grow policy count when compared to last year.

The associated premium for voluntary policies written in the quarter was down 4.6%.

For perspective on the decrease our average loss costs for policies that renewed in the quarter were 7.7% lower than the prior policy period.

Our overall pricing as measured by our E L see them with a $1 53.

I had one in the quarter was audit premium and other premium adjustments decreasing written premiums by $2 1 million odd.

Audit premium in the quarter was slightly negative this was not surprising given policies audited in this quarter covered payroll fully impacted by the pandemic.

And the resulting economic slowdown.

As for payroll being reported now which will impact future audit premium we are seeing growth in payroll was driven mostly by wage growth and by a slight increase in the number of workers.

In total gross premiums written in the quarter was down seven 5% from the prior year quarter.

Turning to losses, we experienced favorable prior year case development in the quarter as our claims handling practices reach better than anticipated outcomes.

Prior accident year favorable development reduced loss and loss adjustment expenses by $19 million in the quarter or 28.1 loss ratio points.

We are pleased that our experience and singular focus on workers' compensation enabled us to reach maximum medical improvement and return to work for injured workers, while also settling and closing claims.

As for the current accident year frequency of claims based on earned premium was up in the quarter, but has not returned to pre pandemic levels.

Verity trends are within our expectations. Therefore are loss ratio of 72% for the current accident year remained unchanged.

We continue to monitor the potential impact of rising health care costs on the long term medical cost inflation.

As an example, the nationwide demand for nurses and the wages health care systems are paying to attract and retain nurses will I believe impact medical cost inflation going forward.

I raised this concern earlier in the pandemic and we're seeing some slight increases in costs, particularly as we plan long term care for injured workers. I believe this is a trend to watch I will now turn the call over to Neil to discuss investments expenses and capital management.

Thank you Jen Allen and good morning, everyone.

For the third quarter of 2021, Amerisafe reported net income of $19 1 billion or <unk> 99 per diluted share compared with $23 4 million or $1 21 per diluted share in last year's third quarter.

Operating net income for the third quarter was $19 8 million or $1 two per share a decrease of 14 cents from the third quarter of 2020.

Revenues in the quarter decreased to $73 million compared with 83 million in the third quarter of 2020 <unk>.

Premiums earned decreased nine 6% to $67 6 million when compared to last year's third quarter.

Turning to our investment portfolio net investment income decreased 14, 4% in the third quarter to $6 million compared with $7 1 million in the third quarter of 2020. The decrease continues to be driven by lower interest rates on fixed income securities as well as higher cash balances for special dividends.

The tax equivalent yield on our investment portfolio was 250% at the end of the third quarter. The pretax yield on the portfolio was 221% at the end of the quarter down from 249% a year ago.

There were no significant realized gains or losses in the quarter or in the year ago quarter.

The investment portfolio is high quality carrying an average double a minus credit rating with a duration of $3 56, and with 61% in municipal bonds, which includes 14% in taxable munis.

15% in corporate bonds, 9% of U S treasuries and agencies, 5% and equity securities and 10% in cash and other investments.

Approximately 60% of our bond portfolio is comprised of held to maturity securities.

Which were in a net unrealized gain position of $28 2 million at quarter end.

These unrealized gains are not reflected in our book value as these bonds are carried at amortized cost.

Moving now to operating expenses, our total underwriting and other expenses were $17 9 million in the quarter compared with $13 9 million in the third quarter of 2020. The increase was largely due to a $5 7 million dollar benefit in last year's third quarter from the termination of an assessed.

Related to a multiple injuries.

Adjusted for the benefit expenses were $1 7 million lower in the third quarter of 2021 compared to the third quarter of 2020.

These lower expenses were due to a $1 million profit sharing accrual on our reinsurance treaty as well as lower compensation and commission expenses.

By category. The 2021 third party expenses included.

$6 2 million of salaries and benefits $5 2 million in commissions and $6 5 billion of underwriting and other costs.

Our expense ratio for the quarter was 26, 5% compared with an expense ratio of 26, 2% in last year's third quarter adjusted for last year's $5 7 million dollar expense benefits.

Our effective tax rate for the quarter was 22, 6% compared to 18, 5% for the same period in 2020.

This was due to a higher estimate of income from underwriting and taxable investment income compared to last year's third quarter.

Return on equity for the third quarter of 2021 was 16, 1% compared to 19, 8% in the third quarter of 2020.

Operating ROE for the quarter was 17, 2%.

Now turning to capital management, and as announced in conjunction with our earnings release, the company's board of directors declared a special dividend of $4 per share for shareholders payable on November 17th 2021 to shareholders of record as of November 10th 2021.

This brings the total amount of special dividends paid out in the last nine years to $25 75 per share.

In addition, the company's board of Directors also declared a quarterly cash dividend of 29 cents per share payable on December 17th 2021 to shareholders of record as of December three 2021.

And finally, just a few other items to note.

Book value per share at September 32021 was $24 80.

Up nine 3% from $22.70 at year end.

Next I wanted to let you know the company recently published some additional sustainability disclosures for investors.

These disclosures, which align with the SaaS B and T. Cfd standards can be found on our website under sustainability.

And finally, we plan to file our Form 10-Q with the SEC tomorrow after market close.

That concludes my remarks, and we would now like to open up the call for the question and answer session operator.

Of course, thank you and if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. If you find your question has been answered you may remove yourself from the queue by pressing star to you as a reminder.

It is star one if you'd like to ask a question.

And we will go ahead and take our first question from Mark Hughes from Truest. Please go ahead.

Yeah. Thanks, good morning.

Mark Good morning, Mark.

Do you know what did you say about audit premium it didnt quite pick it up what would be a driver in the quarter and then does that mean anything on a go forward basis.

Yeah, I said, our other premium for the quarter was slightly negative.

That is in total so we certainly had classes of business.

That was still remain positive for example, construction remain positive sans roofing roofing had slightly negative audit.

<unk> premium trucking was still positive lumber, which has been responded for us quite well during the pandemic and with even with the economic slowdown was still positive.

But oil and gas for example, negative so but in total it.

Was slightly negative for the quarter am I I also mentioned in my prepared remarks, if we're looking forward based on the payroll that we're seeing right. Now we are seeing wage growth, we're seeing a slight increase in the number of workers. So that that kind of speaks to maybe future audit premiums when you have this.

Policy period is audited.

And as a reminder, if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

And we will go ahead and make hallmark. Please go ahead.

Yes. Thank you.

The.

If we think about the.

Quarters that are the.

Paul I would say theyre going to be audited in the fourth quarter going back to mid to late 'twenty 'twenty.

I guess I would assume maybe you see a similar dynamic I would've thought the audit premium would have been would've been positive I'm just thinking from a macro perspective.

And I guess my question is is the Q4 likely to see it.

Similar impact.

So I hear what youre, saying that the payroll now look like they are better but.

I Wonder if you know the trend over the intervening period.

If I'm thinking about that appropriately.

When you think about Q4 Q1.

Still maybe a little negative or.

You know I don't I don't know that for I don't know exactly how that's going to Pan out Mark I'll say. This you know if you think about to your point, if youre thinking back to that time period fourth quarter, 2021st quarter 2021, I do think the economy, we're seeing some a little bit of a boost in the economy and from that aspect. So, but then again it was <unk>.

So slightly negative this quarter. So we're not that wasn't a big surprise to us nor a major concern.

Yeah, Yeah, I guess you had the delta.

Delta variants in the interim that might have impacted the.

Aggregate, perhaps yeah, perhaps.

Good point, how about you mentioned frequency as are up from last year, but not return to pre.

Pandemic levels severities as expected wouldn't that suggest that the current accident year ought to be a little bit lower.

Yes, that's a great question you know we have not seen the number of claims reported return to pre pandemic levels.

That has.

It has not happened.

Health care costs, and the long term component of our claims as you know when we reserve we reserved most likely outcome even for the most current accident year, we get those those case reserves that rather quickly.

So we're contemplating yeah, the going rate for what we're having to pay for some of these services.

I guess theres, a national debate as to how long that last and is it sustainable for the.

Medical community, but it is reality currently.

Yeah.

And then.

A number of large losses in the quarter or year to date compared to last year.

We had nine in the quarter or as of the end of the water not not in the quarter as of the end of the quarter.

Nine.

And what was it last year.

Last year at the same time, we haven't.

Through three quarters, we had 11 last year.

Okay.

So.

Large losses.

Even from a reduced level.

And then how about the competition.

The behavior of your.

Either bigger regional competitors any different this quarter versus prior quarters.

Well in the in the quarter itself I would say competition remained strong really didn't see a lot of changing changes.

Changes in the in the quarter post quarter I'll say, we there are there have been some rumblings.

Of course, some carriers backing away from certain hazardous classes, which of course.

We like to hear [laughter].

Right.

Is that in public commentary or are you just sort of seeing.

Seeing that on the ground.

We're seeing that on the ground.

Yeah.

Is that are they having a bed some bad results.

Or.

I can't speak to what drives other companies' underwriting appetite.

I don't I haven't.

I have I've heard I've seen what I will say this I think in the public we've seen companies current accident year loss ratio go up right.

How do you view that that's not adverse development, but yet there is something to that but.

But no I haven't seen reporting of adverse development that I can think of off top of my head, but I can't speak to what we're seeing on the ground as certain carriers pulling out of classes of business.

Yeah.

Hum.

I'll just ask one more it seems like your written premium you still had a little bit of a dip, but it was low and what maybe ex audit premium down 3%, if I'm thinking about appropriately low single 1.6 for voluntary during the quarter.

So could the la Paz on average 7%.

Yeah, Yeah, so that's kind of the middle of the recent range.

Okay.

Alright, very good thank you.

Thank you Mark Thanks, Mark.

And as a reminder, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad and we'll go ahead and move on to our next question from Matt correlate it from a JV.

Please go ahead.

Hey, Thanks, good morning.

Good morning management.

A couple of questions Mark Mark covered a couple of mine but.

Just following up on the frequency and severity discussion would it be right to think that if those if those conditions hold that frequency kind of stays at or below.

Pre pandemic norms and severities with an expectation that as we think ahead to next year that yes, yes.

It speaks to kind of a likely unchanged accident your loss ratio or are there. Other items will there be continued loss cost pressure or otherwise that we need to think about in that equation.

You know Matt we.

Now, we're still seeing approved loss costs in that high to mid single digit decline. So obviously that adds pressure.

Like I said my my larger concern on the severity side is really what happens with medical cost inflation. Obviously, obviously you know medical costs are a huge component of what we do particularly when we are looking for ultimate when we're trying to set reserves for ultimately what we think these claims are going to cost us and said that from a severity side that is.

A little bit more of our concern.

From the reported the actual reported number of claims I'll say this we've seen wage growth, which we know we often say we like wage growth.

Same workers higher wages higher premium, but we have seen a slight uptick in the number of employees.

So you know, let's let's play that out if the economy.

Rebounds, even further and we have new employees enduring these higher classes hazardous classes of business that could could drive frequency to some degree you would think that it would maybe baked into the loss costs, but frequency has been on the decline for so long.

It would be it would be an interesting balance to see how those new employees.

Impact frequency relatively quickly.

Okay that makes sense.

And then just another question you mentioned kind of along those lines, you're a little bit of concern around I think particularly mentioned nursing wages and just that cost yeah severity cost element on the medical side, you've mentioned in recent quarters kind of the pandemic.

Remote medicine right virtual medicine.

Needed to be used in some cases have you have you seen that persist do you think that that's something that.

Have some legs to it that once people start using it and obviously it is only can be used in certain situations, but do you see that as having some staying power and not put it offsets that severity stuff, but maybe help us a little bit.

Oh I do I do think it will in some instances changed how people access medical care certainly you know severe injury you've locked in are you gonna get acute care, but I think on a long term basis I do think there is some impact there for all of us.

If there's a silver lining to the pandemic for the industry that could be one of them.

Great well, thank you for the answers and congrats on the nice quarter.

Thank you Matt Thanks, Matt.

And with that that does conclude our question and answer session for today and now I would like to turn the call back over to Janelle Frost for any additional or closing remarks.

Thank you I believe the $4 special dividend reflects our operational consistency and discipline over the long term in this season of giving thanks. It is imperative to recognize that the commitment to the discipline is rooted in the expert employees of Amerisafe and what they do day in and day out. Thank you to them are.

Save team and thank you for joining us today.

And with that that does conclude today's call. Thank you for your participation you may now disconnect.

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