Q4 2021 Amerisafe Inc Earnings Call
Please standby we're about to begin.
Good day work because of Amerisafe 2021 fourth quarter and full year earnings conference call.
Today's conference is being recorded at this time I'd like to turn the comments over to Kathryn Shirley Chief.
Chief administrative officer. Please go ahead.
Good morning, and welcome to the Amerisafe 2021 fourth quarter Investor call. If you have not received the earnings release. It is available on our website at <unk> Dot com.
This call is being recorded a replay of today's call will be available for you.
Tales 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.
This earning release earnings release in the 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 undertake any duty to update any forward looking statement.
I will now turn the call over to Danielle for all Amerisafe President and CEO .
Thank you Catherine and good morning, everyone I'm going to change the usual order of my comments and discuss losses incurred first.
For a long time listeners you will appreciate my words when I say this is a lumpy business.
In the fourth quarter, we had a catastrophic claim involving severe injuries to injured where our insured workers as a result of a single accident.
Due to the nature of the injuries and information available we have increased our current accident year loss ratio to 87% for the full year.
As currently reserved this claim impacts our catastrophe reinsurance layer.
To recap our reinsurance we are responsible for the first 2 million of each loss occurrence.
We are then covered by reinsurers for the next 8 million up to 10 million in the working layer.
Then we have catastrophe coverage for the next 60 million in excess of 10 million.
The catastrophe coverage does have a $10 million maximum any one life provision.
Within the layer the most reinsurers will cover per injured worker is $10 million.
While the multi climate aspect of this claim is unusual for us dealing with severe injuries is not there.
This is what we do and have expertly been doing for 36 years.
Each quarter, we disclose the number of severe claims in the context of those with case incurred losses in excess of a million dollars.
In 2021, we had 19 severe claims compared to 18 at year end 2020.
We averaged 18 severe claims per year over the last five years.
We provide severe claim count as additional insight into our high hazard niche and we do so without giving claims specific information.
Out of respect for the injured workers and their families and to protect medical garage privacy, we will not share specifics regarding this accident, nor the injuries sustained in this catastrophic claim.
However, the risk profile of this policy is in our core appetite.
The 87% loss ratio includes our best estimate for the catastrophic claims and no change in any other loss assumptions regarding the accident year.
Frequency trends for accident year, 2021 have not returned to pre pandemic levels, although they are higher than accident year 2020.
Severity was also within our expectations since the catastrophic claim.
As for prior accident years, we recognized $13 6 million of favorable prior year development Jimmy from accident years 2016 through 2019.
The loss ratio for the full year was 58, 3% comprised of 87% for the accident year 2021, and a favorable prior year loss ratio of 22, 4%.
Turning to premiums that premium was down nine 4% for the quarter and six 3% for the full year.
Loss cost declines.
It continues to be a headwind averaging a six 9% decrease in the quarter and a 7% average decrease for the full year.
Competition remains strong and we continue to respond while maintaining underwriting discipline.
As such our renewal policy retention for the quarter was 93, 5% and we were able to grow policy count slightly in 2021 with the addition of new business.
New business growth in 2022 is expected to be aided by a stronger economy with fewer COVID-19 variance spikes and improving agent relations.
Our aggregate pricing for the quarter as reflected by our LCM was at $1 53.
To recap each quarter of the year are you'll see them with a $1 54 in the first quarter of $1 52 in the second quarter and $1 53 in the third and fourth quarters.
Audit premium and related premium adjustments increased gross premiums written point 1 million in the quarter and decreased gross premiums written $1 2 million for the full year.
Audit premium alone was positive in the quarter rebounding from being slightly negative in the third quarter.
Looking ahead payrolls reported in the fourth quarter reflected growth of roughly 4%.
Approximately 70% of that was due to wage growth and 30% to employee count.
In total gross premiums written were down 11, 4% in the fourth quarter and eight 2% for the full year.
I'll now turn the call over to Neal to discuss the financials.
Thank you Danielle good morning, everyone for.
For the fourth quarter of 2021, Amerisafe reported net income of $3 $5 million or <unk> 18 per diluted share compared with $28 5 million or $1 47 per diluted share in last year's fourth quarter.
This result was heavily influenced by the catastrophic claims the company experienced in the fourth quarter as generic outlined.
Which impacted the quarter by 98 cents per share.
For the full year 2021, Amerisafe produced net income of $65 8 million or $3 39 per share compared with $86 6 million or $4 47 per share in 2020.
Operating net income for the full year 2021 was $54 7 million or $2 82 per share.
Revenues in the quarter were down 11, 2% to $78 4 million compared with the fourth quarter of 2020.
Net premiums earned decreased by nine 3% to $67 7 million when compared to last year's fourth quarter.
For the full year net premiums earned were also lower by nine 3% totaling some $276 million.
These premium trends were driven by the continued decline in workers' compensation loss costs in 2020 and 2021.
Turning to investments, we saw continuation of the impact of lower short term and long term yields with net investment income down 16% in the fourth quarter to $6 1 million compared with $7 2 million in the fourth quarter of 2020.
Net investment income for the full year was down 13, 4% to $25 4 million compared with $29 4 million in 2020 due to the lower interest rate environment.
The tax equivalent yield on our investment portfolio was 267% at year end the.
The pretax yield on the portfolio at year end was $2 37.
There were no significant credit losses on any of the securities held in the portfolio during the quarter or for the full year of 2021.
There were no significant realized gains or losses during the quarter or full year.
Unrealized gains on our equity securities were $4 3 million in the quarter and $12 3 million for the full year 2021.
The investment portfolio is high quality carrying an average double a minus rating with current duration of $3 71, and the portfolio is composed of 64% in municipal bonds, including 15% in taxable municipals.
19% in corporate bonds, 5% in U S treasuries and agencies, 6% in equity securities and 6% in cash and short term investments approximately.
Approximately 60% of our bond portfolio is comprised of held to maturity securities which were in an overall net unrealized gain position of $26 6 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 $16 7 million in the quarter compared with $15 6 million in the fourth quarter of 2020.
The increase in operating expenses in the quarter was primarily due to increases in bad debt from in CCI pools and increases in loss based assessments.
By category. The 2021 fourth quarter expenses included $6 3 million of salaries and benefits $5 3 million of commissions and $5 million of underwriting and other costs.
Our expense ratio for the quarter was 24, 7% compared with 29% for the fourth quarter of 2020.
For the full year 2021, operating expenses increased by just $145000 or 0.2%.
Our expense ratio for the full year was 26, 1% compared to 23, 6% in 2020, primarily as a result of lower earned premiums.
Our tax rate for the full year 2021 was 18, 1% compared with 19% in 2020.
As a result of the elimination of a tax valuation allowance on deferred state tax assets.
Return on average equity for the full year was 15, 7% for 2021 compared to 19, 9% for 2020.
Operating ROE for the full year was 13, 6% for 2021 compared with 19, 7% for 2020.
And now to capital management.
During the fourth quarter the company paid its regular quarterly cash dividend of 29 per share as well as a special dividend of $4 per share.
This quarter the board of directors has increased the regular quarterly dividend by six 9% declaring a cash dividend of <unk> 31 per share payable on March 25, 2022 to shareholders of record as of March 11 2022.
And finally, just a few other items books.
Book value per share at December 31, 2021 was $20 62.
Down slightly compared with last year's $22 70 per share.
And we paid out $5 16 per share in dividends to shareholders during the year.
Cash and liquid investments at the holding company at year end was $108 million and the company expects to dividend up $78 million to the parent company during 2022.
Our statutory surplus was $278 million at December 31, 2021.
And finally, we will be filing our Form 10-K with the SEC on Friday after market close.
That concludes my remarks, and we'd now like to open up the call for the question and answer session operator.
Thank you and if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speakerphone. Please pick up your handset and make sure you mute function is turned off so about your signal reaches our equipment again.
Our one if you'd like to ask a question and we'll pause just for a moment everyone an opportunity.
One quick question.
And as another reminder, it is star.
One if you would like to ask a question.
And we'll go ahead and take our first question.
Matt.
Please go ahead.
Hey, Thanks, good morning.
Morning, Matt.
Let's see let's start with <unk> you made the comment that think about seeing payroll growth up about 4% in Q4.
70% of that wage growth, 30% employee count.
In that 70% if I got that right is that <unk>.
Exposure in the sense that the same employees are working more hours or is that more kind of true wage inflation in the sense that they're getting paid more for the same amount of hours being worked.
Yeah, Great question, and it really would be inclusive of both it could be wage it could be higher wages or more hours worked.
Is there any even away you don't really have that.
Or is it away from exact math of it is there any way to kind of what youre seeing across your book more broadly is there any way for you to get a sense of.
Kind of.
Where the market's heading do you think there's just more.
I'm trying to get a feel if there's any more exposure going with that or if youre seeing true in wage inflation come through yet in your kind of specific areas of concentration.
No I think if you look at economic data I believe everyone is experiencing wage increase wage pressures certainly so I don't think that would be any different in our industries or the book of business that we underwrite.
Okay, Perfect and then and then.
Jonathan I've answered this question.
Not hear a thing the first three minutes of the call to drop off and come back.
You probably addressed this I'm sure it was on my end.
So if you've already answered this just say Matt go read the transcript, but I was hoping.
That's helpful.
I was hoping to get just a little digging a little deeper on kind of the nature of the one in sort of that was called out for.
For the for the bank.
The accident year in the quarter.
Just kind of how many parties involved the nature of the incident and just what kind of led to you. It seemed like knowing kind of the details of the cat Treaty.
Pretty big assumption kind of per person potentially and just wondering if that was you had these are very young people that you expect to live.
A very long time or more intense kind of medical assumption or just what kind of how just triangulate kind of how you get to that kind of number.
Yeah, Great questions, Matt certainly we're early on in this claim and I have to be very.
Respectful of.
People's Medical privacy, and what happened with the accident, obviously theres a lot of things going on there were several workers.
You are correct in terms of thinking of the severity of the claim the reason we've isolated it is because it is one claim and we wouldn't want anyone to draw conclusions that we believe the severity of our book has changed.
The severity sans the catastrophic claims for 2021 was within our expectations.
One of the reasons. We highlighted this particular came a we really haven't had a clean like this in our 36 year history. So that is of note.
Secondly, we do feel like it is.
It's the nature of what we underwrite but at the same time, we handle severe claims every single year, Yeah, I don't want say day in and day out because that sounds good.
And it's.
But we continually report and have reported over the over time the number of severe claims in million dollars excess.
As a way of giving perspective to the high hazard nature of our book.
As far as the handling of this claims our reserving philosophy is the most likely outcome based on the information we have at the time and I and we will handle this claim and take care of these injured workers just like we do our severe claims I felt like our claims staff is expertly equipped.
Equipped for this type of incident.
That it hasn't happened in our 36 year history is the best way I can say it happens, but we know we write hazardous business and we know it is a low frequency high severity business.
Understood that's helpful and I guess any color you can give around like what is this.
Your vehicle accidents are a big driver of loss across your various exposures like was this.
Multiple person motor vehicle accident or is this more like an industrial or construction side accident, just trying to get a feel for the more severe injuries or burn if that gives you any indication.
Perfect.
That's plenty.
Great I'll leave it there and let others ask questions. Thank you.
Thank you Matt.
And as a reminder, if you'd like to ask a question. Please signal by pressing star one on your telephone Keypad. Then we'll go ahead and move on to our next question from Mark Hughes with true. Please go ahead.
Yeah. Thank you good morning and Mark.
Yes, good morning, and just to clarify so it sounds like multiple injured workers over the $10 million threshold.
Program is designed to get.
Get everybody up 10, but now you've got the unusual circumstance that you got multiple injured workers.
<unk> in excess of $10 million.
For event or per worker is that the right way to think about it.
Again, I'm trying to I want to be respectful of your question, but I am trying to be sure that we protect the medical information of any of these injured workers and their families and are at this point I don't think were prepared to share that level of information.
Yes.
Given the magnitude of the loss, though am I right in thinking it.
Obviously at least one person is over $10 billion.
And.
Presumably multiple people would be over the $10 million threshold I'm, just trying to understand the nature of your reinsurance agreement theoretically.
I'm not interested in the.
Specific case, but I'm just trying to.
I understand the.
Scenario that would.
Would lead to these these are just magnitude away all the all the scenarios that you're laying out I think youre thinking about it correctly mathematically.
Within the catastrophe layer of our reinsurance any one life. They reinsure is responsible for $10 million anything above that $10 million would be net to amerisafe. So I think mathematically you're thinking about that correctly.
And then is there anything about.
Is this have you rethinking kind of your.
Premiums your coverage is there.
Given that this is unique because there's something about the treatment profile.
Maybe even the survivability of these kind of injuries that is.
Evolved so the.
Expenses.
Clearly a pretty pretty unusual.
Right Yeah. The unusual nature of it does obviously have us think about all those things let me, let me sort of lay it out.
Hussein to Matt first and foremost severe claims is what we do it's what we've been doing for 36 years, so from that aspect and looking at our book of business in our high hazard focus.
This was.
Our long term policy holder.
Nothing about that causes me question. They think Oh is that is that an issue.
Thinking about the reinsurance coverage you know I think our reentry when we purchased our reinsurance cover.
We look at more as protecting protecting us against frequency of severity right.
So I feel very I feel comfortable in that regard again, it's easy for me to say right now with this unusual circumstance.
As far as treatment and how we view reserving and how we think about life expectancies I think we are.
Way too early in this claim to start making those sort of judgments.
As to.
What that ultimately can be certainly we will learn from this claim but at the same time.
This is the first time this has happened in our 36 year history. So I think we're a little early and how these claim yeah it'd be severe claims develop over time I think we're a little bit too early to be questioning how we would think about this.
Long term aspect of our particular book of business and Mark. This is Neal Fuller also if you. If you go to the CCI they've done study on Mega claims, which our claims over then $10 million for the industry and there is typically just a handful of these each year. So this is a very rare occurrence from that standpoint.
Yeah.
Then.
How do you think about the.
Your timing on reinsurance renewals, how do you think that will impact your cost of your reinsurance program and any early thoughts on that.
Yes. So if you if you recall mark our catastrophe layers renew every year. So we were we were renewing at the end of the year.
This claim was known by 12 31. So therefore, the reinsurers were aware of it as well so that's already factored in and keep in mind. The architecture layer is a small portion of our reinsurance premiums.
Okay.
So one would say immaterial.
P&L.
Overall.
Yes, I think you could argue that any.
Yes.
Yes, okay.
And then.
Your.
The 19.
<unk>.
The 19, the severe claims.
This claim actually in 2022 or is this.
Good morning Walter.
I'm, sorry, if I wasn't clear about that yes. It was a fourth quarter 2021 event.
And then if it was 19 as of year end what was the total through three quarters.
Nine.
Okay.
Alright.
In CCI loss cost.
You've in the past kind of commented on what you've been seeing as some of these state numbers come in any observations about the although it's shaping up for 2022.
Yes, mid single digit declines still declines.
Okay sort of I guess really on par with what we saw in 2021.
Yeah and then.
Yeah.
And this is early days, but your appetite for a <unk>.
You've obviously been paying special dividends.
Influence your capital management, I mean, essentially its the dollar.
Converting that that are that you won't have it.
Where do you sit from a capital adequacy scan coin would we think about the potential impact on the special dividend will lead time rolls around again.
Yes, that's a good question Mark.
We have cash and liquid investments at the holding company at year end was $108 million.
We expect to dividend up $78 million additional thats almost $10 per share right. There if you add those two together.
So we're not expecting that this will have any significant impact at this point in time and our capital management strategy.
Statutory surplus in our balance sheet continues to be very strong.
Our <unk> ratio continues to be very strong.
Our actual stats surplus at year end was $278 million. Obviously that includes this claim in.
The current estimate so no changes to our capital management strategy at this point in time.
Very good and then.
Alright, thats good to know.
You sounded a little more.
Or made some positive commentary about new business new business from 'twenty. Two I think you expect it to be aided by.
The economy or at least.
Absolutely the Covid, we hope.
We are all everyone is hoping for that right.
Yeah, Yeah, and then you also cited distribution relationships.
Maybe I'll weave in competitive.
Competitive dynamic.
Those factors plus your view of competition, which you could maybe share your view of the competitive environment now.
What's your feeling about the.
Top line in 2022.
Since you mentioned it I'll ask the question.
Yeah.
I'll start with competitive environment.
On the third quarter call, we sort of mentioned that.
Most of the quarter, we saw a competitor sort of pull out of some of our hazard classes and we were.
Happy to see that is the first time, we've seen that in a while.
Unfortunately, I didn't start a trend so it hasn't really changed in a significant way I still think it happens in very small pockets. So I don't see at this point again sitting here on February 23rd I don't see a large swing in the level of competition in 2022.
In terms of getting more intense or even less intense which would be obviously be my preference.
I think that gives a little bit of color around the competitive environment.
Certainly our goal is to grow our policy count you know we were able to do that slightly in 2021, not probably where we'd want to be.
And that is our continued focus into 2022.
Obviously, a stronger economy helps that.
Our insureds out there working as I worried about wage inflation, we love more new workers less so but in anything that increases payroll increases premium for us. So that's a positive something for us to look at the positive sign for 2022.
As far as the distribution network, Yeah, we're spending time and I believe I mentioned this on the third quarter call as well really spending time with our agents.
Reiterating what the value proposition of working with Amerisafe is from an agent's perspective, and how they sell that to their clients.
Our safety services. Our claims service is how we take care of their injured workers, how we service their policies and I think our retention rate really speaks to that so I think those are all things that we can really drive home with our agents and trying to find the best solutions for their clients in 2000.
'twenty two.
Okay.
You don't mind I'll ask a couple more.
The.
Ceded premiums.
We're up just a little bit.
Is there any P&L impact from the.
From the large claim any reversals of.
Profit sharing commissions or I think you have some.
Some ceding commissions that flow through the P&L anything like that either on.
Written or earned or the expense ratio related to the clean.
Yes, no nothing from that standpoint, other than there was a small reinstatement premium on the cat trading about 300000 increase in ceded premiums, but not really material to the overall level of premiums in the quarter.
Okay and then.
Neil anything on expenses in 2022, when we think about inflation inflation within your own pay.
Payroll.
Yeah.
Uh huh.
Hey, good job of holding the line on expenses. The difficulty obviously is the decline in premium. So we do expect the expense ratio similar to last year to trend up a little bit from current levels based upon.
Continued expected declines in net earned premium at least basically looking at our renewable book of business and loss cost continuing to potentially go down mid single digits, but we expect a little bit of pressure on the expense ratio.
Okay.
Thank you for indulging me appreciate it.
The questions Mark Thanks, Mark.
And with that that does conclude our question and answer your questions I would now like to hand, the call back over to Janelle Frost for any additional or closing remarks.
When I look back at 2021, I am pleased with our ability to turn risk into opportunity. We continue to operate with an underwriting profit in the competitive environment. We have a strong balance sheet and we put value we provided value to our shareholders and importantly through the performance and the expertise of our employees we.
Served our policyholders and their workers with expert safety and claims services congratulations to the Amerisafe employees on a job well done.
One final note. We also issued a press release announcing the appointment of Billy Greer to the Amerisafe Board believes expertise in investment management business development and asset administration make him a great addition to our board and we're excited to have him join again, 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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