Q1 2022 Amerisafe Inc Earnings Call

Good day and welcome to the Amerisafe 2022 first quarter earnings conference call.

The conference is being recorded.

At this time I would like to turn the conference over to Ms. Katherine.

Chief administrative officer. Please go ahead ma'am.

Good morning, welcome to the Amerisafe 2022 first quarter investor call.

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

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

Details on how to access the replay are in the earnings release.

During this call we will be making forward looking statements.

These statements are based on current expectations and assumptions that are subject to various risks and uncertainties.

Actual results may differ materially from the results expressed or implied 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 Gmail, Froth, Amerisafe President and CEO .

Thank you Catherine and good morning, everyone.

Our combined ratio was 81% this quarter was supported by strong policy retention favorable prior year case development better than expected ensured payrolls and a reduction in assessments.

I will address premiums losses in payrolls, and Neil will speak to the reduction in assessments and other financial metrics.

Premium written in the quarter were down premiums written in the quarter were down four 6% from the first quarter of 2021 .

We continue to face competitive marketplace as carriers seek to seek market share and premium in a declining rate environment.

Our average loss cost decline in the quarter was eight 2%.

R E L. T M, which is an index of the approved loss costs with a 154 same as first quarter of 2021.

And holding our discipline and responding to competition, we were successful in retaining 93% of the accounts for which we offered renewal, but overall policy count was down one 1%.

Additive to the top line was higher than expected policyholder payrolls.

Audit premium and related adjustments increased premiums $2 8 million in the quarter, which was a marked improvement over 300000 reported in the same quarter of 2021.

Wage inflation was the primary driver of payroll increases.

Moving on to losses, we experienced $10 2 million of favorable prior year development in the quarter, primarily from accident years, 2017, 2018 and 2019.

Importantly, we did not adjust our reserve estimate for the catastrophic claim reported in the fourth quarter.

As for the current accident year loss ratio was 71%.

I believe it is at this time each year that I use the words three months it does not a trend make.

That being said frequency for the quarter was down from accident year 2021 at three months and severity was within expectations.

We view fewer reported claims as opportunity to focus on open claims and finding avenues to resolve and close them.

Before turning the call over to Neal I wanted to speak about this quarter share repurchases.

In the quarter, we repurchased shares for a total of $2 1 million with $22 9 million remaining within our authorization.

The repurchasing of shares along with our dividend reinforce our confidence in the earnings power of our niche business I'll now turn the call over to Neil.

Thank you Jim and good morning, everyone for.

For the first quarter of 2020 to Amerisafe reported net income of $17 3 million or <unk> 89 per diluted share compared with $19 3 million or <unk> 99 per diluted share in last year's first quarter.

Operating net income for the first quarter was $15 9 million or <unk> 82 per share an increase of six.

Or 8% from the first quarter of 2021.

Revenues in the quarter were lower impacted by last year's $5 5 million increase in unrealized gains on equity Securities revenues came in at $75 6 million compared with $83 4 million last year.

Net premiums earned decreased four 5% to $67 6 million compared with $70 7 million in last year's first quarter and an improvement from the trend in recent quarters.

Turning to our investment portfolio net investment income decreased seven 1% in the first quarter to $6 1 million compared with $6 6 million in the first quarter of 2021.

The decrease was driven by the continued impact of lower interest rates on fixed income securities as they work through the year over year comparisons.

On a positive note net investment income for the first quarter was slightly higher than last quarter and third quarter of 2021.

And the yield on our portfolio continues to increase.

As a result after one more tough comparison next quarter, we expect positive net investment income growth in the third and fourth quarter. This year.

The tax equivalent yield on our investment portfolio was 275%.

First quarter.

The pretax yield on the portfolio was 245% at the end of the quarter flat from 2461 year ago.

Realized gains for the portfolio on Securities sold were 700000 compared with 300000 during the first quarter of 2021.

The investment portfolio continues to be high quality carrying an average double a minus credit rating with a duration of 384 and with 62% in municipal bonds.

It includes 15% in taxable meetings.

And 4% in corporate bonds, and 4% in U S treasuries and agencies, 7% in equity securities and 3% in cash and other investments.

We have increased our allocation to corporate bonds over the past several quarters, finding some attractive opportunities and slightly decreased our allocation to municipal bonds.

Approximately 60% of our bond portfolio is comprised of held to maturity securities and with the substantial rise in rates during the quarter. These bonds are now in a slight net realized gain position at quarter end.

As a reminder, these held to maturity securities are carried at amortized cost and therefore unrealized gains or losses on these securities are not reflected in book value.

Moving now to operating expenses, our total underwriting that other expenses were $15 1 million in the quarter compared with $19 million in the first quarter of 2021 the.

The decrease was largely due to lower insurance related assessments, driven by a $3 8 million return of assessments from Minnesota.

By category. The 2022 first quarter expenses included $5 9 million of salaries and benefits $5 2 million in commissions and $4 million of underwriting and other costs.

As a result of a favorable decline in expenses our expense ratio for the quarter was 22, 4% compared with 26, 8% in the first quarter of 2021.

Our tax rate for the quarter was 19, 1% compared to 18, 3% for last year's first quarter, largely due to higher underwriting profits.

Return on equity for the first quarter of 2022 was 17, 4% identical to the 17, 4% ROE we earned in the first quarter of 2021.

Operating ROE for the quarter was 16, 3% an increase from 13, 9% in last year's first quarter.

In capital management, the company repurchase shares during the quarter for a total of $2 1 million, leaving $22 9 million remaining on its share repurchase authorization.

And also in capital management, our company paid its regular quarterly cash dividend of 31 per share in the first quarter, which represented a six 9% increase over last year's amount.

This quarter the board declared a quarterly cash dividend of <unk> 31 per share payable on June four 2022 to shareholders of record as of June 17, 2022.

And finally, just a couple of other topics book value per share at March 31, 2022 was $20 46.

Down slightly from $20 62 at year end.

Our statutory surplus was $295 million at quarter end up from $278 million at December 31, 2021.

And lastly, we will be filing our Form 10-Q with the SEC on Friday tomorrow after the market close.

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

Yes, Sir thank you and if he would like to ask a question. Please signal by pressing star one on your telephone keypad.

We're using a speaker phone please make sure you.

Your mute function is turned off.

Sorry equipment.

Once again that is star one if you would like to ask a question.

And we'll take our first question from Matt <unk> with JMP.

Hey, good morning.

Good morning, Matt Good morning.

I was hoping I could dig in a little deeper on your comment about better than expected payrolls.

Were there any particular geographies or.

Sectors coverage areas that you saw that more so than in others.

And then also I heard your comment about it being wage inflation can you just talk a little bit about kind of.

How you view kind of that aspect of it and am I right in thinking that all else equal that that that's positive for.

The outlook on future margins.

Certainly.

I'll start with the payroll better than expected payroll growth.

You recall each quarter, we've tried to been giving you some indication of what we've seen in the prior quarters.

Payroll is reported to us so as an example in the fourth quarter, we talked about.

The the payroll growth that we saw reported to us via monthly payroll was up about 4% and 3% of that was wage inflation. So.

So we continue to see that you know each quarter last year seemed to improve over the prior quarter I think maybe third quarter was 3.5% in terms of wage inflation in the fourth quarter was 3%.

When I look at the first quarter of 2022, however that number is seven 3% so from.

Three and a half in the third quarter and 3% in the fourth quarter seven 3% in the fourth quarter and it really was across our.

Our industry groups for the most part I think marine was the only one that Didnt show a lot of wage growth itself, but particularly in our services construction and particularly roofing.

Trucking, we saw wage growth across the board in those categories.

But I don't have visibility into Matt is yes, its wage growth is that simply higher wages or could it be same workers more hours.

It's something I don't really have visibility into at this point now I do we do also look at employee count.

And in the first quarter of 2022 that was one 9% I think in the first quarter. It was one 2%, maybe 1% or 1% the quarter before that so not a lot of fluctuation in terms of employee counts are adding on new employees.

Which you know it always gives us a little bit of pause because we think that drives frequency so to your point about that.

Resulting in and a tailwind for future premium growth I think the answer is yes in terms of what we're seeing and the economic activity of our our Insureds currently and that certainly is how we view that.

Got you and then the the kind of the whether that ultimately results in kind of.

Got it.

The tailwind for margins a little bit on your I guess on your comment of trying to figure out as time goes on how much of that is maybe.

The same employee additional exposure hours worked versus them just getting paid more for the same exposure.

Yeah, we we much prefer to see the wage growth and like the seven 3% number because we do think that means same workers.

So we think that safer than new employees. If that helps you in terms of thinking about future margins I do want to clarify because sometimes it gets a little confusing when we talk about top line and when it shows up so keep in mind that this these payroll numbers I'm talking about our first quarter 2021 work activity.

The 'twenty two 'twenty.

2022 work activity, so that translates to audit premiums when those policies are audited. So that's not that seven three is not impacting our top line currently.

Yeah, It will come in future quarters, Yeah, that's exactly what we wanted to clarify.

Great now that's helpful.

And then kind of a little bit of a follow on to that but obviously audit and adjustment premiums, where we're kind of a very favorable in the quarter can.

Can you.

Can you remind us what's the what's the dollar number that that impacted last year's second quarter. So kind of what's the comparison number that we're gonna be basing it off of for the upcoming quarter.

Yeah. So last year's second quarter was just audit and other premiums were just a half a million dollars, so zero point $5 million.

Versus zero point $3 million in the first quarter of 2021.

Okay Wonderful and then one more question if I could just shifting to the investment portfolio.

You can you know can you remind us or update us I guess on kind of what youre looking at in terms of new money yield versus kind of book yield and I'm, sorry, if I missed it in your comments I was trying to keep up.

And then and then how much of the portfolio you expect to rollover in the next 12 months.

Yeah.

The new money rate rose during the quarter, and particularly got into very attractive new money rates. We think in the last two weeks of March.

And so we think we're at a point now where we're ready to.

Put money out a little bit longer maybe increase our duration a little bit.

Because lease yields look attractive relative to the last several years.

Don't have a specific new money rate to give you versus what's rolling off but there is a pretty big gap.

Whereas before that was pretty much one for one.

I would say that it is on the.

Lines of maybe perhaps a 100 basis points.

Our cash is relatively low right now because we've been taking advantage of those opportunities. So as cash flow comes into the company and then.

Is reinvested in the cash flow comes off of the portfolio that is reinvested. We we would expect that that would continue to drive net investment income growth, but in terms of turnover I don't have a specific percentage of the portfolio to give you.

Okay, great well, thank you for the answers and congrats on a nice start to the year.

Thank you, Matt and thanks, Matt.

And once again that is star one if you would like to ask a question.

We'll take our next question from Mark Hughes with Truest.

Yes. Thank you good morning.

Good morning, Mark Good morning, Mike.

Any more.

Detail you can give us on the new business environment. I think you mentioned it was a competitive market I'm just sort of curious if you're seeing anything anything change in terms of.

Steve your ability to go out and.

Sign up a new a new customers.

Yeah, Great question and I wish the answer was Oh I've seen lots of changed competitors are pulling away, but that's not the case.

But at the same time, we're not seeing a new rash of competitors are either it's just been steady state I think every every carrier sort of battling the same the same issues in terms of you know approved loss costs are still declining high single digits everyone's looking for.

Premium and trying to grab market share, but at the same time appear to be relatively disciplined in terms of their pricing.

It'll be interesting to see you know in CCI as annual numbers come out in a couple of weeks, so it'll be interesting to see how.

How much fluctuation theres been in discretionary pricing over the last two years comparatively because I saw a report.

Recently from C. I, a b I think it was CIB that yeah, they they pull agents and agents have seen.

The last couple of quarters, its been really benign in terms of what they're reporting as rate increases or rate decreases. So I do think carriers are being responsive to that in terms of its yes. The agents aren't seeing these large decreases come through like we were seeing before and so that's sort of a maybe an indication of what's.

Happening with pricing, but it's really on the discretionary side because the approved loss costs.

That we've been seeing come through we're still declines.

Yeah on that topic.

You gave a good precise number in the release I appreciate that.

That person.

088 or eight.

Yes.

Yeah, if I'm thinking about your commentary last quarter was that it was kind of a mid single digit decline, but if I'm thinking about it properly are.

You were just speaking generally.

Hum.

I was just going to ask whether you could what does it really eight versus you know mid single, which would be you know five or six or something is that did it to step down or is that overreach here.

That's a great question I did at eight 2% for the quarter I and they all have to go back and look but I remember it being high single digit last quarter as well. It was I think our expectations for 2022, when we talked last quarter were more in the mid single digits I would say that based upon the most recent rate filings.

Expecting that to be more in the upper part of the range.

More in line with maybe what's in the press release for the rest of the year. Obviously, we will get an update on that from NCC I at the conference in May and a few days time.

Yeah, Yeah, Okay. That's good clarification.

When you think about the frequency being down could you.

Framed it up versus.

Two years ago are pre COVID-19 .

It seems seems pretty striking frequencies down again or I wonder if you could give us some longer term perspective on the.

Yeah, we will be filing the Q on Friday, and you'll see on there you know we always had that chart that says kind of rolls forward. The open inventory. So it has open claims claims reported claims close and then ending open and if you look at if you Youll see that chart, you'll see claims reported in the first quarter of 2021 were less.

1000 claims I think it was like 993, if I remember exactly.

Versus first quarter of last year, which again coming out of Covid was over 1000 claims. So just the number of reported claims.

Yeah.

Premium for a second just actual reported claim counts are down.

And I said as I said in my prepared remarks.

We.

I appreciate that and try to use those opportunities to.

Find ways to resolve older claims.

And Mark just to clarify too last year, we saw frequency bounce back from accident year 2020, right in comparison, because that frequency was so low but that accident year 2021 frequency was still lower than pre COVID-19 levels.

But I will throw in my cautionary tale of three three months is not a trend make.

Yeah.

Did you give the number of.

Large claims in the quarter.

I'm sorry, we did not it was for thank you for asking.

Okay.

And that's about the been the norm is that does that right.

It has been it has been I think we ended last year with 18 19. So yes again, it's it depends on the quarter, but no. There's nothing about that that would cause us to think there's an alarming trend there now.

Yeah.

Firstly did you say how many people were involved in the catastrophic claims.

I did not.

Can you give us some sense of humor.

I would prefer not to at this point.

Just because it is a good target.

Around the world.

Yeah.

Hum.

Uh huh.

I'll need to push it.

But is it kind of a handful of the double digits.

I appreciate I appreciate the quite I really truly appreciate the question, but we you know we try not to give up.

Too much information around the claim obviously, because we wouldn't want to identify any one there are certainly circumstances surrounding the claim just it has not been our practice to discuss individual claims and we are.

Would just prefer not to at this point.

Yeah, I guess I'm, just sort of wondering how much variability there can be in the lawsuit dependent.

Individual cases develop.

We are we are comfortable with reserve estimates that we have up at this time, giving how these the claimants have progressed medically.

Yeah, Yeah I.

I guess, if it's a larger number of people then.

Maybe you see less variability, but it's a smaller number of people that you could see more variability depending on their progress.

Hum.

Thanks for the question.

I don't think that will prompt more detail from you.

Yeah.

Okay.

Alright, well, thank you very much for the answers.

Youre welcome.

Thank you Mark.

It appears there are no further telephone questions I'd like to turn the conference back over to Mr. Ross for any additional or closing remarks.

Next week, we will celebrate the 36th anniversary of writing our first policy a lot of things have changed since underwriting that first logging policy experience in technology have enhanced our ability to turn risk and the opportunity.

What has not changed is our commitment to serving agents policyholders injured workers and since going public in 2005, providing returns to our shareholders. Thank you for joining us today.

And once again that does conclude today's conference. We thank you all for your participation you may now disconnect.

Mhm.

Okay.

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