Q2 2022 Amerisafe Inc Earnings Call
Good day and welcome to the <unk>.
2022nd quarter Earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Vincent.
I know chief risk Officer. Please go ahead Sir.
Good morning, welcome to the Amerisafe 2022 second quarter Investor call.
You have 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 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 the results of risks.
The uncertainties and other factors, including factors discussed in today's earnings release in 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 general Frost, Amerisafe as President and CEO .
Thank you Vincent and good morning, everyone.
Inflation continues to dominate financial news.
Before discussing the quarter's results I thought it would be helpful to discuss three ways inflation impacts workers' compensation industry and Amerisafe.
First premium revenue is based on payroll.
Wage growth brought about by a labor shortage and inflationary pressures as a potential tailwind for revenue.
Insurers payrolls increase.
<unk> continues to see wage growth reported by our Insureds and their monthly payroll reports, which ultimately leads to positive payroll audit premium.
During the second quarter Payrolls grew nine 1% based on our analysis of those policies renewed during the quarter.
Second I believe workers' compensation medical cost inflation will rise above recent trends as the health care industry passes increased labor costs to end consumers.
Industry wide this could lead to increased loss ratios and unfavorable development on open claims.
Amerisafe uses long term averages and our reserve practices and we work diligently to close claims therefore, limiting our exposure on open claims.
Third rising interest rates negatively impact fixed income portfolios of insurance carriers.
The upside is that new investments can be made it much more attractive yields growing investment income in future quarters.
Neil will provide a merits a specific metrics during his prepared remarks.
To summarize the impacts of inflation are far reaching but the three impacts I named directly into his key areas of Amerisafe and our financial income financial outcomes.
In the quarter gross premiums written grew 1% over the prior year quarter, driven by robust audit and other premium adjustments.
Higher than expected payroll anticipated payroll led to positive audit premium for policies written in the first quarter of 2021 and audited this quarter.
Premiums for policies written this quarter was down 5.6% print.
Principally driven by declines in loss costs.
Our overall pricing for the quarter as reflected by our E. L. C M, where the $1 51 down from $1 52 in the second quarter of 2021.
Despite competition remaining strong and pricing pressures continuing we retained 93, 7% of the policies we offered renewal too.
Continuing with losses frequency trends for the current accident year remained favorable with reported claim counts lower than prior accident years at six months.
Coupled with severity within expectations the loss ratio for the current accident year remained 71%.
We had 10 claims with case incurred above a million dollars at the end of the quarter.
This compares to three for the first six months of 2021 and 19 for the full year 2021.
Our history has shown there is no seasonality as to which quarters large losses occur.
Other favorable case development reduced the quarters loss ratio by 13.6 percentage points.
Accident years, primarily attributing to the $9 6 million of favorable development, where 2017 2018 2019 and 2020.
This is the first quarter that we've adjusted the us ultimate loss ratio for accident year 2020.
I will now turn the call over to Neil to discuss expenses investments and capital management.
Thank you <unk> and good morning, everyone.
For the second quarter of 2020 to Amerisafe reported net income of $6 1 million or <unk> 32 per diluted share compared with $23 8 million or $1 23 per diluted share in last year's second quarter.
The decline in net income was primarily driven by declines in our equity securities compared with gains in our equity securities in last year's second quarter.
Operating net income for the second quarter was $13 1 billion or <unk> 68 per share a decrease from $20 2 million or $2 four per share in the second quarter of 2021.
Revenues in the quarter were lower impacted by this year's $9 9 million decrease in unrealized gains on equity securities revenues came in at $68 million compared with $81 2 million last year.
Net premiums earned increased 0.6% to $70 3 million compared with $69 9 million in last year's second quarter.
And a significant improvement from the trend in recent quarters.
Turning to our investment portfolio net investment income decreased three 6% in the second quarter to $6 5 million compared with $6 7 million in the second quarter of 2021 the.
The decrease was driven by the continued impact of lower interest rates on fixed income securities as they work their way through the year over year comparisons.
On a positive note net investment income for the third and fourth quarter is expected to grow as the yield on our portfolio continues to increase.
During the first six months of the year, our yield on new investments was approximately 100 basis points higher than the securities maturing or sold out of the portfolio. During the month of July This difference was over 200 basis points.
The tax equivalent yield on our investment portfolio was 286% at the end of the second quarter up.
26 basis points from one year ago.
Pre tax yield on the portfolio was 256% at the end of the quarter also up from $2 three zero percent one year ago.
Realized gains for the portfolio on Securities sold were $1 1 billion in the quarter compared with $1 2 million during the second quarter of 2021.
The investment portfolio remains high quality carrying an average double a minus credit rating with a duration of 4.07 and with 62% in municipal bonds, which includes 15% in taxable meetings.
One, 8% in corporate bonds, and 4% in U S treasuries and agencies.
6% and equity securities and 8% and cash and other investments.
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 net unrealized loss position of $15 7 million 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 and other expenses were $19 9 million in the quarter compared with $18 5 million in the second quarter of 2021.
The increase was primarily due to higher loss based insurance related assessments during the quarter compared with last year.
By category. The 2022 second quarter expenses included $6 8 million of salaries and benefits $5 5 million in commissions and $7 7 million of underwriting and other costs.
As a result of the increase in expenses our expense ratio for the quarter was 28, 3% compared with 26, 4% in the second quarter of last year.
Our tax rate for the quarter was 13, 9% compared to 18, 5% for last year's second quarter, largely due to a higher proportion of tax exempt income versus underwriting income in the quarter compared with last year.
Return on equity for the second quarter of 2022 was six 3% operating Roe.
For the quarter was 13, 3%.
In capital management, the company repurchase shares during the quarter for a total of $3 6 million.
Leaving $19 $3 million remaining on its share repurchase authorization as of June 32022.
Also in capital management, the company paid its regular quarterly cash dividend of 31 cents per share in the second quarter and this quarter. The board declared a quarterly cash dividend of <unk> 31 per share payable on September 23rd 2022 to shareholders of record as of September nine 2022.
And finally, just a couple of other items book value per share at June 32022 was $19 95.
Down three 2% from $20 62 at year end.
Our statutory surplus was 300 million at quarter end up from $278 million at December 31, 2021.
And then finally later today, we will be filing our Form 10-Q with the SEC after the market close.
That concludes my remarks, and we would like to now open up the call for the question and answer session operator.
Thank you Sir.
I would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you're using a speaker phone.
Please make sure your mute function is turned off to allow your signal to reach our equipment.
We will now take our first question from Matt <unk> from JMP. Please go ahead.
Hey, Thanks, good morning.
Good morning, Matt.
I appreciate your comments that they open about kind of the impact of inflation on the industry in workers' comp.
Particularly.
Caught the comment about expectations for medical loss cost to rise.
And some of the important differences between Amerisafe and the industry can you.
On the claims to all points can you expand on that a little bit and just remind us how.
How how you view America face claims tail versus what maybe.
More commonly think of four <unk>.
As an industry.
Yeah, certainly so I'll talk about it in two ways. One is just number of claims reported to us.
We've talked about on several calls now that we have not.
Bounced back to pre pandemic levels and that still seems to be holding true.
Our claim cat frequency count number of claims reported is still lower at six months compared to prior accident years.
That's certainly benefiting us.
To your point about what happens should there be a recession or how inflation impacts that.
Historically, amerisafe has done pretty well with our <unk>.
<unk> basically that arent.
<unk> performed pretty well during recessions in terms of whether that increases activity or decreases claim activity. We haven't seen a large fluctuation in claim counts related to that in mild recession certainly in the great recession that was a different story.
But when you think about it in terms of duration of claims which is I think where you were headed with the question was.
Amerisafe average duration is somewhere less than three years.
And I think thats, probably a year and a half two I havent looked at the latest numbers on the industry for at wide, but I would say thats, probably a year and a half to two years less than industry wide duration. So I think we are benefiting on the front end from just having fewer reported claims and then to your point on the duration side, we do have <unk>.
Good job of closing claims our open claim counts continue to drop our claim closure rates are very healthy. So we feel really good about that.
Great. That's very helpful and then kind of keeping on the inflation point.
Wage inflation.
Are you are you seeing any notable trends, particularly by different industry focus is where you guys have some concentrations in particular industries.
Pick out is seeing.
Notable trends versus say the rest of the book.
You know, Matt the wage growth that we're seeing and I'll I'll I'll kind of segregate that a little bit but the wage growth. We're seeing is across the board in our industry groups and then sort of follow it sort of tracks with what we see in terms of yeah. If you look at our mix of business, we're seeing it in construction and roofing, particularly trucking, particularly in lumber.
Logging, we've seen considerable wage growth, we try to give a better a clearer picture of where that's coming from versus new employees versus actual wage growth itself.
And I think last quarter, we were quite astonished and we reported out that for policies that reported payrolls in that quarter. We saw actual wage growth of seven 3% and we didn't know if that was.
Okay.
A blip or a trend.
Happy to say it was six 1% in the second quarter of 2022, So seven three last quarter of $6. One this quarter and just wage growth.
Other side of that is employee count so last quarter that was one 9% this quarter two 9% so still not large.
Large amount of growth coming from new employees, which as you know is our preference and that again to your question about the industry specific that seems to be it seems to be pretty consistent across our industry groups.
Great that's very helpful.
Last one just housekeeping you always seem to talent and hydrogen.
What was the LCM in the quarter.
$1 51.
Awesome great. Thank you for all the answers I appreciate it.
Thank you Matt Thanks, Matt.
We will now take our next question from Mark Hughes from Trust. Please go ahead.
Yes. Thank you good morning, good morning.
Mark.
And CCI loss cost number you put out in the release I Didnt see it do you happen to have that kind of looking at your footprint.
Generally speaking on how that's trending.
Right. So for the second quarter that was 10% decline.
And I believe I don't have historically from a $8 two Neal is that correct for last quarter and in CCI put out a projection in may at their annual insurance symposium that they expect MCC I expect lots of cost to be down seven 5% for 2022. So we're seeing similar trends in our book of business.
Although we are high hazard, it's a slightly different booked in all of the N Cci's book.
So the 10% represent where you got information here in the second quarter.
Does that that'd be great.
The 10% represent of the loss cost declines that were effective in the quarter for all the states that had lost cost declines effective that quarter. The decline was 10%.
So thats kind of example.
Right.
Maybe a rolling four quarters to get.
At least.
The country as a whole.
Maybe skewed.
Right. So that's why now we're saying NCI projects overall seven 5%.
Yes.
Okay.
Pretty big number in the 10% it is.
Yeah.
Anything that you can say about 2020.
Hey, guys. This is the first quarter you've taken a look at it do you look at the whole 2020, or just kind of the early 2020 policies at this point no.
In either case, what do you see.
Yes, no we look at the accident year as a whole for 2020 so.
If you're if it's short history, but remembering 2020 claim counts dropped for the industry as a whole theme for Amerisafe.
Severity was within within expectations.
We always try to measure given the severity of the claims that we have we like to wait let those age a little bit and get solid ground on where people are how we're feeling about medical outcomes and long term out outlooks for particular claims hence this being the first quarter for us to adjust kind of consistent with our pattern.
<unk>.
Yeah, and I think the 2000.
One is anomalous in terms of the clay.
Claims count drop.
Okay.
Should we assume that it's going to be.
Uh huh.
Fruitful as you.
Evaluate that accident year.
Time will tell time will tell you if you harken back to 2021 of the concerns for the industry and Amerisafe was.
The impact of Covid and not necessarily just the number of claims reported for COVID-19, but how that was going to impact medical outcomes, even for non COVID-19 related claims.
Knock on wood here and say so far it doesn't seem to be seem to be that impactful other than the stress that it put on the health care industry as a whole, which obviously everyone's feeling right now are beginning to feel right now.
I think as far as Covid specific claims we had less than 40 reported to us.
So from that aspect, we felt really good about 2020.
Yes.
On the medical inflation, how much of that are you actually see in your book.
Youre just.
Painting.
We're anticipating we're anticipating certainly we've talked about it on the last few calls what we're seeing and everyone's experiencing in terms of just nursing costs and home health, but no I cant I don't have any clear metrics in our book is just something that were anticipating trying to be in front of what we think will be a trend.
<unk>.
A large liability on our balance sheet.
The industry's balance sheet, I think amerisafe better about it simply because we closed claims.
Yes, I guess it doesn't help having the NCC I do the 10% decline in the rearview mirror.
[laughter] youre anticipating inflation.
Nothing I could not agree more mark.
Yeah, Yeah I guess.
If everybody wised up in competition eased up a bit and that would be good but doesn't sound like that's the case either.
You know what.
Absolutely if you I don't know if you want to say why is that I think you know in CCI is very data driven and they're using what they're seeing in the data I think people carriers are more it's just more anticipating what's to come.
Even if you look at the <unk> reports and you look at accident year 2021, you know the industry reported a combined ratio of 102 in CCI think ultimately that's not going to be a one or two but I think thats. The difference between what carriers are experiencing and anticipating experiencing and reflecting in their price.
<unk> versus what's actually shown up in the data thus far.
Yes, yes.
How about.
To premium.
I think.
Taking into account that the first quarter of 2021.
We're still pretty conservative on their payroll.
Is that a dynamic that's going to continue for the next several quarters. There is some reason why it shouldnt or right. What's Greg I don't have I don't have a crystal ball, but I would I would think we would continue to see positive payroll goes for the next few quarters going yes. If you think just to your point. If you think about where are we where are the.
Economy was where our Insureds, where first quarter of 2021 and playing that forward. The economy was still pretty robust our insureds, who are working I don't think they anticipated the inflationary pressures that they were there they started to experience in terms of wages, so that I believe bodes well.
For us in terms of a tailwind in audit premium.
Yeah, and that's still the credit card for that is still going through today.
Inflation is coming in pretty hot to your.
Right.
57% growth in wages, probably more than what.
Folks had anticipated.
A few months ago.
Right.
We will make that an editorial comment.
But.
I presume you wouldn't disagree with any of that.
I don't I don't I mean, I saw the headline today in the Wall Street Journal about.
Near record pace in terms of wage growth and benefit growth in the quarter.
Yeah, Yeah well.
Funny headlines.
Fed doesn't like that.
People are making too much money with better stop that.
Okay.
Okay.
Alright, I think I am good there appreciate all the answers.
Thank you Mark appreciate it.
Thanks Mark.
It appears there are no further questions at this time I would like to turn the conference back to Charles for any additional or closing remarks.
Thank you for joining us today I want to take this opportunity to congratulate the amerisafe team on being named towards top 50, P&C carriers for the 14th consecutive year honor such as this only happened because of your dedication to serving our stakeholders.
Thank you for joining us today.
This concludes today's call. Thank you for your participation you may now disconnect.
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