Q3 2022 Amerisafe Inc Earnings Call
Please standby.
Good day and welcome to the Amerisafe 2022 third quarter earnings Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Kathryn Shirley Chief Administrative officer. Please go ahead.
Good morning, and welcome to the Amerisafe 2022 third quarter Investor call. If 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 Jennifer off Amerisafe as President and CEO .
Thank you Catherine and good morning, everyone I'd like to take this opportunity to virtually welcome Andy <unk>, our new CFO .
As previously announced Andy joined the team in September and has been working with Neil as he transitions to retirement so welcome Andy.
Moving onto the quarter.
We are pleased with this quarter's results reporting an 85, 4% combined ratio and an operating ROE of 14, 4%.
The quarter's results were supported by favorable prior year development and increase in net investment income due to higher interest rates and strong audit premiums.
Premium written is up for the second consecutive quarter with a current quarter written premium up one 5% primarily due to audit premium.
Wage inflation continues to be the primary driver for payrolls with our payroll is up significantly from the same period last year.
And maintaining our operational effectiveness, we were successful in retaining 93, 5% of the accounts for which we offered renewal.
Our overall pricing as measured by our LCM was 153 identical to the third quarter of 2021.
Overall policy count was down as we continued to face competitive headwinds in the marketplace.
We're well positioned to retain our policy holders and successfully compete for new business.
In addition, we continued to see growth in payrolls reported in this quarter driven primarily by wage growth this bodes well for future audit premium.
A smaller percentage of the growth is attributable to new workers.
The number of new workers as a trend we closely monitor as new workers typically translate to more claims.
Over 40% of the claims reported in any given year are injuries from workers with one year or less of tenure.
Job training turnover rates and accident prevention measures, our risk with different differentiators are safety professionals evaluate during their onsite visits and are critical to our underwriting evaluation.
Continue with losses, we experienced $10 4 million of favorable prior year development in the quarter, primarily from accident years 2017 through 2020.
For the current accident year loss ratio was 71% unchanged from the first two quarters.
Frequency for the current accident year is down for Baxter ear 2021 at the same point in time and severity was within expectations.
Before turning the call over to Andy I wanted to discuss the special dividend.
The company's board of directors declared a special dividend of $4 per share for shareholders of record as of December 2nd Twenty-twenty to this.
This dividend reflects the operational excellence and commitment to our shareholders by seeking to deploy capital to create long term shareholder value and return excess capital to shareholders I'll now turn the call over to Andy. Thank you Danielle and good morning to everyone for the third quarter of 2020 to Amerisafe reported net income of 11 4 million.
We're 59%.
Diluted share compared with $19 1 million or <unk> 99 cents per diluted share in last year's third quarter. The decline in net income was primarily driven by larger declines in our equity securities compared to last year's third quarter. Additionally, last year's third quarter favorable development included a larger amount of favorable case reserve development.
From close cases.
Operating net income for the third quarter was $14 1 million or <unk> 73 per share a decrease from $19 8 million for adult $1 <unk> per share in the third quarter of 2021 <unk>.
Our revenues in the quarter were lower impacted by $4 1 million in unrealized losses on equity Securities revenues came in at $71 3 million compared with $73 million last year.
Net premiums earned increased 2% to $67 8 million compared with $67 6 million in last year's third quarter, primarily driven by audit premium.
Turning to our investment portfolio net investment income increased 15, 4% in the third quarter to $7 million compared with $6 million in the third quarter of 2021. The increase was driven by yields on money market funds and bank accounts as well as higher reinvestment rates on fixed income securities. During the first nine months of the year.
Our yield on new investments was approximately 147 basis points higher than the securities maturing or sold out of the portfolio. We expect this trend to continue with.
The tax equivalent yield on our investment portfolio was three 6% at the end of the third quarter up 66 basis points from one year ago. The pretax yield on the portfolio was 288% at the end of the quarter also up from $2 two 1% one year ago realized gains for the portfolio on secure.
<unk> sold over 600000 in the quarter compared to a minimal loss during the third quarter of 2021.
The investment portfolio is a high quality carrying an average double a minus credit rating with a duration of 4.09 years. The composition of the portfolio is 58% in municipal bonds, which includes 14% in taxable munis, 21% in corporate bonds, 6% in treasuries and agencies, 6% in equity.
Securities at 9% in cash and other investments approximately 60% of the of the bond portfolio is comprised of held to maturity securities.
Our total underwriting and other expenses were $19 6 million in the quarter compared with $17 9 million in the third quarter of 2021, the reported increase in the quarter was primarily due to a benefit in last year's third quarter from the reinsurance Treaty profit sharing commission.
Our expense ratio for the quarter was 28, 9% compared with 26, 5% in the third quarter of 2021 by category. The 2022 third quarter expenses included $6 7 million of salaries and benefits $5 4 million in commissions and $7 4 million of underwriting and other costs.
Turn on equity for the for the third quarter of 2022 was 12% and operating ROE for the quarter was 14, 4%.
Moving on to capital management as Jay will discuss the $4 per share special dividend declared by the board of directors, what I would like to focus in is on the quarter.
<unk>.
Our quarterly repurchasing of shares for a total of $6 5 million at an average share price of $46 83.
Sure, including commissions with an additional $12 8 million remaining in our share repurchase authorization as of September 32022 for future purchases and finally, just a couple of other topics book value per share at September 32022 was $19 47.
Down five 6% from $20 62 at year end.
2021, and finally Tomorrow October 28, 2022, we will be filing our Form 10-Q with the SEC. After market close that concludes my remarks, we would like to open up the call for the question and answer session operator.
Thank you if you would like to signal with questions. Please press star one on your Touchtone telephone.
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Star one for questions.
And our first question will come from Mark Hughes.
With trust.
Yes. Thank you good morning, Andy Good morning Janelle.
Morning, Mark.
The audit premium outlook I think you suggest the growth that youre seeing in payrolls suggests audit premium Nevada continues to be pretty strong.
Hum.
Is it looking as good as it did at this time say three months ago.
The wage growth of the payroll growth that we saw this quarter is stronger than we've experienced over the last few quarters.
Overall wage growth and this is and again I should clarify these are payrolls that were reported to us this quarter.
So payroll is reported to us this quarter, so there'd been an activity for the month. Prior grew 12, 1% on an overall basis and about 2.9% of that was a new employees. So the wage growth itself component was 10%, which is higher than it will be reported.
Last quarter, which was around 9%.
Yeah Okay.
And then.
From a loss cost perspective, you gave us the LCM sounds like it's steady.
Do you have the kind of the update on what Youre seeing in terms of loss cost trends.
Yeah, the last cost control trends still continue down for the quarter.
The average was 10% down or 10, 3% down which is pretty much in line with what we reported for the second quarter as well so we're not seeing.
If there's a way to say this we're not seeing increasing decreases.
And then on the other hand on the other hand, we're not seeing net positive either.
Yeah.
Anything on the medical inflation front theres been some talk about that and other line.
What do you see.
Yeah, certainly something that we're keeping our eye on and we think about medical cost in particular, and rather anecdotally, but we all hear about how much the <unk>.
Medical field itself is experiencing wage inflation.
We keep a close eye on that for a couple of reasons. We do think that eventually works its way into the workers' compensation system, either be it the Medicare schedules or states updating their loss costs. Meanwhile, you know, it's not built into the rate. So I think the first place we will see it in terms of workers.
<unk> is probably companies really just using discretionary pricing to them.
Ill get in front of the cost that they are experiencing on the claim side and so that's something that we're closely monitoring, but you know as of yet.
There hasn't been a lot of updates to the fee schedules, but it's something that we anticipate happening and of course it takes a while for that to make its way into the actual loss costs are the rates themselves.
Does it.
Could you maybe expand on that a little bit how.
The trajectory.
Do see the inflation it starts in the fee schedules.
The lag on that.
That's a great. That's a great question what is it what is the lag.
We've I've only no I only know one state thus far that has actually updated their fee schedule is I do think it takes time for those trends to build up in that.
It will happen it depends on the state it could be in the Medicare Medicaid fee schedule. It because a lot of faith based there their workers' comp fees also those schedules or the state may have a specific schedule for workers' compensation, but there's definitely a lag there in terms of when that gets when that happens with like I said, we've only seen one thus far so I think we're.
Probably probably six months to nine months away from really seeing any real movement there.
Given.
The rate of medical inflation that.
Is it being experienced in the health care field.
Yeah, and then I'll ask one more I'll be rude here.
Your route has been asking another question of course, okay.
Hi.
[laughter] what color the shoes, you're wearing [laughter] now.
Capital situation with the <unk>.
Dividend.
How are you looking at the kind of capital ratios.
Thanks.
Right you know as as.
We've talked about numerous times, we know the metrics, we talk about our our operating leverage whether that's net premiums written to GAAP equity or even net premiums written to statutory surplus we think on a GAAP equity standpoint, we could be a one time <unk> on a one one or one one times on a.
Tori basis, it could be up to one four and we're just not here we're not at those targets. So operating leverage at the end of the quarter was <unk> seven one I believe.
From an operating standpoint, so there's definitely excess capacity there excess capital there in terms of where we think we can operate and still maintain all of our a M. Best rating in those markets that we are so important to us to operate.
Understood. Thank you very much.
Thank you Mark.
Thank you and our next question will come from Matt <unk> with JMP.
Okay.
Yeah.
I was hoping I could.
Want to ask you a broad economy question, just everybody kind of thinking about a recession.
You guys have some specific sectors that make up large portions of your book.
What are you seeing in your core sectors in terms of economic activity and has it hasnt changed much.
This quarter to last quarter.
Yeah.
Yeah, you know, Matt that's a great question. So when we look at our insured base now our best indication is what are we seeing in reported payrolls until I mentioned you know for the what we saw this quarter and reported payrolls wages were payrolls were up 12%.
All of that with wage growth at 10% of that was wage growth and then new workers.
Even the new workers being at roughly two and a half between two five and 3% is not a stark change from what we have been seeing.
So we monitor new workers very closely.
I think if we think in terms of recession, which is where your question is coming from I would suspect that we would start to see that number decline to some degree in terms of new workers, but our industry groups fare pretty well if we're talking.
Minor recession, or some people I say little or a recession in our industry groups respond pretty well and a little or recession.
Their their essential work.
If you think about the housing market and certainly making headline news was the interest rates being what they are but when you think about commercial or construction being our largest.
Industry group.
About 5% of that roughly 5% of that is not commercial.
Constructions that we feel very comfortable.
And that our construction book bodes pretty well.
All of our industry groups I'll tell you to be trucking seems to hold up really well.
Even in recession Recessionary times, our trucking book has been pretty steady.
That was a long winded question.
Got it no that's super helpful Super helpful.
Maybe shifting gears, a little bit just to the development.
Both both this quarter as well.
Yes, really steady for a number of quarters now maybe just can you refresh us on kind of whats driving that in particular, what I'm getting at is is it is it mostly claims closing kind of below expected in kind of.
If that happens you kind of a for lack of a better term kind of forced to release it or are you seeing anything in kind of the loss trends on open claims that you are then kind of adjusting the reserves are keeping up on claims that remain open.
Right.
So what.
When you think about Amerisafe and I do think this is one of the things that when you think about our loss reserving you really have to remember how different we are in terms of if you can just look at our overall reserves case reserves as a component of our reserves versus IV NR. So we rely heavily on our case reserves are we believe in the expertise of our field case managers.
We keep really low inventories in the field less than 50 claims per adjuster, and that's very intentional on our part I'm simply because we want them to know those claims intimately and get up what we believe is most likely outcome in terms of the case reserve.
Fast forward to what we're seeing in.
Lost development or favorable loss development, it's coming from those case reserves and my claims department really focusing in on how do we how do we close these claims how do we get best outcomes not only for Amerisafe, but for these injured workers and ultimately for the policyholder themselves in terms of mitigating those costs and getting those.
Claims close you know I, probably sound like a broken record, but our job is maximum medical improvement and return that injured worker to work.
Our claims folks are thinking about that every single day, and that's where our favorable development is coming from as those case reserves and being able to close and settle those claims and at the same time take care of those injured workers.
Okay, Perfect and then if there is a real quick one.
Can you update us on where kind of large claims frequency.
Frequency and the number of large claims.
At September 30.
Certainly at September 30, we had 12 large claims and when I say large claims with case incurred over a million dollars.
If I compare that to where we were at 930 last year that number was nine but the year ended with 19 to 2021 accident year 2021 ended with 19 large claims and we're at 12 right now for 2022, so no in my mind, no real differences between and frequency of severity.
Of course this is a lumpy business and you know I think there was 100 days left in the year.
At the time.
Five days left in the year of 65 days I think today's day 300.
Perfect perfect well, thank you very much for the color.
Welcome Andy and Neil.
Look for an enjoyable retirement.
Thank you.
And our next question will come from Mark Hughes with Trust.
Anything we should think about it in the expense ratio in terms of the inflation that you may be seeing in wages.
I know its pretty volatile, but maybe it's been a little bit higher lately.
Sure correct.
Amerisafe does not immune to what everyone seems to be experiencing in terms of wage inflation and what that pressure is and we're.
We're not immune to that so yeah. We're experiencing the same thing everyone. It is everyone else is what that is it a long on a long term basis, particularly when you start thinking about the expense ratio great.
Great question that I don't have the answer to I, just don't know what the long term impact is going to be because I think sometimes you see it in different pockets right, depending on the job market or the skill level.
What is in demand at the time.
Okay, and then how would you characterize comp.
Competition.
In some earlier quarters too.
About.
What youre seeing the appetite among our bigger carriers regional carriers, how would you characterize it now versus three months ago.
It is unchanged our competition is still strong there there are still carriers out there willing to write what Amerisafe rights.
I you know I think the agent force is really.
Honed in on other lines of business, Besides workers' compensation because of the availability of carrot coverages in various pockets.
So workers comp given the fact that last half of the decline in everybody's going into that pretty much going into their agent and getting a rate decrease.
Workers' comp is that just probably not top of mind for those agents in terms of placing that coverage that they're really as we all know the other a lot. There are other property and casualty lines that are really struggling.
So that's.
That's why we I feel like we can do a better job in terms of new business, but as far as the competitive environment It really hasn't changed.
Changed much and you said six to nine months I would even go further and further back than that probably it's probably been two years, even that we really haven't seen a change in the level of competition.
Yeah.
Well I had a great question.
It was a brown.
Yeah.
[laughter].
Oh Oh the question was.
We've also I think sort of characterize.
When you look at your customer base, it's mostly commercial.
Maybe it's that mix jobs, it's important when you think about the future.
Any perspective on the.
So what they're saying about backlog and bidding activity.
Would you feel like that right.
You know that was one of our concerns coming out of it.
During the pandemic and even coming out of the pandemic, we knew our Insureds were working and the concern was with the next job be there.
Based on the payrolls that are being reported to us the answer to that question. Then was is yes. The next job was going to be there.
When we you know when I look at consumer demand.
For lack of a better term you know, it's still very strong and even though interest rates have been going up.
I don't think we've really seen a lessening of demand and until we see that I do think you know the next project is going to be there.
Yeah.
Okay. Thanks.
Thank you again.
Youre welcome.
Thank you and that does conclude the question and answer session I will now turn the conference back over to Janelle Frost.
Thank you I started todays call welcome Andy to the team so I'd like to end by thanking Neal Fuller for his service and leadership at Amerisafe.
The company and our community are better today because of the influence of Neal and his wife Maria.
We wish them the very best thank.
Thank you for joining.
Thank you and that does conclude today's conference. We do thank you for your participation have an excellent day.
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