Q1 2023 AMERISAFE Inc Earnings Call
Income held to maturity securities our capital position is strong with high quality back with a high quality balance sheet.
But I'll, let loss reserve position and conservative investment portfolio at quarter end Amerisafe carrier roughly.
$1 billion in investments cash and cash equivalents since year end book value grew four 9% to $17 38 operate and operating return on average equity was 19, 1%.
With that I would like to open the call for the question and answer portion of the call operator.
Yes, Sir Thank you and if you would like to have.
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.
Once again that is star one if you would like to ask a question.
I will now.
We will now take our first question from Matt <unk> with JMP.
Hey, good morning.
Good morning, Matt.
Okay.
I was hoping you might be able to just kind of walk us through a little bit of the.
The loss environment is kind of your mental math on how you get to think about kind of accident year loss ratios in and specifically kind of just what youre seeing with frequency and severity and kind of your expectations there.
You talked a bit obvious about what loss costs are doing but then also with an eye towards you know kind of a piece of the puzzle that is.
<unk> growth and wage inflation and kind of how that might impact that calculus, and how much of that might.
Act Act like rate, even though it isn't.
<unk> cost per se.
Alright, that's that's a good way to look at it Matt.
I'll start with talking about the loss trends themselves.
It sounds like a broken record when I say this but were still not seeing reported claim counts rebound to pre pandemic levels.
So which is good right that's good news safer employer safer workplaces.
All wonderful things.
When I talk about frequency I tend to talk about frequency in terms of premium dollars not payroll, but I'll get to the payroll in a second.
Even though we've collected less premium dollars to cover those losses.
Our frequency, even our frequency measure has been slightly down.
And which is definitely benefiting us from the frequency standpoint.
From a severity standpoint severity for the first quarter again, not one quarter does not a trend make from the first quarter severity was pretty much on par with where severity was for the first quarter of 2022 accident year as we've talked about numerous times on these calls where our concerns come in and severity is given the long tail.
Nature of our claims.
How does medical inflation influence that over a long period of time I feel like we've always taken a very long term view of medical inflation. So I feel very comfortable about that from our ultimate loss ratio pick and then even on the case reserving basis I cannot give enough credit to my field case managers and.
Terms of how they how they think about these claims and they really do look out to say what.
What could that replacement that knee replacement costs us five years from now 10 years from now and how many of those are going to be factored into the claim and they put that in their initial case reserve so credit to them for how they review and think about individual claims.
To your question about payrolls sort of acting right acting as Ray you're absolutely right, you know and Andy's prepared remarks, he mentioned that.
Premium audits added $8 $9 million to the top line for the quarter, we continue to see payroll growth.
So if you think about Andy's number of eight 9%, that's reflecting policies that we wrote a year ago and how those estimated payrolls turned out regarded to how we had originally estimated them to be how the actual payrolls compared to what we originally estimated them. Today. So you think about that time period, we're talking policies that were in <unk>.
In fact, the work activity that happened in 2022 each.
Each quarter, we've been trying to give a little bit of a forward looking picture of that saying well what are we seeing in wage growth or payroll growth and the previous quarter and as you know we've been reporting double digit increases third quarter. It was 12, 1% fourth quarter, 11% first quarter of 2023, 11%. So we.
That bodes well for us in terms of continuing to see pretty robust audit premium.
Obviously, the comparative year over year is going to get a little bit tougher because of the audit premiums that we've seen increasing it really started increasing in first quarter of 2022, and so as we as we get these quarter over quarter comparisons that growth rate will tend to flatten or be less impactful to the.
Topline, but still.
To your point about the underlying loss costs and the rate those payroll dollars are certainly adding to our premium.
Can you when you think about I answer all your questions.
No very helpful and I guess, just one more kind of.
As we think about that that payroll growth.
Are you do you have a feel for how much of that is.
Increased exposure, so more hours worked or more.
Employees, right that sort of thing versus right.
True wage growth just same person doing the same exact exposure getting paid more for it.
Yeah, I don't have I don't have transparency into hours worked that would that would be ideal right. If we if I knew it same workers extended hours.
I don't know that I know of the 11% that we saw reported to us in the first quarter, which would have been fourth quarter activity, 80% or 8% of the 11 was.
Wage growth absolute wage growth. So it could've been higher wages are same workers higher higher or more hours.
The new employee count has been relatively benign, which we like to see and that's really across Matt really across our industry groups.
Look when we look at it the payroll broken down by industry group, it's been pretty robust for most of them. Obviously, we saw a little bit of increase in more so in roofing, maybe or in our construction book than other lines, but maritime had really strong wage growth, so and I can't even isolate it down to particular industries I think it's just the.
The economies for the small to midsize employers really.
That makes sense and then you actually kind of hit on something that was going to ask as a follow up question and.
And that is the.
Do you have the number the millions of dollars of the.
Q2 'twenty two.
What was the benefit from audit premiums in that quarter, just so we have a baseline.
Five border $5 5 million.
With second quarter of 2022 was $5 5 million perfect.
Great well, that's all I got thank you very much for the color and congrats on the nice start here.
Thank you Matt.
Once again that is star one if you would like to ask a question.
We'll now take our next question from Mark Hughes with Truest.
Yes. Thank you good morning.
Good morning, Mark.
Janelle I wanted to explore your mental map a little further.
Yeah.
Absolutely.
On the construction.
You had said that it was there any sort of headwind or any issue.
What's your feeling about that I think you've talked about.
Customers are always focused on the next job.
Latest vibe on that.
Right if I, if I base my vibe strictly on what's been reported is in payrolls I would say Wow My construction book looks really great.
You you're absolutely right in terms of what does the next job look like.
I am not naive to the headlines that we see about in terms of the tightening in the credit market and that certainly could impact our small to midsize employers in terms of lines of credit being there their credit lines being available to them from small regional banks.
But we haven't really seen it in work activity yet so you know I harken back to the Covid related recession that was one of our big bigger concerns was okay. Youre working now, but it is the next job going to be there and for our our employers the again the small to mid sized businesses.
They they had steady work throughout so unless somehow credit tightened to the point, where maybe that makes it a little bit more difficult too.
Complete that next job or bid on that next project I think we still have a few quarters of robust payroll is coming from those industry groups. I guess, we all read the headlines about is there going to be recessions are not going to be a recession.
Our industry groups tend to bode well.
What we call mild recession, so I feel pretty comfortable about that as well.
Yeah, maybe by the time the recessions over though.
They'll have continued to work on their existing backlog and then.
We can start on the new backlog that would be great that would be great.
Yeah.
<unk>.
Any large losses in the quarter million dollar plus.
We had two we had two claims with case reserves over a $1 million in the quarter.
Okay.
You give the.
In CCI loss costs, and the release and it looks like it.
Moderating a little bit I think last quarter.
Yeah.
Kevin plus.
Hi.
Is that.
Or are you seeing that.
Yeah, you know, it's funny, we've been saying for so long we would we would appreciate a slowing of the decline. So in that regard I guess, we got what we asked for a little bit slowing in terms of the <unk>.
The rate of the decline.
We will see you know NCC I will put out the.
Industry wide results in a couple of weeks in May So, we'll see how how the industry fared in terms of the accident year loss ratio be harken back to that data. The last few years every year, it's been creeping up a little bit higher a little bit higher I anticipate that to be the case this year as well for the industry.
<unk>.
When you say creeping up a little higher.
Less negative or more negative.
Approaching that hundred hundred combined.
You think about the combined ratio.
The accident year, the accident year I know companies are still reporting some redundancies.
But if you look at the accident year combined ratio or even loss ratio for the industry as a whole each year, it's been going up a point or two I pointed to where the combined ratio was approaching 100 last year. So we'll see what they report for 2022.
Yeah, I don't know if because of that.
Five.
That's ultimately, what's what's going to drive whether the rates continue to decline or let's be bold and say flatten.
Yeah Yeah.
Any observations about <unk>.
Loss development trends.
Maybe across the sector.
Part of your process or whether you.
Yes.
To come.
I Wonder if you have any.
Thoughts on.
What's happening more broadly around loss development.
Yeah, I think the industry as a whole is certainly seeing the benefits of declining frequency I don't think thats really changed all that much.
It's happened for Amerisafe I think is happening for the industry severity is.
The question Mark as to what's going to happen with severity I think anyone you talk to you in the workers' comp space obviously.
Spending a lot of time thinking about medical inflation.
And you know just survivability alone, particularly on the types of severe claims that we deal with.
As you know through medical technology and innovation.
People survive injuries and have better health care.
Which is fantastic, but that adds to the ultimate severity of those claims.
I think that just continues to be.
Has to be continue to be factored into the.
The rates themselves that severity is not just about.
Medical inflation. The fact that these injured workers tend to get the best in class in terms of care as they should.
But that also means a higher a higher price tag is associated with those claims.
Yeah.
You mentioned steady competition any shading on that when you think about you.
Q1 versus maybe the back half.
2022, a little tougher.
Suffer a little easier.
No.
We're able to get some new business growth in the quarter, but I'm totally going to attribute that to our employees just really hustling for that new business agents continue to you know.
<unk>.
Struggles if that's the right word in and all the other lines of business. So everyone. That's coming in for workers' comp coverage, particularly if their pricing on all of their product lines workers' comp the rate decrease no matter, which company theyre going to be dealing with unless they've had something obscure happen. So.
Agencies don't have the luxury really if I, if you want to call. It that of shopping workers' comp right now, it's really about where am I going to find the auto coverage, where am I going to find the liability coverage.
So kudos to Amerisafe, we're doing more with what we have we would love to get a large influx of of opportunities to see new business, but you know that requires to your point. It requires the competitive environment to have a shift and we really haven't seen that in quite some time.
Have you this may not be as relevant and workers comp and I am sorry for.
Uh huh.
Do you recall here.
You are buying.
Yes.
I don't know if this is.
It is relevant for workers comp, but any observations around agents being able to get.
Or have access to market.
That.
Okay.
Being beneficial.
Maybe some of your bigger competitors of travelers are Hartford.
It is interested in working with.
The same group of agents as they might have in the past because there.
Kind of narrowing that.
Relationship list.
Do you see anything like that.
I have not mark I haven't seen anything like that.
Okay.
Yes.
It is youre right.
Yeah, Okay, alright, well.
Good for me I appreciate it thank you.
Thank you Mark.
Okay.
We will now take our next question from Bob Farnam with Janney.
Hi, there good morning.
One question in your reserves, so what medical inflation assumption are you using for your reserves.
Yeah. We continue let me I think of this in two different ways. When we think about our overall reserves like the ultimate pick for 2022 or 2023 or even 2022. When we were doing tweens rate like I said, we took out we take a long term approach. So it tends to be mid <unk> mid to high single digit in terms of medical inflation.
More importantly on our case reserves.
Again, I'll give credit to my field case managers on a case reserve basis, they really do factor in.
The realities of.
At eight each individual case and what that means on a long term basis on a few calls ago I heard maybe last call even I talked about home health for using that as an example, there's certainly a labor shortage in home health is a challenge for any for any company, that's having to deal with long term health health component.
My My field case managers are factoring that into my case reserves now the reality is that they are seeing currently.
No. It's it's something shifts in that that regard then that that could be beneficial to us in the future.
But we want to make sure that we get alright, most likely outcome in terms of our case reserving now.
Right and so if.
Yes.
Actual inflation is not as robust as the inflation assumptions that youre putting into reserves.
That portends well for future favorable reserve development as you find out.
<unk> wasn't as strong.
Yeah, I would agree with that statement.
Okay.
And the second question I have is more about the usually probably getting along with what mark was asking so if the if the industry's accident year combined ratio is approaching 100.
Mhm.
I don't know confidence the right word, but how confident are you that the industry industry doesn't overshoot the loss cost declines.
And that's 100 turns into 105 to 110 over time.
I know in many years past.
Workers comp was.
It was not a great in line in terms of profitability, but I don't know of.
Any any sites in the near term instead, where profitability will be going.
Yes, it's a great question history would say that's exactly what happens right where are we getting to a period, where we have declining rates.
And ultimately you know companies are using that to book their premium in and put up their loss reserves and.
The realization of claims start getting paid out you haven't estimated that correctly and you have start paying out those claims and you didn't collect right dollars and so then rates take a swing and.
Ideally for a company like Amerisafe, that's when we tend to do better right in terms of we like those kinds of those kinds of environments because of our underwriting discipline. We feel like we're very good about managing where we what the right price is for our individual risk.
But as an industry as a whole if you look back that's typically what happens you have this period of declining rates.
All of a sudden the industry has some adverse development and then it swings the other way and then you get those rate declines.
Will it be as large of a swing you know well the valleys be as low in the peak would be as high as in prior years I don't think so the industry has better data I think people are more underwriters are more disciplined than that I don't really hear a lot about cash flow underwriting, which was something that was done in the past.
So maybe I think the market is still the cycle is still alive and well, but maybe yeah like I said, maybe the valleys aren't as low in the peaks is high.
So I do think as the industry approaches getting into that unprofitable level, what what we hope to see we amerisafe hope to see is.
Other multiline carriers contracting their appetite for workers' compensation, particularly severe workers compensation and utilizing their capital to pursue lines, where they are getting rate.
And where they have had more success I don't know that they will completely walk away from workers' compensation, but just contracting their appetite.
For us would be a consideration of quote unquote hardening market.
Which we just haven't seen a lot of fluctuation in competition for <unk>.
Over a year now maybe even two years, if I lose track of time with Covid, but lets say two years, there really hasn't been a lot of fluctuation in the competitive levels.
Yes that was kind of what was driving my question I was I didn't mean to imply that that of aerospace combined ratio is going to be going up that high that was more of an industry.
Wondering when the when the competition might start pulling back because it's not profitable anymore. So yes Edward.
You answered that provide a good color so thanks.
Thank you.
And it appears there are no further telephone questions I'd like to hand, the conference back over to MS Frost for any additional or closing comments.
First quarter was a strong start for the year and we're pleased with the quarter's results equally we look forward to continued success in 2023 as the Amerisafe team strives to enhance our service to our agents, our policyholders and injured workers. Thank you for joining us today.
And that does conclude today's conference. We thank you all for your participation you may now disconnect.
Yes.
Yeah.