Q2 2023 AMERISAFE Inc Earnings Call
Yeah.
Please standby we are about to begin.
Good day and welcome to the Amerisafe 2023 second quarter earnings call.
Today's conference is being recorded at this time I'd like to hand, the call over to Kathryn Shirley. Please go ahead.
Good morning, welcome to the Amerisafe 2023 second quarter Investor call if.
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 the earnings release.
And the comments made during today's 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.
We do not undertake any duty to update any forward looking statements I will now turn the call over to Jay nail for all aerospace President and CEO .
Thank you Catherine and good morning, everyone.
The state of the workers' compensation market overall remains profitable despite continued rate softening.
Your line is reporting an industry wide combined ratio below 100%.
<unk> remained redundant and approved loss cost declines are expected to continue.
Amerisafe is a disciplined underwriter in the high hazard workers compensation market that has demonstrated the ability to maintain strong margins throughout many market cycles.
In the second quarter, we reported a combined ratio of 85, 4% and our return on average equity at 18, 6%.
During the quarter, our topline decreased three 7% driven by continued rate declines and wage inflation slightly slowing when compared with our strong year over year growth in the second quarter of 2022.
We continue to see strong retention and policies for which we offer renewal with 93% retention for the second quarter largely in line with our recent experience despite continued competition.
As we look ahead competitive pressures and rate declines are expected to remain a headwind offset by strong payrolls.
Moving to losses, the current accident year loss ratio remained steady at 71%.
During the quarter, our claims handling practices drove better than expected outcome.
Faulting and favorable prior period development of $10 9 million or 16.7 loss ratio points.
Reserves were primarily released from accident years 2018 through to 2021.
As it relates to loss trends frequency and severity are both in line with our expectations trending slightly lower than compared to the previous accident year at six months.
As stated last quarter, we continue to expect medical inflation to increase as the year progresses and reflect this trend and are setting set in case reserves.
Our balance sheet is conservatively positioned roughly $960 million and investments in cash.
A solid reserve position and no outstanding debt.
We expect our market dynamics to remain challenging however, given our long tenure of experience through market cycles, we are well positioned to retain our policyholders and attract business, while delivering robust returns for our shareholders.
Finally, I also like to highlight the merits of its inclusion in the wards 50 top performing property and casualty companies for the 15th consecutive year. This recognition is a testament to our employees' experience expertise and the high hazard workers compensation niche, resulting in financial strength and stability of our company.
With that I'll turn the call over to Andy to discuss the financials. Thank you Danielle and good morning to everyone for the second quarter of 2023, Amerisafe reported net income of $15 6 million or <unk> 81 per diluted share and operating net income of $14 million or <unk> 73 per diluted share.
This surpasses the second quarter of 2022 net income of $6 1 million or <unk> 32 per diluted share and operating net income of $13 1 million or <unk> 68 per diluted share net income was higher primarily driven by gains in our equity securities as compared to losses in the second quarter of 2022.
Gross written premiums were $71 7 million in the quarter as compared to $74 5 million in the second quarter of 2022, a decrease of three 7% on a year over year basis.
During the quarter voluntary premium decreased two 3% primarily due to continued rate pressure.
Audit and related premium adjustments decreased by 800000 for the second quarter of 2023 as compared to the second quarter of 2022, However, payroll audits stand alone increased by 200000 for the quarter as compared to the prior year.
Audit premium remained strong we are seeing some leveling off in the incremental growth due to the lower wage growth.
Premiums increased $1 2 million for the quarter and $2 9 million for the first six months of 2023 as compared to the second quarter of 2022, primarily due to costs related to additional reinsurance coverage.
Turning to our investment portfolio in the second quarter net investment income increased 19, 1% to $7 7 million from $6 5 million in the prior year.
The increase was driven by higher yields on cash as well as higher reinvestment rates on fixed maturity securities for.
For the quarter yield on new investments increased approximately 260 basis points driving our tax equivalent book yield to 362% or 76 basis points higher than the second quarter of 2022.
Amerisafe investment portfolio is high quality carrying an average double a minus credit rating with a duration of three nine years. The composition of the portfolio is 57% of municipal bonds, 28% in corporate bonds, 3% in U S treasuries and agencies, 7% in equity securities and 5% in cash.
The investments.
Approximately 57% of our bond portfolio is comprised of held to maturity securities and with the moderate increase in rates during the quarter.
Resulted in a net unrealized position of $21 million.
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 the book value.
Total underwriting and other expenses were $20 million in the quarter largely in line with the prior year, resulting in an expense ratio of 34 as compared with $28 three in the second quarter of 2022. Despite the dollar level of expenses remaining flat the expense ratio increased due to a lower level of net earned premiums.
Our tax rate was 21% compared to 32, 9% for last year's second quarter, largely due to lower proportion of tax exempt income versus underwriting income in the quarter.
Our capital position is strong with a high quality balance sheet solid loss reserve position and conservative investment portfolio.
Our company paid its regular quarterly cash dividend of 34.
For sure in the second quarter earlier this week the board declared for the third quarter, a quarterly cash dividend of 34 per share payable on September 22023 to shareholders of record as of September eight 2023, and finally, just a couple of other topics book value per share at June 32023 was.
$17 76 up seven 2% from $16 57 at December 31, 2022, and our ROE and an ROE of 18, 6%.
Statutory surplus was $284 million at quarter end up from $270 1 million at March 31, 2023, and $2 $52 5 million at December 31, 2022, and finally later today, we will be filing our Form 10-Q with the SEC after market close with that I would like to open.
The call for the question and answer portion of the call operator.
Thank you.
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Yeah.
And we will now take our first question from Matt.
Matt <unk> with JMP. Please go ahead.
Hey, Thanks, good morning.
Good morning, Matt.
Chanel I was hoping you talked a little bit about wage inflation in your opening comments I was hoping maybe you could dive in a little deeper there I'd be curious just kind of you.
How those trends have evolved over the past several quarters.
Are there particular areas in your book, where it's stronger versus weaker or is it pretty uniform across.
Different.
Insured.
And just kind of your outlook.
Or how that might impact your results on board.
Right I mean, I think Matt the last few quarters, we've kind of been giving what is looking like as payrolls are coming in the door being reported coming in the door, which I guess in some way bodes for future audit premium. So we continue to see wage growth I'm not probably the record levels we have been.
Probably the last few quarters, I think things have moderated to some degree so I think the latter.
Starting in third quarter of 2022, we had double digit payroll growth and most of that was.
Ages right wage wage growth.
I think the last the last few quarters, it was averaging around 8% for wage growth itself not counting new employees in this quarter it was closer to 5%.
So still a very healthy growth number about equivalent to what we're seeing on a national average.
I think the light latest data point I saw for the national with I think five 5%.
So very much in line with that in terms of wage growth.
When I look at it by industry.
Obviously construction being the largest business it with construction did show some slowing in the wage growth, but still very healthy numbers.
And if I look at BLS data are a bureau of economic analysis data construction spending is still up are the labor market for construction is still up lay offs or were down in the large sequential data point so.
Zinc things bode well for that that particular industry group, which as you know over 40% of our book of business.
From a new employee count it was very steady from the prior quarters, we've been averaging somewhere around 2% for new employees and that's what it was for this quarter as well so we're not really seeing additional workforce.
Perfect that's super helpful.
And then maybe shifting gears a little bit could.
Could you just.
Update us on kind of how you might be thinking about capital management as you come into the end of the year topline has been kind of flattish year to date, you continue to throw off really good returns.
How should we think about that is.
So going forward.
Yeah, absolutely you know, we our board actively talks about capital manage each capital management, each and every quarter certainly as you mentioned, we're putting off a really good returns this year.
Our our stance the last few years has been to return that capital to shareholders.
The year is looking great. This year, so I don't really see a change in that strategy, where I sit today at six months.
Obviously, we would like to see some organic growth, we think there's some opportunity for that to happen.
You know what we saw an increase in policy count this quarter, even though the premium dollars didn't quite even out the way we would like to have to have due to loss cost changes and we are I do feel like we've gained a little bit of momentum in terms of how we are approaching new business, but again I don't.
Here, we are at six months I don't see that really impacting our ability to pay it pay a special dividend between now and year end.
Okay, Perfect and then last quick one and I apologize I probably missed it in your opening comments just the LCM for the quarter.
146.
Wonderful alright, thank you very much I appreciate it thank you Matt.
And as another reminder, it is star one if you would like to ask a question. Please press star one to ask a question.
And we will go ahead and take our next question from Mark Hughes with Truest. Please go ahead.
Yeah. Thank you good morning.
Good morning, Mark.
What do you do you know.
Audit premium in the quarter.
<unk>.
Kind of broke that out in a little more detail, but I'm not sure that I could put the pieces together appropriately I think your audit premium in the second quarter.
Last year was $5 5 million.
What's the number that I should use for the second quarter was four.
Four eight.
Okay. Okay.
Very good.
Uh huh.
Ceded premium you mentioned it was up a little bit because of the green.
Reinsurance is this.
Kind of level.
We should expect going forward it.
It is five and it is like that.
Yeah, Great question, Mark you know we.
You may recall, we have a structured product that we call. Our working layer products are 8 million excess of too which renewed this year. In addition to that index of two and you know all the finite details are in the 10-K and we added a 10 extra 10 layer.
We also extended our topside 20 exited 80, so we have a little bit more coverage, there and theres, obviously dollars associated with that but yeah with the raise that you. The run rate you see this quarter would be an accurate run rate.
Yes, yes.
And Andy the.
<unk> ratio.
You said dollars were relatively steady.
Asia was a little higher were there any SaaS.
Estimates or anything like that that influenced the number.
No actually there were no assessments this quarter that would have affected our.
They were flat.
Okay.
Uh huh.
Kind of expenses 20, $25 million, but a good baseline perhaps on a go forward.
I would say, yes, I mean, we are at.
Again the difference.
Between the two years was 50000 Dallas into 'twenty.
$20 million 25, I think is correct from a run rate perspective.
Yeah Okay.
You know you had.
You mentioned the idea.
Potentially pursuing partnerships with.
Other carriers.
Any update on the on that or any other kind of marketing or new business initiatives that you can speak to at this point.
Sure.
No no update other than Hey, this is what we've done we are still exploring avenues, you know I'm very excited youre, taking my closing remarks, I am very excited that we've added a new chief sales officer Ray why isn't going to be joining the company. So we're really excited about bringing on board is a tremendous amount of experience, particularly in.
Workers compensation and you know we've been talking about our agent relationships and how to.
I'm going to say broadened widened that pipeline whether that doesn't necessarily mean, we're agents just means be more efficient and more effective with our agent force and I think ray is going to do a great job for us in that regard.
Yeah.
On the medical inflation front.
I pointed out that it's been.
As expected you anticipate that it will or at least your.
Reserving with the idea that it will accelerate but any new signs of that.
Actual data point anything youre seeing in the claims.
Trends no I mean.
You know other than the pockets that we've talked about numerous times on these calls just pockets here and there.
I know I've had this conversation with you Martin you know one of our concerns is.
All the things that are happening in the health care industry, I think inflation is going to find its way into our cost in one of two ways either we're gonna see updated fee schedules are updated expenses directly related to our reimbursement rates tour for medical care or we're going to start seeing a constriction of the supply.
In prior calls I've talked about home health. That's an example of where there's just.
Less supply available and I think if.
It is a I am of the opinion and this is the world. According to Danielle I am of the opinion if provider reach a point where their reimbursement rates for workers compensation is not advantageous to them as a medical care provider they will limit our constrict.
Their availability for workers comp carriers.
That's a fear I think a lot of people in the industry had not that we've seen it widespread.
But.
Ultimately, we know all the increase.
Increased labor cost and that the medical community is incurred is going to work its way through the system, one way or another.
I mean in any given workers comp company, whether you're high as are not you know, 50% to 60% of your costs or medical specifically.
Specifically related to medical costs.
Yeah. So you know using a merit more example, I'm sorry go ahead.
No no. Please go on.
I was gonna say using the merits of example is one of the things we really focus on you know it was closing claims. So we've been fortunate this year, although claim counts are starting to come back I think we still have this quarter. We still have 56 fewer claims reported than we did in second quarter last year, but our closing rates have been really good so.
My open inventory I have 275 claims less than I had second quarter last year and over 100 fewer than I had even at year end, even though I'm, adding reported claims. So we're really focused on closing those claims and getting them settled sort of hedging against.
Future medical costs for lack of a better term so not only reflecting it in our case reserves, but finding ways to reserves to close claims and federal claims to sort of limit that liability.
Yeah, Yeah exactly.
And then Andy what's a good tax rate going forward.
I would say the 1919 and a half is a good tax rate.
Okay.
Alright, great. Thank you very much.
Thank you Mark.
Thank you.
Right.
And with that that does conclude our question and answer session I would like to hand, the call back over to Janelle Frost for any additional or closing remarks.
Thank you I would as I said to Mark I would like to officially welcome Ray rise to Amerisafe and the leadership team Ray has been appointed our Chief sales officer. He has more than 30 years of experience in the industry. His background is driving results through customer experience fits well with Amerisafe model and will play an integral role in the company moving forward.
Thank you for joining us today.
Okay.
And with that that does conclude today's call. Thank you for your participation you may now disconnect.
Okay.
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