AMERISAFE, Inc. (NASDAQ:AMSF) Q3 2022 Earnings Conference Call October 27, 2022 10:30 AM ET
Company Participants
Kathryn Shirley – Chief Administrative Officer
Janelle Frost – President and CEO
Andy Omiridis – Chief Financial Officer
Conference Call Participants
Mark Hughes – Truist
Matt Carletti – JMP
Operator
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.
Kathryn Shirley
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.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 result of risks, 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-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.
I will now turn the call over to Janelle Frost, AMERISAFE’s President and CEO.
Janelle Frost
Thank you, Kathryn, and good morning, everyone. I’d like to take this opportunity to virtually welcome Andy Omiridis, our new CFO. As previously announced, Andy joined the team in September and has been working with Neal as he transitions to retirement. So welcome, Andy.
Moving on to 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, an increase in net investment income due to higher interest rates and strong audit premiums.
Premium written is up for the second consecutive quarter, with the current quarter written premium up 1.5% primarily due to audit premium. Wage inflation continues to be the primary driver for payrolls, with our payrolls up significantly from the same period last year.
In 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 ELCM 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 are well positioned to retain our policyholders and successfully compete for new business.
In addition, we continue 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 is 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 are risk differentiators our safety professionals evaluate during their on-site visits and are critical to our underwriting evaluations.
Continuing 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, our loss ratio was 71%, unchanged from the first two quarters. Frequency for the current accident year is down from accident year 2021 at the same point in time and severity was within expectations.
Before turning the call over to Andy, I want 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 2, 2022. 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 will now turn the call over to Andy.
Andy Omiridis
Thank you, Janelle, and good morning to everyone. For the third quarter of 2022, AMERISAFE reported net income of $11.4 million or $0.59 per diluted share, compared with $19.1 million or $0.99 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 closed cases.
Operating net income for the third quarter was $14.1 million or $0.73 per share, a decrease from $19.8 million or about $1.02 per share in the third quarter of 2021.
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 0.2% 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.
The tax equivalent yield on our investment portfolio was 3.16% at the end of the third quarter, up 66 basis points from one year ago. The pre-tax yield on the portfolio was 2.88% at the end of the quarter, also up from 2.21% one year ago.
Realized gains for the portfolio on securities saw over $600,000 in the quarter, compared to a minimal loss during the third quarter of 2021.
The investment portfolio is high quality, carrying an average -AA 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 and 9% in cash and other investments. Approximately 60% 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 a 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. Return on equity for the third quarter of 2022 was 12% and operating ROE for the quarter was 14.4%.
Moving on to capital management, as Janelle discussed, the $4 per share special dividend declared by the Board of Directors. What I would like to focus in is on the quarter — the quarter to come — our quarterly repurchasing of shares for a total of $6.5 million at an average share price of $46.83. They are including commissions with an additional $12.8 million remaining in our share repurchase authorization as of September 30, 2022 for future purchases.
And finally, just a couple of other topics, book value per share at September 30, 2022 was $19.47, down 5.6% 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?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question will come from Mark Hughes with Truist.
Mark Hughes
Yeah. Thank you. Good morning, Andy. Good morning, Janelle.
Janelle Frost
Good morning, Mark.
Andy Omiridis
Good morning.
Mark Hughes
The audit premium outlook, I think, you suggest, the growth that you are seeing in payrolls suggests audit premium outlook continue to be pretty strong. Is it looking as good as it did at this time, say, three months ago?
Janelle Frost
The wage growth or the payroll growth that we saw this quarter is stronger than we have 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 they have been activity for the months prior grew 12.1% on an overall basis and about 2.9% of that was new employees. So the wage growth itself component was 10%, which is higher than we reported last quarter, which was around 9%.
Mark Hughes
Yeah. Okay. And then from a loss cost perspective, you gave us the ELCM, sounds like it’s steady?
Janelle Frost
Yeah.
Mark Hughes
Do you have the kind of the update on what you are seeing in terms of loss cost trends?
Janelle Frost
Yeah. The loss cost trends still continue down for the quarter. On the average, it 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 are not seeing — there’s a way to say this, we are not seeing increasing decreases, but on the other hand…
Mark Hughes
Yeah. Yeah.
Janelle Frost
… on the other hands we are not seeing net positives either.
Mark Hughes
Yeah. And then anything on the medical inflation front, there’s been some talk about that in other lines, what do you see?
Janelle Frost
Yeah. Certainly something that we are keeping our eye on, when we think about medical costs, in particular and rather anecdotally, but we all hear about how much the 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 via the Medicare schedules or states updating their loss costs.
Meanwhile, it’s not built into the rate. So I think the first place we will see it in terms of workers’ compensation is probably companies really just using discretionary pricing to get in front of the cost that they are experiencing on the claims side and so it’s something that we are closely monitoring.
But, 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 cost or the rates themselves.
Mark Hughes
So that — could you maybe expand on that a little bit, how the trajectory, if you do see the inflation and it starts in the fee schedule, what is the lag on that, what’s that process?
Janelle Frost
Yeah. That’s a great question. What is the lag? We — I only know one state thus far that has actually updated their fee schedule. I do think it takes time for those trends to build up in that, either it will happen, it depends on the state, it could be in the Medicare, Medicaid fee schedule, because a lot of states base their workers’ comp fees off of those schedules or the state may have a specific fee schedule for workers’ compensation.
But there is definitely a lag there in terms of when that gets — when that happens. Like I said, we have only seen one thus far. So I think we are, probably, six months to nine months away from really seeing any real movement there, given the rate of medical inflation that is being experienced in the health care field.
Mark Hughes
Yeah. And then I will ask one more, I will be rude here. The — rude as in asking another question. The question on capital…
Janelle Frost
Oh! Okay. I pause.
Mark Hughes
What color of the shoes you are wearing at? I can’t say. No. The capital situation, so the — with the dividend…
Janelle Frost
Yeah.
Mark Hughes
How you are looking at kind of capital ratios, that sort of thing.
Janelle Frost
Right. As we have talked about numerous times, the metrics we talk about are 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 at 1 time on a — or 1 time or 1.1 times. On a statutory basis, it could be up to 1.4 times and we are just not — we are not at those targets. So our operating leverage at the end of the quarter was 0.71 times, 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.
Mark Hughes
Understood. Thank you very much.
Janelle Frost
Thank you, Mark.
Operator
Thank you. And our next question will come from Matt Carletti with JMP.
Matt Carletti
Janelle, I was hoping I could kind of ask you a broad economy question just with everybody kind of thinking about 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 changed much this quarter to last quarter, so on?
Janelle Frost
Yeah. 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. And so I mentioned for the — what we saw this quarter in reported payrolls, wages were up — payrolls were up 12%. A lot of that was wage growth, 10% of that was wage growth and then new workers.
But even the new workers being at roughly 2.5% — between 2.5% 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 are talking minor recession or some people like say little R recession. Our industry groups respond pretty well in a little R recession, their essential work.
If you think about the housing market and certainly making headline news with 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 construction. So we feel very comfortable that our construction book bodes pretty well.
Of all of our industry groups, I will tell you, to be trucking seems to hold up really well even in recessionary times. Our trucking book has been pretty steady. That was a long winded answer I apologize.
Matt Carletti
That’s super. No. That’s super helpful. Super helpful.
Janelle Frost
Okay.
Matt Carletti
Maybe shifting gears a little bit just to the development, both this quarter, as well as it’s very steady for a number of quarters now. Maybe just can you refresh us on kind of what’s driving that, and in particular, what I am getting at is, is it mostly claims closing kind of below expected and kind of if that happens you are kind of, 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 or keeping up on claims that remain open?
Janelle Frost
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 just look at our overall reserves, case reserves as a component of our reserves versus IBNR.
So we rely heavily on our case reserves. 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, 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 are seeing in loss development or favorable loss development, it’s coming from those case reserves and my claims department really focusing in on 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 policyholders themselves in terms of mitigating those costs and getting those claims closed.
I’d 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, is those case reserves and being able to close and settle those claims, and at the same time, take care of those injured workers.
Matt Carletti
Okay. Perfect. And then just a real quick one, can you update us on where kind of large claims — frequency in the number of large claims sits at September 30?
Janelle Frost
Certainly. At September 30, we had 12 large claims, and when I say large, that’s claims with case incurred over $1 million. If I compare that to where we were at 9/30 last year, that number was nine, but the year ended with 19, so 2021 — accident year 2021 ended with 19 large claims and we are at 12 right now for 2022. So no — in my mind, no real differences between in frequency of severity, but of course, this is a lumpy business, and I think, there’s 100 days left in the year.
Matt Carletti
Okay. Lots of time.
Janelle Frost
No. There’s 65 days left in the year, 65 days. I think today is day 300.
Matt Carletti
Perfect. Perfect. Well, thank you very much for the color and welcome, Andy, and Neal. Your best of luck for an enjoyable retirement.
Andy Omiridis
Thank you.
Operator
And our next question will come from Mark Hughes with Truist.
Mark Hughes
Anything we should think about in the expense ratio in terms of inflation that you may be seeing in wages, I know it’s pretty volatile, but maybe it’s been a little bit higher lately. Is that a…
Janelle Frost
Sure.
Mark Hughes
… correct impression?
Janelle Frost
Yeah. AMERISAFE is not immune to what everyone seems to be experiencing in terms of wage inflation and what that pressure is. We are not immune to that. So, yeah, we are experiencing the same thing everyone it is — everyone else is. What that is on long — on a long-term basis, particularly when you start thinking about the expense ratio.
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 pockets, right, depending on the job market or the skill level, what is in demand at the time.
Mark Hughes
Okay. And then how would you characterize competition, in some earlier quarters you spoke about what you are seeing, the appetite among the bigger carriers or regional carriers. How would you characterize it now versus three months, six months ago?
Janelle Frost
It’s unchanged. Competition is still strong. There are still carriers out there willing to write what AMERISAFE writes. I think the agent force is really honed in on other lines of business besides workers’ compensation, because of the availability of coverages in various pockets.
So workers’ comp, given the fact that loss costs have been declined and everybody is going into — pretty much going into their agent and getting a rate decrease, workers’ compensation is probably not top of mind for those agents in terms of placing that coverage. They are really — as we all know, there are other property and casualty lines that are really struggling.
So that’s where 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 much, and you said, six months to nine months, I would even go further back than that, probably, been two years even that we really haven’t seen a change in the level of competition.
Mark Hughes
Yeah. I had a great question but is a…
Janelle Frost
My shoes are brown.
Mark Hughes
Yeah. Oh! Oh! The question was, you have also, I think, sort of characterized, when you look at your customer base, it’s mostly commercial. Maybe it’s that next job that’s important when you think about the future?
Janelle Frost
Right.
Mark Hughes
Any perspective on what they are saying about backlog, bidding activity? What do you feel like there?
Janelle Frost
Right. No. That was one of our concerns coming out of or during the pandemic and even coming out of the pandemic. We knew our insurers were working and the concern was would 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 — when I look at consumer demand, if you — for lack of a better term, it’s still very strong and even though interest rates have been going up, I don’t think we have really seen a lessening of demand, and until we see that, I do think the next project is going to be there.
Mark Hughes
Yeah. Yeah. Okay. Thank you again.
Janelle Frost
You are welcome.
Operator
Thank you. And that does conclude the question-and-answer session. I will now turn the conference back over to Janelle Frost.
Janelle Frost
Thank you. I started today’s call welcoming 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 you for joining.
Operator
Thank you. And that does conclude today’s conference. We do thank you for your participation. Have an excellent day.
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