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AMERISAFE, Inc. (NASDAQ:AMSF)

Q4 2013 Earnings Conference Call

February 27, 2014 10:30 a.m. ET

Executives

Michael F. Grasher – EVP & CFO

C. Allen Bradley, Jr. – Chairman & CEO

G. Janelle Frost – President & COO

Analysts

Christine Valley – JMP Securities

Bob Fineham – KPW

Liandi Banner – FBR

Mathew Dotson - Jaywest LLC

Operator

Good day ladies and gentlemen and welcome to the AMERISAFE Inc’s Fourth Quarter Earnings Conference Call. (Operator Instructions) As a reminder this call may be recorded and I introduce your host for today’s conference Mike Grasher, Chief Financial Officer, you may begin.

Michael F. Grasher

Thank you, Ashley. Good morning, welcome to the AMERISAFE fourth quarter 2013 investor call. If you have not received the earnings release it is available on our website at www.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 could materially different because of the factors discussed in today’s earnings release. In the comments made during this call and in the risk factor section of our 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 statements.

I will now turn the call over to Allen Bradley, AMERISAFE’s Chairman and CEO.

C. Allen Bradley, Jr.

Thanks Mike. Good morning ladies and gentlemen, thank you for joining AMERISAFE’s year end 2013 earnings call. I will make a few remarks and then turn the call over to Janelle Frost, our President and Chief Operating Officer and Michael Grasher, our Chief Financial Officer to provide more details on the operational and financial aspects of the past quarter.

The favorable trends that we have discussed in our last few earnings calls continued in the fourth quarter. As a general rule, industry underwriters have remained disciplined in risk selection. This discipline maybe the result of stressed balance sheets, adverse reserved development, historically low investment yields or combination of all of the above.

Regardless of what the motivation was to return to underwriting sanity, the circumstances are welcomed by AMERISAFE. Books of business are in play as ensures turn toward underwriting profitability and continue to shed unprofitable segments of business. There are a few signs that the rate of premium increases are slowing, this should not be surprising to anyone as a marketplace has now lapped itself and premium rate increases at least 2 and more often 3 times.

There are very few indications of pricing concessions however, we believe that increases in rates will plateau in the next few months. We do not believe there would be significant downward pressure on rates as very little if any new money has come into the worker’s compensation market particularly in the haphazard segment. Rather very low investment yields combined with multiple yields of years of highly unprofitable calendar year results will provide pricing discipline.

Like others in the industry have predicted, we believe that many carriers will report additional adverse loss development in the coming quarters. As another sign of farming market the growth in residual market continues albeit at a slower rate than in the previous four quarters. We believe this too will support a relatively rational market.

Partially offsetting these conditions which we consider favorable is an economy that is growing much slower than expected. One can see clear evidence of that slow growth in the lower audit adjustments this company has reported in the fourth quarter and for 2013 as a whole. Janelle will address that in more detail later. However, all things considered we would still characterize these times as and I quote ``The good old days’’.

Now I will turn the call over to Janelle Frost to talk about the operational aspects of the company during the quarter.

G. Janelle Frost

Thank you, Allen and good morning everyone. The operating results for the fourth quarter were notable, our combined ratio was 80% down 12 percentage points from the fourth quarter last year. Our top line grew $10 million at 12.3% during the quarter, policies written in the quarter accounted for $14 million of that growth. New business grew 27% in the quarter in terms of premium dollars. In addition policy retention was 92.5% compared to 91.2% in the fourth quarter of 2012. Premium retention was 88.4% compared to 90.2% in the fourth quarter 2012. This decrease was driven by the loss of 1 multimillion dollar policy.

Audit premium and related adjustments remained positive this quarter at $3.2 million, however, this was a significant decrease of $4.8 million from the last year’s fourth quarter. For the full year audit premium and related adjustments were $13.6 million compared to $20.9 million in 2012. We believe these decreases indicate economic growth continues, but at a lesser pace than last year.

On the pricing front, we continue to show aggregate increases, our Effective Loss Cost Multiplier or ELCM for voluntary premium in the quarter was 1.85 compared to 1.68 in the fourth quarter of 2012. I would expect this trend to plateau in 2014 due to cumulative increase over the last few years. Relative to losses, our current accident year loss and LAE ratio remained at 73.2% this quarter, frequency trends were favorable in 2013 and severity increase within our expectations. Our claims reported in the calendar year were down 1.8% to 5,620 from 5,721. I would like to point out that the claim count decrease of 1.8% is in contrast to the 13.5% increase in premiums earned.

The quarter was positively impacted by favorable developments from prior accident years. Case development led to $4.4 million of favorable loss development in the quarter compared to $2.7 million in the fourth quarter of 2012. This quarter’s favorable development was primarily attributable to accident years 2009 and 2010.

Finally, our expense ratio decreased to 11.7% in this quarter compared to 18.9% in last year’s fourth quarter. Mike will provide the details on those expenses. That concludes my prepared remarks and will now turn the call over to Mike.

Michael F. Grasher

Thank you, Janelle. For the fourth quarter of 2013 AMERISAFE reported net income of $17.4 million or $0.92 per share compared to $9.2 million or $0.50 per share in the fourth quarter of 2012. For the year, earnings were $43.6 million or $2.32 per share up 48.7% from the prior year.

With regard to revenues, net premiums earned increased 10.1% from the year ago quarter to $86.7 million and rose 13.5% year-over-year due to the strength in our premium written over the past year. Our net investment income totaled $6.8 million in the fourth quarter of 2013, a slight increase from the $6.7 million recorded in the fourth quarter of 2012.

The tax equivalent yield on our investment portfolio was 3.9% for the fourth quarter of 2013 down from the 4.3% reported in the fourth quarter of 2012. With a portfolio just over $1 billion in assets at year end 2013, our portfolio held 53.6% in securities classified as held at maturity which carried $24.6 million in net unrealized gains. This compares to the 64.7% and $44 million respectively in 2012 and reflects a change from held to maturity portfolio in into available for sale positions. And total revenue for the fourth quarter of 2013 was $94.3 million up 14.3% from the year ago period while revenues for the year were 10.9% to $356.3 million.

Turning to expenses, our current accident year loss ratio for the quarter was 73.2% compared to 76.5% a year ago. Our incurred loss and loss adjustment expenses totaled $59.1 million for the quarter which included $4.4 million of favorable prior development. This compares to loss and loss adjustments expenses at $57.5 million in last year’s fourth quarter which included $2.7 million of favorable prior development.

In total our net loss ratio for the fourth quarter of 2013 was 68.2% compared to73% for the fourth quarter of 2012. For the year, our net loss ratio was 69.4% with favorable prior year development of $12.6 million comparing favorably for 75.6% and $2.5 million of 2012.

Total underwriting and other expenses decreased 32.2% to $10.1 million compared to $14.9 million in the fourth quarter of 2012 as we benefited from $5.4 million in estimate adjustments during the fourth quarter. More specifically we reduced the allowance for doubtful accounts by $1.7 million, reversed the accrual for retaliatory premium tax by $1.5 million due to re-domestication to Nebraska and reduced estimates on the guarantee fund accrual of $2.2 million an amount consistent with the past several years.

The 2013 fourth quarter expense components include $5.9 million of salary and benefits, $6.7 million of commissions and a negative $2.5 million of underwriting and other costs due to the reductions in estimates. The expense ratio decreased to 11.7% from 18.9% in the same quarter a year ago. For 2013 our expense ratio was 20.3% compared to 21.1% in 2012. In total, our combined ratio was 80% for the fourth quarter versus 92.6% a year ago and 90% for 2013 compared to 97.5% in 2012.

Return on average equity for the fourth quarter of 2013 jumped to 17.1% compared to 9.8% in the fourth quarter of 2012. For the year return on average equity rose 290 basis points to 10.9% from 8% in 2012. Booked value per share at December 31, 2013 was 2241, an increase of 7.3% from 2012. Our statutory surplus was $354.3 million at year end. We had strong cash flow from operations of $128.9 million in 2013 compared to $81 million in 2012.

On the capital management front, our Board increased the regular quarterly dividend to $0.12 per share from $0.08 per share and approved an extraordinary cash dividend of $0.50 per share, both of which are payable on March 28, 2014 to shareholders of record as at March 14, 2014.

That concludes my preparatory remarks on the financials, I will now turn the discussion back to Allen.

C. Allen Bradley, Jr.

Thanks, Mike. With those comments let’s open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Christine Valley of JMP Securities, your line is open.

Christine Valley – JMP Securities

Hi. Good morning.

C. Allen Bradley, Jr.

Good morning Christine.

Christine Valley – JMP Securities

I have just a couple of questions. Do you have any additional color on what was driving the development in the quarter?

G. Janelle Frost

Hi Christine, this is Janelle. The development in the quarter was really driven by case development, cases that we favored, were able to settle or close favorably, not really any through IBNR decreases.

Christine Valley – JMP Securities

Okay. And then, as we look at the loss ratio in the year ahead, you know what would you sort of expect to see it in that number. Would you expect it to come down a bit from the current year given the trends that you are seeing and the price increases that you have gotten over the past year?

G. Janelle Frost

I agree, we have gotten price increases over the past year and I would expect those to decline or decline or flatten in 2014 as far as the price decreases are concerned. So, I mean how much that affects the loss ratio as I reported in my prepared remarks, our ELCM was up to 185 and we do expect that to plateau. So, the effect of the loss ratio should decrease to the degree I don’t know.

Christine Valley – JMP Securities

Okay. And then, just one final question, how should we think about capital management and M&A in the year ahead especially on the heels of the special dividend in the quarter?

C. Allen Bradley, Jr.

Well, the special dividend and the increase in the regular dividend do not significantly impact our capital position such that it would inhibit us or prohibit us from being able to make an acquisition. We also, as you know have no debt. So, nothing to move by the Board is our comment later is really designed to return, to increase the total shareholder return to our shareholders and it was designed to be a mark reduction in capital.

Christine Valley – JMP Securities

Great, thank you very much and congrats on a great quarter.

C. Allen Bradley, Jr.

Thanks Christine.

Operator

Thank you. Our next question comes from Doug [Indiscernible] your line is open.

Unidentified Analyst

Hi. Good morning, I just wanted to follow up maybe on the expense ratio Mike or Janelle, it moved quite bit during the year if you look at the individual quarters. Are you running right around where the average of 2013, we have got 21% what we have for the full years expense ratio. Is that where you are running at or do you see any improvement in that in 2014 as you grow your premiums and how we should be thinking about that?

Michael F. Grasher

Well, there were obviously a couple of items here in the quarter which will help over the long term including the re-domestication in Nebraska. Where we are today related to where we will be, it would be surprising to see it improve out of where we are today, I mean this is 20% some change that’s a pretty low loss, our expense ratio here. From that standpoint I think it will be difficult to repeat.

C. Allen Bradley, Jr.

Doug, this is Allen, one thing you might think about in that the retaliatory taxes were accrued through the first three quarters and then of course not accrued in the fourth quarter as we re-domesticated. In 2014, you won’t see the retaliatory taxes accrued during the quarter. So they may run a little quieter but there is a certain lumpiness about our business. And because of the guarantee fund reassessment at the end of each year there is a little bit of lumpiness there. But, as Mike said that reduction is consistent with the past several years.

Michael F. Grasher

Yes, if you take a look back I think from the allowance or bad debt perspective that particular movement again was something that had been accrued. As we go forward there will be some benefit from that as we move forward, it is hard to gauge how much. Then when you look at the retaliatory tax we are talking about a little over, right around 1.2% of our gross premium written. And then, from the guarantee fund perspective this is something that occurs, it seems to occur annually and the $2.2 million we had this quarter was pretty much in line with prior years.

Unidentified Analyst

Thanks for that. Just one more question I guess for Allen. How is the market shaping up in terms of geographical, is there any particular State or Regions where it’s unusually good and setting aside California which I know you don’t really play in, are there any States which are maybe underperforming your expectations in terms of pricing or in terms of policy behavior with frequencies vary?

C. Allen Bradley, Jr.

There is certainly some pieces moving around the table Doug, just some thoughts not in any particular order. There has been a Supreme Court decision in Florida which has created a disruption in the construction industry there and the question of how long disability payments have to continue. The Oklahoma Legislature approved an opted out program in Oklahoma much like well something like Texas. It’s yet to be determined as to whether or not that would have a negative impact on the worker’s comp volume, it certainly won’t help it in the State of Oklahoma.

There are other States that have particular rules that have come through or rate changes and policy sort of things but not anything really generally. With respect to California, don’t look for us to be making a move out into California, we are somewhat skeptical of the stability of that market, that’s probably the best way I can put it. So, no States are really just horrible that I can think of, Illinois construction continues to be a struggle for us. So, we are looking to write more where we are making money and we have defined that down by State, by industry. And we are looking to write less where we are losing money and that’s a real sophisticated strategy Doug, but that’s kind of what we have identified and that’s where we are going.

Unidentified Analyst

Great, thanks that’s all my questions.

Operator

Thank you. Our next question comes from Bob Fineham of KPW, your line is open.

Bob Fineham – KPW

Hi there and good morning.

C. Allen Bradley, Jr.

Good morning.

Bob Fineham – KPW

For the reserve developments it sounds pretty simple, there are some case developments. I am just curious it there was any other movements in other actions decides on an intended head up or down?

G. Janelle Frost

Sure. I can give you if I actually, I’ll go 2006 and prior was minimal, 2007 was pretty much flat, 2008 was about 700,000 favorable, 2009 was about 1.5 million, 2010 was 2 million and then 2011 and 2012 we held steady.

Bob Fineham – KPW

Okay good, thanks for that. The investment yields, new money rates versus their expiring rates kind of what you are looking at in Philadelphia there and what do we expect in terms of investment performance going forward?

C. Allen Bradley, Jr.

I think more or the same, I think frankly when you look at the market overall, the new money is being invested at considerably lower rates than what that is rolling off. I think that is going to remain consistent over the next year and wouldn’t anticipate any movement there.

Bob Fineham – KPW

And last one for me. Has this winterers kind of weather had an impact on your insured operations? In other words has it been a slowdown, maybe improvement in claims frequency because of that?

C. Allen Bradley, Jr.

The claims frequency I don’t think is weather related because it continued all year Bob, it’s been part of a long term trend, a pull trend for the year. We ensure a lot of people to work outside and the weather is bad they may not work as much. But I think you are going to see that the December premium when that really started, November and December premium was reported until January and that’s not in these numbers. We certainly would expect that February would be down some when those premiums are reported in March because people are unable to work. Typically for us, however that gets made up it’s not lost especially in the construction business, they will just pick it up later, but things are little bit different.

Bob Fineham – KPW

Okay, correct yourself more in maybe second quarter.

C. Allen Bradley, Jr.

And the thing I would be more concerned about and we are watching is just the overall economy. You can see that there is audit premiums, there is a decrease there. If you look at the policies written during this quarter, Bob the top line grew 20%, but yet we reported 13.2% and the difference was at $4.8 million shrinkage in the audited premiums from last year’s quarter to this year’s quarter.

Bob Fineham – KPW

Okay, thanks.

C. Allen Bradley, Jr.

Okay, no problem.

Operator

Thank you. (Operator Instructions) Our next question comes from Liandi Banner of FBR, your line is open.

Liandi Banner – FBR

Good morning, thank you.

C. Allen Bradley, Jr.

Good morning.

Liandi Banner – FBR

I wanted to just develop up a couple of previous questions, this is for Allen, the capital position is still quite in excess phase as you pointed out that the dividend doesn’t make a big difference. And so, from our view being able to deploy that excess capital to raise ROE is kind of a central point. And so, one policy at a time as you said might be tough given the economy. So books of business seem to be in place but we haven’t captured one. So just want to know how competitive it is for those books because we’re seeing people take them down I just like to hear how competitive people are for the books that are playing and getting a feel for that environment?

C. Allen Bradley, Jr.

Okay, first of all, I wouldn’t say we haven’t captured some, we’ve gone from 228 million in written premium 372 million. Now we haven’t captured in the sense that there was an acquisition, there was a transaction that involved acquiring business, that’s true. But, we have acquired business and quite frankly we’ve acquired business in a safer way then going out bad in book of business. Second point, the books that are in play are in play because they are unprofitable, it is not because they are profitable books of business out to be sold. And we are not really that interested in unprofitable business. So we would like to pick the business that we are interested in acquiring. So we know our capital is good, we don’t want to invest in something that won’t continue to return value to our shareholders. With respect, we didn’t shrink capital to the extraordinary dividend and increasing the regular dividend material. It left us with a lot of flexibility with what we want to do, but we are balancing our AM best rating together with what our shareholders we believe have expected to continue, have expected us to continue and that’s growth in book value and returning shareholders value to them. So, we are not going to be driven, it is not just what you have on the top line, is what you get to keep the accounts.

Liandi Banner – FBR

Sure, it seems like, I guess the color I am looking for though is despite kind of exit from the space it seems like there are still people around looking for opportunities to pick up kind of what people are leaving behind. It’s not just a merry State there, there is people who are willing to come in, is that right?

C. Allen Bradley, Jr.

I haven’t seen anybody pay any material premium for anything.

G. Janelle Frost

And we haven’t seen any new capital.

C. Allen Bradley, Jr.

I mean, if you are talking about the AFG acquisition of Bridge Field Summit Group that certainly won’t be much of a premium if anything. I don’t remember what it was, I think it may have been booked value. But, I haven’t seen a whole lot of money coming in, I haven’t seen hardly any except one small $50 million investment, I really haven’t seen money coming in. And when you see growth of runoff companies that indicates that companies with continuing operations don’t see those as viable investments. So, we’ve so far have been confident and comfortable with growing our book of business organically rather than try to do a transaction.

Liandi Banner – FBR

That’s helpful, just one if I can. You mentioned in your opening comments that you thought there could be continued average prior year development from competitors. And I guess my question is what action do you think that will be from, you just had a material redundancy from `09 and `10 accident years which I think goes as the worst for workers confidence cycle. Would you see competitors taking charges in those years or would it be kind of more recently written business where you expect them to feel the paying there?

C. Allen Bradley, Jr.

That’s a very good question. I would tell you just, then this is strictly my opinion and Mike and Janelle may not agree with me. But, if you look at the years where the cycle was softest and you are talking about beginning in `07, some would say beginning is the fourth quarter of 2004. But really the trough in the pricing was `09 and `10 and even some into `11. So, the adverse development, that’s the policy years, `08, `09 and `10 are the low pricing years and that’s where you are going to see the development come from. I will say that the second step of that, the adverse development that they are saying because they just didn’t get their reserves right, correct.

They priced the next couple of years of their assumptions of how good their reserves were. So if the reserves were inadequate their pricing for the next year would be inadequate. So, I would expect to see it bleed on through into `11 and `12. I think by `13 the industry at least the larger riders had probably corrected for that. But when you see adverse developments say for the 2010, by the way I agree with you like 2010 was sort of a trough. But when you see bad development there you can assume that they were still using the results of `10 in 2011 and in 2012 in pricing their product. So, it will continue to probably be underpriced.

Liandi Banner – FBR

That’s helpful. Thanks a lot.

C. Allen Bradley, Jr.

Okay.

Operator

Thank you. Our next question comes from Mathew Dotson of Jaywest LLC, your line is open.

Mathew Dotson - Jaywest LLC

Can you just talk a little bit about maybe from the standpoint, you guys have a lot of gulf coast exposure. Have you started to see I guess that at all from what’s going on down there relative to the big L&G, the big construction, the ENC guys or is it still too early?

C. Allen Bradley, Jr.

It’s still little early Mat, this is Allen. We had snow into Louisiana three times this year, that’s just not something we are used to. And it’s been wet and those sorts of things plus there is a long runway in some of those large constructions programs. There clearly is economic activity building there, but I wouldn’t say it’s anything near for swing or even really well, well underway.

Mathew Dotson - Jaywest LLC

Yes, I am sorry but just as that build out starts to happen over the next couple of years, I mean you guys should be a big beneficiary because you have got a lot of market share down there, right?

C. Allen Bradley, Jr.

We don’t have a lot of market share, we have market share here. I would tell you that we certainly intend to try to take advantage of that but I will also tell you a lot of these projects are things that might be subject to wrap-ups to large contractors by either contractor control products or owner controlled work site. So that remains to be seen as to how much that will help us. But I will tell you a rise in [indiscernible] whether or not we get disproportionate share remains to be seen.

Mathew Dotson - Jaywest LLC

Okay. Thank you.

C. Allen Bradley, Jr.

Yes sir.

Operator

Thank you. I’m not showing any further questions in queue, I would like to turn the call back over to management for any further remarks.

Michael F. Grasher

Okay, thank you Ashley. I want to thank all of you for participating in today’s call. Since we went public in 2005, AMERISAFE has strived to enhance their shareholders value. We have been fortunate in meeting with some success in that effort. At this time last year AMERISAFE initiated a common shareholder dividend of $0.08 per share per quarter. Our Board of Directors this week of course increased that quarterly dividend to $0.12 per share. Additionally, they approved an extraordinary dividend of $0.50. We believe, and I believe that those actions are consistent with our commitment to our shareholders. As I said earlier in the call, we were certain to retain more than sufficient capital to support our growth whether it’s organic or otherwise. With that have a good day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference, this concludes today’s program. You may now disconnect, everyone have a great day.

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