AMERISAFE, Inc. (NASDAQ:AMSF) Q1 2020 Earnings Conference Call April 30, 2020 10:30 AM ET
Kathryn Shirley - Executive Vice President, Chief Administrative Officer and Secretary
Janelle Frost - Chief Executive Officer, President and Director
Neal Fuller - Executive Vice President and Chief Financial Officer
Conference Call Participants
Randy Binner - B. Riley
Matt Carletti - AMP
Mark Hughes - SunTrust
Ron Bobman - Capital Returns
Good day, everyone, and welcome to the AMERISAFE 2020 First Quarter Earnings Conference Call. Today's call is being recorded.
And at this time, I'd like to turn the conference over to Kathryn Shirley, Chief Administrative Officer. Please go ahead.
Good morning. Welcome to the AMERISAFE 2020 First Quarter Investor Call. If you have not received the earnings release, it is available on our website at www.amerisafe.com. [Operator Instructions]
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 the impact of the COVID-19 pandemic on the business and operations of the company and our policyholders and the market value of the securities in our investment portfolio. Other factors that may affect our results are 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-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 Janelle Frost, AMERISAFE's President and CEO.
Thank you, Kathryn, and good morning, everyone. Welcome to my isolation bubble. I hope you are safe and well. Our country and the workers' compensation market are currently facing health and economic uncertainties. Today's conversation looks to be much different than our focus on declining rates and competition just two short months ago during our year-end earnings call. What is not different is AMERISAFE's commitment to service. Throughout this pandemic, AMERISAFE's dedicated employees continue to serve our policyholders, agents and injured workers while protecting themselves and their households' health and safety. On behalf of myself and the Board, I would like to thank them for their remarkable dedication in these unprecedented times.
That dedication, coupled with AMERISAFE's operational discipline over the last 34 years, built a firm foundation of efficient operations with strong liquidity and no debt. In the current environment, our liquidity affords us the opportunity to maintain our workforce, pay our regular dividend and focus on our mission of providing quality insurance services. AMERISAFE and our policyholders are not immune from economic conditions, but I believe AMERISAFE is well positioned for what lies ahead. In the first quarter, we produced a combined ratio of 83.5% and an operating return on average equity of 16.1%. We are pleased with this result, particularly considering continued declines in underlying approved loss costs.
Our ELCM for the quarter was 157, down from 159 in last year's first quarter. Voluntary policy count was down 2.2%, with renewal retention of 92.7%. As a result, premiums for policies written in the quarter were down 5.8%, while average approved loss costs for our classes of business were down 6.9%. For the quarter, audit premium and other adjustments increased gross premiums written $3.6 million. This was a $0.9 million decrease from the first quarter of 2019, which when combined with the decrease in written premium resulted in top line being down 6.5% from the first quarter of 2019. For the states that we operate in, stay-at-home orders impacted the second half of March. Our agents and policyholders were working, and AMERISAFE's operations were uninterrupted throughout the transition to work from home. Therefore, there was minimal impact to premiums in the first quarter related to the pandemic.
Nearly 95% of our policyholders report payrolls and pay premium to us on a monthly basis. In April, we received premium reports based on March payrolls. The reported premiums for those April reports based on March payrolls were approximately 8% lower than the amount we expected based on the policyholders' estimated annual premiums. Now that's not an exact science, but it's our best indication of how many of our insureds were working as stay-at-home orders were enacted. In our top 10 states, most of the larger classes of our businesses were not prohibited from working because of state guidance. We will have a better indication toward the end of May when April payrolls are reported to us.
Payrolls for furloughed employees will be reported in a new class code, for which we will not collect premium. Our loss ratio for the quarter was 55.3%, with a current accident year loss ratio of 72.5%. The current accident year loss estimate was unchanged from accident year 2019. As with premium, we saw minimal impact to losses related to the coronavirus pandemic in the quarter. To date, we've had four COVID-19-related claims, mostly due to employers reporting out of an abundance of caution. There is an ongoing debate in the industry and among states regarding the compensability of coronavirus claims as workers' compensation. We agree with the industry experts that the cost of this pandemic were not considered and/or contemplated in the rate nor in reinsurance agreements.
If healthcare workers and first responders are deemed as covered under workers' compensation, AMERISAFE would have a very small exposure, mostly through our assigned risk policies. In the near term, our overall reported claim counts have declined. We experienced $13.6 million of favorable development from prior accident years in the quarter. That favorable development primarily resulted from individual claim severities being less than anticipated. The stress on the healthcare industry and the delay of doctors' appointments and procedures could impact ultimate severity of claims depending on the length of state restrictions. Our ability to work with claimants, employers and healthcare providers to achieve maximum medical improvement and return the injured worker to work are essential. Anything delaying those outcomes, whether medical or return-to-work-related impacts our ability to close claims.
I'll now turn the call over to Neal to discuss the financial results for the quarter.
Thank you, Janelle, and good morning, everyone. For the first quarter of 2020, AMERISAFE reported net income of $10.8 million or $0.56 per diluted share compared with $19.4 million or $1.01 per diluted share in last year's first quarter. Operating net income for the first quarter was $16.9 million or $0.88 per share, a decrease of $0.03 from the first quarter of 2019. Revenues in the quarter were impacted by $8.8 million in unrealized losses on equity securities and therefore decreased to $79.2 million compared with $95.2 million in the first quarter of 2019. Net premiums earned decreased 7% to $79 million when compared to last year's first quarter, driven by continued declines in state loss cost rates and competition.
Turning to our investment portfolio. Our net investment income decreased 3.3% in the first quarter to $7.7 million compared with $8 million in the first quarter of 2019. The decrease was driven by lower interest rates on fixed income securities, particularly on cash and short-term investment securities. The tax-equivalent yield on our investment portfolio was 3.03% at the end of the first quarter. The pre-tax yield on the portfolio was 2.70% at the end of the quarter, down from 2.82% one year ago. Realized gains for the portfolio on securities sold were $1 million compared with negligible gains in the first quarter of 2019.
The investment portfolio is high quality, carrying an average AA credit rating with duration of 3.87 and with 62% in municipal bonds, 19% in corporate bonds, and 10% in U.S. treasuries and agencies, 2% in equity securities and 7% in cash and other investments. We do not invest in the following securities: no high-yield bonds, no private placements, no bank loans or CLOS, no limited partnerships or any other exotic securities. Within our 21% allocation to corporate bonds, we have no BBB minus- securities, 7% in BBB, 4% in BBB+ and the remaining 8% in A- and above-rated securities. Within our 62% allocation to municipal loans, we have no BBB securities, 5% are single A bonds, 41% are AA bonds and 16% are rated AAA. These are all reported as a percentage of the total portfolio.
Approximately 60% of our bond portfolio is comprised of held-to-maturity securities, which were in a net unrealized gain position of $23.1 million at quarter end. These unrealized gains are not reflected in our book value as these bonds are carried at amortized costs. The company has strong liquidity with $97 million currently in cash and overnight investments, which are held in the U.S. treasury money market fund. The company has $39 million of U.S. treasury securities that mature in less than 12 months, $73 million of additional U.S. treasury and agency securities and $186 million of additional maturities and interest coupons of other bonds in the next 12 months. The total of all of these is $395 million.
During the quarter, we implemented the new accounting standard related to current expected credit losses, or CECL. This resulted in the after-tax charge to retained earnings of $594,000 effective January 1, 2020, or $0.03 per share. The new credit loss allowance balances at March 31, 2020, included an allowance for reinsurance recoverable of $449,000 and an allowance for held-to-maturity investments of $275,000, both were in line with the ranges of potential impacts that we disclosed in our previous SEC filings.
Moving now to operating expenses. Our total underwriting and other expenses were $21.3 million in the quarter compared with $20.7 million in the first quarter of 2019. The increase was largely due to higher insurance-related assessments, which increased expenses by $500,000 compared to last year's first quarter when we had some favorable downward adjustments to assessments. By category, the 2020 first quarter expenses included: $7 million of salaries and benefits; $6.1 million in commissions; and $8.2 million of underwriting and other costs. As a result of the decline in earned premium as well as slightly higher expenses, our expense ratio for the quarter was 26.9% compared with 24.3% in the first quarter of 2019.
Our tax rate for the quarter was 18.4% compared to 18.5% for last year's first quarter. Return on equity for the first quarter was 10% compared to 18.5% for the first quarter of 2019. Operating ROE for the quarter was 16.1%. In capital management, our company paid its regular quarterly cash dividend of $0.27 per share in the first quarter, which represented an 8% increase over last year's amount. This quarter, the Board declared a quarterly cash dividend of $0.27 per share, payable on June 26, 2020, to shareholders of record as of June 12, 2020. And finally, just a couple of other topics. Book value per share at March 31, 2020, was $22.64, up 1.6% from $22.29 at year-end. Our statutory surplus was $371 million at quarter end, up from $360 million at December 31, 2019. And lastly, we will be filing our Form 10-Q with the SEC today after market close.
That concludes my remarks, and we would now like to open up the call for the question-and-answer session. Operator?
And we will take our first question today from Randy Binner with B. Riley. Please go ahead.
Good morning. Thanks. I guess for me, the first area to focus on is claim counts being lower. I think you mentioned that in the opening script. But I don't believe that was quantified as much as what you saw with payroll audits and potential impacts from categories you insure kind of from a top line perspective. So can you dimension for us what the kind of the lower loss element of this new economy might be for AMERISAFE?
Yes. Randy, this is Janelle. So yes, I did say in my prepared remarks that we're seeing lower claim counts currently in terms of just reported claims coming in the door. We did have 1, what we would call severe loss in the quarter, one compared to accident year 2019 that ended at 17 claims ultimately. But I think in the first quarter, it's pretty much the same, one claim. So we are seeing lower claim counts now. I think what if I'm reading your or hearing your question correctly, what how will this impact the ultimate cost of our claims?
Initially, when the stay-at-home orders started and work for everyone was transitioning from work from home, there were certainly some delays just getting things set up from a vendor side, not necessarily AMERISAFE employees working. But obviously, all the different state agencies and workers' compensation commissions, all the people that we have to deal with, were also transitioning from home. So I think there was some delay just maybe that first couple of weeks. But now all of that seems to be online and working. We had delayed doctors' appointments, obviously for so in compliance with stay-at-home orders.
But I think things like telemed is now live and well, and especially with our clients, their appointment. So we are getting doctors' appointments taken care of. As states start opening up, I believe procedures will be taken care of. But there have been delays from that aspect. At this point, will that increase the severity of our claims? I think it really depends on the length of the stay-at-home orders. And of course, that varies by state.
So a couple of follow-ups. One, I guess, is understanding so someone who had a medical visit delayed would have ostensibly, they'd be injured before all this happened. But now you're dealing with kind of lower economic activity. So I guess you could have a construction worker who maybe still is on payroll but not working as much. Is there potentially an element to the claim profile like analogous to auto insurance, where there are less vehicles, there's less accidents? Or does payroll, workers' comp correlate more closely to how the losses would be expected to come in?
Yes. That's a great question. So yes, certainly, if our insureds, our policyholders aren't working and but they have their workers still on the payroll, I think I mentioned in the prepared remarks, there's a new class code now that they can report those premiums or that payroll under this class code so that they don't have to pay workers' compensation premium on that. On the flip side, to your point, that also means we wouldn't have claims related to those employer employees not working.
Okay. And then I guess I'll ask one more and then leave it to the other analysts. But just within construction and trucking, which are your largest two classes, are those in the states where you do business? Have those been deemed essential activities and have kept going? And maybe in the case of trucking, you maybe even see some more activity?
Yes. So I'll address the latter first. Yes, we would anticipate, from a trucking standpoint, just getting goods, and the job being getting toilet paper across the United States. The trucking industry would have been alive and well and perhaps robust through these weeks of stay at home and isolation. For construction, same. For at least our top 10 states, in most of our states, when we look through, to your point, things that were listed as essential businesses in state orders, construction wasn't limited. The only state I can think of top of mind was Pennsylvania. Pennsylvania did limit construction and had a stay-at-home order for construction.
So in the interim, that certainly could impact our insureds. But we believe, at this point, time will tell, we believe our insureds do have the opportunity to work related to COVID-related stay-at-home orders. I guess the larger concern would be if there is a recession or whatever the term we want to pick is for today. They may have jobs now. They may have contracts now. What happens eventually as companies are watching liquidity, do they still have the same capital expenditures? Will there be some sort of compression on construction? The flip side of that is, we've heard, if you listened to any of the presidential or federal news conferences or even some of the Congress news conferences, you'll hear a lot about infrastructure. So I think there's going to be things out there to stimulate the economy that should benefit AMERISAFE policyholders.
Our next question comes from Matt Carletti with AMP. Please go ahead.
Thanks. It's Matt at JMP. A couple of questions. The first is, you guys have always prided yourselves, and I'd say a real kind of hallmark of AMERISAFE has been your pre-quote safety inspections, kind of the extra mile that you go to make sure you really understand your insureds or potential insureds. Can you talk a little bit about how that process likely has changed in the stay-at-home environment?
Yes, certainly. So I believe and I might get the date the exact date wrong. But I'll say in mid-March, around March 17, is when we made the call to say, you know what, it's not safe for our employees, it's not safe for our customers and our safety professionals to transition from work from home. And you think, OK, they're safety professionals, how are they working from home? They were quite creative. And yes, we've been doing virtual safety visits using any technology that we can to talk to policyholders and potential policyholders, help them with safety recommendations and do as many safety visits as we can use virtual means. So that has not prevented us from issuing quotes as this as the stay-at-home, isolations have happened. That's still we're still very much open for business and writing policies.
Okay. Perfect. And then as I think about kind of follow-on to what Randy was asking, that last question there about kind of the auto exposure and does payroll adjust, is there an inherent benefit in trucking? I mean you guys have talked about for a long time across your whole business that the biggest cause of loss is vehicular accidents. And if traffic's down 40%, we're hearing from commercial auto insurers that there's they're seeing a drop of accidents there, too, even though trucking mileage might not be down because there's just less cars on the road. Is that potentially, even if it's just short term, a benefit to AMERISAFE? Are you seeing any of that in your numbers yet?
Great question and we hope that is the case. So yes, anything if there's less vehicles on the road that certainly decreases our chances of a motor vehicle accident. I don't I think it's probably too early to say. So far, we've been tracking it based on different states, and we haven't seen I mean it's been a kind of a puller drop by state consistent drop by state rather than seeing fluctuations in different pockets. But that is something that I think is a possibility and certainly welcome.
Okay. Great. Last one, just could you just give a little color on the what you're seeing competitively in the market, just even as we kind of entered the year, and then if there has been any change in the last month to six weeks with COVID, from your competitors, your competitors that might have exposures to other classes, whether that be more of the first responders, whether that be more retail or things like that? Just have you seen any real change in competitive environment in your markets? Or has it just kind of been a little more status quo?
Yes. So I'll say I'll speak to two different things pre-COVID and then now. So pre-COVID, no, there was really no change in the competition from when we spoke at the end of February. And still workers' comp was a line that people were pursuing. Now that we're post or into COVID, not post, I wish we were post-COVID, it will be interesting to see what happens. Because I think there's a concern over the industry about what's going to be compensable. So I mean, for AMERISAFE, we think we're somewhat protected in that. As we talked about, the things that you think about that are having COVID-related claims at this point are not things that we typically write with the exception of a small portion of our assigned risk book.
But I think it may be enough deterrent to keep companies or for companies that to allocate capital perhaps to different lines of business if they're a multi-line carrier. Earlier in the call, we were talking about auto. So I think auto is looking more attractive, and I welcome that. So yes, as this continues, one of our hopes would be that multi-line carriers may deploy their capital elsewhere, particularly if they're looking trying to project ahead at what payrolls could be what payroll could be doing in the economy, where are we headed. Perhaps they would think let's get something not as tied to payrolls.
Got you. And then just a follow-on on the compensability issue, and I understand it's pretty small exposure for you guys. But am I thinking about it right that if that were to catch on, if that were to kind of be deemed in a large portion of states to be covered for those that have that exposure, that would ultimately work its way into loss cost, correct? I mean there's a delayed impact there but...
It would, yes.
Yes. There's no reason to think that it would be treated otherwise than just how it shows up in the numbers and then work its way in the rates?
Yes, I believe that to be the case.
Great. Wonderful. Well thank you for all the color and best of luck
And we'll take the next question from Mark Hughes with SunTrust. Please go ahead.
Thank you. Good morning I apologize; I missed the early part of the call. But did you comment on the any observations on small business, your smaller accounts versus larger accounts, whether you're seeing any more dislocation? And in the context of any a broader commentary on cancellations or midterm premium adjustments, have you seen anything on that front?
Yes. So I'll start with the small business aspect of what we write. One of the concerns going into COVID and was what happens to small businesses, so we were very happy to see the stimulus available too we would think our insured base would be have access to that fund. So that's a good sign for us. Even if we don't collect premium on those particular payrolls, anything that keeps them going and viable throughout this isolation is good for AMERISAFE. But as I was saying, I think in part, at least we believe, the industries that we insure are working. So as long as they have a contract or a job, we think that they've been working in most of our states, with the exception I mentioned of Pennsylvania.
Construction was not considered "essential" in Pennsylvania. So that, I guess, is a downside. But we think the small and midsized businesses, at least, if they were had the ability to work and the cash flows to work, they could continue to work throughout this, which is, I think, been a major concern in the country, right? How does small businesses if they had to close for a month or two months, how do they survive? For our insured base or our policyholders, we don't think that, that is the case. So that's a good sign.
You asked about payrolls, and I guess that may have been before you joined the call or whatever the case may be. I did give a little bit of forward-looking in terms of what we saw in April. So in April, we received monthly reports based on March payrolls. And granted, I think most of the isolations kind of affected the second half of March, but it still gave us some indication. And those payrolls were about 8% less than we would have expected. But I have to qualify that, expected based on their estimated annual premium. Obviously, that's not an exact science. But it gives us some indication. We'll have a better indication at the end of May once we've received those April payrolls. Because I think once we got into April, things were pretty settled in terms of who's working, who's not working.
With the exception of, like I said if they had a job and was currently working on a job and I'm using construction as my example. If they were currently working on a job, I'll use the construction crew outside of our offices here in DeRidder, they were working. Even when our employees’ transition to work from home, they were still working on the highway outside. They were completing that job. So I think as long as those jobs were there, they were going to be working and complete them. Does that answer your question?
It sure does. And then could you refresh us on the dynamics?
Mark, let me add on. Mark, sorry, just let me add on. You may have missed this too in Janelle's remarks. 95% of our policyholders’ report on a monthly basis. And so there are not a lot of midterm cancellations or midterm endorsements from that standpoint. And so far, retention has been holding in good in the month of March, and we haven't seen any uptick in cancellations.
Very helpful. And then refresh me on the dynamic on your construction book. How much is, say, new construction versus maintenance, repair, that sort of thing?
We don't have a breakout on that. A lot of our roofing, for instance, though, is commercial construction. It's not residential construction. Only about 5% would be considered residential in terms of roofing. So it's commercial restructuring. I think in terms of categories of business that I see the most, just and this is anecdotally, it's a lot of remodeling of buildings, remodeling of schools, that type of thing.
Very good. And I'll just ask one more. I know you've already given the loss cost multiplier in the quarter.
And we'll now go to Ron Bobman with Capital Returns. Please go ahead.
Hi, good morning. I had two questions. Janelle, if I were to look at the current developed loss ratio, whether it be for AMERISAFE or other comp writers for the 2007 accident year, where it's currently developed, and I compare that to a meaningfully worse, let's say, currently developed 2010 year, and I looked at the change, and while we're in the midst of this pandemic, who knows what how it's going to develop and what the economy response is going to be and the severity, etc., what are some of the things that come to your mind that make that delta that I'm pointing to, 2007 versus, let's say, 2010, a good indicator what make what may make 2019 versus 2000 and I'm sorry, 2019 versus, say, 2022 and the change that we might see there between those two accident years, sort of a greater delta or a lesser delta? What are some of the sort of things that come to mind as you think about that type of analysis and trying to look to the past as a little bit of a reference guide?
Yes. We've certainly been doing that, look at the past and say, OK, what happened in the Great I don't know if we'll call it the Great Recession anymore, but in the Great Recession compared to what we think maybe may happen in the next year to two years. When I think back to live in the moment at accident year 2010, I remember thinking, "Oh, this is bad, right?" And for us, for the industry, we all felt like we got it wrong. Return to work was a huge component of what we do, and there weren't jobs to go back to. And we increased our loss ratio. I think we had one quarter of a very small amount of adverse development, which is very atypical for us, albeit it happened.
And now sitting here today, looking back at accident year 2010, at least for AMERISAFE, and I probably should know the industry numbers off the top of my head, but at least for AMERISAFE when I look back, it wasn't as bad as we thought it was at the time, in terms of accident year 2010. But that period that you're talking about, 2007, 2008, 2009 to 2010, what's different, I think, is the underlying rate. So we were at a higher rate, I think the industry as a whole; I know AMERISAFE was at a higher rate premium per $100 of payroll then than we are now. So I think the rate environment was a little bit different.
I think the frequency and severity of accidents was also quite a bit different. The long-term trend has trended down quite a bit since then as workplaces have become safer, and there's been more emphasis by employers on safer workplaces.
Okay. And I have another sort of a more general question. And I know you're specialists, you're you've been in it, and you'll continue to be in it for the long haul. And of course, you look to support your insureds as best you reasonably can. And I'm just sort of thinking, when you were in this environment that we're in right now, we're to be looking at and quoting or at least being asked to quote on a new piece of business. Given all the financial distress, is the bar a hell of a lot higher now for you to even candidly consider quoting and binding a new piece of business, given the financial distress that the insured is presumably sort of undergoing and the uncertainty as to whether they'll make it out the other end and what the future holds?
Yes. It's interesting. I think part of the answer to that question is how long this lasts in terms of this isolation, stay-at-home orders, and people running out of jobs to or contracts to complete. So the length of it, I said, certainly matters. As we got into April, we were still getting new business submissions because agents had been working those months in advance. The longer agents are isolated, the less new business that's going to be presented to us because they're going to have less new business, right?
Because at that point, if they're going to be looking through their books of business, trying to figure out, OK, what what's out there that I can resubmit, because they're not prospecting when they're at home. So it'd be interesting to see how much new business we have. I think everyone is going to try to protect the renewal business. I think insureds are going to be more I hope insureds are more inclined to stay with their renewals with their renewing company simply because, to your point, with all the other moving pieces out there, I think one thing one less thing to worry about is what do I need to do about my comp coverage.
I would now like to turn the call back over to Janelle Frost, President and CEO, for concluding remarks.
Thank you for joining us today. This is a unique time in our country, in the insurance market and in our personal lives. As each day of this pandemic passes, we learn more, we adjust and we adapt. At AMERISAFE, we found new, creative ways to stay connected and serve our clients from isolation. For me personally, I've clicked more in the last month than I have in my lifetime. I'm sure my family would agree, and AMERISAFE is doing a better job at adapting. Stay well.
And that does conclude our conference for today. I'd like to thank everyone for your participation. And you may now disconnect.